How Jack in the Box could benefit from Chipotle’s E. coli outbreak
Investors and Wall Street analysts are quickly signaling fears that sales will slide at Chipotle following an E. coli outbreak in the northwest that led to the closure of 43 restaurants in Oregon and Washington.
Shares of Chipotle (CMG) slipped Monday, the first day of trading after the news broke over the weekend. Some analysts that cover the company have already warned investors to anticipate a sales dip for the fourth quarter. This news comes just after Chipotle has finally moved forward from an unrelated pork shortage problem that took almost a year to fix. Because of the pork supplier woes, Chipotle’s sales growth had already slowed for the first three quarters of 2015. An E. coli outbreak is another headache and suggests that sales acceleration may not occur until 2016.
Because the store closures only affect 2.5% of Chipotle’s store base, most of the expected sales decline will likely be pegged to media coverage of the E. coli outbreak. Chipotle has also been in the news for an outbreak of norovirus in California in August as well a Salmonella outbreak over the summer in Minnesota.
“We believe national publicity of these outbreaks could add a headwind to Chipotle’s 4Q same-store sales, before rebounding in the new year,” warned Telsey Advisory Group in a research note.
Telsey says two rivals in particular could benefit from the Mexican-restaurant chain’s woes. Fast-casual purveyor Panera (PNRA) and Jack in the Box (JACK), the owner of fast-casual chain Qdoba – which is the rival that is most similar to Chipotle in terms of menu and concept.
To fully appreciate the 180 turn at play here, readers need a bit of a history lesson. Back in 1993, Jack in the Box was stung by a massive E. coli outbreak that led to the deaths of four children and hundreds of diners becoming ill after consuming tainted meat. The incident led to a wave of negative publicity and sales at the chain plunged 30% to 35% in the weeks following the outbreak, the Wall Street Journal reported at the time. Robert Nugent, who served as president of Jack in the Box at the time of the incident, said it was the chain’s “worst, worst nightmare.”
Now, Jack in the Box stands to financially benefit – at least in the short term – from the incident at Chipotle.
“Given its expanding system and broadening menu variety, we believe Jack in the Box and its fast-casual Qdoba Mexican Eats could benefit should customers temporarily seek alternatives to Chipotle’s spicy offerings,” says Telsey analyst Bob Derrington.
For its part, Chipotle hasn’t said much publicly on Monday beyond what was disclosed over the weekend. The company still hasn’t issued a formal press statement on its website. When Fortune e-mailed spokesman Chris Arnold for an update, he declined to provide any new details. Arnold reiterated that Chipotle was working with health officials to determine the cause of the issue.
Guggenheim Securities analyst Matthew DiFrisco estimates that same-store sales will now grow by a slim 1.1% in the fourth quarter. That would be even weaker than the third quarter same-store sales growth of 2.6% that Chipotle reported last month. DiFrisco also trimmed its expectations for profits for the period, citing increased store operating expenses and the lower sales view. But he maintained his recommended “Buy” rating on the stock, saying he anticipates management will successfully “reestablish its high food quality brand equity.”
Jack in the Box also finally recovered, thanks to the leadership of Nugent – who was promoted to the CEO role in 1996 and retired in 2005 at the age of 67. Nugent was credited with turning around Jack in the Box and reinventing the brand. Shares at Jack in the Box have surged 220% the past five years, proving the chain remains on a solid path. The stock has even outperformed Chipotle’s gain over that period.