Shares of Chipotle Mexican Grill, Inc. CMG declined more than 3.5% in the trading session on Dec 21 as the U.S. Centers for Disease Control and Prevention (CDC) is probing the restaurateur’s links with a new E. coli outbreak in three states.
According to the CDC, five persons in Kansas, North Dakota and Oklahoma have been infected by an E. coli strain with a rare DNA fingerprint between Nov 18 and Nov 26. All of them confirmed to having dined at Chipotle a week before being taken ill.
Chipotle stated the three of the latest cases started from two of its restaurants — one in Oklahoma and the other in Kansas — and management is cooperating with the Food and Drug Administration (FDA) and CDC to investigate the cause. The CDC, however, is yet to affirm whether the cases are related to the larger outbreak that started in October.
Volatile Sales
Chipotle has been reeling under the negative publicity related to the E. coli outbreak, which began in Oregon and Washington at the end of October. It later spread to nine states, including Illinois, Maryland, Pennsylvania, California, Minnesota, New York, Ohio, Oregon and Washington and was linked to the popular burrito chain. Over the past two months, shares of the fast causal chain lost nearly 20% value.
In response, the company closed 43 restaurants in Seattle and Portland, which were reopened 10 days later with fresh ingredients. Also, fresh food products, raw meat and dairy products were tested before being cooked. Chipotle also stated that it was conducting deep cleaning and sanitizing at the rest of its U.S. locations and collaborating with health officials to improve food-handling practices.
However, Chipotle’s sales have taken a severe hit post the E. coli outbreak. Also, earlier this month, the restaurateur withdrew the 2016 comps outlook in the wake of the current volatile sales trends. Chipotle added that it is difficult to predict sales trends as a lot depends on the results of the probe by the health authorities.
Chipotle confirmed that sales have been ‘extremely volatile’ during the quarter due to its association with the outbreak. While the company reported low single-digit growth in comparable restaurant sales (comps) for October, last month comps declined 16%. Negative publicity is expected to continue to hurt the company’s top line. For the fourth quarter, Chipotle expects comps to decline 8–11%.
The company expects operating margins in the 22%-24% range, substantially below the year-ago quarter level of 26.6%. Earnings for the quarter are expected to be between $2.45 and $2.85 per share, substantially lower than $3.84 per share reported in the comparable quarter last year. (Read: Chipotle Shares Tumble on Weak Q4 Outlook, E. coli Woes)
Our Take
The fact that Chipotle has used only healthy ingredients has long been its marketing strength and brought in more customers, despite its comparatively high prices. With the negative publicity associated with the E. coli outbreak, Chipotle’s popularity among health-conscious diners is expected to continue to decline.
Chipotle presently has a Zacks Rank #5 (Strong Sell). Some better-ranked restaurant stocks are Dave & Buster's Entertainment, Inc. PLAY, Jack in the Box Inc. JACK and Shake Shack Inc. SHAK. All these stocks sport a Zacks Rank #1 (Strong Buy).
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