The last 12 months haven’t been great ones for either Bill Ackman or Chipotle Mexican Grill, Inc. (NYSE:CMG). In 2015, Ackman’s Pershing Square lost 20% of its value. As of October, it was down even more for 2016, with a 21.4%decline to that point according to this New York Post report.
And Chipotle, with its food safety troubles, has faced a similarly dour year. CMG stock traded above $700 per share as recently as the summer of 2015. Over the past twelve months, CMG stock has dropped about 31%, and it’s off by nearly half from the all-time high.
With Ackman taking a large position in Chipotle, can he reverse the tide? Both Pershing Square and CMG are down on their luck. Will joining forces change their stories?
Ackman Wades In
In early September, Ackman’s fund disclosed a large new holding in Chipotle stock. Ackman now controls 9.9% of the firm. That’s just shy of the 10% limit for funds with a passive holding position.
Chipotle soon prepared a legal team to defend itself against potentially forthcoming demands from Ackman. Though, for a month, he didn’t make any immediate requests.
Last week, however, the Wall Street Journal reported that Ackman is close to picking up members on Chipotle’s board. That’s probably not surprising, as Ackman is the company’s second-largest holder. Still, it’s a concrete sign that he will have more influence on the firm going forward.
On the plus side, Ackman has solid experience in the fast food restaurant business. He took a large position in Burger King back in 2012. In 2014, Burger King pulled off a nifty deal, merging with Canada’s Tim Hortons. The combined firm, now named Restaurant Brands International Inc (NYSE:QSR), found serious tax savings by relocating to Canada, thus dodging the U.S.’ higher corporate tax rate.
QSR stock has powered up to near new all-time highs this month; Ackman’s bet on burgers paid off nicely.
But he’s had more setbacks than successes recently. The most famous of these would be Valeant Pharmaceuticals Intl Inc (NYSE:VRX). The formerly high-flying Canadian firm has lost more than 90% of its value since 2015. Ackman’s lofty praise of the company’s management, and intricate scheme to merge with Allergan Plc (NYSE:AGN) all came for naught. Shares collapsed following claims of fraudulent billing practices and ensuing trouble meeting the company’s hefty debt obligations.
And who could forget Pershing Square’s many years’ war against multi-level marketer Herbalife Ltd. (NYSE:HLF). Ackman established a massive short position, calling the company a massive pyramid scheme. While he received a technically favorable ruling from the government enforcement department, Herbalife’s business carries on, and his position remains badly underwater.
Chipotle’s Troubles
The downfall of what was once America’s most exciting restaurant growth story began just over a year ago. Across the country, people fell ill after eating at Chipotle. At first, the company tried to claim the incidents were isolated, but it became apparent there was a big issue in the supply chain.
The company’s revenues fell into a deep tailspin, with several months posting -20% or worse year-over-year comparisons. Even in the most recent quarter, reported in October, sales fell 15% versus the same period last year. Analysts initially said Chipotle’s problems would blow over quickly. There have been food safety issues in the industry previously, and generally the impacted companies survived and eventually rebounded.
But Q3 results badly missed analyst estimates and still show further sharp revenue declines. Chipotle’s brand has taken serious damage. The company has spent heavily on marketing efforts to try to get customers to come back. But so far, those efforts have generated only limited results.
On top of that, the U.S. restaurant industry, as a group, has struggled. Sales turned negative year-over-year. The National Restaurant Association’s Restaurant Performance Index tumbled in August, hitting its lowest level since 2012 before recovering somewhat in September.
At fault, higher labor costs are hurting restaurants, while cheaper grocery prices are encouraging more people to eat at home.
What Can Ackman and Chipotle Do?
Ackman’s initial efforts will be focused on improving the company’s marketing and food safety efforts. That’s a good starting place. And the recent avocado shortage has ended, which will help CMG stock going forward. On top of that, Chipotle should perform better now that the company is a year into the food safety situation. Now, future earnings reports will be compared to post-scandal quarters, allowing the company to post revenue gains again.
Still, the company needs some bigger lever to draw growth investors back into Chipotle stock. One of the leading possibilities would be new brands. CMG has several concepts out there could reduce the company’s reliance on its namesake operation.
The company’s Tasty Made burger chain focuses on better-raised beef. And Chipotle has reported strong sales from the company’s first Tasty Made restaurant, despite mixed customer reviews. The company is also involved in Pizzeria Locale, a small new pizza chain … though, one must wonder if the pizza theme is already played out.
On the downside, Chipotle recently shelved its ShopHouse Asian Kitchen concept, which had topped a dozen restaurants.
No Compelling Reason to Buy Chipotle Stock Yet
While short sellers of Chipotle stock have probably overstayed their welcome, there are few reasons to buy now. The company is exceedingly expensive based on current results, and management hasn’t even managed to stabilize revenues yet. If Chipotle gets its pre-2015 swagger back, CMG stock could be quite attractive today. But we need more evidence that Chipotle can win back nervous customers first. 2016’s results haven’t done that thus far.
And Bill Ackman’s involvement is a mixed development. He succeeded with Burger King, but his recent track record is mostly poor. And his past practices might not be the right recipe for Chipotle today.
His tax maneuvering method is largely off the table with president-elect Donald Trump soon to take office. And his M&A and debt-fueled playbook might be a poor fit with CMG’s conservative management team that has eschewed debt.
At $400 per share, I don’t see enough in Chipotle stock to make me a buyer.
At the time of this writing, Ian Bezek had no positions in any of the aforementioned stocks. You can reach him on Twitter at @irbezek.
