Future in Doubt for Chipotle Facing Several Class Actions

mrojasruiz88
November 5, 2012

2012 may prove to be a difficult year for Chipotle – the famous American Mexican food chain. Currently it is facing several class action lawsuits.

In May, the U.S Department of Homeland Security penalised the company, as it was employing undocumented workers in its restaurants.

That wasn’t the first time the chain was sanctioned for the same reason. In 2010, undocumented workers were found in Minnesota, Virginia and Washington. However, this is not the worst of its problems. Only a couple of months later, its stock crashed by more than 20% after announcing that the company’s growth had slowed more than expected.

Subsequently, shareholders who had purchased shares in the company between the 1^st of February and the 19^th of July announced a class action against Chipotle. This has recently been followed by almost a dozen more class actions.

The management of the company have been accused of hiding or failing to communicate the difficult financial situation that the company was going through, including:

– Chipotle’s margins had decreased due to the increase in the food prices and the limited pricing power of the company

– Chipotle’s demand was slowing due to the recessing economy and increased competition

– Chipotle was decelerating its growth as it was turning into a mature company

Just three months before the stock crash in July, the company reached a share price high on 13^th of April. Between February and April, the price of its shares skyrocketed, rising more than 20% in just a couple of months. During this time, directors and officers sold more than 400,000 shares of the company worth almost $160 million.

The deadline for the shareholders to opt-in to the class action took place on 16^th October. Subsequently the future of the company seems uncertain. With sales declining, the company needs to find ways to keep its growth sustainable. Some analysts suggest it should open new stores to increase total sales however this might prove too risky a strategy. As each new restaurant require a high level of investment, it is not likely to produce immediate economic returns.

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