There’s no need to panic about Brian Niccol’s departure, but there are still some important unanswered questions about the fast-casual chain’s future.
On Aug. 13, Starbucks shocked the investing world when it hired the CEO of Chipotle Mexican Grill (CMG 0.49%) to be its next CEO. Brian Niccol has led Chipotle since 2018, and he oversaw dramatic improvements across the business.
Some investors might feel like this hire is being overhyped. But consider that Starbucks was willing to absolutely break the bank to lure Niccol away from Chipotle. According to Business Insider, Niccol could earn up to $113 million in coming years when considering his total pay package. That’s extraordinary, and it shows just how valuable he’s believed to be by some companies.
Here’s what happened with Chipotle under his leadership and what investors should do now that he’s leaving.
Why Chipotle stock soared with Niccol
In its press release, Starbucks was quick to mention that Chipotle stock had risen by about 800% while Niccol was CEO. Now, short-term stock moves can have a variety of explanations. But a longer-term stock rise such as the one that Starbucks highlighted usually has just one explanation: earnings growth.
Chipotle’s chart shows this clear relationship. Since the start of 2018, the company’s earnings per share (EPS) are up by more than 700%, which has predictably fueled the strong gains for the stock.
Data by YCharts.
Chipotle opened more than 1,000 new locations under Niccol, and that helped increase the company’s profits. But its profit margins are the bigger 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, its restaurant-level operating margin had surged to 29%.
In other words, for every $100 in sales, Chipotle is making roughly $10 more in operating profit now than it did when Niccol became the CEO. This has had a tremendous impact in boosting its EPS, and it’s why the stock has soared.
What to do now that Niccol is on the way out
Companies’ leadership teams change all the time, but abrupt changes such as this aren’t ideal.
That said, Chipotle is making the most logical decision it can by making Chief Operating Officer Scott Boatwright the interim CEO. Boatwright has been at the company longer than Niccol, and things should continue running smoothly during this transition period.
Therefore, I wouldn’t panic if I were a Chipotle shareholder. Niccol’s contributions to the company were undoubtedly valuable, but the business can endure without him and it should be stable during this transition.
It’s also fair to note that Niccol’s time with Chipotle wasn’t altogether free from controversy. The profit-margin improvement has been extraordinary, but critics believe the company has boosted margins in part by shrinking portion sizes. Niccol addressed this assertion during the Q2 earnings call, saying it’s untrue. But there is a perception among consumers that portions are getting smaller at Chipotle.
Boatwright and the eventual permanent CEO who will follow him will have work to do to change this negative perception of the Chipotle brand. To be clear, Niccol said the company never instructed workers to divvy out smaller portions, but it has already “leaned in and reemphasized generous portions” nevertheless.
Chipotle expects its restaurant-level margin to drop to 25% in the third quarter — and the larger portion sizes will be a contributing factor.
This is something to keep an eye on. Niccol’s leadership led to higher restaurant-level margins, but those margins are about to take a step back. Investors must consider that the strong gains of the stock in recent years were fueled by higher profits. If margins are on the verge of contracting, the stock could modestly reverse course in the near term.
Longer term, Chipotle can still create plenty of shareholder value, so it’s no 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.
Jon Quast has positions in Starbucks. 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.
