(Reuters) - Chipotle Mexican Grill Inc’s (CMG.N) plans to spend heavily on marketing and food safety after a spate of E.coli and norovirus outbreaks will help the burrito chain regain its popularity, analysts said, but it’s anyone’s guess when sales will recover.
The troubled company said on Tuesday that sales at established restaurants plunged by more than a third in January after declining 15 percent in the fourth quarter.
Chipotle’s shares fell as much as 7 percent on Wednesday morning, but recovered to be down 3 percent at midday.
The U.S. Centers for Disease Control and Prevention (CDC) said on Monday that the E.coli outbreaks appeared to be over, but Chipotle now faces a nationwide federal probe into its food-safety practices.
Denver-based Chipotle is famous for serving food made with fresh produce and meats raised without antibiotics.
“While we do expect (comparable sales) trends to sequentially improve behind a major PR and advertising campaign set to launch next week and the recent closing of the CDC E. coli investigation, the pace of recovery remains quite uncertain,” Raymond James analyst Brian Vaccaro said.
A favorite with customers and investors alike until the E.coli outbreak, Chipotle’s stock has lost a quarter of its value since its food safety problems began in November.
“We think Chipotle is pretty much near its low point and can’t get any worse,” said Sean Sun, associate portfolio manager at Thornburg Core Growth Fund THCGX.O.
At the end of December, 1.4 percent of Thornburg’s assets were invested in Chipotle.
Most restaurants that have experienced a food safety issue return to sustained same-store sales growth within 12-15 months, Wells Fargo analyst Jeff Farmer wrote in a client note.
Farmer raised his rating on Chipotle stock to “Outperform” from “Market Perform”.
At least eight brokerages cut price targets on Chipotle’s stock following the release of its results.
The median price target is $475, suggesting the stock could rise 8 percent off Wednesday’s low in the next 12 months.
Chipotle’s shares were changing hands around $430 in early afternoon trading.
The company’s spending could hit margins but show its willingness to regain sales momentum, analysts said.
Several said investors should stay on the sidelines until sales showed signs of sustained recovery.
“...We continue to have concerns over Chipotle’s risk/reward profile,” Cowen & Co analyst Andrew Charles said.
Of 33 analysts covering the stock, 19 have a “hold” rating, 13 a “buy” or higher and one a “sell”.
Reporting by Sruthi Ramakrishnan in Bengaluru; Additional reporting by Tim McLaughlin in Boston; Editing by Sayantani Ghosh, Saumyadeb Chakrabarty and Ted Kerr