The fallout from Chipotle’s food crisis is almost over, according to one analyst.
JPMorgan analyst John Ivankoehas forecast that Chipotle’s same-store sales will turn positive in the fourth quarter of this year, and that the company’s earnings per share in 2017 will be very close to its 2014 profits.
“In all, our call is based on Chipotle being a highly meaningful brand, that with time and expense can regain customer trust,” Ivankoe said.
This statement echoes one made back in December by BTIG analyst Peter Saleh, who wrote in a report” we do not believe there will be any longer-term impact to the brand or its customer appeal and expect Chipotle’s growth trajectory to remain intact.”
But it might be too soon to celebrate a Chipotle comeback.
The burrito chain’s sales have plunged following an E. coli scare that affected restaurants in 14 states. The outbreak was declared over in February, but same-store sales — or sales at stores open at least a year — continue to fall.
Same-store sales dropped 26.1% in February, following a 36.4% decline in the prior month. The company’s stock price has lost more than 32% of its value in the last six months.
Chipotle is giving away free food to lure customers back to its restaurants in the wake of the E. coli outbreaks, and the chain says the offers are driving up traffic.
But the strategy is “nowhere near a holistic solution to Chipotle’s issues,” according to Neil Saunders, CEO of retail-consulting firm Conlumino. The offers might draw some loyal customers back to the chain but probably won’t succeed in luring any new customers, he said.
The offers also don’t fix three potentially ongoing problems that have nothing to do with E. coli: menu fatigue, supply chain shortages, and challenges attracting and retaining employees.
Customers have been growing tired of Chipotle’s menu, and there are many other competitors now offering fresh, customized fast food, according to Deutsche Bank analysts.
“We believe [Chipotle’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,” analysts Karen Short and Brett Levy wrote in a recent note.
Chipotle’s sales growth was contracting for several quarters before the E. coli outbreak, which emerged in the fourth quarter of 2015. Same-store sales grew 10.4%, 4.3%, and 2.6% in the first, second, and third quarters of 2015, respectively. By comparison, same-store sales grew 16.8% in 2014.
Chipotle has also struggled with supply chain shortages, because of its strict standards for how animals should be raised and fed.
The chain stopped serving pork at hundreds of restaurants last year after the company cut tieswith a supplier that violated its standards, which ban the use of hormones or antibiotics and require that pigs have access to the outdoors and to deeply bedded barns.
After dropping the supplier, Chipotle had trouble finding replacements that met its guidelines. Ten months after the shortage began, the company finally restored pork to most of its restaurants with the help of a British supplier.
As Chipotle expands, supply chain shortages could worsen and even extend to other menu ingredients.
Chipotle spokesman Chris Arnold has said Chipotle will always find a way to resolve supply chain issues, however.
“We have faced challenges getting the premium quality ingredients we want going back many years, and we have always found ways to rise to meet those challenges,” he told Business Insider in a previous interview.
The company may also face some labor challenges in the months and years ahead, along with the rest of the restaurant industry.
The industry has been struggling with a tightening labor market due to the strengthening economy and growing demand for restaurant meals.
Chipotle held a one-day hiring binge last fall to bring in new workers.
Chipotle executives have said that the chain will eventually bounce back, however. They expectcustomer traffic and profit margins to fully recover in 2017.
“It’s going to be messy in terms of margins. It’s going to be messy in terms of earnings,” Chipotle Chief Financial Officer Jack Hartung said in January, referring to the rest of 2016. “We’re not going to be the efficient business model that everyone has come to know.”
As reported by Business Insider