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This McDonald's Chart Gives Me Hope for Chipotle Mexican Grill

By John Maxfield – Oct 4, 2016 at 11:11AM

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If Chipotle follows McDonald’s lead, which is a reasonable assumption, then Chipotle’s recovery from its 2015 foodborne illness outbreak could soon accelerate.

Image source: Chipotle Mexican Grill.

Two years ago, McDonald's (MCD -0.87%) faced a similar problem to the one Chipotle Mexican Grill (CMG -0.34%) faces today: convincing customers to return to its restaurants.

An investigation in 2014 revealed that one of McDonald's main suppliers in China, where the hamburger chain has over 2,200 locations, was giving the company tainted meat. Secret cameras captured workers at the supplier handling meat with their bare hands, picking it up off the floor and returning it to the processing machine, and repackaging expired beef and chicken products with new expiration dates.

You can imagine what this did to McDonald's sales in the East Asian country. Its same-store sales in China dropped 23% in the third quarter of that year. And they stayed negative, though not nearly to the same degree, for the next three quarters, down between 3% and 7%.

"We're actively taking steps to rebuild customer trust," then-CEO Don Thompson said on McDonald's third-quarter 2014 conference call. "We expect it to take six to nine more months for our business to normalize in the impacted markets."

Data source: McDonald's. Chart by author.

Thompson was just about right. Following four quarters of negative comps, McDonald's same-store sales in China rebounded sharply in the third quarter of 2015. They climbed 27% that quarter, helped by the fact that they had dropped by 23% in the year-ago period.

Since then, McDonald's comparable sales have stayed in the black, growing between 2% and 7% over the past three quarters.

It's this position, in turn, that Chipotle Mexican Grill finds itself in after a series of foodborne illness outbreaks at multiple of the burrito chain's locations caused its sales to plummet over the past few quarters.

In the fourth quarter of last year, roughly halfway through which the first incidents erupted, Chipotle's same-store sales fell 14.6%. The following quarter, the entirety of which felt the impact, comp sales were down 29.7%. They were lower in the second quarter of this year as well, off by 23.6%.

This is not good news for Chipotle shareholders. However, there is a silver lining. Namely, because Chipotle is about to approach the anniversary of its 2015 outbreaks, the chain will soon start comping against its sales from the worst part of its crisis.

Just as in McDonald's case when it reported huge positive comps in the third quarter of 2015 -- that is, 12 months after its supplier scandal -- Chipotle should also start to see its fortunes turn. It could happen in the fourth quarter of this year, or, more likely, in the first quarter of next year.

But either way, the negative headlines trumpeting Chipotle's falling sales should be over in the next few months. That should help to silence its remaining critics, giving its stock a chance to finally recover from the crisis.

John Maxfield owns shares of Chipotle Mexican Grill. The Motley Fool owns shares of and recommends Chipotle Mexican Grill. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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