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Why Chipotle raising prices may be a good thing for its stock

·Anchor, Editor-at-Large
·3 min read

When it's all said and done, Chipotle's latest price increase will probably be just another catalyst for the stock price.

The burrito and salad bowl joint disclosed Tuesday that it recently raised menu prices by 4% to compensate for higher labor costs, fueled in large part by worker shortages sweeping across the country. It's an issue Chipotle (CMG) has chosen to address by lifting the average hourly wage for workers to $15 an hour, explained Chipotle CEO Brian Niccol on Yahoo Finance Live.

"So, we can pass that through. So, it feels like the right thing at the right time," Chipotle CFO Jack Hartung told analysts at a Baird conference. 

Chipotle raised prices on digital-only orders earlier this year.

But despite the newest menu price increase, Chipotle isn't showing any signs of losing customers upset with having to pay more for a burrito or salad bowl. Actually it's quite the contrary. With people becoming more mobile after getting their COVID-19 vaccine, they are packing out Chipotle (and other fast food restaurants) locations for lunch and dinner. 

"We are seeing people coming back to the dining rooms," Niccol told Yahoo Finance Live. "It's great to see the line back. It's great to see people back in the restaurant." Niccol added that digital sales (coming off that aforementioned increase on digital ordered food) have remained strong. 

What amounts to pricing power amidst strong demand is likely to be a tailwind to Chipotle's earnings this year, even when factoring in higher labor costs. No small coincidence that Chipotle's stock price rose 1% on the menu hike news on Tuesday, adding to a 30% gain over the past year. 

FILE - In this Feb. 8, 2016, file photo, shows a sign for the Chipotle restaurant in Pittsburgh's Market Square. Chipotle shares, under siege after a series of food scares erupted just over a year ago, are surging before the opening bell Wednesday, Sept. 7, after activist investor Bill Ackman revealed that he's become the taco chain's second largest investor. (AP Photo/Keith Srakocic, File)
A sign for the Chipotle restaurant in Pittsburgh's Market Square. (AP Photo/Keith Srakocic, File)

Meanwhile, Wall Street generally agrees that Chipotle has several other catalysts in place to support a richer valuation. 

The three being cited most by analysts, based on Yahoo Finance's read, are Chipotle's shift to drive-thrus (known as Chipotlanes), menu innovation and an impressive cash position. Chipotle plans to open more than 200 new restaurants this year (on the road to 6,000) and build off the latest successful introduction of quesadillas by debuting new menu items. 

"We believe there could be upside to unit development this year and remain optimistic about Chipotlane conversions, which we believe could allow the company to operate as many as 1,000 drive-thru locations by 2025. We view the conversion potential as an under-appreciated aspect of the story that should build in the coming years; the strong near-term momentum, unfolding sales drivers and long-term positioning keep us positive on shares and lead to our higher price target," wrote BTIG restaurant analyst Peter Saleh in a research note to clients. 

Saleh reiterated his Buy rating on Chipotle with a $1,725 price target. 

"Chipotle’s $1.7 billion total liquidity (including the $500 million revolver) is an enviable position to have," points out J.P. Morgan restaurant analyst John Ivankoe.

Ivankoe has a Neutral rating on Chipotle with a $1,460 price target. 

Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

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