Chipotle Downgraded After Merrill Lynch Says Their Labor Costs Are Too Much

While fans haven’t been happy with Chipotle’s queso as of late, the burrito chain’s got bigger problems to worry about. A major finance firm, Bank of America Merrill Lynch, recently had Chipotle downgraded on its value performance estimates.

Merrill Lynch analyst Gregory Francfort told CNBC that his company was moving Chipotle from “Neutral” to “Underperform” due to concerns over labor costs that should cause a 10% drop in earnings per share for each of the next two years. “We believe further gains from trimming hours will prove difficult which limits the opportunity to get labor below 27 percent of sales even if traffic recovers,” Francfort said, indicating a concern that those expenses will eat too much into Chipotle’s revenue.

Merrill Lynch also feels that Chipotle doesn’t have room to cut hours more to increase sales, as their report found that average weekly hours for full-time and part-time burrito makers fell from 34.1 to 21.7 from 2006 to 2016. This could just be because Chipotle hires a lot more part-time workers than they do full-time, however. The chain has over 59,000 employees across its 2,250 locations, which is significantly higher than the rest of the restaurant industry, according to wealth optimization platform Macroaxis.

Chipotle spokesperson Chris Arnold called the analysis “flawed and inaccurate,” claiming that the burrito business had actually increased hours to help launch their new queso. He also noted that the firm’s report was based on a 12-year time frame over which “the scale of our business and labor wages have changed dramatically.”

Regardless, neither company’s statements bode well for Chipotle’s employees. They currently make an average of about $9.37-$9.62 per hour at the Crew Member level, according to Glassdoor. At full-time, that puts the mean salary at around $19,500-$20,000 before taxes. Merrill Lynch’s demand for hour cuts and Chipotle’s claim that they essentially have more available hours to cut puts some of those wages in jeopardy.

Investors seem to be unfazed overall by Merrill Lynch’s report, however, as shares of Chipotle have held steady in the $320-328 range over the past week. Chipotle will have their third-quarter earnings call later today, though, so we’ll see how the stock performs after that.