Chipotle Mexican Grill Inc. has to buy a lot of avocados to keep up with guacamole demand, and with prices going up margins could take a hit, Truist Securities says.

Avocado shipments could fall 5.8% in the third quarter, according to data from the Hass Avocado Board quoted in a Truist note. The decline could drive up the cost of avocados.

“We believe that avocados account for only 5% to 10% of Chipotle’s COGS [cost of goods sold], but volatility in recent years has had an outsized impact on margins,” analysts wrote.

Chipotle
CMG,
+1.98%

recently raised prices by 3.5% to 4% in order to offset the cost of higher wages, which were announced in May.

See: Chipotle’s upcoming launch of smoked brisket should make recent price hikes easy to swallow

Wedbush analysts say menu additions, like smoked brisket, will likely tamp down any customer pushback on higher prices.

Still, Truist says avocado prices can now be added ” to the list of inflation concerns.”

Watch: Which sectors stand to win or lose as inflation creeps up

Truist rates Chipotle stock buy with a $1,750 price target.

Chipotle shares are up 7.4% for the year to date while the S&P 500 index
SPX,
+0.33%

has gained 13.6% for the period.



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