Chipotle Mexican Grill Stock On The Watch Following Downgrade

Chipotle Mexican Grill, Inc. (NYSE:CMG) shares took a beating today, after a Street analyst downgraded the company. Deutsche Bank analyst Karen Short lowered the rating to a Sell, retaining the target price at $400.

The stock traded lower in the pre-market session following the news, and is currently down 1.88% at $516.00 at 10:20 AM EST.

The firm announced it did not see substantial changes to recover from the E. coli crisis that started in the third quarter of last year. Shares jumped above the level recorded on December 21, 2015, when news of how the restaurant was not to blame for some customers having contracted the virus broke, but Mr. Short thinks recovery efforts are still “questionable.”The company has lost several customers over the last few months, following the scandal. The restaurant was associated with serving infected food to customers. This lead to a sharp same store sales (SSS) drop, along with poor fourth-quarter (4Q) revenue results for 2015.

The company reported sales of $997.5 million over the last quarter, down from $1.07 billion over the same period last year. Additionally, SSS for 4Q dropped 14.6%, compared to a 16.10% rise over the same period a year ago.

Deutsche Bank is concerned as to whether recovery plans will be able to bring customers back.

Analysts say the slowdown in sales shows signs of “menu fatigue.” Customer traffic has significantly dropped over the past few months, due to lack of innovation in menu items. The company is reluctant to bring in new items, and has thus forced customers towards rival restaurants. Rising menu prices also serve as a headwind for the company.

Chipotle was cleared of the allegations by the Center for Disease Control and Prevention (CDC) last month. The agency said the restaurant had nothing to with E. coli. The company’s stock dropped over 28% in the last six months while people remained under the impression that Chipotle food was the culprit.

To recover its tarnished image, the company initiated several food safety programs, along with new marketing and compensation initiatives, to regain customer trust. However, the question as to whether customers will respond positively to these efforts remains.

Deutsche Bank ponders as to how long it will take for sales to rebound. Though it has been over a month since the company was cleared, it is still to unveil details regarding margin contraction and infrastructure investment.

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