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Chipotle blames restaurant staff for outbreak; reports on 2Q

Chain tells investors future is bright but uncertain; cites possible litigation, 'government action'

The summertime fall of Chipotle’s stock, which began a week ago when customers reported a norovirus outbreak, isn’t reflected in the chain’s 2Q financials. But foodborne illnesses past and present were an undercurrent Tuesday during an investors’ conference call with executives.

Founder and CEO Steve Ells alluded to the cause of the norovirus outbreak among customers of a Chipotle restaurant in Sterling, VA, in his opening remarks.

We have isolated the failure that allowed this to occur in at a single location, Ells said, stopping short of saying what the failure was. Chipotle is providing managers and employees additional education and training on how to prevent the spread of norovirus, telling them “compliance is non-negotiable and a condition of their employment,” Ells said.

Later, during a question-answer session, Ells said the outbreak that has sickened at least 135 customers of the Virginia restaurant occurred because an employee was working while sick. That’s a violation of health codes and Chipotle corporate policy.

While the Virginia outbreak indicates a violation of Chipotle’s food safety policies, Ells said he is confident the chain has taken care of any deficiencies in protocols and procedures in the wake of a string of foodborne illnesses that sickened hundreds of people across the country in 2015.

In a rare admission, Ells said the company had focused too little on food safety efforts during its rise from a single restaurant in 1993 to the chain of 2,339 restaurants it now operates. The E. coli, Salmonella and norovirus outbreaks of 2015 made that evident, he said.

James Marsden, executive director for food safety at Chipotle Mexican Grill Inc.

Ells touted the hiring of researcher and scientist Jim Marsden from Kansas State University to head the Chipotle food safety efforts as part of the corporation’s commitment to refocusing the attention of restaurant managers and employees. Marsden introduced the fast food chain to the concept of HACCP — Hazard Analysis and Critical Control Points.

“We are the only major restaurant to have HACCP,” Ells said during the conference call, later commenting “it is not possible to completely eliminate all food safety risks.

In describing the norovirus outbreak this past week, Ells placed the blame squarely on the individual restaurant, saying “norovirus is unrelated to our food supply chain.”

The fine print
Buried in the small, italic print of a news release, which supplemented the 2Q conference call and was filed with the Securities and Exchange Commission, Chipotle officials hinted they could be facing the federal government in court because of foodborne illness outbreaks among their customers.

“These (forward-looking) statements are subject to risks and uncertainties that could cause actual results to differ materially from those described in the statements (about operations and performance),” according to the boiler plate language in the quarterly report.

Among the uncertainties listed were “risks relating to litigation, including possible governmental actions related to foodborne illness incidents…”

Other uncertainties and risks listed in the “forward looking statements” disclaimer that mentioned food safety and foodborne illnesses include:

  • “the uncertainty of our ability to achieve expected levels of comparable restaurant sales due to factors such as changes in consumers’ perceptions of our brand, including as a result of food-borne illness incidents;
  • “the risk of foodborne illnesses and other health concerns about our food or dining out generally; and
  • “the potential for increased labor costs or difficulty retaining qualified employees, including as a result of market pressures, enhanced food safety procedures in our restaurants, or new regulatory requirements.”

The burrito chain’s pursuit of integrity is the topic of another uncertain risk.

“(There could be) risks associated with our Food With Integrity philosophy, including supply shortages and potential liabilities from advertising claims and other marketing activities related to Food With Integrity,” according to the Chipotle statement.

The bottom line
Chipotle’s financial highlights for the three months that ended June 30, before the company’s stock prices started slipping down the norovirus slope, included diluted earnings per share of $2.32, a substantial increase compared to the 87 cents for the second quarter of 2016.

Other key numbers in Chipotle’s financial bullet list Tuesday included:

  • Revenue increased 17.1 percent to $1.17 billion;
  • Comparable restaurant sales increased 8.1 percent;
  • Net income was $66.7 million, an increase from $25.6 million.

In the first six months of this year, Chipotle opened 107 new restaurants, and closed or relocated 18 restaurants, including the closure of 15 ShopHouse restaurants.

As part of its attempt to regain customers, market share and its all-time high stock price of $757.77, the corporation is introducing cheese dip and drive-through windows to its profile. After news of the 2015 outbreaks broke, Chipotle stock started a downhill run, dropping well below $400 before beginning to rebound.

The Virginia norovirus outbreak this past week sent the share price down again, with shareholders seeing it at $336 and below during day trading on the New York Stock Exchange.

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