Chipotle's new management still has the old problem: Food safety

  • Chipotle shares sank more than 7 percent on reports of a foodborne illness outbreak in Ohio.
  • While analysts have maintained their confidence in the brand, keeping outperform ratings and even upgrading the stock, it seems that investors remain queasy.
  • This is CEO Brian Niccol's first food safety incident with the company since he began his term in March.

Chipotle Mexican Grill's new CEO, Brian Niccol, is facing his first big test — a food safety outbreak.

The burrito chain briefly closed down one of its restaurants in Powell, Ohio, on Monday after a number of customers became sick. The restaurant reopened Tuesday.

While analysts have maintained their confidence in the brand, keeping outperform ratings and even upgrading the stock, it seems that investors remain queasy. On Tuesday, shares of the company were down more than 7 percent.

Chipotle told CNBC on Tuesday morning that the local health department received two illness complaints. However, by 4 p.m., the Delaware General Health District said it received 368 inquiries related to the outbreak and had delivered 33 stool sample kits to people who reported they were ill.

Delaware Health said it is asking that people who have experienced symptoms reach out to the Communicable Disease Team.

Patrick Quade, founder of iwaspoisoned.com, said the outbreak was more extensive based on reports to his website. The site allows people to report food poisoning incidents but does not confirm the information.

Quade told CNBC that Chipotle's initial response made it seem like this incident was a small problem, however by his count, there were more than 100 reports citing 170 sick — and that number continues to climb.

An inspection by a local health department last week found that the restaurant was not keeping its lettuce and beans at proper temperatures, according to Business Insider. It is unclear if this was the cause of the reported illnesses, which included symptoms like vomiting, nausea and fever.

Food poisoning expert Bill Marler told CNBC that the outbreak "looks like norovirus."

Chipotle is by no means the only restaurant to face food safety issues. McDonald's recently recalled salads at about 3,000 of its U.S. restaurants due to an outbreak of cyclosporiasis tied back to lettuce tainted by the cyclospora parasites, which is transmitted in fecal matter.

The Centers for Disease Control and Prevention said it has traced at least 163 cases across 10 states back to McDonald's. The company said all of the locations have been resupplied from a different vendor.

Despite this nationwide recall, shares of McDonald's remained predominantly unaffected.

Still, Chipotle's history with foodborne illness issues has made its investors wary.

"Under previous management, the brand quickly issued 'Buy One, Get One' coupons following food safety scares to help protect traffic, which did not prove successful," Andrew Charles, a Cowen analyst, wrote in a research note Tuesday. "We would like to see CEO Brian Niccol take a more accountable and responsible approach and grab the bull by horns to clarify what happened, what was remedied, and what changes going forward to limit the risk an event like this will occur again."

Charles made no changes to his estimates, but said he would be monitoring the situation and viewed the incident as "Niccol's first test as CEO."

In the past, Chipotle was very tight-lipped in communicating the extent of any issues and how it planned on handling them.

On Monday night, Chipotle spokeswoman Laurie Schalow described the scope of the issue as "a handful of illness reports at one restaurant in Powell, OH."

"We acted quickly and closed this single restaurant out of an abundance of caution and we are working with the local health officials to reopen this restaurant as soon as possible," she added.

But now there is the possibility that this outbreak is larger than initially believed.

While Baird analyst David Tarantino maintained his outperform rating for the brand Monday, he said consumer sentiment and traffic to other Chipotle restaurants could take a hit if the incident remains in the media spotlight for too long.

"While we are optimistic that the media coverage of the Ohio restaurant closing will prove to be short-lived and ultimately result in an immaterial event for the brand, the lack of visibility creates a new risk factor that is worth monitoring very closely (in our opinion), and based on that dynamic, we would be more patient in putting new money to work in CMG in the short run," Tarantino wrote in a note to investors Monday.

Had it not been for the reports about illnesses, Chipotle's stock might have been lifted by an upgrade from Jefferies analyst Andy Barish on Tuesday. He upgraded the name to buy from hold and boosted his price target to $550 from $400.

"We believe CMG is one of the better positioned companies to benefit from the ongoing shift to digital/off-premise with the operations now poised to again handle increased volume & throughput," Barish said. "New management plans are credible and should help drive results in '19 (where we are now 20 percent above [consensus]) and beyond."

Since January, Chipotle's stock is up more than 50 percent, the result of confidence that Niccol could lead the company through a successful turnaround.