While the last six months have been challenging for Chipotle (CMG, Financial)’s brand, shareholders, and other stakeholders, we believe the company’s significant long-term growth opportunity is one of the most attractive in the industry. Prior to making our initial investment, we understood that this investment could be a volatile journey, and this has certainly proven to be the case. As we have seen with many other restaurant companies in the past, brand and customer sentiment can change quickly, and we are confident that, with the right initiatives and execution, Chipotle will be able to stage a successful turnaround.
Management’s immediate focus has been on optimizing existing operations to allow its restaurants to deliver a consistently great guest experience. This effort is being led by the new Chief Restaurant Officer Scott Boatwright, who joined the company in May after a successful career at Arby’s. Near-term operational initiatives include eliminating layers in the upper management ranks to redeploy more resources directly overseeing the restaurant operations, restructuring operations support, and improving the hiring process. In response to tremendous customer demand for something new from Chipotle, the company launched all-natural queso nationwide on September 12, 2017, and is currently testing several other menu additions.
Chipotle’s digital initiatives, led by Chief Digital and Information Officer (and Starbucks veteran) Curt Garner, continue to progress. The first major mobile app revamp in many years was launched on November 6, 2017. The new app includes many new features that make it easier for guests to order from Chipotle, including: (1) quick reorder; (2) more precise customization of meals; (3) Apple and Android pay; and (4) the ability to receive, store, and redeem Chipotle offers. The company has also made further progress on integrating key third-party delivery partners, and soon will make its catering offering more accessible by lowering the minimum group size and entry price tier. These initiatives: (1) improving the guest experience; (2) growing digital opportunities; (3) driving menu innovation; and (4) expanding delivery and catering – will all be critical to enabling the turnaround at the company and increasing average unit volumes.
Chipotle stock has been highly volatile, increasing to $499 per share in May of this year as sales trends improved, and then declining more recently to a low of $263 per share after a food safety incident in July in one store, and a below expectation quarter. At first glance, this is a surprising degree of volatility for a company with a substantial net cash position and no debt. We believe the volatility is driven by the fact that the value of the company is highly dependent on investors’ estimates of future growth, average unit volumes, and store margins. When these investor estimates change, the associated discounted cash flow calculations lead to widely varying estimates of intrinsic value, which ultimately drive the stock price. If the company begins to show progress on these metrics, we would expect the stock price to respond accordingly to the upside.
Like ADP and Howard Hughes, we expect that Chipotle will be a substantial beneficiary of lower US corporate tax rates.
From Bill Ackman (Trades, Portfolio)'s third quarter 2017 shareholder letter.
