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2016 was an ugly year forChipotle Mexican Grill, Inc.(NYSE: CMG) and its shareholders. Not only did the stock lose 21% of its value, but the company's attempt to bounce back from 2015's food safety crisis gained little traction. In the 12 months following the worst of the E. coli outbreak, comparable sales fell more than 20%, a slide that's unprecedented in the restaurant industry.
While other chains have experienced similar foodborne illness outbreaks, all have seen sales growth return after a year, and that includesJack in the Box(NASDAQ: JACK), whose E. coli outbreak in the 1990s infected more than 700 and caused the deaths of four children.
Customers have been slow to return to Chipotle even close to a year after the outbreak ended. In the company's third quarter, comparable sales were down more than 20%, and comps fell 4% in the fourth quarter even though a year had passed since the beginning of the outbreak in late October last year. Management has also expressed nervousness about hitting its goal of high single-digit same-store sales growth this year, and even if it hits its target, comps will still be down double digits over the two-year period.
Chipotle has blamed social media, the media and the CDC response to the outbreak for the sharp sales decline, but the real reason it's been so difficult to bring customers back in the door may have something to do with the way Chipotle branded itself.
Unlike Jack in the Box andYum! Brands'Taco Bell, which experienced its own E. coli outbreak a decade ago, Chipotle has always positioned itself as different from traditional fast food. It touts its "Food with Integrity" platform, which features locally sourced ingredients and meat from humanely raised animals, messaging that has helped customers feel good about eating there. But the series of foodborne illness outbreaks cost Chipotle that trust with customers and its reputation as a purveyor of better, healthier food. The organic label is irrelevant if customers are getting sick.
There may be no adequate parallel for the restaurant industry, but looking to the broader retail sector, there is one company that has undergone a similar experience:Lululemon athletica(NASDAQ: LULU).
Like Chipotle, Lululemon was a fast-growing company that shook up its industry. The company essentially invented the "athleisure" concept by making exercise clothes, specifically yoga pants, that were fashionable enough for women to wear as everyday garments.
Coming out of the recession, Lululemon was one of the fastest-growing stocks on the market, putting up blockbuster sales growth nearly every quarter. But then the company experienced what may be the fashion equivalent of E. coli. In March of 2013, the company announced a massive recall of its trademark black pants, as they were too sheer due to production problems. It ultimately pulled one sixth of its black pants from shelves, resulting in shortages that weighed on sales and profits. In the aftermath, the company fired its Chief Product Officer, and CEO Christine Day stepped down a few months later, though that seemed to be unrelated to the pants recall. Further sullying the brand was Founder Chip Wilson's making unsavory remarks about women's bodies on at least two occasions; he ended up leaving his role with the company. Lululemon's skyrocketing earnings growth stalled that year, and has only grown modestly since then. As a result, the stock has still not topped its all-time high, which it reached in 2013.
Lululemon is still growing, but its growth has come mostly from new stores, as its sales per square foot continues to fall. Not only was its brand harmed by the pants recall, but competitors have encroached in the meantime, cramping its margins and growth potential in the process.
The same pattern seems to be unfolding for Chipotle. The fast casual phenomenon has gone mainstream, and the company now has similar "Food with Integrity" competitors big and small challenging it for sales.
If Lululemon's recovery is any lesson, Chipotle may never see the blockbuster growth it had as recently as 2014. The company should eventually recover its lost sales, but it may be years before the stock tests its former heights.
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