Chipotle Does the Right Thing

Chipotle Mexican Grill's (NYSE: CMG  ) burritos won't be getting more expensive this year, after all. The Tex-Mex chain had hinted at "potential menu price increases" last quarter, but shelved the idea yesterday, saying that it has no plans to jack up prices for the rest of 2013. So investors will have to wait at least six months for the profit and sales jump that would come with any price hike.

You could argue that Chipotle has even more reason to raise prices now. Food costs ticked up again this past quarter, to 33.1% of sales. Those rising costs bit into restaurant margins, cleaving almost two percentage points from profits. Chipotle's expenses are well above fast-casual rivals like Panera Bread (NASDAQ: PNRA  ) , which books a steady 29% food charge. For its part, Panera hasn't shied away from pricing boosts. A 2.3% price rise helped the baker log a 3.3% jump in sales for the first quarter.

Slowing sales growth isn't an excuse for Chipotle to punt on pricing changes any longer, either. Customer traffic levels are on the upswing, as comparable sales bounced in the second quarter to over 5% versus the 1% growth it clocked to start the year. That's much better than Yum! Brands' Taco Bell chain could manage. After beating Chipotle by logging 8% growth in 2012, its fast food rival couldn't engineer a repeat, growing by just 2% in the U.S. last quarter.

Still, despite the stronger sales position Chipotle isn't budging on prices. Management says that a stable outlook for food costs should keep a cap on expenses going forward. The bad news for investors is that profitability will look weaker this year as a result. Chipotle's restaurant margin is 27.0% through the first six months of 2013, as compared to 28.3% through the same period last year.

The good news is that Chipotle's focus on attracting customers over hoarding profits should pay off over the longer term. In fact, the company boosted its sales growth outlook for the year, and it now expects "mid to low single digit" comparable sales growth, as opposed to the "flat to low" growth it forecast just last quarter. Sure, it could juice growth even more just by boosting prices a tad. But focusing on customer traffic levels is a better way to go. And Chipotle could always raise prices next year.

Right on

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