Chipotle Mexican Grill (NYSE:CMG) stock is up 55% so far in 2018, thanks mainly to the reputation of new CEO Brian Niccol, hired from Taco Bell in February.
A good pre-Niccol first quarter, earnings of $2.13 per share on revenue of $1.15 billion, sent the stock rocketing upward in April, and expectations are high for the report due July 26, investors expecting $2.78 per share, and hoping for $2.85, on revenue of $1.26 billion.
Niccol’s quick, Taco Bell-like improvements, like pick-up shelves cut into the doors of restaurants and catering for as few as six people, have helped keep the stock’s momentum going. During the quarter Niccol also tried to get some Internet street cred by granting rapper Cardi B, who is big on Instagram, free guacamole and chips for life.
Rising Before Results
Even if the second quarter numbers fail to live up to expectations, the stock could still hold its ground on the promise of changes still to come.
Niccol has announced that 65 stores will close to increase profitability, a $60 million drag on second quarter earnings.
The remaining restaurants will open earlier, and close later. They will also offer “happy hours” during the slow afternoon day part and in the new evening hours, as Niccol tries to build a “lifestyle brand” out of what had been a healthy eating alternative.
Niccol is also investing heavily in technology, with apps for delivery and pick-up, and screens replacing paper in the food prep line. The company is also moving away from flour-based burritos into corn-based tacos, adding avocado tostadas , quesadillas and milkshakes.
There is some irony in all this. Chipotle was founded as part of McDonalds (NYSE:MCD) and spun-out as a “healthy” alternative to McDonald’s pre-made hamburgers. The new Chipotle stores, with their digital ordering systems, second production lines geared to delivery and heavy use of marketing, are going to look and feel a lot more like McDonald’s than they did during the chain’s heyday.
Another possible model is Starbucks (NASDAQ:SBUX), which, like Chipotle, owns its own stores — in contrast to McDonald’s, which is following the trend toward bulk franchising with corporate partners.
The fast run-up of the stock — to a price-to-earnings multiple of 68 and a market cap of $12.69 billion (almost three times last year’s sales) — has caused some traders to take profits.
Mizuho analyst Jeremy Scott moved the stock to “sell” earlier this month, saying other investors were expecting too much too soon, which caused a slight hiccup to the stock price. Other analysts are also warning that the second quarter won’t look as good as the bulls expect.
Investors also sold the stock late last month, after Niccol unveiled his plans for the chain — a classic “buy the rumor, sell the news” maneuver that demonstrates the stock’s volatility, with fewer than 28 million shares outstanding.
Bottom Line on CMG Stock
Many reporters continue to call Chipotle “struggling,” an allusion to its repeated food safety scandals, while analysts seem certain those problems are in the past and that Niccol’s makeover can pay quick dividends.
But competition is growing in the space. Diners are becoming more choosy, and restaurants are getting better at delivering authentic Tex-Mex and even Mex-Mex “street tacos” to diners in quantity.
Chipotle investors could find they have a short-term win and a long-term competitive challenge. Getting the balance right, between top-quality Mexican food and American efficiency, is harder than it looks. Buying the hype, even a quick improvement, may prove to be a trap.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this article.