Chipotle Mexican Grill Inc. (CMG) said it will consider raising its menu prices again next year, as the company is already seeing the impact of the summer drought on its food costs, while customer traffic growth is stuck at a lower rate than in the past.
Chipotle's shares sank 10% after hours to $257.03 as the company's 20% rise in profit in the third quarter didn't meet Wall Street's expectations.
The Denver-based burrito chain, positioned in the hot spot between traditional fast-food and waiter-service dining, has seen double-digit sales growth at its established restaurants in the past.
But in the third quarter, sales at restaurants open for roughly at least a year rose 4.8%, falling short of the 5.4% projection of analysts polled by Thomson Reuters and perhaps providing more fodder for the theory that Yum Brands Inc.'s (YUM) Taco Bell may be stealing customers with a new, similar menu.
Chipotle's shares have been dragged down since April amid concern about slower growth in customer traffic and sales. The company's second-quarter results, announced in July, only exacerbated investors' fears that the economy and the competition are weighing on Chipotle.
The stock has also been pressured by hedge fund manager David Einhorn, who recently said Chipotle had a "nosebleed valuation," and that it's losing customers to Taco Bell's new higher-end "Cantina Bell" burritos and burrito bowls.
Chipotle argued that its underlying customer traffic trends were consistent from the second quarter to the third quarter, indicating that Taco Bell's new copycat menu isn't causing customers to defect.
Founder and Co-Chief Executive Steve Ells said Chipotle is different from Taco Bell and others because it allows customers to combine the variety of ingredients in any way. "I think that's why you have such a high frequency at Chipotle," Mr. Ells said on a conference call. "It's because of that ability to customize."
Instead of conceding to the speculation that Taco Bell is infringing on its territory, Chipotle continued to blame the economy for its slowdown in customer traffic growth.
But with higher food costs pressuring its profit margin, Chipotle said it may be necessary to raise menu prices in spite of consumer weariness.
Chief Financial Officer Jack Hartung said the company will be "patient" with its pricing decisions, so as not to deter customers. "We could move quickly, but we're going to choose not to be in too much of a hurry.
We don't want to be the first ones out of the box with price increases," he said. "We'd rather see what happens with the economy, see what happens with the consumer spending, see what other competitors do and how consumers response."
Last summer, Chipotle implemented a round of price increases in certain regions for the first time since the recession, but said the pricing didn't have a negative impact on sales.
Looking to maintain growth long-term, Chipotle is working on expanding in Europe and has been pushing to speed up its long lines during the lunch rush. It is also moving forward with its new Southeast Asian concept called ShopHouse, with plans to open its second and third locations in the first half of 2013.
Chipotle posted a third-quarter profit of $72.3 million, or $2.27 a share, up from $60.4 million, or $1.90 a share, a year earlier. Revenue grew 18% to $700.5 million, below recent growth above 20%.
Analysts predicted earnings of $2.30 a share on revenue of $702 million...
Source: Argentine Beef Packers S.A.
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