Chipotle declines after saying customer service has slipped

Chipotle Mexican Grill Inc., the burrito chain struck by a food-safety crisis last year, suffered its worst stock decline in six weeks after warning that deteriorating customer service is hampering comeback efforts.

As the company works to bounce back from a widespread E. coli outbreak, it has lost its focus on the customer experience, co-Chief Executive Officer Steve Ells said on Tuesday. That's slowed down lines at its restaurants and undermined one of its former strengths.

"I'm not satisfied with the rate of recovery," Ells said during a Barclays investment conference in New York. "I'm particularly not satisfied with the quality of experience in some of our restaurants."

The stock fell as much as 7.8 percent to $365.33 in New York trading after Ells made the comments. That marked the biggest intraday decline since Oct. 26. Even before the dip, Chipotle shares were down 17 percent this year.

Chipotle's same-store sales — a closely watched measure — dropped 21.9 percent last quarter, worse than the 18.7 percent decrease projected by analysts. The chain's woes began late last year, when a series of foodborne-illness outbreaks scared away customers.

At the conference, executives also said they were "nervous" about meeting guidance for next year, and that same-store sales are difficult to predict. In October, Chipotle forecast 2017 earnings of $10 a share.

The company has tried to get diners back by spending more on marketing and ads, establishing different food-safety protocols and introducing a loyalty program. But it's been a slower rebound than expected, Ells said on Tuesday.

"2016 has been the most challenging year in our history," Ells said. "We obviously have a long way to go."

Chipotle hit an "inflection point" in July, when it began gaining more customers than it was losing, Ells said. Trust in the brand also has returned to near pre-crisis levels, he said. But slow customer service threatens to turn off people if they come back to restaurants and they aren't perfect, according to Ells.

Chipotle's service is suffering as the U.S. labor market tightens and the chain experiences higher employee turnover. Restaurant worker turnover was about 130 percent, co-CEO Monty Moran said in July.

"People are leaving for better wages elsewhere," said Peter Saleh, an analyst at BTIG LLC. With declining sales, Chipotle doesn't "have the capability to pay people more."

The Denver-based company also said on Tuesday that it's imposing a hiring freeze as it works to recover.

"They're in a really tough spot," Saleh said. "I'm not exactly sure what they're going do."