It’s not just food safety issues affecting Chipotle now. Rising food costs are increasingly a problem for the restaurant chain’s profitability, says one Wall Street firm.
Credit Suisse lowered its price target and reiterated its neutral rating for shares of the burrito restaurant chain, citing risk to future earnings due to higher avocado prices.
“We would not be buyers on recent weakness given limited visibility on the trajectory of same-store sales (due to July norovirus incident) and avocado inflation,” analyst Jason West wrote in a note to clients Friday titled “Avocado prices pose risk to 3Q/4Q EPS.” The avocado “price spike has potentially material ramifications for margins and EPS, at least near-term.”
West lowered his price target for Chipotle to $320 from $335. The new target is 6 percent higher than Thursday’s closing price.
Avocado prices have risen 75 percent since the middle of July because of shortages in Mexico and a poor harvest in California. The analyst noted Chipotle management commented during a July 25 earnings call that they expected prices for the fruit to “moderate” the rest of the year.
West estimated that every 10 percentage-point increase in avocado prices would lower Chipotle’s earnings-per-share by 30 cents on an annual basis.
The company’s stock has underperformed the market this year. It is down 20 percent year to date through Thursday compared with the S&P 500’s 9 percent gain.
A Chipotle spokesperson, in response to a request for comment, wrote in an email the company “will provide our next update on all of our financials — including trends impacting food costs — when we release our third quarter earnings.”