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Will Chipotle (CMG) Regain Ground On Leadership Change?
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Shares of the quick-casual and fresh Mexican food restaurant chains operator Chipotle Mexican Grill, Inc. (CMG - Free Report) were up over 3% in yesterday’s trading session following the news that the company is doing away with its dual Chief Executive Officer (CEO) structure.
The company announced that its board of directors has named founder, Steve Ells the company’s sole CEO. He will also remain chairman of the board of directors.
Meanwhile, Monty Moran, with whom Ells had shared the duties of a CEO since 2009, has stepped down from the co-CEO post and from his board seat effective immediately. Moran will retire altogether from Chipotle in 2017.
Rationale Behind
We note that the move to eliminate the dual-CEO structure comes as Chipotle continues to reel under negative publicity related to the E. coli and norovirus outbreak since the end of 2015. As a safety measure, the fast casual chain was forced to close several outlets. Although these were reopened later with fresh ingredients, and extensive cleaning and sanitizing activities, the incidents dealt a severe blow to Chipotle’s sales and reputation.
In fact, the company’s earnings and revenues have been under tremendous pressure since then. As a result, comps have declined in each of the trailing four quarters, with an average of over 23%.
Consequently, shares of Chipotle have been persistently underperforming the Zacks categorized Retail-Food & Restaurants industry. The stock has plunged 20.3% year to date, while the broader industry is up 2.5% in the same time frame.
Thus, despite various food safety and sales-building initiatives, Chipotle struggled to repair its image and bring back its customers. The recovery has been indeed long and slow
Moreover, investors’ fears were renewed last week, when Ells raised some concerns over the company in a conference. The chief among these is the possibility that the company might not be able to achieve its previously announced guidance.
With the third quarter 2016 results, management had announced that it expects fourth-quarter same-store sales to decline in low single-digit rates, while 2017 same-store sales were projected to rise in high single digits. However, Ells declared that he was “nervous” about achieving this target.
In fact, Ells stated that he himself is not satisfied with the rate of recovery of Chipotle and the quality of the guests’ restaurant experience. He added that most of the restaurants would be graded poorly due to untidy dining rooms, dirty soda filling stations and slow-moving lines.
Thus, given the ongoing challenges, the board felt that it would be best if Ells resumes leadership of the company, going forward. Management is optimistic that Ells’ relentless focus on innovation and ensuring a tremendous guest experience along with simplified restaurant operations will aid in turning around the company’s fortunes.
Also, having one CEO will streamline the company’s operations. Moreover, given the criticism faced by the company in the past over the co-CEOs’ pay package, the latest change could free up resources to be used more efficiently elsewhere.
The Road Ahead
Chipotle seems to be trapped in a maze with no clear way out. Prior to the incidents last year, the brand prided itself on speed, safety and good vibes. However, the need to shift focus to increased food safety measures has reduced the speed of service in an already declining customer trust situation.
Ells thus aims to focus on simplifying restaurant operations in order to offer better service and serve healthier food, made from whole and unprocessed ingredients. Additionally, the company has been emphasizing on internal training programs to make sure that its employees are aware of the company’s standards for food safety and handling.
Another change that could be coming down the pipeline as indicated by Ells is to work on employee incentives, which are more closely tied to guest experience. Ells could thus oversee a program aimed at enhancing and streamlining employee hiring, training as well as incentives with the end goal of improving customer experience, the look of dining rooms and service speed.
Meanwhile, Ells has already announced a new mission statement for Chipotle: “Ensure that better food, prepared from whole, unprocessed ingredients is accessible to everyone.” This replaces the old motto: “Change the way people think about and eat fast food.”
Bottom Line
We note that Chipotle is not the only food company that has done away with the dual-CEO model. Last month, the largest purveyor of natural foods in the world -- Whole Foods Market, Inc. – discarded the co-CEO model by making co-founder, John Mackey, the sole CEO.
Meanwhile, Chipotle’s market share, particularly in the Mexican cuisine category, is unlikely to increase soon as the company already reached 60% saturation in the U.S. last year. Also, it is currently facing increased competition from the likes of Yum! Brands, Inc. (YUM - Free Report) owned Taco Bell and Jack in the Box Inc.’s (JACK - Free Report) subsidiary Qdoba. This is lowering the ability of the brand to recover and return to its peak levels of 2014, as smoothly and quickly as expected.
The dual-CEO model clearly did not serve Chipotle well once the food safety crisis hit and its abandonment is a modest step forward. However, many more management changes are needed to invigorate the board. The company needs to bring in new individuals and augment its executive team with a skill set closely aligned to address the issues that it is facing presently.
Thus, though the latest move might boost the stock in the short term, only a new slate of board members could reinvigorate investors’ confidence and aid the beleaguered burrito chain to regain its footing after the food-borne outbreaks last year.
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Will Chipotle (CMG) Regain Ground On Leadership Change?
Shares of the quick-casual and fresh Mexican food restaurant chains operator Chipotle Mexican Grill, Inc. (CMG - Free Report) were up over 3% in yesterday’s trading session following the news that the company is doing away with its dual Chief Executive Officer (CEO) structure.
The company announced that its board of directors has named founder, Steve Ells the company’s sole CEO. He will also remain chairman of the board of directors.
Meanwhile, Monty Moran, with whom Ells had shared the duties of a CEO since 2009, has stepped down from the co-CEO post and from his board seat effective immediately. Moran will retire altogether from Chipotle in 2017.
Rationale Behind
We note that the move to eliminate the dual-CEO structure comes as Chipotle continues to reel under negative publicity related to the E. coli and norovirus outbreak since the end of 2015. As a safety measure, the fast casual chain was forced to close several outlets. Although these were reopened later with fresh ingredients, and extensive cleaning and sanitizing activities, the incidents dealt a severe blow to Chipotle’s sales and reputation.
In fact, the company’s earnings and revenues have been under tremendous pressure since then. As a result, comps have declined in each of the trailing four quarters, with an average of over 23%.
Consequently, shares of Chipotle have been persistently underperforming the Zacks categorized Retail-Food & Restaurants industry. The stock has plunged 20.3% year to date, while the broader industry is up 2.5% in the same time frame.
Thus, despite various food safety and sales-building initiatives, Chipotle struggled to repair its image and bring back its customers. The recovery has been indeed long and slow
Moreover, investors’ fears were renewed last week, when Ells raised some concerns over the company in a conference. The chief among these is the possibility that the company might not be able to achieve its previously announced guidance.
With the third quarter 2016 results, management had announced that it expects fourth-quarter same-store sales to decline in low single-digit rates, while 2017 same-store sales were projected to rise in high single digits. However, Ells declared that he was “nervous” about achieving this target.
In fact, Ells stated that he himself is not satisfied with the rate of recovery of Chipotle and the quality of the guests’ restaurant experience. He added that most of the restaurants would be graded poorly due to untidy dining rooms, dirty soda filling stations and slow-moving lines.
Thus, given the ongoing challenges, the board felt that it would be best if Ells resumes leadership of the company, going forward. Management is optimistic that Ells’ relentless focus on innovation and ensuring a tremendous guest experience along with simplified restaurant operations will aid in turning around the company’s fortunes.
Also, having one CEO will streamline the company’s operations. Moreover, given the criticism faced by the company in the past over the co-CEOs’ pay package, the latest change could free up resources to be used more efficiently elsewhere.
The Road Ahead
Chipotle seems to be trapped in a maze with no clear way out. Prior to the incidents last year, the brand prided itself on speed, safety and good vibes. However, the need to shift focus to increased food safety measures has reduced the speed of service in an already declining customer trust situation.
Ells thus aims to focus on simplifying restaurant operations in order to offer better service and serve healthier food, made from whole and unprocessed ingredients. Additionally, the company has been emphasizing on internal training programs to make sure that its employees are aware of the company’s standards for food safety and handling.
Another change that could be coming down the pipeline as indicated by Ells is to work on employee incentives, which are more closely tied to guest experience. Ells could thus oversee a program aimed at enhancing and streamlining employee hiring, training as well as incentives with the end goal of improving customer experience, the look of dining rooms and service speed.
Meanwhile, Ells has already announced a new mission statement for Chipotle: “Ensure that better food, prepared from whole, unprocessed ingredients is accessible to everyone.” This replaces the old motto: “Change the way people think about and eat fast food.”
Bottom Line
We note that Chipotle is not the only food company that has done away with the dual-CEO model. Last month, the largest purveyor of natural foods in the world -- Whole Foods Market, Inc. – discarded the co-CEO model by making co-founder, John Mackey, the sole CEO.
Meanwhile, Chipotle’s market share, particularly in the Mexican cuisine category, is unlikely to increase soon as the company already reached 60% saturation in the U.S. last year. Also, it is currently facing increased competition from the likes of Yum! Brands, Inc. (YUM - Free Report) owned Taco Bell and Jack in the Box Inc.’s (JACK - Free Report) subsidiary Qdoba. This is lowering the ability of the brand to recover and return to its peak levels of 2014, as smoothly and quickly as expected.
The dual-CEO model clearly did not serve Chipotle well once the food safety crisis hit and its abandonment is a modest step forward. However, many more management changes are needed to invigorate the board. The company needs to bring in new individuals and augment its executive team with a skill set closely aligned to address the issues that it is facing presently.
Thus, though the latest move might boost the stock in the short term, only a new slate of board members could reinvigorate investors’ confidence and aid the beleaguered burrito chain to regain its footing after the food-borne outbreaks last year.
Chipotle currently has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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