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Chipotle, Restaurants Suffer As Avocado Prices Surge

Chipotle-Avocado-082817.jpg

Beleaguered Mexican-food chain Chipotle Mexican Grill Inc.'s (CMG) profitability might be severely impacted in the near-term due to the recent surge in avocado prices, prompting bearish Chipotle speculators to load up on short positions.

Avocado prices have surged 75 percent since the start of July amid disappointing harvests in Mexico and California. The green fruit accounts for about 10 percent of Chipotle's food costs and is the primary ingredient in guacamole.

Financial analytics firm S3 Partners noted that the restaurant sector in general has seen an increase in short interest over the last month due to disappointing same-store sales and overall customer demand in 2017.

"Chipotle is the largest short in the sector, as well as the most profitable short in the sector after short sellers gained $467 million in the 3rd quarter," S3 Partners commented.

Other reasons for traders to be bearish on Chipotle include the short-term earnings effect of the company's promotional and marketing spending as well as margin degradation due to higher labor costs, according to S3 Partners.

Meanwhile, Credit Suisse said in a research note that Chipotle's profitability in the near-term may be severely affected due to the recent surge in avocado prices.

The research firm estimates that every 10 percent increase in avocado prices will cause a 30 cents decline in Chipotle's earnings per share.

Credit Suisse maintained its neutral-rating on the company, and lowered its price target by 4.5 percent to $320. It also also trimmed its estimates for Chipotle's 2017 and 2018 earnings per share to $6.38 and $9.57, respectively, from $6.95 and $9.71 previously.

Chipotle has been struggling with a sales slump on a series of food-related disease outbreaks, and was trying new avenues to woo back customers to its outlets. The company, a burrito and tacos chain, was spun off from McDonald's in 2006.

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