Deutsche Bank analysts are not sure how or when Chipotle will win customers back.
In a note Tuesday, they downgraded their rating on the stock to “Sell” from “Hold,” maintaining their price target of $400.
Chipotle shares closed at $524.90 on Monday, and so their target represents a 24% projected downside.
Deutsche’s Karen Short and Brett Levy argue that Chipotle’s sales had already been under strain before several E. coli and norovirus cases were linked to the fast-casual restaurant’s meals.
And it’s not clear whether customers that have stayed away from Chipotle since they first heard of the outbreaks will ever trust the food enough to return.
Short and Levy write (emphasis ours):
“We still question what a recovery will look like (and when it will materialise). While management has been proactive – putting in place new food safety prep and procedures (in its supply chain and unit-level), and new marketing and compensation programs to regain consistency and customer trust, there is tremendous uncertainty on how well they will be received.”
The analysts say that even after the company has taken several active steps to win back customers, there are some new complications. Those include increased in-store wait times, which would be detrimental to the company since speed is a huge part of what makes Chipotle successful.
They also are not sure that Chipotle is keeping up with the competition as well as it should.
“We believe CMG’s success made them a bit complacent (although not with its desire to expand its store base or improve in-store operations) as the company’s lack of interest in innovation over the last decade has resulted in what we consider to be menu fatigue,” they wrote.
And we got more unpleasant news when the company reported fourth quarter earnings earlier this month and disclosed that it had been s
ubpoenaed as part of a federal criminal investigation into food safety at its restaurants.
The analysts also argue that the stock’s gain of about 11% since the earnings results has stretched the company’s valuation. The current share price implies a price-to-earnings multiple of 20x, which is greater than its competitors and the 16x historical average.
Chipotle shares fell 3% in pre-market trading.
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