- Analysts slash estimates as foodborne-illness crisis grows
- One-time industry darling hammered by negative headlines
Wall Street is struggling to figure out if the worst is over for Chipotle Mexican Grill Inc.
The burrito chain, staggering from a foodborne-illness crisis entering its third month, has seen more than $10.7 billion in market value wiped out since August. After the company announced last week that it had been subpoenaed in a related criminal probe, analysts are scrambling to determine how low the stock will fall and whether the former industry darling can recover its luster.
“If ‘Saturday Night Live’ does a skit on Chipotle, maybe that’s the bottom,” said Stephen Anderson, an analyst at the Maxim Group who has a hold rating on the shares, which fell to a one-year low of $413.29 on Friday. “The bad publicity surrounding the subpoena creates a whole new risk.”
Anderson cut his target price $40 to $395 on Wednesday after Chipotle said in a regulatory filing that it had received the subpoena, which stems from a norovirus outbreak at one of its restaurants in California. It also reported that same-store sales slumped 14.6 percent in the fourth quarter, a steeper decline than the chain had predicted. Analysts expect the company’s sales to be negative at least until 2017. The shares slipped 0.5 percent Monday to close at $411.10 in New York, putting them 46 percent below their all-time high of $757.77 on Aug. 5.
The food-safety problems have battered Chipotle’s reputation, which was built on the concept that fast food made with fresh and sustainably sourced ingredients is a more healthful dining option. The chain was popular with millennial customers and investors alike until November, when it was linked to an E. coli outbreak that sickened more than 50 patrons in nine states. That brought national attention to previous illnesses at Chipotle -- about 500 people have been sickened since July -- and sent the Denver-based company into a tailspin.
The uncertainty surrounding the subpoena and a continuing U.S. Centers for Disease Control investigation have led to increasingly divergent 12-month stock forecasts. On Oct. 31, before the E. coli news, there was a $190 gap between Chipotle’s high and low price targets. On Friday, that difference had widened to $338. Among 19 analysts surveyed by Bloomberg, the lowest target price was $375, while the high was $713.
Will Slabaugh, an analyst at Stephens Inc. who made the $375 forecast, had initiated coverage earlier in the week with a target of $425. He now says Chipotle faces “significant margin deterioration and longer and more pronounced” sales declines than previously anticipated. Fallout from the crisis could continue into 2017 and weigh on shares, he said.
Chipotle’s crisis expanded beyond E. coli last month after a norovirus outbreak at one of its restaurants sickened more than 140 Boston College students. That brought attention to previous incidents that weren’t widely reported, including the case in California that’s the subject of the U.S. criminal probe.
On Dec. 10, Steve Ells, the company’s founder and co-chief executive officer, publicly apologized for making customers sick and said the company would institute protocols that would transform the chain into an industry leader in safety. Even so, the shares took a fresh hit after the CDC said Dec. 21 that the E. coli outbreak had spread to three additional states.
“There’s been a tremendous amount of bad news out there, and with how fast news moves on Twitter, it hasn’t helped their cause,” said Jason Moser, an analyst at the Motley Fool. “They really need to stay out of the headlines for six weeks. Until they can pull that off, there’s going to be questions.”
Before the crisis, when Chipotle’s main concern was slowing sales growth, the company introduced a marketing campaign to tout its simple, unprocessed ingredients. The chain, which has said it still plans to open as many as 235 new restaurants this year, said it had room to grow because there was a large group of potential customers who weren’t familiar with its concept. Now, headlines about sick customers may be the way many people first hear of Chipotle Mexican Grill.
"The portion of the American population that hasn’t heard of them is probably the population that watches the network newscast in the early evening,” Anderson said. “They’re being introduced to it that way.”