The story of the rise and fall of Chipotle (CMG) 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!
The news today is that Chipotle co-CEO Monty Moran will step down and founder Steve Ells will become the sole CEO. The move was simple really. Steve presumably threw Monty under the bus for food safety shortfalls that hurt the company’s sales and reputation. This doesn’t change our view that the Chipotle brand is fundamentally broken and management still has no fix for the underlying problem: its own hubris.
When true values are not present, responsibilities are not met, accountabilities not taken seriously, and results not achieved with integrity, there should be swift and strong consequences. It’s time for the Board and the management team of Chipotle to take responsibility and be held accountable for what has transpired over the past year.
On the issue, we agree that it’s time for hedge fund and activist manager Pershing Square Capital Management to clean house and transform this into a stronger company. Transformative change is necessary to provide a proper working environment for all employees, and this is achieved by 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.
Following the recent investor conference, we raised these key points:
- Co-CEO Monty Moran was not present, likely on his way out.
- CMG is focused on making changes to the board, adding relevant experience and addressing tenure issues.
- Sales recovery is slower than expected, recovering at 1% per month for the last 10 months.
- Core customers have almost returned to pre-crisis levels, but management missed out on a crop of potential new consumers during this crisis.
- No disagreements with Ackman on what needs to happen, Ackman wants a Board seat, and appears like he will get one.
- ~50% of restaurants have an internal rating on key metrics of ‘C’ or worse.
- Lines are back, but some of them are just due to slower throughput.
- Management remains dedicated to store opening trajectory; long-term 5,000 units still feels right for them.
- Selective price increases could hit in 2017.
In short, we do not believe the bleeding is over. Chipotle shares have substantial downside to $250 or even lower.
