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Sangara Narayanan
Sangara Narayanan
Articles (562) 

Leadership Changes at Chipotle Could Be Beneficial

A new CEO is more likely to make tough decisions in favor of long-term investors

December 08, 2017 | About:

Chipotle Mexican Grill Inc. (NYSE:CMG) took a crucial step in pitching itself as a turnaround candidate by announcing founder, chairman and CEO Steve Ells will step down. The changes at the top should assuage the concerns of long-time Chipotle investors, as new CEOs generally enjoy a honeymoon period, allowing them enough elbow room to make tough decisions that can help the company in the long run.

Ells commented on his decision:

“Bringing in a new CEO is the right thing to do for all our stakeholders. It will allow me to focus on my strengths, which include bringing innovation to the way we source and prepare our food. It will ultimately improve our ability to provide our guests with delicious food that is prepared with high quality ingredients that are raised responsibly and served in a way that is accessible to everyone. I am confident that this will allow us to deliver value for our shareholders, and provide rewarding opportunities for our employees.”

It has been almost two years since Chipotle was hit with food safety issues, but the stock price is still miles away from the all-time of high of $750 that it hit in 2015. The overall trend continues to be downward, but there is a good chance a change in leadership will bring some stability in the short term.

Although the brand has suffered some real damage over the past couple years, Chipotle has managed to survive, and the strength of its balance sheet and cash flow will certainly increase the odds of the company pushing past its issues over the long term. The company carries no long-term debt on its balance sheet and reported an operating income of $210.7 million in the first nine months of the current fiscal year.

Comparable store sales have grown 8.3% over the period, which allowed revenues to increase 17.3%. Sales growth was also boosted by new restaurant openings. Between third-quarter 2016 and third-quarter 2017, the total number of restaurants has increased from 2,178 to 2,734 units. The company expects to continue this pace of new restaurant openings in 2018 as well, planning to open 130 to 150 new restaurants next year.

Chipotle is the not the first company to be hurt by food safety issues, and it certainly will not be the last. But the market remains extremely fearful as bad news keeps hitting the company at regular intervals. The baton handover at the top will allow some extra time for Chipotle to fix ongoing issues and work toward long-term goals. This news may certainly help stabilize the stock’s price in the short term, but the real challenge for the restaurant chain in 2018 will be to keep its current streak of positive comparable stores sales going.

Disclosure: I have no positions in the stock mentioned above and have no intentions of initiating a position in the next 72 hours.

About the author:

Sangara Narayanan
Sangara Narayanan holds an MBA from Kent State University, Ohio, and has worked on the floor as a trader in New York. You know where. He is passionate about capital markets and specializes in business analysis, stock valuations and making chicken curry

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