Shares of Chipotle Mexican Grill (NYSE: CMG) dropped 7% on Aug. 13 after the company announced the abrupt upcoming departure of its CEO, Brian Niccol, who had led the fast-casual restaurant chain since 2018. Niccol will take on the same role at Starbucks at the end of the month.
That news stunned Chipotle's investors, since Niccol was credited with its digital-driven turnaround strategy over the past six years. Did the market overreact to the news and create a good buying opportunity for long-term investors? Or will Chipotle's growth engines sputter out without its star CEO?
How Brian Niccol turned Chipotle around
From 2014 to 2018, Chipotle's revenue had a compound annual growth rate (CAGR) of only 4%. Its comparable-restaurant sales (comps) rose 16.8% in 2014, but that key metric nearly stayed flat in 2015 before declining in 2016 and 2017.
That slowdown was caused by a series of food poisoning outbreaks, the sluggish expansion of its mobile app, and tougher competition in the fast-casual dining market.
Under Niccol, Chipotle added grab-and-go ordering options, a rewards program, and more analytical tools to its mobile app. By gathering more data on its customers, it was able to launch clearer strategies for shaping its menus, locking in repeat customers and crafting new marketing campaigns.
Niccol also halted Chipotle's heavy discounts and promotions -- implemented to lure back customers after its food poisoning outbreaks -- and allocated that spending toward new TV, social media, and digital advertising. All of these efforts started to bear fruit in 2018 as its comps rose 4%.
From 2018 to 2023, Chipotle's revenue had a CAGR of 15% as its earnings per share (EPS)) experienced a CAGR of 47%. Its comps rose every year, it consistently opened new locations, and it expanded its restaurant-level operating margins.
|
Metric |
2018 |
2019 |
2020 |
2021 |
2022 |
2023 |
|---|---|---|---|---|---|---|
|
Comps growth |
4% |
11.1% |
1.8% |
19.3% |
8% |
7.9% |
|
Year-end restaurant count |
2,491 |
2,622 |
2,768 |
2,966 |
3,187 |
3,437 |
|
Restaurant- level operating margin |
18.7% |
20.5% |
17.4% |
22.6% |
23.9% |
26.2% |
Data source: Chipotle.
Chipotle maintained those impressive growth rates even as it temporarily halted its dine-in services during the onset of the pandemic. It also successfully countered the inflationary headwinds over the past two years by raising its menu prices and opening new drive-thru "Chipotlanes" to accelerate its orders.
Will Niccol's departure change that trajectory?
From 2023 to 2026, analysts expect Chipotle's revenue to have a CAGR of 14% as its EPS experiences a 21% CAGR. However, Niccol's departure might cast a few doubts on the company's ability to meet those expectations.
Scott Boatwright, chief operating officer since 2017, will take over as its interim CEO. In a press release, Chipotle says Boatwright "played a critical role as part of the leadership team that created and executed the turnaround strategy that has delivered incredible results since it began in 2018," and that he would "continue to execute the company's strategic plan without interruption." Jack Hartung, president for strategy, finance, and supply chain, also plans to stay indefinitely to assist Boatwright's CEO transition instead of retiring next year.
So, although Niccol's sudden resignation is jarring, Chipotle will likely stick with the same strategies that worked so well over the past six years. In other words, Chipotle's growth won't stall out the moment Niccol heads to Starbucks.
But Chipotle is still priced for perfection
Niccol's departure is disappointing, but it isn't a thesis-busting event for the bulls. Yet the main problem with Chipotle is that it was already priced for perfection. Even after its latest decline, its stock is still up more than 220% over the past five years and trades at 48 times this year's earnings. The company might be able to justify that premium valuation if it maintains its momentum, but we still don't know if Boatwright can keep the company on its current path.
So, for now, I think investors can nibble on Chipotle after its recent downturn, but they might want to wait for a few more quarters to see if it sticks with Niccol's well-balanced expansion or trips over its own feet.
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