Chipotle's Stock Just Hit Its Lowest Point in Three Years

Despite its much-talked-about recovery plan, Chipotle has so far failed to inspire confidence in investors after its string of food safety scares last year. On Tuesday, the company's stock hit its lowest level in three years. CNN reports a Deutsche Bank report released Monday "appears to have sparked the most recent round of selling."

In a note to investors, Deutsche Bank analyst Brett Levy wrote that, due to the highly publicized E.coli outbreak which led to a federal investigation and low same-store sales, some of Chipotle's customers "may be lost for good."

On Wednesday, stock was up from its Tuesday low, but just slightly.

Howard Penney, a consumer analyst at Hedgeye Risk Management, says the chain's stock will likely go even lower than it did Tuesday, when it was trading at around $390. Its all-time high, in July 2015, was over $742.

Penney says the burrito chain's much-touted recovery plan won't begin to positively impact the company for a couple of years. "It's going to take time," he says. "The damage they did is very extensive and those things don't correct themselves overnight. They certainly don't correct themselves by giving away free food."

The company has worked to lure back loyal customers with free burritos, but that move has only taken them so far; same-store sales decreased 30 percent in the first quarter of 2016.

In the company's most recent earnings call, Chipotle executives said they would soon launch a new menu item — chorizo — and a rewards program called Chiptopia as part of their comeback plan.

Penney worries that chorizo won't be exciting enough to bring people back. A rewards program, he says, is a gamble. "They are behind the game when it comes to loyalty. So that, to me, is not a driver of traffic. Chili's employed a loyalty program last year and it did nothing for their business." He adds that if the program requires the company to give away more free food, it will likely bring in lower margin customers, therefore not adding much to the bottom line.

Chipotle launched as a healthier alternative to traditional fast food, and one of the few chain restaurants that prided itself on serving "food with integrity," utilizing non-GMO produce and antibiotic-free meats. But while Chipotle has been struggling with its reputation and food safety protocols, its competitors have been gaining ground: The "integrity" that once set Chipotle apart has now become standard protocol.

"You look at what any company is doing — they're all going antibiotic-free," says Penney. "The gap between what the rest of the industry was serving and what Chipotle was serving has narrowed over time. As they try to repair the damage they did by serving bad food, the competition has gotten better."

The move toward Chipotle alternatives is already becoming apparent. In April, consumers selected Moe's Southwest Grill as the top fast casual Mexican restaurant in the Harris Poll's annual Brand of the Year Awards. Chipotle, which had previously won the title every year since 2013, didn't even make it to the top four.

Penney thinks the company can fight its way back to the top by narrowing its focus. Calling the company's rumored Better Burger concept (which is already dead, by the way) "a distraction at best," he says that Chipotle needs to take a long, hard look at Chipotle — and nothing else — for the foreseeable future. "Anything other than trying to fix the core business right now is ridiculous. They prided themselves on the ability to do one thing really well, and they screwed that up. To think that they can do multiple other things — pizza, Asian, burgers — is not responsible."

The chain's other problem? Rapid growth. Penney says the company is "deploying capital at aggressive rates" to open large numbers of stores each year. "That is a very bad strategy for them," he says. "They're not helping the value of the company by continuing to open up 225 stores a year."