Chipotle Mexican Grill (CMG 0.79%) stock is down by almost 20% from its highs of the last year. The drop is mostly due to concerns about a recent E. Coli outbreak that could be related to the company's restaurants in Oregon and Washington. While the investigation about the E. Coli outbreak hasn't reached any definitive conclusions yet, it could clearly have negative implications for the company in terms of sales and reputation.
Is the recent decline in Chipotle stock a buying opportunity, or should investors get away from the company before things things continue deteriorating?
Facing the situation
According to recent reports, nearly 40 people have been poisoned by E. coli in Washington and Oregon, and sanitary authorities believe this outbreak could be linked to Chipotle food. Chipotle is responding rapidly to the situation. Management announced in a press release that the company has closed 43 restaurants in Washington and Oregon "out of an abundance of caution," even though only eight restaurants have drawn concern from the authorities.
Chipotle also announced additional measures such as extra cleaning and full sanitizing of its restaurants in the area, conducting environmental and food testing in its restaurants and distribution centers, and retaining two food safety consulting firms to assess and improve its food safety standards.
Steve Ells, chairman and co-CEO, said in the press release:
We work with a number of very fresh ingredients in order to serve our customers the highest-quality, best-tasting food we can. If there are opportunities to do better, we will push ourselves to find them and enhance our already high standards for food safety. Our deepest sympathies go out to those who have been affected by this situation, and it is our greatest priority to ensure the safety of all of the food we serve and maintain our customers' confidence in eating at Chipotle.
The big question for investors
When something like this happens, the key question for investors is whether the company is facing a temporary difficulty or if this is a sign of harder times ahead. Chipotle is a top player in the restaurant industry. The company has delivered explosive growth for investors over the past several years, and it still has substantial room for expansion. If Chipotle's problems are temporary, then the recent pullback in the stock is a buying opportunity. On the other hand, if the fundamentals are deteriorating, then it's better to stay away from the stock, even at discounted prices.
Chipotle has built its booming success on a simple and powerful receipt, what the company calls a "food with integrity" approach to Mexican food. Chipotle focuses on fresh and organic ingredients, sourcing from local producers when possible, and avoiding GMO ingredients. The company uses meat and dairy from pasture-raised animals, and the farms that supply Chipotle aren't allowed to use nontherapeutic antibiotics or synthetic hormones.
This approach has important implications on multiple fronts. Chipotle products don't only taste better than typical fast food offerings; the company's menu and practices are also generally considered better for the environment and overall healthier for consumers.
The store closings will have a modest direct financial impact on the business, Chipotle ended the third quarter with 1,931 restaurants, so the company is closing only 2% of its units. Negative publicity and customer concern are more important considerations, but chances are the company will be able to regain consumer trust over time.
Many restaurant chains, food producers, and drug companies have gone through much bigger problems in the past. Chipotle stands out among industry peers because of its unique culture and deep focus on food quality. Besides, management is doing the right thing by being straightforward about the situation and strengthening the company's food safety standards.
Investors need to closely monitor the situation in order to make sure that Chipotle continues providing an adequate response to both customers and authorities. However, Chipotle has what it takes to successfully navigate the situation and emerge from this crisis in a stronger shape than ever. If anything, Chipotle's E. Coli problems could be creating a buying opportunity for-long term investors.
