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TheStreet Open House

Chipotle (CMG) Considers Raising Prices Because of Higher Costs

Stocks in this article: CMG

NEW YORK (TheStreet) -- Chipotle (CMG) is considering raising menu prices next year as it faces higher costs for food products. For the third quarter ended Sept. 30, the Mexican food eatery recorded a 60-basis-point decrease in its restaurant-level operating margins to 26.8%, a result of increased produce and marketing expenses.

During a conference call on Thursday evening, Chief Financial Officer Jack Hartung said higher prices for salsa ingredients, dairy and meats is hindering profitability. Chipotle has also committed to removing all produce containing genetically-modified organisms (GMO) from the menu by 2014.

"While the timing is difficult to predict as we still have work to do to remove GMOs from our ingredients, a price increase around midyear is a reasonable assumption," said Hartung.

Chairman and Co-CEO Steve Ells said a price increase could be in the mid-single digit range and is dependent on general ingredient inflation and the cost of removing all GMOs.

"Our food cost which is now in a 33.5-34% range now drops down much closer to that 32-32.5% range," added Hartung based on a projected 4% price increase. "It would give us the opportunity to have returns that are at or above what our record levels have been."

In the third quarter, food costs were 33.6% of revenue, compared to 33.1% in the previous quarter and 32.6% in the same period a year ago.

Ells noted the fast-casual restaurant will continue to keep prices low while maintaining a strong economic model. "We have been able to do that by virtue of the fact that our food tastes better and we have high average unit volumes enough to cover this more expensive food cost," he added.

Reporting after the bell on Thursday, the Denver-based restaurant chain beat expectations on revenue with an 18% increase in the third quarter to $826.9 million. Due to the higher food costs and marketing expenses, earnings per share came in at $2.66 a share, lower than analysts' expectations of $2.78 a share, according to Thomson Reuters.

In his recent Real Money analysis, Jim Cramer said while he was concerned third-quarter results would disappoint, he was pleased with the same-store sales numbers (a 6.2% increase in the quarter) and growth prospects such as new menu item Sofritas.

Shares were 10.8% higher to $486.26 early Friday; the S&P 500 was gaining 0.27%.

 TheStreet Ratings team rates Chipotle Mexican Grill Inc as a Buy with a ratings score of A-. TheStreet Ratings Team has this to say about its recommendation:

"We rate Chipotle Mexican Grill Inc (CMG) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its robust revenue growth, largely solid financial position with reasonable debt levels by most measures, growth in earnings per share, increase in net income and solid stock price performance. We feel these strengths outweigh the fact that the company is trading at a premium valuation based on our review of its current price compared to such things as earnings and book value."

Written by Keris Alison Lahiff.

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