Chipotle's Menu Price Increases Will Likely Expand In Coming Months

Chipotle Mexican Grill, Inc. CMG patrons should be bracing for menu prices increase in the coming months, according to a note from BTIG.

The view comes close on heels of reports of menu price increases and findings by BTIG based on its own pricing checks.

Analysts Peter Saleh and Ben Parente noted that menu prices have increased in about 440 restaurants or about 20 percent of the total units in markets such as San Diego, Denver, Arlington and Columbus.

The increase averaged about 5 percent across the entire menu and ranged between 4 and 5.5 percent for entire items and 5-8 percent for drinks and side items, with the increase fairly consistent across markets, the analysts added.

Reasoning that the scope of price increase is limited at least for the time being, the analysts think same-store sales will likely be impacted by less than 1 percent in 2017.

A Necessary Evil?

Though Saleh and Parente questioned the timing of the price increase, given the fact that the concept's sales recovery remain debatable, they believe the increase was necessary to offset the considerable increases in some expenses in the past two years. The analysts also noted the company hadn't had any pricing change in most markets for about two years.

More Increases to Follow...

"Given the increased costs seen in recent years, particularly labor, we are not entirely surprised by the increase and believe more markets could see a similar increase in the coming months as sales recover," the analysts said.

Notwithstanding the pricing, BTIG estimates the higher costs from food safety and sales recovery efforts to result in a 300-400 basis point-reduction in margins below the previous levels even if the average unit volumes recover to $2.5 million.

Neutral on Chipotle

BTIG said it remains Neutral on shares of Chipotle, citing the pace of sales recovery and concerns about the time and effort needed to fully recover from food safety incidents.

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