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Tariffs on Mexico to cost Chipotle $15M, could cause price hike, CFO says

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Tariffs on Mexico to cost Chipotle $15M, could cause price hike, CFO says

Chipotle Mexican Grill Inc. could raise prices on its burritos, tacos, bowls and other menu items to offset an expected $15 million in additional costs in 2019 from the Trump administration's newly announced tariffs on imports from Mexico, CFO Jack Hartung said June 3.

The U.S. plans to apply 5% duties on all imports from Mexico starting June 10 and will gradually increase tariffs to 25% by October over President Donald Trump's concerns of migrants crossing the U.S.-Mexico border.

That would add cost for Chipotle and erode the company's margins by 20 to 30 basis points, Hartung said in a statement provided to S&P Global Market Intelligence. The quick-service chain posted a 21% restaurant-level operating margin in the first quarter, up from 19.5% in the year-ago period, according to an earnings release.

"We know that we could easily solve the volatility in our supply chain by purchasing pre-mashed or processed avocados which would be cheaper, readily available and provide stability, but we are committed to our brand purpose and upholding our food with integrity principles," Hartung said in the statement.

Chipotle would look to "other margin improvement efforts already underway" should the tariffs become permanent, Hartung said.

"We could also consider passing on these costs through a modest price increase, such as about a nickel on a burrito, which would cover the increased cost without impacting our strong value proposition," Hartung said.

Chipotle could suffer worse impacts from tariffs in 2020 if they are in effect for the full year, William Blair analyst Sharon Zackfia said in a June 3 note to clients following Hartung's announcement.

Shares in Chipotle were down 2.5% in midday trading on June 3 to $643.63.