I've been a Chipotle Mexican Grill (NYSE:CMG) shareholder since 2006, the year of its IPO, and a big fan of the company both as an investor and a customer since I first visited the burrito chain in the 1990s.
Not surprisingly, I've long been bullish on the stock -- but a year after the company's stock first started falling on E. coli reports, I've been forced to reconsider my thesis. Chipotle's sales recovery has been much slower than I, and many others expected. In investing, it's always a good idea to consider the counterargument to your own thesis. Here are two big reasons why Chipotle stock might not bounce back.
1. This time it's different
When Chipotle was going through the worst of the E coli crisis, investors took solace in the fact that several fast-food chains had experienced similar foodborne illness outbreaks, but all had recovered their lost sales after a year. Jack in the Box, which experienced the worst foodborne illness outbreak in modern history -- its food infected more than 700 people, resulting in the death of 4 children -- recovered with the help of a new marketing campaign. The stock has increased more than 1,000% since then.
However, though Jack in the Box's outbreak was worse, Chipotle's sales slide has been steeper and longer.
There are a number of theories for why Chipotle's sales recovery has been so slow. Management has pointed to the viral nature of social media for exaggerating the threat, as well as the incremental reporting methods of the CDC and the traditional media's response.
However, the more likely culprit was that Chipotle's elevated branding, its "Food With Integrity" motto and insistence on using better ingredients like local, organic produce and humanely raised meat, left the company particularly vulnerable to such an outbreak. No one goes to Jack in the Box or Taco Bell to feel good about what they're eating. That's what was different about Chipotle. The food tasted good, but you could also feel good about eating because of how it was sourced. That's changed now. The customers it lost are likely those who favored Chipotle because of its unique approach to fast food. It may be difficult to persuade those customers to come back after losing that trust.
Basically, something has never happened until it happens the first time, and that could be the situation here.
2. A slow-footed response
Chipotle may have blown an opportunity to nip the food safety crisis in the bud before it robbed the company of nearly 40% of sales in January. Management was initially hesitant to apologize for the problem, and did not do so until a Norovirus outbreak infected more than 100 people at a Boston location in December. That outbreak exacerbated the customer exodus, and by the time founder Steve Ells went on the Today show and issued an apology in several major newspapers, it was probably too late. What was a food safety crisis morphed into a public relations crisis.
Chipotle took several significant steps at each point in the supply chain to revamp its food safety practices to ensure that the risk of infection were as close to zero as possible. But after the initial campaign to reassure customers, there was little follow-up. There were plenty of food giveaways, but free food won't entice someone who thinks it will make them sick.
The company added a section about the new food safety practices to its website, but instead of being front-and-center on the home page, it was buried and difficult to find. On its Twitter account, customers would often ask if it's safe to eat at Chipotle, and the company would offer a casual response like "Yup" or "Sure," indicating a corporate culture that seemed to downplay the seriousness of the event.
Over the summer, the company released another animated marketing video, but by ignoring the food safety crisis, it seemed to indicate a tone-deafness about the situation. The brand has been seriously damaged by the series of infections last year. Management's job at this point is to make sure that damage isn't permanent. With comparable sales still down more than 20%, it's clear it still has work to do on that front.
I'm holding onto my Chipotle stock, and I still think it should eventually recover those lost sales. But the horizon has gotten much further away. In its third-quarter report out Tuesday, the company said it was targeting $10 in EPS for 2017, or slightly below the $10.47 it made in 2013. At its current share price, that still translates into a steep P/E multiple of 40. Based on that projection, it will be years, if ever, before shares return to $750, where they were before the crisis hit.