Chipotle Mexican Grill (CMG 2.97%) shares dropped 12% last Friday after the CDC announced that more reports of E. coli had been connected to Chipotle restaurants. The stock fell to an 18-month low as it became clear that the foodborne illness outbreak was not just limited to the Pacific Northwest, where the company had closed stores a few weeks earlier. New cases were reported in California, Ohio, Minnesota, and New York, which seemed to make it a nationwide threat. Making matters worse, the source of the bacteria has yet to be identified.
The stock started bouncing back on Monday morning, indicating that some investors saw the plunge as a buying opportunity. Analysts, meanwhile, are divided on the stock, with some predicting a further decline as the extent of the outbreak and its impact on the burrito chain's brand are not yet known. No one knows how this will affect Chipotle's performance, but foodborne illness outbreaks are not uncommon in the restaurant industry. At this point, history likely presents the best guide on how chains recover from them.
A brief history of E. coli
E. coli is one of the more common and potentially dangerous foodborne bacteria, and can be transferred through contaminated water or food as well as contact with animals or people. The most well-known E. coli outbreak in modern history happened at Jack in the Box (JACK 2.54%) in 1993 when ground beef served at the California-based burger chain caused 623 confirmed cases with 171 hospitalizations and four deaths. Investigators implicated 73 restaurants in the outbreak, and a recall ensued. The negative media attention was crushing for Jack in the Box, and its comparable sales plummeted 22% the quarter news broke, finishing the year down 7%. However, the following year, comps rose modestly and the company's stock has roared back in the years since, in part on the strength of its Mexican fast-casual chain, Qdoba, which competes with Chipotle.
An E. Coli outbreak at Yum! Brands' (YUM 0.95%) Taco Bell chain in 2006 sickened as many as 67 people and led to a 5% decline in comparable sales in the quarter the outbreak took place. Comp sales fell 5% in 2007, the following year, as well.
Where Chipotle stands today
The initial Chipotle outbreak sickened a reported 39 people in Oregon and Washington. Chipotle responded by closing all 43 restaurants in both states and replacing all food items in the stores "out of an abundance of caution." The CDC last Friday reported six additional cases in four other states, but it appears that the bulk of the issue is in the Northwest.
At this point, the biggest risk to the company is that the infections expand into new stores and regions once again, but the CDC pointed out that only one infection occurred from someone eating at Chipotle after Oct. 30. (That visit took place on Nov. 6.) This would seem to indicate that the outbreak has been controlled, though the fact that a source hasn't been identified remains concerning.
The outbreak is much less severe than the one that hit Jack in the Box in 1993, as only 16 people have been hospitalized and there have been no deaths. In scale, it seems more similar to the Taco Bell 2006 E. coli outbreak.
Some blowback on Chipotle's sales is likely as the news is hurting the brand, and will take a toll on consumers' confidence in its food safety even after the company gets a clean bill of health. For investors though, historical cases would indicate that there should be no real long-term damage to the company. The stock has already been punished considerably, falling 16% since word of the outbreak first became public a few weeks ago. Its P/E ratio fell as low as 32 on Friday, its cheapest valuation in more than three years. As this week's rally seems to indicate, this setback offers a good entry point for the stock, as long as there are no further illness reports.
