What should Chipotle shareholders do now that its CEO is leaving for another job?

On August 13, Starbucks shocked the investing world when it hired the CEO Chipotle Mexican Grill (CMG 0.49%) to be its next CEO. Brian Niccol has led Chipotle since 2018 and has overseen dramatic improvements in the business.

Some investors may feel this commitment is overstated. But consider that Starbucks was certainly willing to break the bank to lure Niccol away from Chipotle. According to Business Insider, Niccol could earn up to $113 million in the coming years, taking into account his total salary package. It’s amazing and shows how valuable some companies think it is.

Here’s what happened to Chipotle under his leadership and what investors should do now that he’s gone.

Why Chipotle Stock Soared With Niccol

In its press release, Starbucks was quick to point out that Chipotle’s stock rose roughly 800% while Niccol was CEO. Now, short-term stock movements can have a variety of explanations. But a longer-term stock rally like the one Starbucks highlighted usually has only one explanation: earnings growth.

Chipotle’s graph shows this relationship clearly. Since the start of 2018, the company’s earnings per share (EPS) has risen more than 700%, predictably fueling the stock’s strong gains.

Data by YCharts.

Chipotle opened more than 1,000 new locations under Niccol, which helped boost the company’s profits. But its profit margins are the biggest factor here. At the restaurant level (excluding corporate expenses and interest income, among other things), Chipotle had an operating margin of nearly 19% in 2018. By the second quarter of 2024, the restaurant-wide operating margin has risen to 29% .

In other words, for every $100 in sales, Chipotle now makes about $10 more in operating profit than it did when Niccol became CEO. This has had a tremendous impact in EPS growth and that is why the stock has gone up.

What to do now that Niccol is on the way out

Corporate leadership teams change all the time, but sudden changes like this are not ideal.

That said, Chipotle is making the most logical decision it can by making Chief Operating Officer Scott Boatwright interim CEO. Boatwright has been with the company longer than Niccol, and things should continue to run smoothly during this transition period.

Therefore, I wouldn’t panic if I were a Chipotle shareholder. Niccol’s contributions to the company have undoubtedly been valuable, but the business can survive without him and should be stable during this transition.

It’s also fair to note that Niccol’s time with Chipotle wasn’t entirely without controversy. The improvement in profit margin has been tremendous, but critics believe the company has boosted portion margins by shrinking portion sizes. Niccol addressed that claim during the Q2 earnings call, saying it was untrue. But there is a perception among consumers that portions are getting smaller at Chipotle.

Boatwright and the eventual permanent CEO who will succeed him will have work to do to change this negative perception of the Chipotle brand. To be clear, Niccol said the company has never instructed workers to hand out smaller portions, but has already “bent over and re-emphasized generous portions.”

Chipotle expects its restaurant-wide margin to fall to 25% in the third quarter — and larger portions will be a contributing factor.

This is something to keep an eye on. Niccol’s leadership led to higher margins at the restaurant level, but those margins are about to take a step back. Investors should note that the stock’s strong gains in recent years have been fueled by higher profits. If margins are on the verge of contracting, stocks could slightly reverse course in the short term.

Longer term, Chipotle can still create a lot of value for shareholders, so now is not the time to sell the stock. But much of what comes next will depend on the leadership of its new CEO, so I wouldn’t necessarily start a position in Chipotle stock today.