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Chipotle Mexican's Costs to Rise on Trump Tariffs for Mexico

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Chipotle Mexican Grill, Inc.’s (CMG - Free Report) costs may increase by approximately $15 million, if Trump tariffs are enacted on Mexican imports. Following the news, shares of the company declined 2.8% yesterday.

President Donald Trump has decided to levy a 5% tariff on all goods imported to the United States from Mexico. He added that the “tariff will gradually increase until the Illegal Immigration problem is remedied at which time the Tariffs will be removed.”

If the illegal immigration crisis persists, Trump said that tariffs will be raised to 10% on Jul 1, and by another 5% every consecutive month, up to 25% by Oct 1. Trump said that “tariffs will permanently remain at the 25 percent level unless and until Mexico substantially stops the illegal inflow of aliens coming through its territory.”

According to Chipotle’s CFO Jack Hartung, if the tariffs get enacted it will likely offset the costs through margin enhancement efforts and by modest price increases. On the first-quarter 2019 conference call, the company stated that food costs are likely to increase by 100 basis points during the second quarter due to increase in avocado prices. Tariffs might further push up the prices higher.

Meanwhile, Chipotle’s consistent efforts to connect with its customers in order to retrieve their trust and loyalty as well as bring them back to its stores have escalated costs. Moreover, costs to support the company’s newly designed food safety program may dent the company’s margins. Also, the implementation of food safety practices has increased the amount of labor required to prepare and serve food, resulting in higher labor costs.

Price Performance

In the past six months, shares of this Zacks Rank #2 (Buy) company have surged 41.5% compared with the industry’s 10% rally. Despite its reputation taking a hit from a food-borne illness, Chipotle’s viable business strategy and the appointment of Brian Niccol proved conducive to the company in 2018.

For 2019, management expects comps to grow in the mid to high-single-digit range and open 140-155 restaurants. Additionally, Chipotle's increased focus on food safety and improving customer experience along with various sales-building initiatives is likely to drive the top line.

Other Key Picks

Other favorably-ranked stocks that warrant a look in the same space include Denny's Corporation (DENN - Free Report) , Dave & Buster's Entertainment, Inc. (PLAY - Free Report) and Yum China Holdings, Inc. (YUMC - Free Report) . Denny's sports a Zacks Rank #1 (Strong Buy), whereas Dave & Buster's and Yum China Holdings carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Denny's earnings surpassed the Zacks Consensus Estimate in two of the trailing four quarters, the average beat being 8%.

Dave & Buster's Entertainment and Yum China’s long-term earnings are likely to witness 14.8% and 9.8% growth, respectively.

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