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Chipotle Mexican Grill Inc's Customers Still Haven't Come Back Yet

By Rich Duprey – Mar 22, 2016 at 3:30PM

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Fast-casual leader is still witnessing a major exodus of customers.

Chipotle Mexican Grill may try to spin its February sales plunge as an improvement, but additional health concerns indicate any gains will be ephemeral.

Chipotle Mexican Grill (CMG 0.42%) is ill. The fast-casual dining leader says it's on its way back to health, but the continued collapse in same-store sales in February shows the Mexican food chain remains bedridden, and though it may not be a deathbed, there is still a long convalescence ahead of it.

Chipotle updated investors on its business and financial health last week and said sales are recovering. Instead of the 30% drop it experienced in December and the 36% plunge that followed in January, comparable sales "improved" to a decline of 26% in February. Where they had risen to a 21% drop the first week of March, they fell back to a 27% shortfall in the second week as it had to close another restaurant due to illness.

Worse, it also said it's going to report its first quarterly loss as a public company. It estimates per-share losses will total $1, whereas last year it recorded profits of $3.88 per share.

Chipotle's claim of improvement is a change without a difference. Customers remain leery of going into the Mexican food restaurant because flare ups of illness are still occurring at the chain, even though the latest outbreak of norovirus at a Massachusetts restaurant involved no customers getting sick. The specter of not having its food safety problems under control persists.

Yum! Brands (YUM 0.48%) went through a similar issue in China when a supplier was found to be using tainted chicken. Comps plummeted at its KFC chain and it took more than a year for business to get back on track. In fact, it wasn't until KFC started practically giving away buckets of chicken for free that customers began to returns.

Unfortunately, another supplier scandal the following year sent sales tumbling again and having gone to the well of customer goodwill one too many times, faith in its food quality has been damaged. While sales didn't collapse nearly as badly as they had the first time, Yum! Brands admits the recovery is moving much slower than anticipated and it announced it is spinning off its China division to reduce its exposure to the region.

Chipotle Mexican Grill has no such safety valve. The outbreaks of E. coli bacteria and norovirus at restaurants across the country have left customers questioning whether its "food with integrity" mantra is little more than a marketing message.

The restaurant operator did try to reinforce its image as being concerned for the wholesomeness of its ingredients by implementing a thorough inspection system at the end of the year, but it was also just reported it was stepping back from the more stringent aspects of the program (and presumably the most costly) because other actions it was taking negated their necessity.

That may be true, but it gives the perception it is backpedaling on its commitment. It also risks further alienating customers by changing how they view the chain.

Chipotle has prided itself on the freshness of its ingredients and their just-prepared nature when serving them. However, in an effort to make its food safer, it has begun cooking some ingredients ahead of time and having them reheated at the local restaurant. That may obviate the requirement -- and expense -- of ensuring ingredients undergo DNA-based testing for the presence of bacteria, but it may also change the flavor profile of the food. At a time when it's trying to lure customers back in with the promise of free burritos, changing how its food tastes and altering the perception of the fast-casual chain as a place to grab fresh food could cause customers to continue their exodus.

Chipotle Mexican Grill's stock has lost more than a third of its value over the past year and it tumbled 10% last week after the latest revelations show that, despite the spin emphasized during the update, the fast-casual chain's operations are still sick and there's a long road ahead of it before it's back in the pink of health.

Rich Duprey has no position in any stocks mentioned. 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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