Chipotle's decline is unstoppable

Wall Street has growing doubts that Chipotle will ever recover from the E. coli outbreak that sent its sales tumbling.

In a note published Thursday, BTIG analyst Peter Saleh said the company's marketing strategy has become "stale" in the minds of consumers and that its millions of dollars in free food offers aren't working.

"The multiple promotions run this year have seen little apparent success and we believe a new approach may be necessary to drive a quicker pace of sales recovery," Saleh writes.

Saleh thinks Chipotle needs to fire workers to reduce its labor costs, and even suggests shifting away from "food with integrity" - which has long been the cornerstone of Chipotle's appeal and marketing strategy - to lower food expenses.

He said Chipotle's labor expenses have ballooned to nearly 30% of sales since the E. coli outbreak. By comparison, in 2014 and 2015, labor accounted for 22% of sales and 23.2% of sales, respectively.

According to Saleh, customers no longer trust the company's "food with integrity" promise, so Chipotle should also consider letting go of naturally raised ingredients.

"Chipotle has historically operated with higher food costs than many of its competitors as many of its ingredients are naturally raised and more recently, non-GMO," he writes.

In 2014, that meant Chipotle's food costs accounted for nearly 35% of sales, which is well above the 30% average of most restaurant operators.

"In the past, the economic model made sense because what Chipotle gave up with higher food costs was more than offset with lower labor, occupancy and operating expenses," Saleh writes. "While it is uncertain how long this will last, it is clear to us that Chipotle is not being recognized by many of its former guests for its investment in naturally raised ingredients."

Chipotle's sales have fallen for three straight quarters since the E. coli outbreak that sickened more than 50 people in 14 states.

The chain's same-store sales fell 23.6% in the most recent quarter.

At least one investor thinks Chipotle will make a comeback.

Billionaire activist Bill Ackman and his hedge fund Pershing Square took a 9.9% stake in the company this week, and said he plans to shake up the burrito chain.

But Wall Street analysts appear skeptical of the investment.

"We see no quick fix to what CMG really needs, a revitalization of top line, and activism's traditional tools for restaurants - spin offs, re-franchising, asset sales and cost cuts - don't appear to offer short term opportunities, leaving few obvious quick levers to pull," Morgan Stanley analysts wrote in a recent note.

Stifel analysts had an even more brutal reaction.

"We emphatically reiterate our sell rating on [Chipotle] shares following the news that Pershing Square has started a 9.9% activist position," Stifel analysts wrote in a note. "We cannot fathom Pershing's operational or mathematical investment thesis."

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