Chipotle Mexican Grill, Inc. (CMG) Stock Is Broken. Here’s the Fix.

Chipotle now admits slipping customer service is a concern. CMG stock is a buy ... the second management is changed out.

The Potential Chipotle Stock Rebound Is All About Brian Niccol

Source: Mike Mozart Via Flickr

Chipotle Mexican Grill, Inc. (NYSE:CMG) stock is down more than 5% on Tuesday morning on yet another setback for the fast-casual burrito slinger: poor service. And those two words should strike fear into the heart of anyone who still owns CMG stock.

Because it means that still, somehow, Chipotle management isn’t taking the whole management thing too seriously.

Bloomberg reported that the company warned “deteriorating customer service may bring a new hurdle to its comeback efforts,” with co-CEO Steve Ells admitting that the company lost its focus on consumers.

That’s a baffling admission from a company that suffered a nearly 30% slide in Q1 same-store sales, 23.6% declines in Q2 comps and another 22% in Q3.

Thus, CMG stock holders should be awfully excited about reports that Chipotle could be due for a new slate of directors.

What Management Is Supposed To Do

Priority should have (and apparently was) given to fixing the problems that led to the company’s 2015 outbreak of E. coli and other health issues. After all, that’s why CMG stock trades at less than half of what it did just a little more than a year ago.

But when you’re suffering a customer exodus, one of the most natural reactions you can possibly have as management is to make sure everyone at the ground level gets the menu: butt kissing is priority one. Smiles, speed, quality — if they weren’t there before, they’re certainly there now.

Yes, CMG didn’t just duck its head into the sand after the E. coli outbreak. To address the need, it established a number of food safety protocols, and it even addressed the forward-facing side of its business by unleashing Chiptopia — a loyalty program that ended up costing about $20.4 million to keep people coming through the doors. And the company said Chiptopia did its job in at least helping to boost sales.

But customer service? Now?

Chipotle stock holders who haven’t had enough should consider this the last straw. They certainly should be rooting for Bill Ackman to nose his way into some sort of boardroom arrangement. Ackman’s Pershing Square hedge fund bought a nearly 10% stake back in September, in which he said he would “engage in discussions” about Chipotle’s “governance and board composition, business, operations, cost structure, management,” among other things.

Of all those issues, management is perhaps in greatest need of an overhaul — or at least a swift slap to the back of the head.

And it looks like we’re getting that. Ells said on Tuesday that an announcement was forthcoming about bringing in new directors that can strengthen the company. Per Reuters, “he said the company is considering long director tenures and candidates with expertise in areas such as marketing, crisis management and corporate governance.”

That’s fantastic news. Because right now, Chipotle management reeks of “reactivism.” You’ll notice that while other companies like Potbelly Corp (NASDAQ:PBPB) and Panera Bread Co (NASDAQ:PNRA) haven’t really achieved similar levels of success as CMG stock over their publicly traded lives, they also haven’t made headlines for having to put down fires across numerous aspects of their businesses.

Panera in particular has been the golden boy of the fast-casual space, outgaining CMG stock 50% to 10% over the past five years with a whooooooole lot less volatility.

It doesn’t have to be this way, folks.

Bottom Line for CMG Stock

There’s literally nothing wrong with Chipotle’s concept of narrow-option Mexican food. That’s not why shares broke down last August — worries about food sickness did the trick. That’s not even why Chipotle stock is breaking down today — worries about a decline in customer care are doing shares in.

But these (completely justified) worries are what separates a great concept from a great restaurant stock.

What’s going down at Chipotle shows one of two things: Current management either doesn’t take its job seriously, or it’s not up to the task of keeping tabs on other aspects of the business whenever it has a mess to clean up. But this clearly is a management issue.

I typically don’t root for activist investors because they often agitate for short-term changes that pad their pocketbooks but can come at the detriment of longer-term shareholders. Some even consider them to be no more than simple stock manipulators. I wouldn’t go that far, but suffice to say, in most situations I’d prefer management changes to come naturally and with a little self-awareness.

But CMG stock is a dog that doesn’t have to be. Chipotle has a lot more to give — it just needs a stricter and more able hand that can be proactive and get the company’s headline churn back to what it once was.

You know: Costume contests and the occasional free burrito.

Chipotle stock will be a buy again some day, and I’ll be camped out in line myself the second new management is in place. If today’s news comes to fruition, I might buy today.

Until then, avoid CMG. It’s too much of a minefield.

This story has been updated to reflect news about pressure on the board.

Kyle Woodley is the Managing Editor of InvestorPlace.com. As of this writing, he was considering a long position in CMG within the next 48 hours. Follow him on Twitter at @KyleWoodley.


Article printed from InvestorPlace Media, https://investorplace.com/2016/12/chipotle-mexican-grill-inc-cmg-stock-fail/.

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