There is a huge shortage of avocados and it’s not only millennials’ favourite breakfast food that will be affected.
Avocados make up about 10% of the cost of Chipotle’s food, and prices are up more than 75% since July, according to Jason West, an analyst at Credit Suisse.
Mexico and California, two of the largest suppliers of the green fruit, have had disappointing harvests this year. Prices are about 50% higher than the same period last year, according to West.
Chipotle’s management is a seasoned group of avocado buyers and they have learned to expect seasonal fluctuations in prices, but not at the levels seen right now, according to West.
Chipotle executives said they were expecting a seasonal 20% drop in prices moving into the second half of 2017. Instead, they they are likely to face a 10% increase.
The price of avocados is materially important to Chipotle’s earnings, and West expects the higher than expected prices to drag down third quarter earnings expectations by 13% and fourth quarter estimates by about 20%.
“We would not be buyers [of Chipotle] on recent weakness given limited visibility on the trajectory of same store sales (due to July norovirus incident) and avocado inflation,” West wrote.
West lowered his price target from $US335 to $US320 based on the rising avocado prices. Chipotle currently trades at about $US307.90.