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Stay on sidelines until Chipotle sales recover: analysts

Published 02/03/2016, 09:18 AM
Updated 02/03/2016, 09:20 AM
© Reuters. A Chipotle logo is seen on a store entrance in Manhattan, New York
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By Sruthi Ramakrishnan

(Reuters) - Sales at troubled burrito chain Chipotle Mexican Grill Inc (N:CMG) will have to show signs of sustained recovery before investors consider returning to the once high-flying stock, several Wall Street analysts said.

Chipotle said on Tuesday sales at established restaurants plunged by more than a third in January after declining 15 percent in the fourth quarter.

Chipotle's shares fell 6 percent to $449 in premarket trading on Wednesday.

The company has been hit by a spate of E.coli and norovirus outbreaks at its restaurants, which serve food made with fresh produce and meats raised without antibiotics.

While the U.S. Centers for Disease Control and Prevention (CDC) said on Monday the E.coli outbreaks appeared to be over, Chipotle is now contending with a nation-wide federal probe into its food-safety practices.

"It is still impossible to determine what the ongoing top line trends will look like or when they will recover," Deutsche Bank (DE:DBKGn) analyst Karen Short said in a research note.

Short, who maintained her "hold" rating and $400 price target on the stock, slashed her earnings outlook for this year and the next.

A favorite with customers and investors alike until the E.coli scandal, Chipotle's stock has lost a quarter of its value since the company first reported the outbreak in November.

The company, which plans to launch marketing campaigns to bring back customers to its restaurants, is expected to spend heavily on food safety and marketing this year, putting pressure on its margins.

At least eight brokerages including Goldman Sachs (N:GS) and Barclays (L:BARC) cut their price targets on the stock after Chipotle reported results. The median price target of these brokerages is now $462.50.

At this price, the stock is expected to fall another 3 percent in the next 12 months.

Still, some analysts remained positive on the stock.

Barclays analyst Jeffrey Bernstein said he expected sales to improve in February thanks to a variety of favorable factors, including the CDC announcement and the company's aggressive spending plans.

© Reuters. A Chipotle logo is seen on a store entrance in Manhattan, New York

Of the 33 analysts covering the stock, 19 have a "hold" rating, 13 a "buy" or higher and one a "sell".

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