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Still Waiting for Better News From Chipotle Mexican Grill Inc.

By Motley Fool Staff - Mar 26, 2016 at 10:00AM

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It's no surprise that the same-store comps for the fast-casual dining leader are still awful. The real question is: How much permanent damage did the E. coli outbreaks do?

To the surprise of no one, Chipotle Mexican Grill's (CMG 0.31%) same-store sales were down pretty dramatically year-over-year in February, though it managed a slight improvement from its numbers in January. And the stock was off, too.

In this segment from the Motley Fool Money podcast, Matt Argersinger and Simon Erickson go over a few of the many steps that Chipotle has taken to recover from the E. coli outbreaks, and how it is still dealing with them. With management apparently understanding there could be some long-term, even permanent damage from this, they also discuss two concerns about the brand  that investors need to bear in mind.

A full transcript follows the video.

This podcast was recorded on March 18, 2016. 

Chris Hill: If you thought Chipotle's monthly same-store sales report was going to be bad, you were right. February comps down 26%, Matty, and shares of Chipotle falling right along with them. Not 26%, only about 10% this week.

Matt Argersinger: But Chris! That was an improvement from the 36% lower comps in January! (laughs) No, it was a bad number. It missed expectations. Chipotle's calling it an improvement, and the numbers got even better in March. But, hey, we're still looking at bad year-over-year numbers. It's important to remember that the CDC just came out in February and gave Chipotle and everyone the all-clear about the E. coli scare. But it's still going to take a while for Chipotle to work through that.

They also hired James Marsden, a food safety specialist, he's going to come in. He's kind of an expert in E. coli, food pathogen elimination. And, the company is giving away a lot of those free burritos. I'm sure that everyone at this table has gotten one of those [coupons] in the mail. I've gotten several. So, they're going to try to build traffic back that way. It's going to be a tough climb, though. The business is much more expensive. Those of us in Million Dollar Portfolio, we think Chipotle gets through this. We think, by the second half of the year, and certainly in 2017, the numbers will look a lot better.

My longer-term worry, though, is that all the measures they take, food preparation -- they're talking about, for example, cooking a lot of their beef now outside of the restaurants and changing a lot of their fresh ingredients -- does that impact the brand? Does that impact the taste of the food? That could have longer-term implications for Chipotle. I don't think that's a major risk, but it's something I'm thinking about when I'm looking at Chipotle.

Simon Erickson: You know, Chipotle's CFO just recently had an investor presentation, and he said that he thought up to 7% of his customers were not going to come back after this whole food scare thing that they've been going through. And I think that's the biggest thing we're looking at. We know this is probably a short-term hiccup. It's not going to be continual that you're having E. coli problems. But, has the brand damage been done that consumer habits change permanently from something like this? I think that's something we need to look at as investors.

Hill: Do you think he was being conservative with the 7%? Do you think he was padding that? Or do you think that was optimistic?

Erickson: Oh, I think it's conservative. I mean, 7% not coming back? We saw, what was it, a 26% drop in same-store sales right now. I mean, maybe that's ... (groans) I still think it's conservative in the bigger picture.

Hill: Am I the only one stuck on the fact that they brought in someone who has self-identified as an E. coli expert? Is this someone you want to hang out with at a barbecue or something? (laughs) Can you imagine introducing yourself? "What do you do for a living?" "Well! Let me tell you!"

Jason Moser: (laughs) You go to shake hands and it's like, well ... maybe not.

Matthew Argersinger has no position in any stocks mentioned. Simon Erickson owns shares of Chipotle Mexican Grill. Chris Hill owns shares of Chipotle Mexican Grill. Jason Moser owns shares of Chipotle Mexican Grill. 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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