Chipotle Continues to Set the Pace for Fast-Casual Restaurants

Chipotle Mexican Grill (NYSE:CMG) has become the standard for restaurant perfection, as not even bad winters and intense promotional activity can keep its growth from exceeding 20 percent-plus year over year. But perhaps most impressive is the fact that in the first quarter, when all of these hardships existed, Chipotle’s comparable sales rose 13.4 percent.

In comparison, fast-casual peers like Noodles & Co. (NYSE:NDLS) and Potbelly (NYSE:PBPB) saw their comparable sales decline 1.6 percent and 2.2 percent, respectively, in the same period. Chipotle has defied the odds, and with menu pricing it’s doing it once more, trading higher for good reason. Despite Chipotle’s near-flawless first quarter, its stock did see a decline from north of $600 to below $500 following earnings.

Like most restaurants, Chipotle saw costs rise in the quarter, approximately 150 basis points, which had a negative impact on operating margins of 40 basis points. It was this concern of rising food costs and the fear of lower margins that then resulted in Chipotle’s rather significant stock losses. With that said, Chipotle has staged a rather impressive stock rally from below $500 to more than $550 in the last couple of weeks.

Why might this be? According to RBC Capital, Chipotle has been consistently and seamlessly rolling out higher prices. The firm tracked prices at Chipotle stores in 11 major cities and found that overall menu prices have increased 6.5 percent while side items and drinks have increased 7.3 percent in recent weeks. Among the items with the biggest price increases is guacamole, which has been boosted as high as 11 percent in some areas. Notably, guacamole has contributed to much of Chipotle’s rise in costs, as it specifically has become more expensive. Yet perhaps the most impressive information from RBC’s research is that there has been no consumer backlash, which is evident seeing as how RBC’s research is the first time that price hikes have been make known. So what does this mean?

A high single-digit increase to prices combined with no downside estimates in same-store traffic means that Chipotle is almost certain to exceed analyst expectations for the current quarter, boost guidance, and that its margins will see significant increases. Albeit Chipotle has managed to increase prices very quietly, meaning such changes might not be throughout the country.

Personally, I have noticed no change in prices at two Chipotle stores in the Cincinnati area. However, with Chipotle appealing to consumers who don’t mind paying $8 to $10 for a burrito, it’s unlikely that such hikes would be noticed. In other words, pricing power is one thing, aside from growth, that Chipotle has going in its favor. McDonald’s (NYSE:MCD) couldn’t boost prices too much seeing as how it caters to value buyers.

Yet Chipotle has always prided itself on premium ingredients and quality food, which gives it leverage, and which is also why the stock is trading higher and why growth acceleration is likely to lead to even higher gains in the months ahead.

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