Can The Chipotle Stock Recover From Its E.Coli Nightmare?

  • Chipotle sales and reputation have suffered since the restaurant chain was associated with E.coli outbreaks around the country.
  • The company is spending aggressively to regain consumer trust.
  • Analysts agree that CMG can return to its former glory- it’s simply a matter of when and how much it will cost.

What started as an isolated E. coli incident over the summer quickly snowballed into a national food safety crisis. By the fall, Chipotle Mexican Grill (NYSE:CMG) had become the center of an E. coli and norovirus outbreak, with dozens of people in several states reporting Chipotle food as the source of their illness. Soon enough, the overcrowded lunch lines at the fast-casual Mexican food chain became empty seats, raising the eyebrows of analysts and investors.

The food safety crisis turned into a PR nightmare for Chipotle, causing sales to plummet. For the fourth quarter, the company revealed a 15% decrease in year-over-year same-store sales and a nearly 7% year-over-year decrease in revenue.

Chipotle is sparing no cost in an effort to regain consumer trust. The company implemented a widespread “Raincheck” campaign with a free burrito giveaway, encouraging customers to return to its restaurants in an attempt to rescue its tarnished reputation. While this resulted in a temporary increase in traffic, sales are still on the decline, prompting mixed reactions from Wall Street analysts.

One Credit Suisse analyst, Jason West, continues to recommend buying shares of Chipotle despite the company’s food safety woes. In a note earlier this month, West admits that sales may remain sluggish in the near-term, but he is optimistic that the company will regain its former glory. He explains that an analysis on Google Trends indicates “early signs of a positive shift in sentiment towards” the company. Additionally, increased consumer traffic at the company’s locations suggests that Chipotle is successfully regaining consumer trust.  The analyst sees substantial upside in the stock with a 12-month price target of $550, marking a potential 17% upside.

However, not all analysts are so optimistic on Chipotle’s bright future. Karen Short of Deutsche Bank notes that recurring food scares associated with the chain substantially set back the company’s efforts to regain consumer trust. Due to disappointing same-store sales figures and risks to profitability, the analyst advises investors to sell shares of Chipotle.

Analyst Andy Barish of Jefferies is also skeptical, downgrading the stock from hold to sell and reducing his 12-month price target to $350 from $390. The analyst points to lasting damage to the brand’s reputation due to the permanent nature of social media, which makes scandals like these hard to forget. He notes that it will be difficult for the chain to regain the trust of its most dominant and “fickle” Millennial consumer, who value its “Food with Integrity” promise, which is now hard to support. Prior to the scandal, Barish expected a more vigilant growth in SSS and EPS, two metrics that took a hard hit. He believes that the promotional giveaways were not enough to reverse “disappointing” February same store sales. Additionally, the analyst notes his survey results, which “indicates a negative directional lean to response rates and intent to return, putting added pressure on CMG to continue to aggressively promote during '16.” As a result, the company will have to increase costs, damaging profitability.

In the last three months, 12 analysts have recommend buying Chipotle, 4 have recommended selling, while 11 are staying on the sidelines and remaining neutral. Overall, analysts seem to agree that Chipotle does have the capacity to get back on its feet- it’s simply a matter of when and how much spending the company will have to do to get there.

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