Chipotle shares dropped Tuesday, July 18, after the company confirmed it had closed a location in Sterling, Virginia, due to a wave of illnesses consistent with norovirus. Under the circumstances, the perception of "unsafety" is more important than the reality, BMO Capital Markets Corp. analyst Andrew Strelzik wrote Wednesday, July 19.
"While norovirus at a single location is not overly significant on the surface, we believe there is greater uncertainty now as there is a reasonable probability that media coverage will outweigh the severity of the incident and create renewed same-store sales weakness, expanding downside risk within our framework," he wrote, downgrading Chipotle to market perform and reducing his price target to $350 from $550.
The outbreak is likely caused by individual employees rather than problems with Chipotle's supply chain and won't require "significant food safety-related investment," added Strelzik, like Chipotle's E. coli crisis in 2015. Still, "customer psyche likely remained somewhat fragile in the wake of CMG's previous food safety issues."
Echoing Strelzik was BTIG analyst Peter Saleh.
"While norovirus does not come from the food supply, we believe customers will take little comfort in that distinction and some will likely avoid Chipotle at least in the near term," he wrote, maintaining his neutral rating on Tuesday. "While the same-store sales impact is still unknown, we believe the repetitive and seemingly unavoidable nature of these incidents will reduce the multiple investors are willing to place on the shares."
Potential traffic losses at Chipotle could send diners to other Mexican restaurants and chains, including McDonald's Corp. (MCD - Get Report) and Darden Restaurants Inc.'s (DRI - Get Report) Olive Garden, or even encourage cooking at home, Strelzik wrote.
On the other end of the spectrum, Telsey Advisory Group analyst Bob Derrington believes Chipotle will easily weather the storm. He upgraded Chipotle shares to outperform from market perform, citing Tuesday's declines.
The incident is another reminder "of the risk of dining out," he wrote, which should be offset by "management's more aggressive sales and menu innovation plan," including margaritas, salads and queso. Derrington holds a $440 price target on Chipotle shares.
Chipotle shares dipped 0.5% to $373.06 early Wednesday afternoon.
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