Chipotle Mexican Grill (CMG) is on the Hedgeye Restaurants Best Ideas List as a SHORT.

 

HEDGEYE OPINION

In another episode of what has become a sad soap opera, Steve Ells, newly appointed sole CEO of Chipotle, picked up where he left off at last week’s Barclays’ Eat, Sleep, Play – It’s Not All Discretionary conference. Ells, and his management team, ventured to reassure the investing public that their company was on the up-and-up, but in doing so, they have raised even more questions.

In what quite a few people saw coming, Chipotle formally announced that co-CEO Monty Moran would be stepping down from his position in 2017, and also relinquishing his seat on the company’s Board of Directors, effective immediately. Following the announcement, Ells and Chief Marketing & Development Officer, Mark Crumpacker, proceeded to, surprisingly, lay out all of the issues that their brand continues to face. Their laundry list of issues did not only show that the brand was not recovering at the rate they had expected, but it also unveiled some troubling realizations that we had not heard before…

  • Chipotle continues to fail at streamlining the order fulfilment process.
  • Management lost sight of the primary purpose of business.
  • Employees lacked adequate training, but were promoted nonetheless!
  • Management admits that turnover has increased and attributed this to a lack of training (employees lacking skills to succeed) AND employees feeling overwhelmed by the complexity of the job, post-outbreak.
  • Significant complaints filed by customers, with complaints being (in order of significance): Long lines/slow order throughput; restaurants running out of food; messy dining rooms.
  • Competition has improved, resulting in increased competition when trying to win back customers.
  • Long and drawn-out hiring process.

Pardon our frankness here, but it’s no wonder why they made people sick; we point you to Exhibit A: employees lacked adequate training, but were promoted nonetheless. And to compound this, management seems to be reaching for excuses, as many of their reasons were contradictory. For example, they linked turnover to a lack of training, but also linked it to overly-complex training. Then Ells went on to say that there were instances where they would lose many employees to their long and drawn-out interview process. But wouldn’t they want to make sure that an employee has the capacity to perform such a job, especially given the scrutiny surrounding CMG’s food safety practices? If the answer is yes, then such a long and drawn out interview process may actually be necessary.

More importantly, these are all the reasons the company needs to slow its unit growth and focus all available resources on fixing the store performance.  Fixing these issues will take time and money, and the longer the company resists reality, the harder it becomes to fix the business. 

Additionally, trends concerning consumer opinion of CMG have not improved over the last three quarters. Trends continue to not progress to the extent that management had hoped and is supported by information from our CivicScience survey showing that customers still dislike CMG more than they used to. Since our last survey update on 6/13/16, results have held relatively flat.

  1. The “I don’t like it” crowd has held flat at 24% since 2Q16, declining slightly sequentially from 3Q16 by 100bps.
  2. The “I like it” category has held flat at 17% since 2Q16, declining 200bps sequentially from 3Q16.
  3. “I love it” responses have remained flat at 13% since 2Q16, despite a slight dip to 12% in 3Q16.
  4. The “I don’t have a strong opinion” is down 100bps from 2Q16.

CMG | AND THE BEAT GOES ON… - Chart 1

We remain firmly SHORT CMG, as all signs point to a continued rocky recovery for the brand. The company’s lingering problems continue to push many customers away and survey results show that customers refuse to return to the brand in a meaningful way.

Please call or e-mail with any questions.

Howard Penney

Managing Director

Shayne Laidlaw

Analyst