Come on, Chipotle Mexican Grill, Inc. (CMG). I thought you were better than this.
I don’t know why. A series of separate incidents at Chipotle locations across the U.S. involving breakouts of norovirus, E. coli and salmonella caused CMG stock to crash from highs near $760 a share to a nadir below $400 in January.
After a rebound that sent Chipotle shares as high as $533, the stock is taking a hit again today, down 5% after news that one employee at a Massachusetts store has come down with norovirus. Two others are suspected to have the illness, and another has called in sick.
It’s an almost comical turn of events for the burrito chain, which seemed to be doing everything it could to right its wrongs. Just last week, I myself wrote that I thought the worst was over for Chipotle and CMG stock, though I still cautioned William Blair’s $660 price target was too optimistic.
Today? I think $500 may be too optimistic.
The Worst-Case Scenario for CMG
To be perfectly honest, the specter of another health crisis was still looming over Chipotle stock. But a well-publicized companywide meeting last month, for which more than 2,000 locations were shut down during lunch hours to go over new health procedures with employees, was supposed to instill confidence.
CMG then spent heavily on promotions, including a coupon for a free burrito for anyone who had their lunch plans disrupted by the company meeting. Not content to stop there, it committed to a February-to-May campaign to offer deals through direct mail and online in order to retain customers and get traffic numbers higher.
I myself got a coupon for a free burrito in the mail the other day. The fact that my roommate claimed it before I did doesn’t bother me quite so much anymore.
Today’s news is a crippling blow to Chipotle’s marketing efforts, which may simply equate to $50 million down the drain.
For CMG stock owners, this simply means it will take even more time for Chipotle’s same-store sales slump to recover. Given that same-store sales plunged 14.6% in the fourth quarter — including a whopping 30% in December — there’s quite a lot of work to do.
Margins will be subdued for even longer, and CMG may have to spend even more money on promotions and marketing.
But the bigger issue, of course, is that the problem still isn’t fixed. The fact that the precise source of the outbreaks was never specifically identified is somewhat harrowing in light of the most recent Massachusetts incident.
Will CMG have to shell out even more money to launch yet another investigation to get to the bottom of this? Will the Food and Drug Administration launch another investigation of their own? Will the decision to clean the entire Billerica, Massachusetts, store and dump all the food on hand be repeated at other stores?
These are lingering, real questions, and not anything that Chipotle stock investors want to hear.
As an investor myself, I considered buying into Chipotle last week, because I thought the worst was over. Now, it seems that it’s not so simple.
And CMG stock, trading at 34 times forward earnings, is no longer worth the stretch.
As of this writing, John Divine did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.
