Morgan Stanley identifies 3 risks to Chipotle's business

Chipotle is trying to dig itself out of several straight months of sales declines in the wake of E. coli outbreaks that sickened more than 50 people in 14 states.

The E. coli outbreak has been declared over, but there are a few risks that the company could face in the months ahead.

Morgan Stanley outlined some of those potential risks in a recent note to clients.

1. Chipotle’s sales are still highly sensitive to negative headlines.

The company temporarily closed a restaurant in Boston earlier this month after four employees called in sick with suspected norovirus. The company voluntarily closed the restaurant for cleaning out of precaution, and no customers reported getting sick.

But Chipotle’s sales dropped at a faster rate after the closure, and the company believes the news surrounding the Boston incident spooked customers.

In the first week of March, same-store sales were down about 22%. After it was reported that a store in Boston closed because of sick employees, the declines dropped to 27%.
“The fact that a single incident in Boston (again — but no customer illnesses reported) reversed the sales improvement is a reminder of how fragile this recovery is,” Morgan Stanley analysts wrote.

2. Despite profits plunging, Chipotle is sticking with its plan to open another 220 to 235 restaurants in 2016.

Chipotle’s new restaurants have traditionally out-performed peers in terms of productivity and returns, the analysts note.

But as its total number of units grows, Chipotle risks cannibalising sales at existing stores, as well as exposing itself to lower-income demographics that could result in lower-than-average traffic.

3. Chipotle is vulnerable to food inflation. The burrito chain, unlike many of its peers, can’t scale back the use of many of its proteins to make up for rising costs, the analysts note.

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