Chipotle sales set to fall as E. coli spreads to 6 states

Same-restaurant sales at Chipotle Mexican Grill Inc, hit by an E.coli outbreak at its restaurants, look set to decline for the first time since the burrito chain was spun off from McDonald's Corp in 2006.
An E. coli problem somewhere in the supply chain of Chipotle's has now ensnared restaurants in six U.S. states. (Robert Galbraith/Reuters)

Same-restaurant sales at Chipotle Mexican Grill Inc, hit by an E.coli outbreak at its restaurants, look set to decline for the first time since the burrito chain was spun off from McDonald's Corp in 2006.

The company on Friday said the outbreak, initially limited to restaurants in Washington state and Oregon, had spread to four additional states: California, Ohio, New York and Minnesota.

Chipotle's shares slipped to an 18 month-low after markets opened on Monday but quickly rallied to trade up 6 per cent at $569.03. They had fallen 12 per cent on Friday.

"I think there might be a strong reaction to the downside on Friday ... there haven't been any new cases since those several cases that were reported on Friday afternoon," Maxim analyst Stephen Anderson said.

Anderson, who expects more cases to be reported soon, said the outbreak could hurt Chipotle's traffic for the next few quarters.

Stock reaction

Some analysts said investor reaction was overdone and that Chipotle was a good long-term bet.

"... We see value in shares from current levels for investors that can look through the near-term choppiness," William Blair analysts said.

Chipotle's stock has declined more than 16 percent since Oct. 31, when Chipotle said it would close 43 restaurants following the outbreak. The company said on Nov. 10 it would reopen those restaurants.

At least four brokerages cut their price targets on Monday. Maxim was the most bearish, lowering its target to $585 from $718. The median price target on Chipotle's stock is $740, according to Thomson Reuters data.

Of the 32 brokerages covering Chipotle's stock, only one brokerage has a "sell" rating. Eighteen rate it "buy" or higher, and the rest rate it "hold".

The recent incident marks the third lapse in food safety at Chipotle, whose tagline "Food with Integrity", has come to mean the promise of fresh food. While such products are often healthier, some processing such as high heat can kill pathogens like E.coli.

At least 45 people have been infected with the E. coli O26 strain in the United States in the past month. Of those, 43 reported eating at a Chipotle restaurant in the week before their illness started, according to the U.S. Centers for Disease Control.

"The source of the problem has not been identified, which we believe creates uncertainty about whether the bad news is fully behind the company," Sterne Agee analysts said. They cut their rating on the stock to "neutral" from "buy".

But a Reuters report on Saturday showed that some diners were unfazed by the reports, saying freshness and convenience outweighed concerns about contamination.

The company is expected to report fourth-quarter results in February.

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