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Wall Street has a mixed appetite for Chipotle

When Chipotle (CMG) was coping with a rash of foodborne illnesses in January, Bloomberg noted that Wall Street was "struggling to figure out if the worst is over" for the burrito-making chain. It's now spring, and analysts and investors are still grappling with the problems afflicting the restaurant operator, which had boasted for years that it served "food with integrity."

Shares of the Denver-based company have plunged nearly 30 percent over the past year despite its promise to institute "unprecedented food safety standards" in the wake of E-coli and norovirus outbreaks that left customers and employees ill.

The chain, which is under federal investigation related to an outbreak that sickened more than 200, closed all of its restaurants in February to talk to employees about the importance of food safety. It also has hired Kansas State professor James Marsden as executive director for food safety.

Norovirus closes another Chipotle

The negative publicity has ravaged Chipotle's bottom line. Same-store sales, a key metric measuring the performance of locations opened at least a year, fell more than 26 percent in February, which was an improvement from a 36 percent decline in January.

March, though, got off to a "slow start" even as the chain ratcheted up marketing costs to lure "lapsed" frequent customers back into the restaurants, according to Cowen & Co.'s Andrew Charles. He rates the shares as "market perform."

At least seven Wall Street analysts have slashed their ratings on Chipotle's stock since the beginning of the year, while three have raised them. Roughly 10 percent of the company's float is held by short sellers, who profit when a stock price falls. That's the highest short interest since 2013.

Chris Arnold, Chipotle's communications director, said the company continues "to make progress in establishing a best-in-class food safety program, and we've established a fund to help local suppliers meet our heightened safety standards. Our plans to build new Chipotle locations remain unchanged, and we're seeing continuing improvement in sales and transaction volumes -- all of which is good news."

He added: "Overall, we're pleased with progress to date in 2016 and we remain optimistic about the future. We'll update more when we announce first-quarter earnings at the end of April."

"The thing that Chipotle needs more than anything else is just to be out of the news for a little while," said Mark Kalinowski, an analyst at Nomura Securities, who has a "neutral" rating on the stock. "The food tastes good. The speediness of the customer service is good. So, if they're out of the news for a while, and people aren't being reminded that over and over again about their food safety issues, then the customers will eventually gravitate back."

A debate is raging on Wall Street, however, regarding how long it will take Chipotle to recover. Jack in the Box (JACK) bounced back from a worse outbreak in the 1990s that killed several customers. However, the burger chain wasn't subject to the social media pressure Chipotle has felt, according to Stephen Anderson, an analyst with Maxim Group, who has a "sell" on the stock.

He doesn't think Chipotle's business will recover until 2018 at the earliest, and he notes that buy-one-get-one-free and free burrito offers have failed to interest many consumers.

Jake Bartlett, an analyst with SunTrust Robertson Humphrey, is one of the few Chipotle "bulls" among analysts. He argues that the "vast majority" of customers will return and that same-store sales will post gains by year-end. However, he estimates that 15 percent to 20 percent of consumers won't come back.

"As long as we are moving in that direction, the pace of recovery is less important," said Bartlett, who rates the stock as a "buy."

Customers who do return to Chipotle might notice some changes: The chain reportedly is testing alcohol sales at a location near Denver.

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