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SOURCE: Katrina Lewis, Bloomberg

Chipotle Mexican Grill Inc.’s margins are set to benefit from a resurgent avocado supply that will keep prices lower at least through the summer, SunTrust analyst Jake Bartlett wrote in a report.

The latest avocado shipment projections from the Hass Avocado Board suggest a favorable year for the fruit, which is the key ingredient in Chipotle’s guacamole. The supply of avocados is expected to increase 16% year-over-over in the second quarter of 2020 and 21% in the third quarter through August 30, fueled primarily by higher supply from California, Bartlett said.

Bartlett estimates that avocados account for only 5% to 10% of Chipotle’s cost of goods sold, but volatility in recent years has had an “outsized impact” on the chain’s margins. Last summer, Chipotle explored sourcing its avocados from California and Chile as Mexico’s tight supply caused prices to surge.

“The only wild card, as usual, for us is avocados,” Chief Financial Officer John Hartung said in response to a question about commodities during the company’s first quarter earnings call in April. “Hopefully this will be a more normal year since we’ve had two or three or four years now in a row of pretty volatile avocado costs.”

The popularity of avocados during the coronavirus pandemic comes at a key time for Chipotle with shares already trading at a record high. The stock has risen more than 120% from its lows mid-March and touched an all time high towards the end of May.

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