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Spiking avocado prices are the least of Chipotle's worries

  • "For the investment community, avocados are the least of [Chipotle's] worries," BTIG analyst Peter Saleh told CNBC.
  • Saleh said that rise in avocado prices will impact Chipotle's margins, but that shareholders are more focused on whether the restaurant can win back diners.
  • For more than two years, Chipotle has worked to put a string of food safety incidents behind it and lure back customers who ditched the brand.
Chipotle restaurant workers fill orders for customers.
Getty Images
Chipotle restaurant workers fill orders for customers.

Chipotle Mexican Grill has more to worry about than the rising price of avocados.

While the price of the main ingredient in the restaurant's guacamole has jumped 75 percent since mid-July, BTIG analyst Peter Saleh told CNBC in a phone interview that the "avocado issue" is irrelevant for Chipotle going forward.

"For the investment community, avocados are the least of [Chipotle's] worries," he said.

Saleh said that rise in avocado prices, which has been caused by shortages in Mexico and a poor harvest in California, will impact Chipotle's margins, but that shareholders are more focused on whether the restaurant can win back diners.

"If the sales improve and they miss the bottom line because avocado prices went up too much, nobody is going to care," he said. "And in reverse, if [Chipotle] beats the bottom line because they managed avocado prices well but the sales came in the weak, the stock's going to go down."

In a research note published Friday, Credit Suisse analyst Jason 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.

"We generally don't update our financial outlook apart from our quarterly earnings disclosures," Chris Arnold, spokesman for Chipotle, told CNBC via email. "We'll update all of our financials, including any relevant food cost trends, when we disclose our third-quarter earnings."

For more than two years, Chipotle has worked to put a string of food safety incidents behind it and bring back customers who ditched the brand. However, the brand has been marred by a data breach, overtime pay lawsuits, another norovirus outbreak and an incident in Texas where rodents fell from the ceiling in one of its restaurants.

In a meeting last week, Mark Alexee, Chipotle's head of investor relations and treasury, told Saleh that the company will be implementing some strategies that it hasn't pursued aggressively in the past. This includes offering new menu items and bolstering the restaurant's TV advertising.

In fact, Chipotle is currently testing queso in about 350 locations in the U.S. The addition of this product could not only drive traffic but help with the rising cost of avocados.

"Keep in mind that if [Chipotle does] roll out queso it could be an item that cannibalizes some of its sales of guacamole," Saleh said. "So their incidences or sales of guacamole may come down as they sell more queso and therefore avocado pricing will be less important."

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