Can a New CEO Save Chipotle?

The burrito-maker is turning to outside help to stop its slide

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Feb 19, 2018
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After flying high for several years, Chipotle Mexican Grill (NYSE:CMG) has had a rather ugly fall. In the past two years, shares have fallen more than 40%. Disease outbreaks at restaurants across the country battered Chipotle’s reputation and bottom line. Rising competition in the fast casual sector, and increasing cost for raw materials such as avocados, have also contributed to the company’s woes.

Chipotle spent 2017 in turnaround mode, and had little to show for it by year’s end. With its first attempt at returning to greatness foiled, the company is now pinning its hopes on a change at the top. Brian Niccol has been appointed as the new CEO. Niccol is leaving his post as chief executive of Taco Bell, a subsidiary of Yum! Brands (NYSE:YUM). In that role, he led a successful turnaround that has seen Taco Bell’s fortunes change for the better. Now Chipotle investors are pinning their hopes on the idea that lightning can strike twice.

Today, we take a look at whether a change of leadership will be enough to reverse the burrito restaurant chain’s failing fortunes.

Track record bodes well

Brian Niccol has already proven himself capable of turning around a struggling Mexican restaurant chain. At Taco Bell, his leadership saw the fending off of the class action lawsuits and other impediments that had been a distraction and drain on the bottom line. After getting the house in order, he has led Taco Bell into a new era, cultivating partnerships with Lyft and Grubhub to facilitate deliveries, taken out many of the artificial ingredients that were a turn-off to more health-conscious consumers, and expanded its breakfast offerings.

The results speak for themselves. Younger consumers have returned, margins have picked up, and Taco Bell has surged into first position as the best-performing chain in the Yum! Brands stable, which includes such household names as KFC and Pizza Hut. It is understandable, given that track record, that Chipotle investors would be cheered by the arrival of Niccol at the helm. Taco Bell has nearly three times the number of locations as Chipotle, so it is certainly no monumental step for the new CEO. He is a known quantity and tested turnaround leader. But will that be enough?

Man with a plan?

Can the new boss turn things around at Chipotle? The market seems to think so, with shares up 20% since the announcement. Chipotle’s founder, Steve Ells, had many positive things to say about Niccol:

“His expertise in digital technologies, restaurant operations and branding make him a perfect fit for Chipotle as we seek to enhance our customer experience, drive sales growth and make our brand more relevant.”

But it will be a great challenge to reverse the problems facing Chipotle. The market reaction has been overwhelmingly positive since the announcement, yes, but that can only be sustained if the new chief executive can actually deliver on meaningful changes. That may prove difficult in an increasingly competitive marketplace. Specifically, Chipotle, despite having fallen badly from its past highs, is still priced as a hot growth stock. Yet the company’s own guidance for 2018 calls for a decline in new store openings. As the fast casual restaurant market matures, and as Chipotle’s own footprint continues to expand, the possibilities for high growth and margin expansion start to taper off.

There is still plenty of room for Chipotle to grow, but its share price, which is nearly 50 times earnings, means that Niccol cannot simply deliver healthy financial performance and growth. He has to keep the fast-paced engine moving for quite a long time. That may prove more challenging than a conventional turnaround, where expectations are usually not as high.

The Verdict

So, can Niccol deliver as shareholders now hope? That is hard to say. But, even at its current compressed valuation, Chipotle is no value stock opportunity. For those hunting for hot growth stocks, Chipotle is definitely one to watch in 2018. But again, that growth story will need some new justification if the share price is going to hold up in the year ahead.

Disclosure: I/We own no stocks discussed in this article.