After Fueling a 195% Rally That Outperformed Everyone, Chipotle’s CEO Faces New Test

(Bloomberg) -- Brian Niccol has held the top job at Chipotle Mexican Grill Inc. for 505 days. Over that time, the stock has surged 132%. Throw in the three weeks between his appointment and arrival, and the gain swells even more -- to 195%.

That’s more than any other stock in the S&P 500 Index.

It’s been quite a debut, one that took Chipotle from a crisis-ravaged stock that was languishing at a more than five-year low to a record high this month. That reads like the kind of turnaround case study they teach at MBA programs across America. Now comes the hard part: Can Niccol maintain the momentum?

Ahead of its second-quarter earnings this afternoon, Chipotle is back to being the high-growth story it had been before a rash of food-borne illnesses sickened hundreds and tarnished its brand so badly that some wondered whether it would ever recover. Niccol, the 45-year-old former head of Taco Bell, has turned Chipotle around by cleaning up the chain’s operations, adding new menu items, pushing into delivery and boosting the brand’s digital presence. Under his direction, the chain has also embraced new diet trends like Keto and Whole 30 and -- most importantly -- brought an end to the string of sicknesses.

Basic stuff, really, but basic stuff that had somehow been overlooked for years.

‘New Perspective’

“They are doing a lot of things right,” said Maxim Group analyst Stephen Anderson. “It took someone like Brian Niccol to give some new perspective on the brand.”

The results, including a year of accelerating quarterly same-store sales under his belt, have secured Niccol’s place in the pantheon of modern-day turnaround gurus, but now he must succeed in the next phase of Chipotle’s growth. And, analysts warn, that phase could prove trickier than the last one.

The company faces increasingly tough competition from fast-food rivals that are cutting prices. At the same time, the rising costs of labor and food threaten profit margin. And the strategy that pushed Chipotle into prominence -- fresh ingredients from a menu of limited items -- no longer stands out in the restaurant industry.

“It’s a very different world that the current Chipotle has to navigate through,” said Nick Setyan, an analyst at Wedbush Securities Inc. “Pre-food crisis, they just had this halo -- they were pretty much on auto-pilot.”

Chipotle’s shares have surged more than 70% this year, far outpacing the gain in the S&P 500. But that jump has sparked more skepticism from analysts, who have the most sell ratings on the stock since the depths of the crisis in 2016, according to data compiled by Bloomberg.

Among their concerns: Niccol has already picked the low-hanging fruit. It’s also going to take time to build average restaurant sales back to their pre-crisis levels of about $2.5 million a year. They’re hovering around $2.05 million a store annually now on a trailing 12-month average.

“It’s high expectations for this company both by analysts and investors. They have very little wiggle room to fail,” said Nita Umashankar, marketing professor at San Diego State University. “Food costs, food-safety costs, as well as labor costs are going up. There’s only so much customers are willing to pay.”

Still, the bulls outweigh the bears, and they’re largely crediting Niccol for the company’s resurgence. He has overhauled the management team with a new marketing head, also formerly of Taco Bell, and a new supply chain officer to oversee Chipotle’s food system. He’s trying to speed up orders again, too. They’ve gotten much slower than where they used to be -- to help, Niccol is trying to get workers to stick around longer and be more loyal to the brand. The company just started a new quarterly bonus program in June for workers to earn extra pay.

Chipotle Chief Financial Officer Jack Hartung said the company has been encouraged by investors’ support, but acknowledged the challenge now of keeping up the pace.

“We know the daily stock price is not an indicator that our work is complete,” he said in an emailed statement to Bloomberg News. “We’re still in the early stages on many of our key initiatives and remain focused on driving the business forward for many years to come.”

Just the Numbers

• 2Q adjusted EPS estimate $3.76 (range $3.19 to $4.48)
• 2Q revenue estimate $1.41 billion (range $1.38 billion to $1.43 billion)
• 2Q comparable-store sales estimate up 8.2%: Bloomberg data
• Full-year revenue estimate up 12% to $5.43 billion; Chipotle forecast mid- to high-single-digit growth, with price contributing about 2%, on April 24

Data

• Implied one-day share move 6.6%
• Adjusted EPS has beaten estimates in each of the past six quarters
• Stock has gained 72% so far this year, compared to a 19% increase in the S&P 500
• Chipotle has 11 buys, 16 holds, 7 sells; average price target $703 implies 5% downside from last closing price
• Short interest 6.3% of float, down from high of 10% in March, according to financial analytics firm S3 Partners

Timing

• Earnings expected around 4:10 p.m. New York time
• Conference call 4:30 p.m. 1-888-317-6003, password 4273517

To contact the reporter on this story: Leslie Patton in Chicago at lpatton5@bloomberg.net

To contact the editors responsible for this story: Anne Riley Moffat at ariley17@bloomberg.net, Steven Fromm

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