Chipotle Supply Woes Persist After Pork ‘Rolling Blackouts’

Chipotle's Burrito
Chipotle Mexican Grill Inc. stopped selling carnitas burritos at hundreds of its restaurants in January because it dropped one of its pork vendors, and it’s still not fully stocked again. Photographer: Craig Warga/Bloomberg

Chipotle Mexican Grill Inc.’s supply shortages, which led to “rolling blackouts” of carnitas in recent months, are expected to last until the end of the year, threatening to undercut the restaurant chain’s growth.

After first-quarter sales missed analysts’ estimates on Tuesday -- in part because of a lack of pork for tacos and burritos -- the company said it probably won’t be fully supplied again until the fourth quarter. The disappointing outlook sent the shares down 7.4 percent to $641.23 in New York, the biggest one-day decline in more than two years.

“Investors are waking up a little bit to the fact that the rest of the year may not be so great for the stock,” said Asit Sharma, an analyst at the Motley Fool.

Chipotle has been trying to boost its supply of pork since January, when it suspended a supplier for not meeting its standards for how pigs are housed. The shortage forced more than a third of its roughly 1,800 restaurants to stop selling carnitas -- the shredded pork shoulder that goes into burritos, tacos and salad bowls.

In the aftermath of the supplier suspension, Chipotle resorted to rolling blackouts, rotating carnitas on and off menus in various markets for about six weeks at a time. The tactic wasn’t particularly effective, Chief Financial Officer Jack Hartung said on a conference call.

“This rolling blackout has caused confusion among our customers about where and when we’re out of carnitas, and this has worsened the sales impact,” he said.

Ending Blackouts

Chipotle will stop the practice later this month, opting instead to serve carnitas more consistently in the markets where the item has been most popular. The company also found that carnitas fans were reluctant to switch to chicken or steak, making it harder to keep these customers happy.

“We had hoped that the shortage would encourage our carnitas customers to try another menu option, and some did,” Hartung said. “But many have decided to hold out until carnitas returns to their market.”

The carnitas situation, coupled with severe weather in parts of the country, lowered the company’s sales growth by about 2 percentage points last quarter.

Chipotle had already warned in October that growth would slow in 2015. And the chain raised menu prices an average of more than 6 percent in the third quarter to help offset higher beef, avocado and dairy prices.

Beef Prices

The company is now looking at raising beef prices again this year, possibly as soon as the third quarter, Hartung said. That increase may be 4 percent to 6 percent.

Chipotle also said tortilla costs are rising because it’s trying to eliminate additives from the products -- the only item on the menu that uses preservatives. The company has recently been using more flour that’s organic, unbleached and unenriched, spokesman Chris Arnold said.

The tortilla improvements come as Chipotle is gearing up for a new marketing campaign that will tout the simple, unprocessed ingredients in its menu, and contrast that with the practices at other fast-food chains.

“There are more than 800 artificial ingredients, preservatives and processing aids used in processed foods,” Mark Crumpacker, Chipotle’s chief creative officer, said on the conference call. “In fact, there are 85 ingredients in a single fast-food burrito served by one of our competitors.”

Missing Predictions

While Chipotle’s sales rose 20 percent last quarter, that was a lower rate than analysts had projected. Its $1.09 billion in revenue missed the average estimate of $1.11 billion. Same-store sales, a benchmark that measures restaurants open at least 13 months, rose 10.4 percent in the quarter. Analysts had predicted an 11.8 percent gain, according to Consensus Metrix.

First-quarter net income increased 48 percent to $122.6 million, or $3.88 a share, from $83.1 million, or $2.64, a year earlier. The average estimate of analysts surveyed by Bloomberg was $3.65.

Chipotle previously warned that same-store sales growth will slow this year to a low- to mid-single-digit percentage rate, following a 17 percent gain in 2014. The company repeated that forecast on Tuesday.

To maintain growth, Chipotle has been accelerating the opening of new restaurants. The company added 49 locations in the first quarter and plans to open as many as 205 this year, bringing its total to about 2,000. Chipotle ended last quarter with 1,831 restaurants.

Delivery Effort

It’s also pushing into delivery. Chipotle recently selected the startup Postmates Inc. as its official partner for the project. Customers can have online and mobile orders delivered in 67 cities, according to Chipotle’s Crumpacker.

The company hasn’t identified the pork vendor that it dropped in January, but it said Tuesday that a new source has been found.

“There is little cushion today in the supply system for pork that meets our standards,” Steve Ells, co-chief executive officer, said on the conference call. “That being said, we now believe we’ve found a solution with a new supplier to help us fill our gap.”

Chipotle will introduce pork from the new vendor in coming months and steadily increase supply through the third quarter. The goal is to be fully stocked by the final three months of the year.

“As we move closer to resolving the supply issues that have left us short of carnitas, we believe the pieces are in place to deliver strong performance throughout the year,” Ells said.

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