The Bear Case Against Chipotle | $CMG

Takeaway: Our Restaurants analyst sees an additional 25%+ downside risk even after Friday’s -12% fall.

The news for Chipotle investors continues to go from bad to worse.


Last week, a CDC press release warned consumers that Chipotle’s E.coli outbreak had spread beyond just the Pacific Northwest to cities nationwide. The announcement raised fresh concerns about Chipotle's (CMG) food quality controls and sent the stock reeling Friday, dropping 12% on the day. CMG is down about 25% from its August high.


The Bear Case Against Chipotle | $CMG - chipotle 2


Prior to the CDC’s warning shot, Restaurants analyst Howard Penney hosted an institutional conference call outlining their Best Idea Short call on Chipotle. (For those who missed it, click here to watch a brief excerpt.) On the call, Penney expressed concerns about Chipotle’s supply chain and quality controls as well as a more challenging real estate environment with quality locations harder to find.


Another underappreciated risk are Chipotle’s marketing tactics. The company claims that its food is entirely GMO-free. A pending class action lawsuit claims otherwise. Penney posits that CMG is reaching a “Whole Foods-like moment” whereby it loses the trust of its consumer as a result of these misleading marketing tactics. To be sure, burrito lovers are already paying a premium for Chipotle’s seemingly non-GMO products. In other words, a notch against the brand's core marketing strategy could cause a serious breakdown in consumer trust.


The Bear Case Against Chipotle | $CMG - chipotle


Compounding all of this lawyerly uncertainty, Chipotle raised prices early last year. That means CMG will soon be bumping up against the previous year’s strong comps while it continues to duke it out in court.


Add in higher costs, top-line deceleration, and multiple contraction, and Penney sees an additional 25%+ downside risk from Friday’s -12% fall.



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