Key Points
Chipotle stock fell 10% after a Salmonella outbreak in some Minnesota restaurants.
The company replaced its jalapeno supplier and the Dept. of Health said it was not concerned about Chipotle.
The reputational damage of the 2015 E. coli outbreak took years to unwind.
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Chipotle Mexican Grill (NYSE:CMG) stock finished down 9.7% on Tuesday, and the culprit will be familiar to anyone who’s followed the stock for a long time.
The burrito chain pulled jalapenos from some of its locations in Minnesota in response to a Salmonella outbreak in the area. According to Bloomberg, of the 84 sickened people interviewed, 75 said they ate at a Chipotle restaurant. The company has replaced the jalapenos with new ones from different suppliers.
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Chipotle said in its own press release that the Minnesota Department of Health “confirmed it has no ongoing concerns with Chipotle.” The company said it is cooperating with public health authorities.
Image source: Chipotle.
Why investors are spooked
As most long-term investors know, Chipotle faced a drawn-out food-safety crisis in 2015 that began with an E. coli outbreak. The stock fell sharply on the news, and customers fled the burrito chain as the company botched the response to the outbreak as well. That was followed by lesser food-safety scares, which also drove away customers, and the company didn’t start to recover from the crisis until it brought in former CEO Brian Niccol in 2018
Of course, there’s no evidence right now that this outbreak has stretched beyond some stores in Minnesota, but customers may feel a sense of deja vu if this story stays around too long or the outbreak spreads, especially with the cyclospora outbreak already in the news, though that hasn’t implicated Chipotle.
The company’s food safety protocols should also be much more robust than they were at the time of the E. coli outbreak, and the company said it followed its ingredient traceability system to determine that jalapenos were the problem. The company’s food safety advisory council includes a former undersecretary for food safety at the USDA, Elisabeth Hagen, and a former associate commissioner of foods at the FDA, David Acheson.
Is this a buying opportunity?
At this point, I think Chipotle investors are better off taking a wait-and-see approach to the Salmonella outbreak.
The food safety crisis in 2015 included several moments when it seemed like the worst was over for the company, only for more bad news to come out and for the stock to plunge again. This looks like a more controlled situation, and hopefully Chipotle’s protocols are able to contain the fallout, but there’s also the potential for reputational damage, which is what happened to the company last time.
It has been several years since the E. coli outbreak, so memories of it have likely faded among consumers. Nonetheless, a foodborne illness outbreak is one of the biggest risks facing a restaurant chain, and investors shouldn’t underestimate its potential impact, as Chipotle knows well.
A 10% decline in the stock doesn’t seem like enough of a discount for the additional risk the business now faces.
Given its enhanced food safety protocols and crisis management procedures, I think Chipotle is much better prepared to handle this outbreak, and it’s more likely than not that this will just be a blip for the stock. However, I’d like to see more evidence that the outbreak is fully contained before calling the stock a buy.
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Jeremy Bowman has positions in Chipotle Mexican Grill. The Motley Fool has positions in and recommends Chipotle Mexican Grill. The Motley Fool recommends the following options: short September 2026 $35 calls on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
