Chipotle shares tumble as it loses top CEO: Time to buy?

Actions of Chipotle Mexican Grill (CMG 0.32%) fell 7% on Aug. 13 after the company announced the upcoming sudden departure of its CEO, Brian Niccol, who has led the fast-casual restaurant chain since 2018. Niccol will take on the same role at Starbucks at the end of the month.

The news stunned Chipotle investors, as Niccol has been credited with its digital-driven turnaround strategy for 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 fizzle out without its star CEO?

Image source: Getty Images.

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 (comp.) rose 16.8% in 2014, but that key metric was almost flat in 2015, before declining in 2016 and 2017.

That slowdown was caused by a series of food poisoning outbreaks, slow expansion of its mobile app and tougher competition in the fast-casual restaurant market.

Under Niccol, Chipotle added grab-and-go ordering options, a rewards program and more analytics tools to its mobile app. By gathering more data about its customers, it was able to launch clearer strategies for shaping its menus, locking in repeat customers and creating new marketing campaigns.

Niccol also halted Chipotle’s big discounts and promotions — implemented to lure customers back after its food poisoning outbreaks — and allocated that spending to new television, social media and digital advertising. All these efforts started to pay off in 2018 as its compositions increased by 4%.

From 2018 to 2023, Chipotle’s revenue saw a CAGR of 15%, as earnings per share (EPS)) saw a CAGR of 47%. His companies grew every year, he constantly opened new locations and expanded his operating margins at the restaurant level.

Data source: Chipotle.

Chipotle has maintained those impressive growth rates even though it temporarily halted its meal service during the outbreak of the pandemic. It has also successfully countered the inflationary headwinds of the past two years by raising menu prices and opening new “Chipotlanes” to speed up its orders.

Will Niccol’s departure change that trajectory?

From 2023 to 2026, analysts expect Chipotle’s revenue to grow at a CAGR of 14% as EPS grow at a CAGR of 21%. However, Niccol’s departure could cast some doubt on the company’s ability to meet those expectations.

Scott Boatwright, COO since 2017, will take over as interim CEO. In a press release, Chipotle says Boatwright “has been instrumental 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 will “continue to execute the company’s strategic plan. without interruption.” Jack Hartung, president of strategy, finance and supply chain, also plans to stay on indefinitely to help CEO Boatwright with the transition, instead of retiring next year.

So while Niccol’s sudden resignation is upsetting, Chipotle will likely stick with the same strategies that have worked so well for the past six years. In other words, Chipotle’s growth won’t stop when Niccol turns to Starbucks.

But Chipotle still has a price for perfection

Niccol’s departure is disappointing, but not a thesis-breaking event for the bulls. However, the main problem with Chipotle is that it already had the perfect price. 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 may 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 may want to wait a few more quarters to see if it keeps up with Niccol’s well-balanced expansion or trips over its own feet.