April 17, 2014 / 12:57 PM / 6 years ago

UPDATE 2-Chipotle raising prices as steak, avocados, cheese costs rise

(Adds company comment, details on food costs, byline)

By Lisa Baertlein

April 17 (Reuters) - Chipotle Mexican Grill Inc on Thursday said it will increase menu prices for the first time in nearly three years, fueled by all-time high costs for steak as well increasingly expensive avocados and cheese.

Shares of the popular burrito chain jumped as much as 6.5 percent on top-line results, but retreated 1.4 percent to $544.68 in midday trading after executives said they expect food costs to head even higher.

The Denver-based chain said key sales at established restaurants rose 13.4 percent in the first quarter, the highest in nearly eight years, helped by big-ticket catering orders and increased visits from diners, who often added extra meat and guacamole and chips to orders.

Chipotle is one of the fastest-growing restaurant chains and generally has been able to raise prices without denting its business. Other restaurants, including McDonald’s Corp, are struggling to increase traffic and sales and likely are not in a position to charge significantly more for food without alienating mainstream diners, many of whom are still spending cautiously amid the slow U.S. economic recovery.

“It has been nearly three years since our last company-wide price increase, and while we want to remain accessible to our customers, we are at a point where we need to pass along these rapidly rising food costs,” Chief Financial Officer Jack Hartung said on a conference call with analysts.

Chipotle expects to increase menu prices in the mid-single-digit percentage range starting at the end of the current quarter and complete changes early in the third quarter.

The company, which is known for using antibiotic-free meats and organic produce when possible, has a strong following among people who want to know how their food is produced. It was the first major U.S. restaurant chain to announce plans to remove food ingredients containing genetically modified organisms, or GMOs, from its supply chain.

The chain’s first-quarter food costs were a bigger-then-expected 34.5 percent of revenue, an increase of 150 basis points. Much of the pressure is coming from steak prices, which are up 25 percent so far this year and at the highest level Chipotle has experienced. Avocados and cheese are also adding to the commodity cost increases.

Hartung said food costs will be nearly 36 percent of revenue during April and are likely to push past that over the next two quarters, excluding the effect of any price increase.

“We believe we have a lot of pricing power,” Hartung said in response to questions from analysts. “We have built up quite a bit of permission to raise prices. We won’t cash in on all of that pricing ability right now, so we will still have some in the bank.”

Chipotle’s first-quarter net income rose 8.5 percent to $83.1 million, or $2.64 per share.

Based on last quarter’s strong results, the chain raised its forecast for sales at restaurants open at least 13 months to call for an increase in the high-single-digit percentage range, excluding any menu price increases.

Its prior forecast was for an increase in the low-single-digit percentage range.

It also reiterated its plans to open 180 to 195 new Chipotle restaurants in 2014, more than ever before.

Chipotle shares closed at $552.40 on Wednesday, marking a 52-week gain of more than 61 percent. (Additional reporting by Siddharth Cavale in Bangalore; Editing by Joyjeet Das, Bernard Orr)

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