UPDATE 2-Chipotle customers shrug off price hike, flock to burrito chain

Mon Jul 21, 2014 8:01pm EDT

(Adds industry context, analyst and company comment, byline)

By Lisa Baertlein

July 21 (Reuters) - Burrito chain Chipotle Mexican Grill Inc last quarter achieved what many of its rivals could only dream of: It raised prices, yet attracted more diners during a period of sluggish economic growth.

The Denver-based chain on Monday reported a nearly 26 percent jump in second-quarter profit after sales at established restaurants surged 17.3 percent.

The better-than-expected results prompted Chipotle to boost its full-year same-restaurant sales forecast, and its shares rose almost 10 percent in after-hours trading to $648.80.

Chipotle is known for serving antibiotic-free meats and organic produce, which appeal to trend-setting teen and young adult diners. Investors love the chain because its restaurants crank out more and more sales without increasing costs.

Rival Panera Bread Co was on a similar trajectory until last year, when "operational friction" caused it to stumble on speed.

Executives at Chipotle said speed of service is at record levels, due to its focus on nurturing top-performing staff and its use of technology that helps analyze and improve performance.

"We are the fastest we have ever been at lunch time and at dinner time, but the averages throughout the entire day are speeding up as well," Chipotle co-Chief Executive Monty Moran said on a conference call with analysts.

And, he said, service can get faster still.

Investment Technology Group restaurant analyst Steve West agreed.

"I wouldn't bet against Chipotle until they prove otherwise," said West, who noted that bears for years have wagered that Chipotle would hit its limit on service times.

Based on last quarter's gains, Chipotle raised its forecast for 2014 same-restaurant sales growth to a mid-teen percentage range, from a single digit estimate previously.

The company is an outlier in the U.S. restaurant industry, whose same-store sales rose just 0.3 percent in the second quarter, according to Black Box Intelligence, which tracks 19,000 restaurants.

It is difficult for restaurants to raise prices when same-store sales growth is anemic, and McDonald's executives likely will face pricing questions after the company reports quarterly results on Tuesday morning.

Chipotle boosted prices to help offset higher costs for ingredients like beef, avocados and dairy. While more people ate at the chain, some diners did switch from pricey beef to lower-cost chicken, executives said.

Chipotle also has begun buying grass-fed, antibiotic-free beef from Australia to help ease tight supplies, co-Chief Executive Steve Ells said.

Chipotle's stock, which was trading at around $400 a year ago, closed at $589.93 on Monday, valuing the company at more than $18 billion. That was twice as much Burger King Worldwide , but still significantly less than former owner McDonald's Corp, with its market value of more than $96 billion. (Reporting by Lisa Baertlein in Los Angeles; Editing by Bernard Orr and Richard Chang)

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