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Why Chipotle Is Raising Menu Prices

Stocks in this article: CMG

NEW YORK (TheStreet) - Expect your Chipotle  (CMG) burrito bowl to be more expensive in the next few months. Suffering from higher food costs, especially in meat, cheese and avocados, the Denver-based burrito chain is finally doing what Wall Street has long expected - it's raising menu prices. 

During a conference call on Thursday to discuss the company's first-quarter earnings, Chipotle didn't say exactly how much menu prices would rise, just that the increases would be on average in the mid-single digits. It expects to start installing new menu boards with the new pricing late in the second-quarter, and be fully rolled out by early in the third quarter. Chipotle executives noted that the last time it raised menu prices was nearly three years ago. 

The news comes as Chipotle said that first-quarter net income rose 8.5% to $83.1 million, or $2.64 a share, missing analysts' estimates by 22 cents, according to Thomson Reuters. Revenue rose 24.4% to $904.2 million, beating the average estimate of $874 million.

The company said that comparable restaurant sales rose 13.4% in the March-ending quarter, compared to estimates of 8.8%, as tallied by Consensus Metrix. Chipotle attributed the growth to increased traffic and to a lesser extent an increase in average customer checks. Comps also benefited from one extra trading day in the quarter as compared to the first quarter of 2013.

Restaurant level operating margins fell 40 basis points to 25.9% during the quarter, from higher food costs partially offset by "favorable sales leverage" in labor and occupancy costs. Food costs were 34.5% of revenue, an increase of 150 basis points driven by higher commodity costs as a result of "inflationary pressures" in beef, avocados, and cheese prices, the company said. Additionally, general and administrative costs were 7.4% of revenue, up 130 basis points from the prior year period from "higher non-cash, non-economic stock compensation expense, and to a lesser extent from higher litigation costs," the company said in its earnings release. 

Chipotle opened 44 new restaurants in the quarter, bringing its total to 1,637. Chipotle restaurants are company owned stores, not franchised like other fast-casual eateries.

"We are delighted that more and more people are choosing to visit our restaurants every day allowing us to deliver double digit comps during the quarter. Our food culture has always been a defining characteristic of Chipotle and continues to set us apart from other restaurants. We are confident that our special food culture will continue to attract more customers to visit Chipotle as customers better understand and connect how natural and high quality ingredients that are freshly prepared result in better tasting food," said Steve Ells, Chipotle's founder, chairman and CEO.

Food prices have been an issue for the successful chain. The prices of steak is up 25% since the fourth quarter; cheese prices are expected to rise 10% in 2014 and avocado production in California is expected to fall 30% this year, while demand still rises, CFO John Hartung said on the company's conference call. 

Hartung noted that food costs will be 36% of revenue in April and likely higher over the next two quarters. That said, the company is expecting food costs to somewhat level off in the fourth quarter. 

In answer to a question on the call Hartung noted that going forward, the company is not a fixed time schedule as to whether menu price raises will be yearly or every few years.

--Written by Laurie Kulikowski in New York.

Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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