1 Chart That Shows Chipotle's in a Bind

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:

Source: Chipotle's financial filings.

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.

More about Chipotle
Chipotle's stock has been on an absolute tear since the company went public in 2006. Unfortunately, the past year hasn't been kind to it, as investors question whether its growth has come to an end. Fool analyst Jason Moser's new premium research report analyzes the burrito maker's situation and answers the question investors are asking: Can Chipotle still grow? If you own or are considering owning shares in Chipotle, you'll want to click here now and get started! 

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  • Report this Comment On February 06, 2013, at 6:05 PM, EquityBull wrote:

    I sold 7/8th of my CMG after hours yesterday. The slowing growth is troublesome mostly in context to CMG's hyper-growth valuation. The company itself is good. The growth is good. But the valuation says it must be GREAT. It isn't and I could not swallow paying up this much for a company with good growth that is no longer "great".

    Left a little on the table for the long term but do fear a valuation correction once the selling kicks in and people start to question it. Right now you have a very highly valued equity (as CMG often has been) except in the past their numbers have been there to support it.

    Now you run up against a higher store base and smaller percentage of new openings relative to the base. About 1400 stores and 160 to 180 new openings. A little more than 12/% unit openings if they hit the high end in 2013. Couple that with 0% to 3% same store sales in first half. then maybe 5% to 8% if they can push through price increases WITHOUT losing foot traffic. That gets you to about 17% eps growth if all goes well. At 35 plus PE just too much.

    Hopefully we get a pullback to the 150 to 200 range and it can be a good buy there

  • Report this Comment On February 07, 2013, at 6:41 AM, TMFSigma wrote:

    @equitybull - That's the hard part, as you said: pushing through price increases without slicing your traffic numbers. Looks like the market got excited about the potential for goosed profits after prices do finally go up. But if it hurts customer traffic its a long-run negative IMO.


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