Wall Street analysts warned of a tough road ahead for Chipotle Mexican Grill Inc. in reports on Wednesday despite attempts by company executives to focus on plans to entice customers back to restaurants with a “near zero” risk of foodborne illness.
In a call with analysts on Tuesday following a dismal fourth-quarter and full-year report, Chipotle founder, chairman and co-CEO Steve Ells outlined what was a very challenging end to fiscal 2015, during which multiple foodborne illness outbreaks had customers running scared from the brand.
After same-store sales slid 14.6 percent for the Dec. 31-ended quarter, including a 30-percent drop in December alone, Chipotle said same-store sales declined even further in January, with a 36-percent drop, which was blamed in part on bad weather and tougher comparisons, but also on negative headlines tied to the foodborne illness crisis.
On Monday, the Centers for Disease Control and Prevention declared an end to two lingering E. coli outbreaks that sickened 60 people in 14 states, although a cause was not found for either outbreak. A report in the Wall Street Journal citing unnamed sources indicated that Chipotle officials at one point suspected contaminated Australian grass-fed beef, but the CDC said it was too difficult to pinpoint one culprit given that the menu is made up of dishes with multiple ingredients that are mixed or cooked together.
Regardless of the cause, Ells said the company is eager to move forward with comprehensive new food-safety protocols designed to bring the risk of foodborne illness to “near zero,” and an aggressive marketing campaign set to launch in mid February that aims to welcome customers back to what he described as a better Chipotle.
“The events of the last few months have shown us we need to do better,” Ells said. “I am confident Chipotle will emerge as a stronger company than we were before our recent challenges.”
Tempering the forward-looking plans was news that a federal criminal investigation of Chipotle’s food-safety practices at one restaurant in California was broadened considerably to include restaurants company-wide going back three years.
Monty Moran, Chipotle co-CEO, did not elaborate on the investigation, but said it was likely tied to federal laws regulating the sale of “adulterated” food.
“I think they’re just wanting to make sure that everything we did was on the up and up,” Moran said.
In reports, some analysts said the wider criminal probe is not likely to impact Chipotle’s attempts to recover.
“The wheels of justice turn slowly,” said Joe Fersedi, restaurant and grocers analyst at ITG Investment Research. “So even if authorities ultimately determine that the company had conducted itself in a way that challenges the company’s core brand of ‘food with integrity,’ we would presume that such a determination would occur, if it ever occurs, well after the company has rebuilt its relationship with the customers lost over the last three months.”
Steven Anderson of Maxim Group, however, wrote that the investigation could spark another descent in Chipotle’s stock price, which has dipped below $400 in recent weeks from its high of $758 over the past year. In midday trading Wednesday, Chipotle’s stock price was down nearly 4 percent, to $458.02.
“Although we believe that management’s more aggressive food safety stance may mitigate any unfavorable verdict, we still caution that such a verdict may lead to another bout of negative headline risk, and thus downside for Chipotle shares,” he wrote.
A focus on bringing customers back
Most analysts were hopeful that Chipotle’s aggressive marketing plans for the coming year would bring customers back.
Mark Crumpacker, Chipotle chief creative and development officer, said the marketing messages to come will not focus on food safety, but will instead spotlight the flavorful food and quality of ingredients. The company’s internal research indicates that consumer perceptions about the brand have been improving slightly in recent weeks.
Next week a marketing blitz will launch, including outdoor, radio, print and digital ads that will run through June.
Additionally, direct mail and mobile marketing will target the brand’s most loyal fans and will include digital efforts like a game called “Guac Hunter.”
Anderson wrote that avoiding mention of food safety in the marketing campaign is risky.
“Consumers may see through this strategy, and thus be reminded of the reason why they left Chipotle for competitors,” he said in the report.
However, Crumpacker noted that the brand’s renewed pledge of food safety will be communicated.
A new website will launch Monday with details about the chain’s new protocols. All domestic restaurants will also close for lunch that day for a companywide meeting with employees to explain the food service focus and rally the troops to provide an excellent experience for returning customers.
Ells said the new protocols are designed to create layers of redundancy to prevent any potential contamination from reaching the food service line.
The chain will conduct routine DNA-based tests of fresh produce and meats, rejecting any batch of ingredients that does not meet standards before it reaches restaurants, he said. A new bar code system will also help the company track ingredients through the supply chain to restaurants.
In addition, certain high-risk items like tomatoes, lettuce and bell peppers will be prepared in central kitchens and tested before being shipped to restaurants. Certain items like avocados, onions, jalapenos and citrus will be blanched for 5 seconds as a kill step. Salsa ingredients will be marinated in citrus juice to kill certain pathogens and enhance flavor, he said.
Crew training about the risks of foodborne illness has been enhanced under the new program. Restaurants will be audited weekly and quarterly by a third-party auditor.
Third-party audit scores will be the basis for 50 percent of manager bonuses in 2016. The other half will be based on how well restaurants welcome back customers, Moran said.
Chipotle expects margins to be squeezed in 2016 by the cost of the new protocols and increased spending on marketing. The company said it will not cut back on labor, preferring to have restaurants overstaffed and exceeding customer expectations, Moran said.
Executives did not offer projections for the full year, saying the pace of recovery will be very hard to predict. But most analysts predicted that the chain’s same-store sales would remain negative through 2016, though trending upward.
Andy Barish of Jefferies lowered his same-store sales estimates for Chipotle’s first quarter to negative 25 percent from an earlier projection of a 10-percent decline, noting that he does not expect positive same-store sales until 2017.
“With low visibility to a recover in an environment that is becoming increasingly challenging and competitive, we expect Chipotle’s stock to remain under pressure,” Barish wrote.
Contact Lisa Jennings at [email protected]
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