News of a federal probe into a norovirus outbreak at a California location of Chipotle Mexican Grill in August raised questions about jurisdiction, but food safety experts say it is not unprecedented.
After projecting same-store sales for its fourth quarter would fall 14.6 percent, Chipotle officials on Wednesday also revealed the Denver-based chain had been served with a federal grand jury subpoena in December from the U.S. District Court for the Central District of California in connection with the U.S. Attorney’s Office and the Food and Drug Administration’s Office of Criminal Investigations.
Chipotle said it will fully cooperate with the investigation, but officials declined to elaborate. The subpoena was related to a norovirus outbreak in August involving a single restaurant in Simi Valley, Calif., in which about 80 customers and 18 Chipotle workers fell ill.
The day’s news sent Chipotle’s stock price to new lows as Wall Street analysts grappled with worse-than-feared projections of sales declines. The stock price plunged nearly 5 percent to $426.67 after hours, its lowest point over the past year.
What the federal investigation might mean for Chipotle remains unclear. Officials with both the U.S. Attorney’s office and the FDA’s Office of Criminal Investigations declined comment.
Last week, the Justice Department announced a criminal investigation of Blue Bell Creameries for its handling of a listeriosis outbreak in ice cream dating back five years, in which three people died. In that case, prosecutors are looking at whether company executives committed wrongdoing in how they handled the outbreak, according to CNN.
Bill Marler, an attorney specializing in foodborne illness said federal charges typically result from cases that involve adulterated product crossing state lines, and that is not likely in the Simi Valley norovirus case. Marler is currently representing about 100 people sickened in the latest series of foodborne illness outbreaks tied to Chipotle restaurants, including cases from the Simi Valley incident.
In 2012, for example, the two owners of Jensen Farms in Colorado were sentenced to fines and five years probation after being charged on six counts related to an outbreak of listeria from their cantaloupe farm. The outbreak sickened 147 people in 28 states, killing more than 33, according to Marler.
In 2013, Iowa egg farmers Quality Egg LLC faced charges and later pleaded guilty in 2015 to bribing federal inspectors. The company and its owners faced $7 million in fines and the owners were sentenced to three months in jail, though they have appealed.
In 2014, officials with Peanut Corporation of America faced multiple federal charges stemming from a Salmonella outbreak that sickened 714 and killed nine people in 2008.
Last year, ConAgra Foods agreed to plead guilty and pay $11.2 million after a 2006 outbreak of Salmonella in peanut butter sickened an estimated 700 people.
Michael Nunez, an attorney with Murchison & Cumming LLP in Las Vegas said subpoenas in foodborne illness cases are not unprecedented, though actual charges are rare.
Nunez said he is not involved in any current lawsuits against Chipotle. The federal jurisdiction may be warranted simply because Chipotle is national chain, with multi-state operations.
Eric Lindstrom, a food regulatory attorney with Keller and Heckman LLP, said the FDA typically defers to state and local health departments in cases of foodborne illness from restaurants, but may be getting involved in the Chipotle case “because it’s a big name and has deterrent value,” he said.
“Although criminal charges may not be brought as a result of the grand jury investigation, the FDA still has a number of civil enforcement tools at its disposal,” he said. “But over the last 10 years or so, criminal charges have become more common. When the DOJ is looking at what people knew, what they were doing, they’re looking for culpable conduct, not just an accident.”
Same-store sales expectations
Investigators in the Simi Valley case also reviewed records of the Ventura County Environmental Health Division, said Doug Beach, manager of the county’s community services program.
One area of concern may be what Chipotle officials knew about its sick employees at the restaurant at the time.
Beach said county officials were notified of illnesses on Aug. 21, a Friday, but found that employees had reported gastrointestinal symptoms earlier in the week, starting on Aug. 18, a Tuesday.
“They told us they excluded people who were sick,” said Beach. “But they didn’t inform us until the following Saturday, and it was a Tuesday when, I believe, they learned of the issue.”
Chipotle voluntarily closed the restaurant, discarded food, cleaned and disinfected the facility.
Beach said Chipotle’s policy required workers to stay home for at least five days, but after some workers still tested positive for norovirus, county officials kept some home for as long as two weeks until they were cleared.
Wall Street analysts in reports Wednesday reacted to Chipotle’s updated guidance, saying the impact was much worse than previously feared.
Stephen Anderson of Maxim Group reduced his stock price target to $395 from $435 following the downgraded guidance of negative 14.6 percent same-store sales for the fourth quarter, noting that it was worse than his previous estimate of negative 13.5 percent.
Legal proceedings tied to the federal investigation will further pressure results in 2016, saying an unfavorable verdict “may have the potential to do more long-term damage to the Chipotle brand than even the recent E. coli and norovirus outbreaks.”
Regardless of the outcome, he added, “we contend there will need to be comprehensive changes in protocol, and potentially to management, as a result of recent outbreaks,” Anderson wrote.
Anderson estimated same-store sales for Chipotle would be down in the mid-to-high-single-digits for 2016, and the return to positive same-store sales is not likely before fiscal 2017.
Andy Barish, equity analyst with Jefferies LLC lowered his fourth quarter same-store sales estimate for Chipotle to down 14.7 percent, compared with earlier estimates of down 10 percent. For the year, Barish expects Chipotle’s comparable sales to decline 1.8 percent, though he cautiously expects conditions to normalize by the end of 2016, estimating that same-store sales will be up 3 percent in 2017.
“However, visibility remains low as the impact from these events on same-store sales going forward is hard to predict, particularly as competition continues to increase across the broader industry,” he wrote.
Keith Siegner of UBS Global Research noted that Chipotle officials have been adamant that new unit opening projections for 220 to 235 restaurants in 2016 remain on track.
Siegner, however, suggested that the pace seemed a bit “aggressive,” saying 210 would be more likely for 2016 with 200 in 2017.
Contact Lisa Jennings at [email protected].
Follow her on Twitter: @livetodineout
