Chipotle Mexican Grill, Inc. (NYSE:CMG) certainly had a year to forget in 2016. Shares of CMG finished the year down more than 20% and are now down 44% in the past two years of trading. While CMG stock continues to look like a restaurant stock to avoid, good news is coming.
Wedbush, for example, recently upgraded shares of Chipotle, bringing the beleaguered restaurant stock from “underperform” to “neutral” and raising its price target from $370 to $400.
Indeed, Chipotle stock could be in for an exciting 2017 with these three key reasons that could get CMG shares moving.
New Leadership a Positive
One of the most exciting items for Chipotle stock could be a change in leadership. Pressure from activist investor Bill Ackman has led to Chipotle adding four new board of directors members. Ackman, who owns around 10% of CMG stock, has been pushing for changes and this is the first of several that could be coming.
The big name that jumps out in the four added board members is Matthew Paull. While serving as the Chief Financial Officer at McDonald’s Corporation (NYSE:MCD) from 2001 to 2008, Paull helped make major contributions to the fast food giant and is credited with the company’s turnaround. Paull also worked with Chipotle founder and CEO Steve Ells from 2001 to 2006 at McDonald’s, prior to Ells taking Chipotle public.
Chipotle is also now operating with a sole CEO, leaving founder Steve Ells in complete control. Co-CEO Monty Moran, who moved up to the role in 2009, is no longer with the company. Getting rid of one CEO is a smart move here as it gives Ells more control to oversee the company. The move could also free up some money that could be invested elsewhere to boost Chipotle stock.
In 2015, Ells made $13.8 million and Moran made $13.6 million. Those lofty figures were much smaller than 2014, when Ells and Moran made $28.9 and $28.1 million, respectively, thanks to strong stock options. Chipote, who has been a target of people calling for executive compensation cuts, will tie bonuses to the price of Chipotle stock.
A Major Rumored Catalyst
Investors shouldn’t always invest in speculation, but the idea of a Chipotle drive-thru could provide a huge boost to sales and is one big reason to invest in CMG stock. After shunning drive-thrus for years, reports say Chipotle is at least considering testing this guest service at restaurants.
The company’s fast casual burger brand Tasty Made is getting 52% of its sales from its drive-thru at its one location. Tasty Made is even using iPads for employees to take orders in the drive-thru when the lines get too backed up. A report says customers are loving the drive-thru and continually asking if Chipotle locations will get the same convenience.
Another case study for drive-thru success would take us back to 1975. In that year, McDonald’s opened its first drive-thru. Sales at that store increased 40% in two months and the company never looked back. Drive thru-sales now account for around 70% of McDonald’s sales in the United States. Most quick service restaurants get 60% to 70% of their sales from the drive-thru.
So as Chipotle continues to see large declines in same store sales, investors of Chipotle stock have to wonder how much of an improvement adding drive-thrus could immediately add. Imagine a 10% to 20% increase in sales every month for this struggling company. Chipotle shares would get a huge lift on positive news from the company even testing drive-thrus.
Tasty Made Expansion a Positive
One of the reasons for the drive-thru focus is the success coming behind the window at Chipotle’s fast casual burger brand Tasty Made. Earlier in 2016, Chipotle opened its first Tasty Made location to long lines, but mediocre reviews. This brand expansion comes as Chipotle threw in the towel on its Asian food concept, ShopHouse.
Months after opening the first Tasty Made location, Chipotle has already taken steps to improve results based on customer feedback. The store has lowered its prices after feedback and now is more in line with peers. The price of a double cheeseburger dropped from $6 to $4.10. Cheeseburgers costs $2.55 and an order of fries is $1.95. Compare that to Five Guys where burgers run over $5 and fries over $4. Tasty Made is doing a good job here of putting itself on the low-end of the fast casual burger pricing.
A less outrageous change was switching to less expensive beef. Tasty Made is now using conventionally raised beef instead of responsibly raised hormone and antibiotic free beef. This change helped the company dramatically lower the costs, but also moved it away from one of its founding principles at Chipotle.
In this case, it appears boosting sales and making money for owners of Chipotle stock could be a better goal than putting such a heavy emphasis on where food comes from. A study showed 90% of customers were unaware or didn’t care that Tasty Made was using responsibly raised beef.
Chipotle is set to open its second Tasty Made location in February in Ohio. Getting these items under control before the open is important and this brand could have major legs to expand if it can compete with other fast casual burger chains on quality and pricing. Tasty Made has positioned itself somewhere in between quick service and fast casual, which could lead to big expansion.
The company will likely take it slower with this brand after mediocre success from ShopHouse. I think plans will be announced to open an additional five to 10 stores, which could make Tasty Made an actual catalyst for CMG stock, as analysts will start to spin the wheels on a number of stores the brand could maintain annually.
Bottom Line on Chipotle Stock
Aside from changing leadership, Chipotle needs to do something to help offset declining sales. In the third quarter, revenue fell 14.8% to $1 billion. Same store sales fell 21.9% in the third quarter. While that number is still startling, it is an improvement from the -36.4% same store sales loss seen in January of 2016. Chipotle cited more customers returning to their 2000-plus stores during the third-quarter conference call.
Executives gave a bullish tone during the earnings call, which should put Chipotle stock on investors’ radars. The company sees same store sales turning positive in the year in the high single-digit range. The company also sees earnings per share coming in at $10. Operating margin improvement is seen hitting 20%, a figure that came in at 14.1% during the third quarter, or half of the 28.3% produced in the prior year.
In February, CMG stock will report its fourth-quarter and full fiscal year results. Analysts may be eager to ask executives on the conference call what the progress is of this. Expect Chipotle to explore all options to boost its declining, but rebounding sales. Chipotle stock looks like a winner in 2017.
As of this writing, Chris Katje did not hold a position in any of the aforementioned securities.
