Although Chipotle (CMG, Financial) has made significant progress in improving its business and driving a sales recovery since early 2016, the company suffered an unfortunate setback in mid-July in the form of a norovirus incident at a single restaurant in Virginia. Norovirus is a common and highly contagious illness affecting nearly 20 million Americans each year and is unrelated to Chipotle’s food supply chain. The incident in Virginia was the result of a failure in one restaurant to comply with the company’s procedures used to minimize the risk of a norovirus outbreak. While Chipotle has already implemented a robust and advanced food safety program, the company will continue to build a culture of compliance in its operations through relentless training and enforcement of its policies.
Despite this setback, we are pleased that Chipotle has taken a number of significant steps since Pershing Square’s initial investment to position the company for long-term success. These steps include (1) the dismantling of the co-CEO structure and the appointment of Steve Ells as sole CEO; (2) a major board refresh that reconstituted half of the current board with new directors, including investment team partner Ali Namvar and Pershing Square advisory board member Matthew Paull; (3) a renewed focus on simplifying operations and delivering an excellent guest experience which has led to improvements in key performance metrics; (4) the strengthening of the leadership team with the additions of a proven restaurant operations executive from Arby’s in the newly created role of Chief Restaurant Officer and a seasoned communications executive with over 20 years of public affairs experience at Yum! Brands as the first-ever Chief Communications Officer; and (5) the opening of the Chipotle NEXT Kitchen to explore the operational impact of potential menu innovation.
Potential new menu additions in various stages of testing include queso, the single most requested item by guests, frozen margaritas, new salad greens served with an avocado citrus dressing, and buñuelos, a crispy cinnamon dessert served with a Chipotle-infused chocolate dipping sauce. On the technology front, the company is on track to launch a new mobile app later this year which will provide substantial improvements to the digital experience for its customers.
We made our investment in Chipotle anticipating that the sales recovery would be neither smooth nor predictable, but with a belief that the key drivers of Chipotle’s powerful economic moat and long-term success would remain intact. With the steps that the company has taken to improve its business, we continue to believe there is an enormous long-term growth opportunity for Chipotle given: (1) the significant potential to drive sales per restaurant higher through mobile and digital ordering, menu innovation, catering, and improved operations, (2) the opportunity to expand its vastly underpenetrated restaurant base in the U.S., and (3) the considerable potential to build the brand internationally.
From Bill Ackman (Trades, Portfolio)'s second quarter 2017 shareholder letter.
