Shares of Chipotle Mexican Grill Inc (CMG.N) soared more than 15 percent on Friday, a day after the burrito chain said it was considering a price hike in the middle of 2014 - a move that could more than cover higher food costs and take overall profit margins to record levels.
Shares of Chipotle, which in the last 12 months had traded as low as $233 on fears that competition, higher food costs and a weak economy had ended its hot streak, topped $500 to trade at all-time highs on Friday.
Chipotle on Thursday posted unexpectedly strong third-quarter sales at established restaurants, which overshadowed profit that fell short of Wall Street's estimate.
Sales at restaurants open at least 13 months, known as same-store sales, were up 6.2 percent in the third quarter. That accelerated from a gain of 1 percent in the first quarter and 5.5 percent in the second quarter. Same-store sales are a key gauge of performance for restaurants.
On Friday, analysts raised their price expectations for Chipotle shares. One of the most aggressive increases was from Baird Equity Research, which raised its share price target to $550 from $480.
Chipotle historically has pushed through higher menu prices with little resistance from customers, but it has been holding off this year despite demands from investors. A typical Chipotle burrito costs around $7, significantly more than the price of a burrito from fast-food rival Taco Bell.
Chipotle executives said they want to secure supplies of antibiotic- and hormone-free meats and replace cooking oil and tortillas made with genetically modified organisms, or GMOs, before raising prices again.
A menu price increase of 4 percent next year could put Chipotle at "all-time high margins" even if there is greater food inflation and higher costs associated with swapping GMO ingredients for non-GMO ingredients, the chief financial officer, Jack Hartung, said on a conference call with analysts on Thursday.
Chipotle's rebound comes slightly more than a year after hedge-fund manager David Einhorn pummeled its stock, saying that significant competition from Yum Brands Inc's (YUM.N) "resurgent Taco Bell" chain and higher food and healthcare costs made the company attractive to "short" -- a practice in which investors bet a company's share price will fall.
Einhorn, the founder of the $7.7 billion Greenlight Capital hedge fund, said in a letter to clients on Tuesday that "it has been hard to make money on shorts," citing bets against Chipotle.
He said investors have rewarded Chipotle "in the face of falling comparable-store sales, slowing and disappointing earnings growth, and a loss of pricing power."
"Such is the nature of the current market environment. Muy Loco!" Einhorn said, using the Spanish phrase for "very crazy."
Shares of Chipotle, which traded under $300 at the beginning of the year, were up $67.28 to $506.35 Friday afternoon.
(Reporting by Lisa Baertlein in Los Angeles and Jennifer Ablan in New York; Editing by Leslie Adler)