January 16, 2013 / 3:00 PM / 7 years ago

Chipotle food costs bite amid rising competition

(Reuters) - Higher food costs and rising competition are biting burrito chain Chipotle Mexican Grill Inc (CMG.N), which saw shares fall more than 5 percent on Wednesday following its late-night earnings warning.

Chipotle forecast fourth-quarter profit below Wall Street expectations. It blamed a faster-than-expected rise in food costs during the latest quarter, when cost pressures squeezed profitability. Still, the company said it expects food inflation to level off in 2013.

The chain didn’t say which ingredients were seeing the biggest price increases, but Chipotle historically has seen large moves in prices for steak and chicken, as well as rice and produce.

Chipotle is vulnerable to big swings in food costs because, unlike many other chains, it often cannot lock in prices for the antibiotic-free meats and organic ingredients used in its “premium” menu offerings.

It has been rough sledding of late for the fast-growing chain that has long been an investor darling.

Chipotle, which is the subject of an ongoing federal criminal probe into its hiring practices, this autumn cautioned investors that its restaurant sales could slow in 2013.

Influential hedge fund manager David Einhorn in October called the chain’s stock an attractive “short,” saying Chipotle will face significant competition and additional costs.


The Denver-based company, which runs more than 1,400 restaurants, late on Tuesday said it expected fourth-quarter earnings per share of $1.92 to $1.97 per share - well below analysts’ average forecast of $2.09 a share, according to Thomson Reuters I/B/E/S.

Ingredient costs are a persistent concern for restaurant chains and last year’s U.S. drought could raise prices for meat and other staples this year.

Still, some analysts said the fourth-quarter food cost spike appeared to be specific to Chipotle.

Chipotle’s stock fell 5.7 percent to $280.34 in late trading, while shares of rivals such as Taco Bell parent Yum Brands Inc (YUM.N) and Qdoba owner Jack in the Box Inc (JACK.O) were down less than 1 percent.

Chipotle said it expects to report food costs at 33.5 percent of sales in the fourth quarter, up from 32.2 percent in the year-ago quarter. Janney Capital Markets analyst Mark Kalinowski had forecast 32.7 percent.

“Commodities remain a wild card, particularly for companies that can’t or don’t hedge or contract,” Bernstein Research analyst Sara Senatore said.

With increasing competition from Taco Bell, Qdoba and countless upstarts, analysts said Chipotle will have a hard time raising prices to offset higher food costs.

S&P Capital IQ analyst Jim Yin on Wednesday cited such concerns in a note in which he reiterated his “sell” opinion on Chipotle shares.

Stock in Chipotle, which has been one of the industry’s best performing names, hit an all-time high above $442 in April. However, it’s up about 20 percent from lows in October.

The company is something of a victim of its own success, Morningstar analyst R.J. Hottovy told Reuters.

“They’ve basically given the restaurant industry a blueprint for a successful business model,” Hottovy said.

Indeed, many new restaurants feature Chipotle’s assembly line style of food preparation, where diners choose the ingredients used to build their burritos, tacos or salads.

“Not everybody is going to be able to recreate the brand,” bur rivals can easily mimic the company’s operations, Hottovy said.

And some analysts worry that Chipotle doesn’t have a line-up of new food to set it apart from me-too rivals.

“We remain concerned that it lacks future sales drivers, such as new product introductions,” Lazard Capital Markets analyst Matthew DiFrisco said in a client note.

Reporting By Lisa Baertlein in Los Angeles; Editing by Nick Zieminski

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