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Chipotle warns Mexican tariffs could cost the brand $15 million

Fast-casual concept says it might have to raise burrito prices by 5 cents

Chipotle Mexican Grill Inc.’s stock fell several percentage points Monday after the fast-casual chain said a proposed tariff on imported Mexican goods could cost the brand $15 million and force the company to raise prices.

“If the announced tariffs are enacted, they could negatively impact our costs by about $15 million in 2019, and reduce our margins by 20-30 basis points,” said Jack Hartung, Chipotle’s chief financial officer, in a statement released Monday.

Chipotle’s stock closed Monday at $641.66 a share, down about 2.8% from Friday’s close of $659.97 a share.

Mexican goods play a large role in the brand’s menu. The Newport Beach, Calif.-based fast-casual chain sources avocados, limes, jalapeños, tomatoes and bell peppers from Mexico. 

If the tariffs, announced last week by President Donald Trump, become permeant, Hartung said the company “would look to offset these costs through other margin improvement efforts already underway.”

He didn’t not elaborate on what margin efforts the company was considering.

He said the company, which has about 2,500 restaurants, would also consider raising burrito prices by five cents to offset the financial impact of tariffs.

Passing that impact on to consumers “would cover the increased cost without impacting our strong value proposition,” he said.

Peter Saleh, an analyst with BTIG LLC, said in a note: "While we recognize the modest potential margin threat from tariffs on Mexican imports (primarily impacting avocados), we expect leverage on labor and other operating expenses to more than offset any drag. Furthermore, we note that Chipotle remains underpriced relative to its peers, giving the company an opportunity to further defend margins with price increases."

Hartung said Chipotle would not resort to any food shortcuts.

“We know that we could easily solve the volatility in our supply chain by purchasing pre-mashed or processed avocados, which would be cheaper, readily available and provide stability, but we are committed to our brand purpose and upholding our food with integrity principles,” he said. “We believe that using whole, fresh ingredients and making guacamole by hand in our restaurants each day leads to better tasting guacamole that our customers deserve and expect from Chipotle.”

On average, Chipotle makes more than 70 pounds of guacamole per store per day. Each day, that totals about 179,000 pounds prepared across all restaurants, the company said.

The proposed tariff comes as the peak availability of California avocados ends soon. The season runs through late summer, according to the California Avocado Commission. California is the largest producer of avocados grown in the U.S.

However, a majority of avocados consumed in the U.S. are imported from other regions including Mexico, where supplies are available year-round.

The Irving, Texas-based Avocados from Mexico trade group said the U.S. consumes 1.7 billion pounds of Mexican avocados each year.

Update June 3, 2019: This story has been updated with share closing information for Chipotle Mexican Grill's Inc.

Contact Nancy Luna at [email protected]

Follow her on Twitter: @FastFoodMaven

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