The calendar of restaurant-related sickness says you can't wait much longer than one year after an incident occurs to start buying the stock of the offending chain.
Therefore, the calendar says that Bill Ackman's Pershing Square will be right with his timing of his 9.9% position that he's taken in the beleaguered Chipotle's (CMG) stock.
It's been tough to try to figure out the tolling period where Chipotle's bad press began and where it ends. That's because reports of the initial outbreak of E-coli in Oregon and Washington occurred Oct. 26 last year, but the CDC didn't opine on the story until Nov. 20 when it stated that 45 people had gotten sick in six states.
Actually, Chipotle, which has done the best reporting on itself, has stated that 60 people, during the period October through November, became ill in the following states: California, Delaware, Illinois, Kansas, Maryland, Minnesota, New York, Ohio, Oregon and Washington.
Now, we know that Chipotle failed to realize the financial gravity of the situation, because it made several pronouncements in the aftermath that suggested the downturn would not be all that severe, with same store sales suggested to dip to negative 8 to 11% when it rescinded rosy guidance back in December of last year.
At the same time on Dec. 7 Chipotle suffered a second, wholly unrelated incident in a Chipotle near Boston College, where 143 people contracted the norovirus from one sick employee.
That's when same store sales collapsed, dropping to minus 36%, far below what the company had been looking for. The company had to incur a huge number of expenses to go from good to gold standard in food prep and handling while offering some real margin busting deals to get people back in its stores.
The numbers still haven't turned in any noteworthy fashion and we don't have recent data. In fact, the best data we have is my anecdotal survey of 1912 people on Twitter about the size of the crowds at their Chipotle: 38% said the lines are back, 35% said no lines and the rest were rated work in progress.
But you know what? It may not matter. What does matter is the process of recovery from these incidents.
There have been three major bouts of restaurant-related sickness: Jack in the Box (JACK) with E coli that sickened 178 people and resulted in the deaths of four children back in 1993; Taco Bell's 2006 E Coli outbreak, which sickened 52 people; Yum's (YUM) outbreak of sickness from contaminated food at its KFC outlets in 2012.
In every single one of those instances, if you waited one year you caught a turn in same store sales as you annualized the bad news.
The difficult thing with Chipotle is: when do you really annualize? In the next month, when the E-coli outbreak occurred? Or in December, when the norovirus outbreak happened?
I have been of the opinion that same store sales declines should bottom in the coming quarter. That's what caused me to say last week that the stock has already bottomed, as the stock tracks same store sales pretty closely.
I did think the stock would mark time as we annualize the norovirus incident, even as that is far more one off.
Now comes Bill Ackman's buy, and I do think that his actions plus the recent deals the company's been offering can accelerate the timetable somewhat. But unless the hedge fund manager is sending legions of people to the stores, you are not going to get the same store sales compares that justify the stock rising until November of this year.
Of course, if you are trying to buy 9.9% of a stock that's a notoriously bad trader, you can't wait until November. You have to act now, which is what he's been doing.
Now, we know Ackman wants to meet with the company and some, including our own Brian Sozzi, have suggested that Ackman can't be happy with what seems like an insular board made up of some old McDonald's (MCD) chums and some people from a pharmaceutical background. I think the company was doing fabulously with that board until the incidents, so I discount that notion.
I do think, though, that its inability to scale its other ideas, whether it be its Asian Kitchen or its Pizza Locale concept or its most recent foray into burgers, Tasty Burger, does signal an issue of bandwidth. I know they don't want to rush anything. But if I were Chipotle's team, I would simply suspend everything and focus on this issue. Once it's done, then it might be time to expand into other concepts more aggressively. There was a time to do so; it's passed for now.
Either way, to me the timing's pretty fabulous for Ackman. He's in before what has historically been the same store sales turn.
He may just have to wait and have history play out, because even with all of the additional costs Chipotle has had to bear no one is saying that it isn't among the most profitable of stores when it gets it right. The balance sheet's still impeccable, despite all the stock that's been bought back.
It's always been a matter of when the illness bell tolls, and right now it's tolling for those wanting to get into the stock, not for those trying to get out of it.