After posting robust third-quarter results, Chipotle Mexican Grill (NYSE:CMG) has warned of rising labor costs and related price hikes in 2024. CFO Jack Hartung cited the newly passed law in California that requires fast food chains to pay minimum wages of $20 per hour to workers. The increased employee cost will be passed on to customers in California in the form of higher menu prices beginning April 2024.
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Chipotle currently pays its workers in California about $17 to $18 per hour in wages, already on the higher side when compared to rival chains. The burrito maker’s overall wage costs shot up 10.5% in the September quarter compared to the year-ago period and are slated to rise by another 2.5% to 3% in 2024. In California alone, the wages could rise by 15% to 20%, putting a big dent in its earnings.
The new law in California affects restaurant chains with at least 60 national locations. Chipotle has 3,300 restaurants across the U.S., with roughly 15% situated in California. Even so, Hartung did confirm that the law will not hamper the company’s plan to open more shops in the state.
Is CMG Stock a Buy or Sell?
Following the news of the law, Evercore ISI analyst David Palmer said that since CMG’s menu prices are cheaper compared to peers, it is in a “good spot” to increase the prices without drastically hurting margins. Palmer cited the cost of a typical chicken burrito priced at $9. He said with the expected price bump, the same burrito could see its price rise by a quarter in the coming months, which is not a big jump.
On TipRanks, CMG has a Moderate Buy consensus rating based on 14 Buys and five Hold ratings. The average Chipotle Mexican Grill price target of $2,173.88 implies 11.9% upside potential from current levels. Meanwhile, CMG stock has gained 41.7% so far this year.
