April 20, 2011 / 8:20 PM / 8 years ago

UPDATE 3-Chipotle faces criminal probe, higher costs

* Q1 EPS $1.46 vs Street view $1.44

* U.S. Attorney joins criminal probe into Chipotle hiring

* Food costs rise in Q1; expected to rise again in Q2

* Shares fall 3.2 percent after-hours (Adds details on immigration investigation, company comment, updates share price)

By Lisa Baertlein

LOS ANGELES, April 20 (Reuters) - U.S. prosecutors have joined a widening investigation into the hiring of illegal workers by Chipotle Mexican Grill Inc (CMG.N), requesting the fast-food burrito chain turn over documents, the company said on Wednesday.

Shares in the high-flying restaurant chain fell 3.2 percent after the company also said rising food costs were taking a bite of profits.

The criminal division of the U.S. Attorney’s Office in Washington, D.C. has requested documents related to U.S. Immigration and Customs Enforcement (ICE) audits, Monty Moran, co-chief executive of the burrito chain, said on a conference call.

“We’re told that it is customary for ICE and (U.S. Attorney) to work together, so makes sense they would be interested in reviewing this incident to be sure that our handling of the issue has been appropriate,” Moran said.

“At the end of the day, the investigation will show that we’re a good corporate director,” he said.

ICE Director John Morton told Reuters he had no comment on the Chipotle investigation.

Chipotle fired 450 illegal workers in Minnesota late last year and early this year after reviewing its hiring documents there.

ICE also is auditing Chipotle restaurants in Virginia and Washington, D.C., where dozens of illegal workers were recently fired. [ID:nN12256565]

Chipotle said on Wednesday that in March it began using the ICE-recommended E-Verify system in all its U.S. restaurants to check that new employees are legally eligible to work in the United States.

During the first quarter, a nonrecurring state unemployment tax refund and labor leverage driven by a 12.4 percent rise in sales at established restaurants offset about 30 basis points of expense from replacing illegal workers in Minnesota.

Labor costs were 24.6 percent of revenue in the latest quarter, down from 24.8 percent in the fourth quarter.

Analysts have said that they were concerned Chipotle’s labor costs could rise as it replaces illegal workers, taking away the cost advantage the company has held in the past.

A spike in food costs is also making it harder for the company to keep down expenses.

Prices for beef, chicken and avocados have been rising. Unlike many other chains, Chipotle it is unable to lock in prices because it uses natural and organic ingredients where possible.

Chipotle’s restaurant level operating margin was 25.2 percent for the first quarter, down 70 basis points from the prior quarter and down 90 basis points from the prior year.

During the first quarter, food, beverage and packaging costs were 32 percent of revenue, compared with 31 percent in the fourth quarter. Executives said they expected that to rise to around 32.5 percent.

First-quarter net income at the Denver-based company grew almost 23 percent to $46.4 million, or $1.46 per share. That topped analysts’ average estimate for a profit of $1.44 per share, according to Thomson Reuters I/B/E/S.

Revenue rose 24 percent to $509.4 million. Sales at restaurants open at least 13 months rose 12.4 percent, fueled by an increase in customer visits.

Chipotle said it now expects 2011 same-restaurant sales growth in the mid-single-digit percentages. It previously had called for a low-single-digit percentage gain in 2011 same-store sales.

Chipotle’s shares fell to $278.99 in after-hours trading after closing at $288.10. (Additional reporting by Jeremy Pelofsky and Mary Milliken in Washington, D.C. Editing by Tim Dobbyn)

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