Yahoo Finance Why rising avocado prices won't be a big deal for Chipotle
Avocado prices are in limbo following a disruption in Mexico, but one analyst doesn't think Chipotle (CMG) investors have anything to fear.
This week, the US Department of Agriculture resumed avocado inspections in the state of Michoacán, Mexico, the country's largest avocado exporter, after they were suspended following an attack on two USDA employees earlier this month. The USDA plans to "gradually begin to return to the packing plants," the Associated Press reported, but said that additional security protocols are needed before operations fully resume.
Following the incident, the price per box of Hass avocados from Michoacán spiked roughly 54% from June 14 to June 18, according to Bloomberg data.
While consumers and investors might assume this could be bad for the overall Chipotle model — and drive up guacamole prices further (a side of the dip sells for $3 in NYC) — Bernstein analyst Danilo Gargiulo argued the impact may be limited.
"Chipotle has more limited exposure to avocado than I think most investors might assume," Gargiulo told Yahoo Finance.
3 reasons why avocado prices aren't a big deal for Chipotle
Gargiulo estimated that avocados only represent around 3% to 5% of Chipotle's total restaurant expenses and a high-single-digit mix, approximately 8%, of its food basket costs.
For comparison, beef makes up 20% of Chipotle's food basket and chicken makes up 15%, while dairy and packaging each make up 10%.
Chipotle has also been "diversifying their purchases over time" by sourcing avocados from different places like California, Gargiulo said. Now, he added, a "majority" of the avocados are coming from Peru.
Lastly, Gargiulo suspects the restaurant chain is hedging potential risks through "long-term contracting with suppliers that can help Chipotle mitigate some of these exposures."
"If you look at the correlation of avocado prices with the overall margins, there is no clear correlation," he said. "Management has been able to adjust the margins accordingly, and [has been] able to deliver better results than feared."
Chipotle's operating margin last quarter was 16.3%, up from 15.5% the year prior, while the restaurant-level operating margin was 27.5%, an increase of 190 basis points.
In a call with investors following the burrito chain's first quarter earnings results, CFO Jack Hartung said the company expects its cost of goods to be in the "mid-29% range due to higher prices across several items." For the remainder of the year, Chipotle expects inflation for its food costs to be in the mid-single-digit range.
However, Hartung specifically called out inflation in avocados, noting that the company anticipates "a step-up from the low levels we have seen over the past several quarters."
Chipotle stock was flat on Wednesday afternoon following the company's 50-for-1 stock split.
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Brooke DiPalma is a senior reporter for Yahoo Finance. Follow her on Twitter at @BrookeDiPalma or email her at bdipalma@yahoofinance.com.
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