Will Customers Come Back to Chipotle?

Chipotle Mexican Grill Inc.’s health-related issues might be over, but the damage inflicted on investors will likely linger.

Federal investigators declared Monday that the E. coli outbreak linked to Chipotle appears to be over. The chain is now focused on implementing new food-safety measures. It is also planning an extensive advertising and social-media campaign to bolster its image. That blitz will be on display Tuesday when Chipotle reports fourth-quarter results.

After cutting estimates multiple times, Chipotle expects earnings for the period ending in December of $1.70 to $1.90 a share, down by about half from a year ago. Wall Street analysts estimate same-store sales to be down 15%. They also expect three additional quarterly declines in 2016.

Therein lies the problem: Winning back customers won’t be an easy feat.

Even former parent McDonald’s Corp. is eating Chipotle’s lunch (and breakfast) amid its thriving all-day offerings. And Chili’s operator Brinker International Inc. has been raising its bet on higher-end Mexican food.

The Wall Street Journal

Dining operators historically don’t strike quick fixes in these situations. Yum Brands Inc. has been hit by multiple food-safety concerns in China in recent years. Investors with an even longer memory will remember the E. coli outbreak in 1993 that slammed Jack in the Box Inc. While those issues were much more severe than what Chipotle faced, it still took over four years before that company’s shares recovered to their prior levels.

Furthermore, the halo effect that helped propel Chipotle shares above $750 in October was looking vulnerable before the health problems. Investors sent Chipotle shares down at least 6% in the trading session following four of the previous five quarterly reports.

Following the stock’s 45% peak-to-trough slide, Chipotle shares are lacking spice. But the stock’s 20% rebound over the past three weeks also looks far too aggressive given how far earnings expectations have fallen.

Analysts don’t expect Chipotle’s earnings to recover to prior levels until the third quarter of 2017, according to FactSet. And trading at 36 times forward earnings, Chipotle is still pricey compared with most of its competitors.

Investors shouldn’t lose sight of Chipotle’s long road ahead.


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