Editor’s note: This column is part of our Best Stocks for 2018 contest. Kyle Woodley’s pick for the contest is Chipotle Mexican Grill, Inc. (NYSE:CMG).
It seems wrong to grouse about 13% gains in just three months. Especially when it’s a company like Chipotle Mexican Grill, Inc. (NYSE:CMG), which has ridden the E. coli-fueled vomit comet to stark losses over the past couple of years.
But considering 13% gains aren’t even enough to put my pick in the top half of the 10 Best Stocks for 2018 results so far, there’s clearly plenty of room for improvement. Also, considering that a truly awful idea for Chipotle is being floated about, CMG longs have a small reason to get antsy about the first quarter’s progress being derailed.
I still think Chipotle stock is set up to be the best-performing stock for 2018. The company just needs to ignore the temptation to take a page out of its new CEO’s past.
What Went Right for CMG
One of the biggest keys for Chipotle as it entered 2018 was on the leadership front. The burrito slinger was looking for new leadership to replace founder Steve Ells and finally get Chipotle past its self-inflicted wounds. As I said back then:
“The key to all of this is new leadership. While a willingness to innovate and try new things aren’t a guaranteed cure for what ails Chipotle, the past couple of years have proven that a glacial rate of change certainly won’t do the trick. Whoever comes in has to be ready to ruffle feathers.”
Chipotle couldn’t have made me happier, then, when it announced in mid-February that it was bringing on Taco Bell CEO Brian Niccol. And the outgoing Ells summed up Niccol’s abilities perfectly: “His expertise in digital technologies, restaurant operations and branding make him a perfect fit for Chipotle as we seek to enhance our customer experience, drive sales growth and make our brand more relevant.”
Niccol helped transform Taco Bell from an also-ran fast-food joint that was trying to rescue its image from a lawsuit over filling in its beef to one of the more clever marketers in the fast-food world. It has added delivery service, experimented with alcohol and launched enormous successes such as Doritos Locos Tacos.
Taco Bell also successfully entered the breakfast sphere — but CMG stock holders should pray Chipotle doesn’t try to follow suit.
The A.M. Money Pit
I’ll stress this right now: Chipotle itself hasn’t explicitly stated that it’s entering the breakfast realm. It’s merely an idea that has been brought up by Chipotle fans and pundits alike — and one that seemingly has a little more basis in reality given that Niccol navigated Taco Bell through sunrise cuisine.
But Chipotle already once failed to get breakfast options off the ground, and Oppenheimer analysts are mercifully trying to throw cold water on the idea of a revived attempt.
Oppenheimer’s Brian Bittner and Michael Tamas put out an analyst note early this month saying that if Chipotle opts to expand its offerings by going the breakfast route, it’d likely do more harm than good.
“Our work suggests breakfast expansion likely would be margin-dilutive, creating a difficult path to achieving the margin improvement targets above,” Bittner and Tamas wrote, with one of their fears being that it could cut into its lunch performance.
Perhaps one of the most obvious observations, however, is the limitation Chipotle has thanks to its lack of drive-through windows. Taco Bell only ever had a chance because of sheer convenience, and it’s the same reason why people tussle with the likes of McDonald’s Corporation (NYSE:MCD) and Burger King (NYSE:QSR) in the morning. The food’s good — I’m personally a Steak, Egg and Cheese Bagel guy — but I wouldn’t get it two or three times a week if I had to sit down for it like it was FirstWatch.
Moreover, Chipotle hasn’t yet regained the trust in its food the chain needs to make an expansion into another mealtime. Taco Bell isn’t exactly haute cuisine, but when it entered into the breakfast sphere, it wasn’t dogging fears that its chalupas would send people to the hospital. Chipotle’s not there yet.
Breakfast is decidedly not a “build it and they will come” opportunity, and CMG has two strikes against it in that arena anyway.
Niccol was the right hire by a country mile. Under Niccol, Taco Bell offered special items that resonated with consumers, marketed itself well and took technological chances that ended up paying off. These are all traits Chipotle can use right now as it attempts to get a PR facelift and entice new customers with something more than its current bare-bones menu.
If Niccol sticks to those strengths, CMG stock is golden.
Kyle Woodley is the Senior Investing Editor at Kiplinger.com, and he can be reached at email@example.com. As of this writing, he was long CMG.