How a new CEO could make a mark on the company.
While Starbucks got a lot of positive press following the hiring of its new CEO, Brian Niccol, Chipotle Mexican Grill (CMG -2.78%) just lost the individual who had helped guide it successfully over the past six years.
Let’s look at the potential effect on the company and whether the stock is still a buy.
CEO jumps ship to Starbucks
Brian Niccol jumping ship to go from CEO of Chipotle to taking the reins at Starbucks shocked the investment world, sending shares of Starbucks soaring while shares of Chipotle sank. Niccol helped lead a turnaround at Chipotle following a spate of foodborne illnesses at the restaurant. He was also instrumental in pushing out new technology to help increase worker efficiency, improve Chipotle’s supply chain, and help with staffing and restaurant traffic. He led the charge with mobile ordering and Chipotle’s loyalty program to keep more casual diners engaged and coming back.
The good thing is that all the technological improvements and strategies that Niccol implemented at Chipotle are staying.
At the same time, not everything on Niccol’s watch was smooth. The restaurant’s uneven portion sizes recently came under fire from customers, and the company admitted that about 10% of its locations had been short-changing its customers. It will retrain these restaurants, but it is also expected to put near-term pressure on the company’s margins as a result.
However, when a new CEO comes in, it could be a good marketing opportunity for the company to play up new, standardized portion sizes to bring in customers who may have become disenchanted with the brand. So it’s not like there aren’t opportunities for a new CEO to improve upon after taking over.
Chief Operating Officer Scott Boatwright will take over as Interim CEO, and whether he’ll keep the job permanently is still up in the air. However, the job undoubtedly will be in high demand if the board does decide to bring in candidates from the outside.
Image source: Getty Images.
A recipe for success
Regardless of who is CEO at the moment, though, Chipotle has found a recipe for success, and the key is just to not veer too far away from what has made it successful. This includes a small menu with relatively few ingredients, from which workers can make orders in an assembly-like fashion. This strategy helps lead to both strong throughput (fast orders) and solid gross margins, as it gives the company scale and buyer power.
Meanwhile, Chipotle has found success luring in buyers through both special limited time offers that change out quarterly, and through its targeted loyalty program. None of that should change under a new CEO. The company should also continue with its expansion throughout the U.S.
Going beyond that, the next CEO could shake things up in two ways. One way is with international expansion. Chipotle currently has a modest international presence, with locations in just four countries outside the U.S. heading into 2024. Earlier this year, it entered a new market for the first time in 10 years when it signed an agreement with the Alshaya Group to put a franchise in Kuwait. It will also open a Dubai location later this year. A new CEO could ramp up its international presence, as Niccol was not very active in this area.
The other big move it could make is adding breakfast. Breakfast burritos, anyone? Adding a breakfast daypart has been a tried and true winner in the quick-service industry’s playbook for years and tends to add an immediate boost to sales. It’s something that likely will remain in the company’s back pocket in case same-store sales ever start to wane.
Is it time to buy the stock?
Following the recent sell-off in the stock, Chipotle now trades at a forward price-to-earnings (P/E) of under 40 times 2025 analyst estimates. While that’s not a bargain basement price, it is a discount to where it has traded recently for one of the best-performing restaurant chains out there.
CMG PE Ratio (Forward 1y) data by YCharts
Meanwhile, the company continues to have a lot of expansion opportunities ahead of it, and a lot of levers it can still pull to grow and increase shareholder value. While Niccol was a very good CEO, I think the company’s future remains bright, and I would use this opportunity to pick up some shares for the long term. The stock remains a buy.
Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chipotle Mexican Grill and Starbucks. The Motley Fool recommends the following options: short September 2024 $52 puts on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.
