Wall Street really likes Chipotle’s new management

The company’s stock has soared since Brian Niccol took over, says RB’s The Bottom Line.
Photograph courtesy of Chipotle Mexican Grill

the bottom line

Wall Street has faith in Brian Niccol.

Stock in Chipotle Mexican Grill rose again on Friday and has been into the green all week, soaring well above $500 a share.

The company’s stock has not been this strong since the food safety crisis in 2015, which sent Chipotle’s sales, profits and share price tumbling and ultimately led to the replacement of founder Steve Ells with Niccol, Taco Bell’s former CEO.

Niccol’s hiring was announced last February. In the 11 months since, Chipotle’s stock has risen more than 112%.

Even with that, analysts are on board. According to Nasdaq, eight Wall Street analysts have Chipotle rated as a Strong Buy, and another one rates the company a Buy. By comparison, 13 give it a Hold rating and one an Underperform, and just two have a Sell rating.

Not everybody is on board. Maxim Group analyst Stephen Anderson earlier this month downgraded the stock to Hold, citing its recent valuation surge. And he noted that the stock’s “potential positives and risks now are in balance.”

But for the most part, analysts and stock pickers fully expect continued momentum for Chipotle this year. And they’re expecting the Niccol-led company to bring back the model the chain once had as a super-profitable growth concept with a world of expansion opportunities ahead.

Recall that before a series of food safety incidents in 2015 hammered customer faith in the fast-casual chain, Chipotle generated otherworldly results. Its locations boasted unit volumes approaching $2.5 million, with margins as high as 28% that would enable the company to pay off a new unit in less than two years.

This is what the company refers to as “The Chipotle Model,” and it’s still probably unrealistic to imagine it ever returning in full. Labor costs have increased in the years since, as have rent and construction costs, and of course sales are just that much more challenging.

But the company is still a strong performer even after the food safety incident led to steep declines in sales and profitability. Unit-level operating margins in the first nine months of last year exceeded 19%, for instance, and its volumes were probably in the $2 million range. Both numbers are much higher than any of its fast-casual Mexican rivals.

The company still needs to generate more consistent traffic growth—its 4.4% same-store sales increase in the third quarter, for instance, came entirely from higher prices and average check.

But there’s some belief that the company’s improved marketing performance under Niccol in particular could help bolster that traffic—along with changes in operations that should boost service as the chain increases its use of technology, including online ordering and delivery.

Chipotle executives’ presentation at the ICR Conference earlier this month was among the most optimistic of any company attending the event.

During that conference, executives provided a rosy outlook for one particular customer generation strategy it expects to introduce nationally this year: loyalty.

“This has been a good learning experience for us,” Niccol said of the company’s loyalty test in three markets. “Enrollment has exceeded our expectations. And they’re a lot of light and lapsed users as opposed to just heavy users.”

Convincing lapsed users to return to the chain could be key for the company to see improved traffic.

There’s another element, however, to the enthusiasm behind Chipotle: There are few true growth chains in the publicly traded restaurant universe.

Many chains have been sold to private-equity or strategic buyers the past two years, including Popeyes Louisiana Kitchen, Panera Bread and Sonic Corp. And most of the fast-casual growth chains that went public between 2013 and 2015 have disappointed—and many of those have been sold, too.

As this continues to play out, what’s left for investors are large, well-established companies such as Yum Brands and McDonald’s, or smaller, weaker companies that are riskier investments. As such, investors are flocking to the company that has proven its ability to profitably grow.

Or, as Hedgeye Risk Management analyst Howard Penney told me on RB's "A Deeper Dive" podcast a couple of months ago, “Chipotle is the next Chipotle.”

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