Chipotle has a problem on its hands: labor costs are still too high.

Bank of America Merrill Lynch downgraded Chipotle and cut its earnings targets for 2018 and 2019, saying the struggling restaurant chain will have trouble cutting back labor costs any further than it already has.

"We are downgrading Chipotle to Underperform from Neutral as we believe, assuming no significant tax reform, that 2018 and 2019 consensus EPS needs to drop at least 10 percent," analyst Gregory Francfort write in a note Wednesday. "We believe further gains from trimming hours will prove difficult which limits the opportunity to get labor below 27 percent of sales even if traffic recovers."

The average weekly hours for full- and part-time Chipotle crew members were cut from a high of 34.6 in 2006 to 21.7 in 2016, according to the Bank of America report.

Chipotle spokesperson Chris Arnold told CNBC in an email that, on the contrary, it has increased hours.

"We absolutely have not cut hours. In fact, we have recently increased scheduled hours for our crew so that our teams would be ready to prepare and serve our new queso. The Bank of America analysis is making estimates and conclusions about our management practices over a 12-year time frame and the scale of our business and labor wages have changed dramatically over that time."

The Bank of America analyst slashed his 2017 earnings estimate to $7.40 from $7.60, and lowered his 2018 estimate to $9.50 from $10.50. Shares of Chipotle have risen nearly 10 percent over the past month, but remain down over 12 percent this year.

By late morning, shares were down 2 percent following the call.

The company has been testing new products and initiatives to drive traffic to its restaurants after its struggles with food safety outbreaks and subsequent setbacks. Chipotle recently launched its own queso nationwide due to growing competition from California-based Del Taco.

—CNBC's Michael Bloom contributed to this report.