Chipotle Mexican Grill’s margins could take a hit from the predicted decline in avocado shipments next quarter, according to Truist analyst Jake Bartlett.
The Hass Avocado Board is forecasting a 5.8% decline in avocado shipments during the third quarter compared with last year. A smaller supply of avocados could cause prices to spike and make it more expensive for Chipotle to whip up its guacamole.
Bartlett estimated in a Wednesday note to clients that avocados account for only 5% to 10% of Chipotle’s cost of goods sold, but they can still have a significant impact on its margins. He is forecasting that a 10% spike in the price of an avocado could drag down earnings by 10 to 12 cents per share in the third quarter.
By now, the burrito chain is very familiar with spiking avocado prices. CFO Jack Hartung told analysts on the company’s first-quarter earnings call that the company is seeing a seasonal shift every year now.
The summer months typically usher in surging prices for avocados because Mexico, the top supplier of them to the U.S., usually ships fewer during those months. Peru, the second-highest supplier, usually sees its avocado shipments rise during the summer, thanks to reversed seasons in the Southern Hemisphere, but its production typically isn’t enough to satiate American consumers. California grows about 12% of the supply.
So far, 2021 has been a rocky road for avocado prices. They fell 26% in the first quarter due to higher shipments from Mexico and rose 4% in the second quarter, according to Bartlett. As of Friday, U.S. retail prices for the Hass variety were up 6% to $1.19, based on USDA data.
Chipotle has already raised prices this year. Earlier in June, executives said menu prices have risen about 4% to cover the cost of raising wages for its workers. Hartung said the company is monitoring rising food costs but no further increases are planned at that time.
Chipotle did not immediately respond to a request for comment from CNBC.
Shares of Chipotle were up modestly Wednesday afternoon. The stock is up 5% this year, giving the company a market value of $42 billion.