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Invest in Chipotle, Despite Slow Growth?

With Chipotle Mexican Grill facing slowing growth, two analysts warned that a rise in menu prices to mitigate potential food inflation could further reduce customer traffic and sales.

Chipotle anticipates mid-single-digit comparable restaurant sales growth for the full year, but said it sees only flat to low-single digit growth in 2013.

With growth slowing, margins could get squeezed if inflation picks up next year. On the conference call, Chipotle said it was reluctant to raise menu prices. While it has not seen a loss in market share to other competitors, higher prices could drive some consumers from Chipotle to lower-priced chains like Taco Bell, McDonald’s, and Burger King.

“We expect that a lot of this is macro-driven, so I don’t think the Chipotle brand is forever damaged,” Jeffery Bernstein, Barclays analyst who is neutral on stock, told CNBC’s “Squawk on the Street.” “In the near term, it’s going to be difficult for people to see the visibility to drive it meaningfully higher.”

He noted that with last year’s drought, winners in a rising commodity price environment would be twofold. The first of the two winners would be companies that franchise their businesses, which tend to be more fast-food chains.

The other winner, one that has very strong traffic trends, Bernstein said, has historically been Chipotle. However, if Chipotle raises prices, it may potentially damage further traffic.

He said the real challenge is managing investor expectations, as growth inherently slows overtime.

While Chipotle is in no rush to take on pricing, the company said it will first watch how the competitive market plays out in the next couple of quarters.

Bernstein maintains a $290 price target.
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