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Takeaway: Hedgeye Restaurants analyst Howard Penney remains short Chipotle (CMG).

Penney: Chipotle Has A Lot More Downside | $CMG - chipotle cartoon  

Another day, another big down move for shares of Chipotle (CMG). The stock is off over -5% after the company reported the impact a recent norovirus outbreak had on its financials. Quick take: Not good. 

It gets worse.  

The beleaguered restaurant chain further disclosed that it was a served a Federal Grand Jury Subpoena from the U.S. District Court for the Central District of California, to be investigated by the U.S. Attorney's office for the Central District of California, in conjunction with the U.S. FDA.   

In Chipotle's own words:

"It is not possible at this time to determine whether we will incur, or to reasonably estimate the amount of, any fines, penalties or further liabilities in connection with the investigation pursuant to which the subpoena was issued."

***Editor's Note: Penney has been warning investors about the underappreciated risks of owning Chipotle shares since September. The stock is down 39% since he made his short call. To access his team's most recent institutional research ping sales@hedgeye.com.  

 Penney: Chipotle Has A Lot More Downside | $CMG - chipotle chart

Outside the lawyerly realm, Penney argued that Chipotle's "food with integrity" motto was also under fire. Just before Christmas, he conducted a survey assessing the consumer hit the company would take in the wake of all the foodborne illness attention it has received. 

"... We conducted a survey of Chipotle consumers to get a read on how much this outbreak will affect future business performance. Specifically we screened participants by asking them: have you stopped going to Chipotle because of the E. coli outbreak? In which, 31.3% of respondents said “yes” they have stopped going.

 

Our first reaction was that this was lower than we were expecting, just given what we have seen with our own eyes at Chipotle restaurants here on the east coast. But people may have been thinking they are just waiting for the all-clear from the CDC and then they will return, which we have heard plenty of times from people we have talked to (these people may have registered as a “no”).

 

Subsequently, we took the people that answered “yes” and asked them if they would ever go back to eat at a Chipotle restaurant again. An astonishing 56.8% of respondents (out of 200 people polled) said they would never go back to a Chipotle. Now you can say what you will about the number of people polled, but over half of those people said they would never go back. That is an alarmingly high number, and implies a very rough road ahead for Chipotle."

Clearly, the damage to the brand is palpable.

in the video below, Penney lays out his broader thesis...

Another must read: Penney's scathing "open letter" to Chipotle CEO Steve Ells.

Bottom Line:

Watch out!