Does Chipotle Have Even More Downside Than Previously Thought?

Chipotle Mexican Grill Inc. (NYSE: CMG) has been a premier stock to own in the past decade. Its shares saw a meteoric rise during this time, and the company set the standard for fast casual dining. However, a recent outbreak of E. coli continues to threaten the company’s well-being.

In November, we initially suggested that Chipotle could fall about $200 or more when news of E. coli broke. Merrill Lynch even went as far as dropping its price target to $470 from $750 and lowering the stock to an Underperform rating.

The company issued updated guidance on where it stands with its E. coli outbreak, and things look much worse than previously thought. In a recent SEC filing the company listed what it expects to be the impact of this incident:

• Comparable restaurant sales to be in a range of negative 8% to negative 11%.
• Non-recurring expenses during the fourth quarter in the range of $6.0 million to $8.0 million.
• The estimate of non-recurring expenses includes costs to replace food in select restaurants, lab analysis of food samples and environmental swabs, and retaining expert advisory services related to epidemiology and food safety. It does not include any estimate for legal claims and related expenses.
• Restaurant level operating margins of 22% to 24%.
• Diluted earnings per share in the range of $2.45 to $2.85 (consensus estimates call for $4.00 in EPS).

However no impact is anticipated to new restaurant openings during the fourth quarter.

In the filing the company said:

Sales trends during the quarter so far have been extremely volatile. October comparable restaurant sales were positive in the low-single digit range. When we announced the closure of 43 restaurants on November 3, company-wide comparable restaurant sales dropped for the ensuing few days to approximately -20%. The severity of the national impact was temporary, and when we announced the re-opening of restaurants in Oregon and Washington on November 10, 2015, comparable restaurant sales over the next several days quickly improved to approximately -9%. On November 20, 2015 the U.S. Centers for Disease Control and Prevention (CDC) announced four additional cases linked to the same E. coli incident; following this announcement and related negative publicity, daily comparable restaurant sales trended down to approximately -22%. Over the past five days, comparable sales have gradually improved to an average of approximately -16%. For the full month of November, comparable restaurant sales were -16%.

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Shares of Chipotle were down 4.2% at $537.00 Monday morning, with a consensus analyst price target of $687.58 and a 52-week trading range of $532.03 to $758.61.