Chipotle Mexican Grill, Inc. (NYSE:CMG) stock was once a Wall Street favorite but a series of recent food safety issues that hit Chipotle restaurants damaged its reputation for high-quality food.
Dozens of Chipotle customers fell sick due to outbreaks of E. coli, norovirus, and salmonella that forced the restaurant to temporarily shut down some locations. Investors have hammered CMG stock, driving shares down about 35% over the last six months, as customers started to take their appetites elsewhere.
If you held shares of CMG stock during this time, there was much pain to suffer. But don’t worry; the worst is probably over. This might be a good time, too, for investors who don’t own shares of Chipotle stock to take a closer look.
Last month, the Centers for Disease Control and Prevention (CDC) announced that the food outbreak was finally over. The CDC couldn’t pinpoint the cause of the outbreaks, but it did say its investigation was complete and that Chipotle’s food was safe to eat.
That’s extremely good news for Chipotle and CMG stock. The company can finally put the food scare to bed and focus on winning its customers back with its products previously known for being “food with integrity.”
With the worst behind it, a Citigroup analyst thinks CMG stock now has room to run. Citigroup’s Gregory Badishkanian is maintaining a “Buy” rating on the stock and is raising the price target from $551.00 to $605.00. At the current stock price, that’s a 17% upswing. That’s also a number that should whet investors’ appetites. (Source: “Citi Raises Target On Chipotle To $605,” Benzinga, February 19, 2016.)
CMG stock will have no problem getting to the $605.00 price target if it can work to reverse recent same-store sales declines. However, that might take some time.
“While the co plans to step up marketing and promotional spending next week following the recent conclusion of the CDC investigation, we expect any recovery to be somewhat slow,” Badishkanian stated.
In its most recent earnings release, Chipotle reported that same-store sales declined 14.6% in January. (Source: “Chipotle Same-Store Sales Growth Was -14.6%: Blame It on the Food,” Market Realist, February 8, 2016.)
Chipotle’s first step in countering declining same-store sales was to close all of its U.S. restaurants during prime lunchtime hours earlier this month to educate staff on food safety guidelines.
More than 50,000 employees packed into movie theatres to watch a live video feed of co-Chief Executives Steve Ells and Montgomery Moran talk about plans to improve safety. They described plans to increase testing of ingredients and to discourage sick employees from coming into work by offering paid sick leave. (Source: “Chipotle shuts U.S. stores for food safety meeting, rivals pounce,” Yahoo! News, February 8, 2016.)
Now Chipotle will sacrifice short-term pain for longer-term gain, as it begins a massive marketing and promotional campaign to get customers back into its restaurants. The company’s data show that “consumer awareness of the incident is high.” (Source: “Citi Raises Target On Chipotle To $605,” Benzinga, February 19, 2016.)
In the first quarter, Chipotle will spend $50.0 million on its promotional and marketing efforts, the most in its history. Chipotle is confident this tactic will work, as these efforts were successful in driving substantial traffic to restaurants in the past, according to the company. (Source: “Chipotle Confident It Will Win Customers Back with New Marketing Blitz,” The Street, February 2, 2016.)
In the early 90s, Jack in the Box (NASDAQ:JACK) suffered an E coli outbreak at its restaurants, during which 700 people were infected and four died. Sales plummeted, but eventually, the chain recovered and the stock is much stronger today. Taco Bell, owned by Yum! Brands, Inc. (NYSE:YUM), also suffered from an E. coli outbreak and it can be argued that the chain is stronger today than ever.
The Bottom Line on CMG Stock
Chipotle’s customers will come back eventually. The company’s aggressive marketing campaign should work in helping to alleviate customer’s fears. After all, Chipotle’s burritos are too good to stay away from.
Investors might want to consider taking a look at CMG stock before customers come back in droves and the stock price rebounds to $605.00 or beyond.