Chipotle’s Health Troubles Turn Criminal

Chipotle announced a sales slump Wednesday, and, more troubling, a criminal investigation.

01.06.16 9:05 PM ET

Unlike its chips, Chipotle’s woes seem bottomless.

The burrito giant’s plans to regain ground after last year’s E. coli outbreak were foiled on Wednesday by an SEC filing in which the company admitted that its fourth-quarter sales were lower than expected and revealed that it has been served with a subpoena for a criminal investigation involving a norovirus outbreak at a California location last August.

In early December, Chipotle predicted an 8 to 11 percent fourth-quarter sales drop to result from the CDC’s investigation of an E. coli outbreak connected to restaurants in several states. That investigation eventually encompassed over 50 cases of foodborne illness in nine states, most of which were reported to have begun in October 2015.

Then, on Dec. 21, the CDC announced that it was investigating a more recent outbreak of a different strain of E. coli with start dates as late as Nov. 26, 2015. That investigation is still ongoing.

Now, the SEC filing has revealed the potential toll of the company’s year-end woes: a fourth-quarter sales drop of 14.6 percent.

In December alone, comparable restaurant sales were down a full 30 percent after trending as low as negative 37 percent “following this [Dec. 21] announcement and related national media attention.”

In addition, the SEC filing notes that the company has incurred one-time expenses between $14 million and $16 million during the fourth quarter, including “costs to replace food in select restaurants, lab analysis of food samples and environmental swabs, increased marketing expenses, retaining expert advisory services related to epidemiology and food safety, and preliminary estimates for legal claims and related expenses.”

Much like guac, a food safety crisis costs extra.

Chipotle’s stock took a dive following the news but the SEC filing also notes that the company’s board has authorized a $300 million buyback program. That’s in addition to the 609,000 shares of its stock that the company already repurchased in the fourth quarter at an average price of $556 per share. Most of those shares were bought back during December as the company endured its PR crisis and went on a public apology tour.

Most alarming to investors and wary customers, however, was the company’s admission that it was served last month with a federal grand jury subpoena for a criminal investigation conducted jointly by the U.S. Attorney’s Office for the Central District of California and the U.S. Food and Drug Administration’s Office of Criminal Investigations.

“The subpoena requires us to produce a broad range of documents related to a Chipotle restaurant in Simi Valley, California, that experienced an isolated norovirus incident during August 2015,” the filing noted.

Spokespeople for the U.S. Attorney’s Office and the FDA declined to comment on the investigation or provide any further details, although the latter stressed its commitment to “protecting public health” and investigating foodborne illness outbreaks.

Chipotle spokesperson Chris Arnold told The Daily Beast, “As a matter of policy, we do not discuss details surrounding pending legal actions, but we will cooperate fully with the investigation.”

Whatever the nature of the investigation, it pertains to an outbreak of norovirus, a highly contagious stomach illness, at a Chipotle restaurant in the Simi Valley Town Center shopping mall in August 2015. Norovirus and E. coli are separate illnesses, although both can result from unsanitary food handling.

As Food Safety News (FSN) reported at the time, 99 people reported falling ill after eating at that location. The Ventura County Public Health department said that number included 82 customers and 17 employees, some of whom went to the emergency room.

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“I was throwing up a lot,” one affected customer told a local CBS affiliate. “My aunt who works in the ER told me 19 people came in the night I got sick with food poisoning.”

The Ventura County Environmental Health Division investigated the restaurant and found several violations including unsanitary premises, unclean equipment, flying insects, unauthorized food handlers, equipment being directly connected to the sewer, and unclean restrooms. According to FSN, the restaurant closed for an afternoon, cleaned up, brought in new food, and reopened the next day for lunch.

On top of the December 2015 norovirus incident, which affected 120 Bostonians, including several members of the Boston College men’s basketball team, the criminal investigation into this relatively underpublicized Simi Valley outbreak is ill-timed indeed.

The Boston incident has, so far, not resulted in any criminal investigation but the civil suits have already begun, with one mother suing the restaurant on behalf of her 16-year-old son. More litigation is expected to follow.

Judging from its SEC filing, Chipotle is digging in for potentially costly legal battles. In addition to spending money for “preliminary estimates for legal claims,” the company noted that “[i]t is not possible at this time to determine whether we will incur, or to reasonably estimate the amount of any fines, penalties or further liabilities in connection with the investigation.”

Until more details emerge, it’s hard to know exactly how big of a bite this latest news will take out of Chipotle’s already diminished public image. Suffice it to say that new reports of investigations into foodborne illness aren’t making anyone any hungrier.