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Analysts mixed on impact of Chipotle E. coli outbreak

Analysts mixed on impact of Chipotle E. coli outbreak

Chain posts list of restaurants implicated

The E. coli outbreak linked to Chipotle Mexican Grill will likely have more lasting impact on the chain’s sales now that 17 restaurants in six states have been implicated, analysts said Monday.

The Centers for Disease Control and Prevention reported Friday that victims of the E. coli outbreak were found in California, New York and Ohio, as well as a second case in Minnesota. Prior reports had focused on Washington and Oregon, with one case in Minnesota.

A total of 45 people have been sickened in the six states, and 16 have been hospitalized, as of Nov. 20, according to the CDC.

On its website, Chipotle revealed six additional restaurants outside the Pacific Northwest that have been associated with reported cases as of Monday.

They include a restaurant in Turlock, Calif., at 3090 Countryside Drive; in Burnhaven, Minn., at 728 County Road 42 W; and in Amherst, N.Y., at 1643 Niagara Falls Blvd.

In addition, three restaurants in Ohio were associated with the outbreak: 24369 Cedar Road in Lyndhurst; 7683 West Ridgewood Dr. in Parma; and 272 East Exchange St. at University of Akron in Akron.

The company reported previously that six restaurants were implicated in Oregon, along with five units in Washington.

Chipotle voluntarily closed 43 restaurants in Washington and Oregon earlier this month, although only 11 units were implicated in those regions. Those locations have since reopened.

The company said deep cleaning and replacement of ingredients has been conducted at all restaurants linked to the outbreak. No additional restaurants have been closed.

In a report Monday, Stephen Anderson, senior equity research analyst, restaurants and consumer, of Maxim Group, said the outbreak, in a “worst-case scenario,” could turn fourth-quarter same-store sales negative for Chipotle for the first time since it was spun off from McDonald’s Corp. in 2006. Those trends may linger into the first half of fiscal 2016.

“We argue that the outbreak now threatens to depress CMG’s traffic nationwide more profoundly for the next few quarters,” Anderson wrote. “We now expect that the outbreak could reduce comps by as much as 330 basis points in 4Q15, 120 basis points in 1Q16 and 40 basis points in 2Q16.”

Although the source of the outbreak has not been identified, produce was seen as a likely culprit because some victims were vegetarians, according to Washington State health officials.

However, Anderson argued that because Chipotle tends to use local produce, the broadening geographic scope of the outbreak could point a finger at another source.

“If this is the case, we would not rule out the possibility of finding of additional cases across the U.S.,” he said.

Anderson said Chipotle is likely to lose market share to fast-casual peers like Qdoba Mexican Eats, Panera Bread and Zoe’s Kitchen.

“Management has yet to address this directly, but in addition to heightened costs related directly to the outbreak at the affected locations, we believe that management likely will incur costs — at least in the near term — to provide additional scrutiny of the company’s supply chain management,” Anderson said. “We believe that the company will need to invest heavily to regain the trust of customers and get them to return.”

David Tarantino, associate director of research and senior research analyst of Baird Equity Research, also lowered his projections for Chipotle’s fourth quarter in a report Monday, saying same-store sales will likely be flat to up 1 percent. For early 2016, Tarantino said same-store sales will likely increase 2.8 percent with gradual improvement through the year.

Tarantino, however, expressed confidence that the E. coli outbreak posed a short-term threat, and that Chipotle officials will ultimately manage through the crisis.

“We believe the issues related to the recent E. coli outbreak could turn out to be a temporary headwind,” he wrote.

Nicole Miller Regan, senior research analyst for Piper Jaffray & Co., wrote that it remains difficult to measure the potential impact of the E. coli outbreak on Chipotle’s performance.

Her channel checks indicated that same-store sales were running within her initial projection of a 2.5-percent increase in the fourth quarter.

However, she wrote, “It is difficult to defend the unknown in terms of assessing, identifying and estimating the impact from the current situation; however, we remain encouraged relative to what the company can immediately control as they work through this matter: namely continued transparency with guests and support of team members.”

Chipotle’s stock price plummeted about 10 percent on Friday after the CDC report hit the media, but it climbed back up by almost 5 percent in morning trading on Monday, to $559.86.

Contact Lisa Jennings at [email protected].
Follow her on Twitter: @livetodineout

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