After years of dazzling diners - and investors - with its healthy fast-food concept, Chipotle Mexican Grill (NYSE: N:CMG) has been turned upside down by an E. coli outbreak.
Shares have been plunging ever since the first reported incident in late October. To date, the stock is down more than 25%.
After closing all 43 of its locations in the Washington and Oregon area and taking food safety measures required by the Centers for Disease Control and Prevention (CDC), Chipotle began to reopen the affected restaurants on November 10. The company even garnered support from public health officials.
But the troubles continue. The CDC recently announced that cases of the same E. coli strain had previously surfaced in several other states: Minnesota, California, Ohio and New York.
Then on Monday, another bacteria bombshell hit a Chipotle location in Boston...
Several Boston College students got sick, causing the restaurants that served them to be shuttered temporarily.
So, will these incidents further trample Chipotle shares?
The sharp drop in the company’s stock shows that investors expect the outbreak to have a significant impact on sales.
Based on the experience of Jack In The Box Inc (O:JACK) - which suffered its own E. coli outbreak more than two decades ago - that’s probably a fair assessment.
Prior to the outbreak, comparable store sales (comps) at Jack in the Box had risen 6.2% year over year. In the two months after the news hit, comps plunged 22%.
The next two quarters weren’t much better, with declines of about 9%.
But as the crisis subsided, customers gradually began to return... and in fiscal year 1994, Jack in the Box posted a full-year comp increase of 2.7%.
What’s important to note for investors is that, over the decade that followed, Jack shares rocketed more than 500%.
The company’s stock has continued to climb in recent years, peaking around $100 in February.
This could bode well for Chipotle, provided it can get its current outbreak under control. In fact, it probably has a better chance at a quick recovery.
For one, Jack in the Box initially disputed its responsibility in 1993. Chipotle, on the other hand, took quick action to try and contain the outbreak.
Second, the 1993 outbreak was linked to a much more virulent strain of E. coli.
So, Chipotle is unlikely to see the declines that Jack in the Box saw in 1993. Of course, it will take time for the company to fully regain customers’ trust.
But it seems poised to do just that.
And with the stock trading 28.5% below its all-time high - set in August - this could be a good time for forward-thinking investors to load up on shares at a discount.