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Instant Analysis: Chipotle Mexican Grill Inc. Says E. Coli Scare Will Make 2016 "Messy"

By Rich Duprey - Jan 19, 2016 at 4:45PM

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Fast-casual restaurant says its foodborne illness crisis will set back its growth plans for at least a year.

What happened?
The foodborne illness crisis that's held Chipotle Mexican Grill (CMG 1.06%) hostage for the past five months may be temporary, but even the fast-casual dining leader is admitting it's going to make for a "messy" 2016. The comments came last week at an investor conference.

Does it matter?
Assuming the "extraordinary measures" the company is implementing really do put this food-safety scandal in the rearview mirror for Chipotle, the Mexican food restaurant ought to be able to win back customer trust over time.

Since the beginning of the outbreaks -- first with norovirus and then with E. coli -- Chipotle Mexican Grill has been nothing short of cooperative, concerned, and transparent. Even though class action lawsuits have been filed against the chain alleging the company misled investors, and there is a federal investigation into one of the norovirus cases, there's nothing to suggest that management is criminally culpable in these cases.

Other companies hit by food-safety issues have bounced back to varying degrees. Costco (COST -1.12%) was never knocked off its stride even though it was hit by an E. coli outbreak at the same time as Chipotle, but McDonald's (MCD 1.27%) and Yum! Brands (YUM -1.32%) both suffered severe setbacks in Asia after being hit by a food-quality scandals. Yum! Brands suffered more, however, as it had two of them in as many years.

Beginning next month, Chipotle is undertaking a massive campaign to woo back customers, starting with opening every single restaurant four hours late on Feb. 8 for an all-company meeting set to include co-CEO Steve Ells updating all employees on the status of the problem and what the restaurant is doing to correct it. The chain will then begin a media blitz that will stress food safety, even if it doesn't mention the actual incidents. As Ells told an investor conference last week, "I have confidence we are going to recover from this and that we'll win our customers back and emerge a much stronger company."

In the meantime, though, the incidents are going to wreak havoc on earnings. The Mexican food joint told investors earlier this month that fourth-quarter same-store sales tumbled 15% and plunged 30% in December alone as another case of norovirus linked to the chain was reported.

It had to implement some strict policies as a result of the outbreaks, the outcome of which the CFO said will "be messy in terms of margins and earnings," making Chipotle not the "efficient business model that Chipotle has been known for."

While it ought to restore confidence in the chain, it looks like the pricing power Chipotle Mexican Grill previously enjoyed won't be seen again until at least 2017. "We can look forward to 2017. We know we have a proven ability to bring our margins back," said the CFO.

Rich Duprey has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Chipotle Mexican Grill. Try any of our Foolish newsletter services free for 30 days. 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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Stocks Mentioned

Chipotle Mexican Grill, Inc. Stock Quote
Chipotle Mexican Grill, Inc.
CMG
$1,639.09 (1.06%) $17.28
McDonald's Corporation Stock Quote
McDonald's Corporation
MCD
$260.06 (1.27%) $3.26
Costco Wholesale Corporation Stock Quote
Costco Wholesale Corporation
COST
$535.82 (-1.12%) $-6.08
Yum! Brands, Inc. Stock Quote
Yum! Brands, Inc.
YUM
$116.93 (-1.32%) $-1.57

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