Chipotle Mexican Grill shares slipped a bit after a pair of bad news items hit the media. The fast casual food chain reported in a regulatory filing that a federal grand jury has subpoenaed it in connection with a serious food poisoning outbreak in California. Because of the multiple serious outbreaks linked with eating at the chain, its sales took a huge hit as same store sales tumbled amid consumer fears about eating there.
Despite all the bad news, however, Chipotle shares were relatively little affected. They fell by the low single-digit percentages before turning a corner and moving back toward Tuesday’s closing price and then falling again. The stock remains volatile, bouncing around in the morning trading hours. As of this writing, the stock is down 2.3% at $438.84 per share.
Chipotle Mexican Grill faces federal probe
Chipotle said the grand jury which called for the investigation is demanding documents related to the norovirus outbreak that happened in August in Simi Valley, Calif. and sickened more than 200 employees and customers. Management said that it’s too early to know whether the fast casual chain will face any fines, penalties or other liabilities due to the probe. They have said they will cooperate with investigators but that they don’t usually comment on pending legal actions.
Unfortunately for Chipotle, the outbreak in California wasn’t the only one, which suggests that more probes could be launched in other places. An E. coli outbreak happened in nine states in October and November, and there was another norovirus outbreak at a location near Boston College that sickened at least 141 students.
Things go from bad to worse at Chipotle Mexican Grill
These other incidents received more media attention than the California outbreak. Health officials already revealed a probe of the widespread E. coli outbreak in December. Also in December, the Centers for Disease Control and Prevention announced yet another outbreak in three more states.
ABC News reports that in order to combat the damage that has been done to its reputation, Chipotle Mexican Grill took out full-page newspaper ads to apologize to customers and promise to make changes to improve food safety. Among the plans are changes to the cooking methods used and greater testing of produce and meat.
Chipotle sales fall due to fallout from outbreaks
Chipotle Mexican Grill also warned investors that all the negative media attention regarding the foodborne illness outbreaks in is having an impact on sales. The dining chain reported that comparable restaurant sales tanked in the fourth quarter, diving by an estimated 14.6% — a huge shift in a company that had been seeing steady growth for some time. In fact, it was the first decline since Chipotle went public, according to Bloomberg. Management had been projecting only a decline of 8% to 11%.
In a sign that things have gone from bad to worse, Chipotle Mexican Grill said following the Boston outbreak, same restaurant sales declined 34%. After the report from the CDC about the additional E. coli infections late last month, the metric fell 37%. For the full month of December, same restaurant sales tumbled 30%.
Management has retracted their revenue guidance for this year because they can no longer provide reasonably predictions due to fallout from the foodborne illness outbreaks. However, they are now estimating a range of $1.70 to $1.90 per share for the fast casual chain’s fourth quarter earnings. Analysts had been predicting earnings of $2.49 per share.
Chipotle Mexican Grill projects between $14 million and $16 million worth of expenses during the fourth quarter in connection with the foodborne illness outbreaks. Among those expenses were food replacement costs, lab testing, and marketing.
Analysts calm investors on Chipotle Mexican Grill
In spite of today’s bad news, analysts remain confident in Chipotle. BMO Capital Markets analyst Andrew Strelzik said in his report today that he continues to rate the fast casual chain’s stock at Outperform with a price target of $713 per share. He did say, however, that today’s announcements highlight all the uncertainty Chipotle faces going forward. Visibility into future metrics is now clouded even more as the company must invest unknown amounts of money into its supply chain, which will likely impact earnings and comparable sales for this year and beyond, he warned.
He also said that investors have been expecting bad news from Chipotle Mexican Grill for some time and that it’s roughly in line with what they were expecting. He thinks investors might be pleasantly surprised and that same restaurant sales might recover faster than expected.
“Recognizing near-term risks and uncertainty, the long-term CMG unit growth story remains intact and comps should begin to recover over time, in our view,” he wrote. “Even assuming a flattish EPS year in 2016, we believe the risk/reward is compelling as CMG’s stock currently trades at approximately 30x P/E on trough EPS,” he added.
Chipotle price target cut
Credit Suisse analyst Jason West and his team also continue to rate Chipotle Mexican Grill at Outperform but trimmed their price target from $600 to $575 per share. They explained their bullish stance despite the bad news (only pertaining to the food outbreaks and not the probe announced today) because they expect a strong recovery in 2017.
They said other brands have faced similar issues regarding food safety but have managed to recover, and based on the trajectory of those other brands’ sales, Chipotle Mexican Grill should recover nicely. They added that easy year over year comparisons in 2017, plus better digital capabilities and potentially another price increase should boost sales and earnings growth between 2017 and 2018. In fact, they’re projecting earnings for 2017 of $17.70 per share, a 37% increase from their 2016 estimate.
Cannibalization a concern?
UBS analyst Keith Siegner and his team have a more bearish view on Chipotle Mexican Grill. They remain Neutral-rated on the fast casual chain and have slashed their price target for its stock from $540 to $460 per share. He also cut his estimates for the food chain to a decline of 14.4% in same restaurant sales and earnings of $2.19 per share for the fourth quarter. His 2016 estimates move close to the lowest estimates on Wall Street.
