Chipotle (NYSE:CMG) is in a bit of a pinch.
The company just reported fourth-quarter results that place its sales growth firmly in the "good but not great" category. Comparable-store sales rose by just 3.8% in the quarter. That's a tad better than the 3% that Yum! Brands (NYSE:YUM) managed in the U.S. But it's well below Panera Bread's (NASDAQ:PNRA) 5.1% boost.
It's also a far cry from the 11.1% rise that Chipotle logged in the year-ago quarter.
Chipotle's most recent results continue a trend of decelerating sales growth that's been going on for almost a year at the burrito maker. But the real problem is that the slowdown is also coming at the same time that a big jump in food costs has hit the company's books:
Of course, Chipotle isn't alone in having to deal with rising food costs. Yum! Brands saw its restaurant margins tick down last quarter, thanks in part to commodity cost inflation. The difference for Chipotle is that it hasn't responded to rising costs by raising menu prices.
And that comes back to its decelerating sales trends. The company can't jack up its menu prices while sales growth is softening, for fear of feeding into that worrisome trend.
Still, with price inflation running so high, Chipotle might not have much choice. Management told investors that the company plans to "be patient," and to decide on any potential price hikes later in the year. CEO Steve Ells put it this way:
We'd rather find efficiencies ourselves and that's why we have always been patient, we've always tried to make sure that that we can find as many efficiencies within our existing business model before having to raise prices, but in cases like this where we think we are finding most of efficiencies or have most [efficiencies] in our model where inflation has cooked our food cost up into this range [of] 33.5% or 34% or so, we find that we have no choice but to raise prices.
Once Chipotle's management feels confident enough to boost menu prices, the impact on comparable sales could be significant. Panera's 5.1% growth in the quarter, for example, wouldn't have been possible without the 2.5% contribution from price increases. But before Chipotle can enjoy that kind of profit boost, it needs to see its sales growth stabilize.
Fool contributor Demitrios Kalogeropoulos has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill and Panera Bread. The Motley Fool owns shares of Chipotle Mexican Grill and Panera Bread. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.