Chipotle Bean Counters Eye Prices



January 17, 2013, 7:30 p.m. ET


Chipotle Mexican Grill Inc., which turns 20 this year, is starting to feel its age.


The burrito chain has long been an industry rising star, with a highflying stock and devoted fans willing to pay about twice as much to eat there than at, say, a McDonald's or Burger King.


The chain used to be able to boost sales at existing restaurants partly by opening new ones, because people who learned about Chipotle for the first time by seeing a new restaurant tended to visit other Chipotles in their city, says Cowen & Co. analyst Paul Westra. But as Chipotle's brand awareness has increased—it now has more than 1,350 locations in the U.S.—that impact is fading and the chain is settling into "middle age," Mr. Westra says.


At the same time, cheaper rivals are encroaching and it is struggling with the rising cost of fresh ingredients, which are a source of pride for the company. Those things have weighed on its profits and pushed down its share price.


On Thursday, the company said it is likely to raise prices later this year to mitigate the costs for ingredients, which gobble up about a third of its sales. That's a potentially risky move when consumers are still feeling tight-fisted and there is plenty of competition. At Chipotle, the average meal is about $9. Taco Bell has moved in on Chipotle's territory with a line of similar burritos at a third of the price.


Chipotle Chief Financial Officer Jack Hartung told investors on Thursday that the company "won't rush" into passing along its cost increases to customers and didn't offer specifics. Yet earlier this week the company said faster-than-expected food inflation is likely to dent its profits in the fourth quarter, a warning that sent its shares down more than 5% Wednesday.


Company executives say they are pleased with their top-line sales growth—which is expected to total 17% for the fourth quarter—but Chipotle is taking steps to boost restaurant visits with a new ad campaign. It plans radio, print and outdoor advertising in several markets starting in March. In 2011, Chipotle had revenue of $2.26 billion.


The company also has tried to wring more sales out of existing restaurants by speeding up food assembly during peak hours and using hand-held devices to process payments while customers wait in line. The chain has gotten so fast that some analysts say there isn't much room left to process more orders.


Chipotle's shares, after reaching an all-time high of $442 in April, plunged 22% one day in July, after the company missed second quarter same-store sales growth expectations. Chipotle took another hit in October, when hedge-fund manager David Einhorn, whose Greenlight Capital had a short position in Chipotle stock, said the burrito chain had a "nosebleed valuation" and that it was losing customers to Taco Bell, an assertion Chipotle disputes...