The Greatest Fall From Grace The Restaurant Industry Has Ever Seen

Editor's Note: Below is an institutional research note written by Hedgeye Restaurants analyst Howard Penney.


The Greatest Fall From Grace The Restaurant Industry Has Ever Seen - chipotle sunset


I hope Mark Crumpacker can get his life back in order. 


That being said, Chipotle desperately needs NEW LEADERSHIP and, importantly, a new direction. 


The story of the rise and fall of Chipotle has become a dark one and now borderline pathetic. The company’s foundation for its food was built on the word “integrity,” ironically; the foundation of its leadership team has demonstrated time and again that there is a complete lack of integrity.  We are witnessing the greatest fall from grace the restaurant industry has ever seen, and many people have suffered as a result. 


How much more damage will be done before changes are made at the top?


Here is what we think Chipotle needs ASAP:

  • A CEO with strong core values and integrity who can inspire others to be their best.
  • Hire a new leadership team with strong values, who demonstrate the courage and ability to cultivate a culture of high integrity, and to do what's right for the business.
  • Honor and support the supply chain and its vendor partners, and not disparage them.
  • Reinvent the business; it will be a process to rebuild this iconic brand that once enjoyed great success.
  • Earn customers trust through transparency, honesty, humility, authenticity, active engagement, collaboration and hard work.
  • Develop and move forward confidently with a well thought out, comprehensive three-year plan that has an ongoing cadence, not a desperate and tactical one based on giving away free food. 
  • Embrace speed - "Be quick, but don't hurry."


As the truth rises to the surface, it’s becoming clear that the current Chipotle management team is not capable of managing the company. The company has served up multiple cases of foodborne illnesses causing pain and suffering for people across the country, all due to Chipotle’s negligence and lack of appropriate controls. The Chipotle problem is so devastating; it makes the entire food service industry look bad. 


Management’s response to the disaster has been late, incomplete and woefully inadequate to actually overcome the flood of consumer complaints and customers' mass exodus away from visiting Chipotle restaurants. Now, one of the top executives, with the responsibility of regaining the trust of the American public, is indicted on major drug charges in New York City.


Financially, the profitability of the company has declined by -70% over the past year (represents FY16E versus FY15).  The market value of the company has decreased by $11.9 billion since October 13, 2015, and we believe there is an additional ~$140 per share of downside from current levels to $250 per share.  Lastly, there is a strong possibility the company will report its second straight quarter of operational losses, currently consensus estimates are projecting a gain of $0.95 per share. 

The Greatest Fall From Grace The Restaurant Industry Has Ever Seen - chipotle same store

The Greatest Fall From Grace The Restaurant Industry Has Ever Seen - CHART 2



The Board needs to eliminate the co-CEO structure and immediately begin a search for a new CEO, one who can instill integrity and high standards into this company, and dramatically turn around its performance.  


The Board needs to look outside the company and hire a seasoned restaurant executive with the following experience and results:

  • A leader who has led difficult turnarounds of large brands in the restaurant industry with a proven track record.
  • A leader who understands the subtleties and the enormous importance of branding, consistency, and consumer trust.
  • A leader who has demonstrated the credibility of leading hundreds of thousands of employees to efficiently and profitably run operations, starting first and foremost with ensuring the safety of its quality ingredients sourced throughout the supply chain.



Values inherent in the best run companies are developed by the leaders of the company with the thorough involvement of and ownership by its vast and diverse team of employees, and vendors. These values ultimately become the fabric of the organization modeled by the daily behavior and actions of its leaders, starting with its CEO.


We are now seeing what the culture of Chipotle is like.  Over the past year, the behavior of this management team has revealed that the culture is rotten at the core.  From the very beginning the culture is based on arrogance; a lack of transparency; a lack of required skill sets to run a big company; a lack of good judgment; a disturbing complacency; a sense of entitlement and now even more apparently, a recklessness that has further endangered the organization.


When the true values are not present, responsibilities are not met, accountabilities not taken seriously, and results with integrity not achieved, then there should be swift and strong consequences.  It’s time for the Board and the management team of Chipotle to take responsibility and be accountable for what has transpired over the past year.


It’s time to clean house! 


It is just unacceptable for two co-CEO’s to be paid what they’re being paid collectively in light of all the problems currently being experienced at Chipotle while on their watch. And now, their close colleague and Chief Marketing Officer, claims that a summer loyalty program and the introduction of chorizo are the answers to Chipotle’s current problems, and will be enough to turn around their hemorrhaging business, while he’s 'pre-occupied' with allegedly doing drugs.


How long are shareholders going to allow this to go on? Is the Board in Founder Steve Ells' back pocket?


Shareholders MUST demand a complete and thorough overhaul of its leadership team if Chipotle has any hope of regaining the trust of the American public.


It is evident to me, that this leadership team does not understand the magnitude of the problem. It is so far reaching and so very deep. As a result, they have no idea what to do. This homegrown group of executives is floundering in uncharted waters, and potentially taking a lot of people down with the ship.



Transformative change is needed to consistently ensure a quality experience for customers to overcome an egregious and highly damaging breach of public trust.


Transformative change is necessary to provide a proper working environment for all employees that is based on holding people to high standards and treating them with genuine respect.


And ultimately, transformative change is needed to ensure the ability to create significant value for its shareholders after one of the most embarrassing examples of negligence, arrogance and recklessness in the restaurant industry.


The Shareholders and the Board of Chipotle need to take action, and they need to do it now.


The company desperately needs new leadership at the top.


The troubles this company faces is of epic proportions. Chipotle is quickly running out of time.

Daily Market Data Dump: Monday

Takeaway: A closer look at global macro market developments.

Editor's Note: Below are complimentary charts highlighting global equity market developments, S&P 500 sector performance, volume on U.S. stock exchanges, rates and bond spreads, and key currency crosses. It's on the house. For more information on how Hedgeye can help you better understand the markets and economy (and stay ahead of consensus) check out our array of investing products




Daily Market Data Dump: Monday - equity markets 7 11


Daily Market Data Dump: Monday - sector performance 7 11


Daily Market Data Dump: Monday - volume 7 11


Daily Market Data Dump: Monday - rates and spreads 7 11


Daily Market Data Dump: Monday - currencies 7 11

CHART OF THE DAY: Here's Why You Shouldn't Chase All-Time Highs In US Equity Beta

Editor's Note: Below is a brief excerpt and chart from today's Early Look written by Hedgeye CEO Keith McCullough. Click here to learn more.


"... What’s next?


The #1 reason why you won’t see me chase US Equity Beta this week is that our #1 Q3 Macro Theme is the #ProfitCycle slowing faster than Consensus Macro thinks. That starts Thursday when JP Morgan (JPM) reports Earnings."


CHART OF THE DAY: Here's Why You Shouldn't Chase All-Time Highs In US Equity Beta - 07.11.16 EL Chart

investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

REPLAY! This Week On HedgeyeTV

Our deep bench of analysts take to HedgeyeTV every weekday to update subscribers on Hedgeye's high conviction stock ideas and evolving macro trends. Whether it's on The Macro ShowReal-Time Alerts Live or other exclusive live events, HedgeyeTV is always chock full of insight.


Below is a taste of the most recent week in HedgeyeTV. (Like what you see? Click here to subscribe for free to our YouTube channel.)




1. McCullough: Here's Who's Really Getting Paid (7/8/2016)



In this excerpt from The Macro Show today, Hedgeye CEO Keith McCullough discusses who’s really getting paid in the current market and economic setup.  


2. REPLAY | Healthcare Investor Q&A with Tom Tobin (7/7/2016)



Veteran Healthcare Sector Head Tom Tobin and analyst Andrew Freedman gave a special preview of their upcoming Healthcare Themes call today. Don’t miss the key investing callouts and trends in healthcare as well as changes to their Best Ideas list (Tickers include ATHN, ILMN, HOLX, AHS, ZBH, MD, MDRX). 


Click here to access the associated slides.


3. Too Late to Buy Gold and Treasuries? (7/6/2016)



In this excerpt from The Macro Show today, Hedgeye CEO Keith McCullough answers a subscriber’s question about whether it’s too late to buy the long bond (TLT), Utilities (XLU) TIPS and Gold (GLD).


4. About Everything | Live Q&A with Neil Howe: The Global Economy Gears Down (7/6/16) 


In this complimentary edition of About Everything, Hedgeye Demography Sector Head Neil Howe discusses lackluster global growth and the IMF's continually downgraded GDP forecasts. 

Click here to read Howe’s associated About Everything piece.


Click here to access the associated About Everything slides.


5. McCullough: What Is Plunging 10-Year Yield Telling Investors? (7/5/2016)



In this brief excerpt from The Macro Show this morning, Hedgeye CEO Keith McCullough takes a look at U.S. bond yields sinking to record lows and what may lie ahead.

This Week In Hedgeye Cartoons

Our cartoonist Bob Rich captures the tenor on Wall Street every weekday in Hedgeye's widely-acclaimed Cartoon of the Day. Below are his five latest cartoons. We hope you enjoy his humor and wit as filtered through Hedgeye's market insights. (Click here to receive our daily cartoon for free.)




1. SHORT EARTH? (7/8/2016)

This Week In Hedgeye Cartoons - Intelligent life cartoon


A gloomy mood is engulfing the globe. 


2. Dumbbells (7/7/2016)

This Week In Hedgeye Cartoons - Rate hike dumbells cartoon 07.07.2016


At the beginning of the year, some Fed officials suggested as many as five rate hikes in 2016. Not today. With a Fed gone dovish, the market is now skeptical of any rate hikes this year.


3. Wise Guys, Eh? (7/6/2016)

This Week In Hedgeye Cartoons - Three central bankers cartoon 07.06.2016


How long can these central planners keep this charlatan charade going?


4. Pounded (7/5/2016)

This Week In Hedgeye Cartoons - Pound cartoon 07.05.2016


The British pound hit a 31-year-low against the dollar today as the Bank of England warned that "the current outlook for UK financial stability is challenging."

The Week Ahead

The Economic Data calendar for the week of the 11th of July through the 15th of July is full of critical releases and events. Here is a snapshot of some of the headline numbers that we will be focused on.



The Week Ahead - 07.08.16 Week Ahead

Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.