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Takeaway: After surveying the damage, Hedgeye Restaurants analyst Howard Penney thinks Chipotle shares are worth $350 to $400.

Penney: Why Chipotle Could Fall 25% Or More | $CMG - chipotle cartoon

If you are a Chipotle shareholder you probably had a bad weekend. 

After the market closed Friday, Chipotle (CMG) released an 8-K detailing what the company is going to do to fix the issues it faces, including the impact of the E. coli outbreak that spread to stores nationwide. (Click here to read a brief recap of "The Bear Case Against Chipotle")

The expected "E. coli impact" on Chipotle's earnings was staggering:

  1. Comparable restaurant sales to be in a range of -8% to -11%
  2. Diluted earnings per share in the range of $2.45 to $2.85, versus consensus of $4.05
  3. Plus this- "We are also rescinding our previously-announced 2016 outlook for comparable restaurant sales increases. In light of recent sales trends and additional uncertainty related to the E. coli incident, we cannot reasonably estimate 2016 comparable restaurant sales at this time."

CMG shares took another hit today falling 3%. 

It's not done falling either. As Restaurants analyst Howard Penney writes, "We expect the swift decline in same-store sales caught management off guard and they are unprepared to deal with the severity of the problem." 

penney lays out his bearish thesis in the video below:

Why? To be clear, there are still a lot of unanswered questions. Here are a few from Penney's research note sent to institutional subscribers yesterday:

  1. Can the company grow its units at the same rate and deliver on consumer and investor expectations?
  2. What is the long-term damage to the Chipotle brand?
  3. Will the company need to adjust its non-GMO claims?

"The direct impact of a more humble management team will be a company with a lower margin structure and a significantly slower unit growth rate. CMG is just another restaurant company and the management team needs to realize that," he writes.

Bottom Line: Penney thinks the stock is now worth between $350 and $400.

To access Penney's more detailed institutional research note on Chipotle or his team's other research email sales@hedgeye.com.