Since it jumped on first quarter earnings in April, shares in Chipotle Mexican Grill (NYSE:CMG) have made one of those dreaded “round trips,” with Chipotle stock rising to nearly $580 before falling back to $428 per share, its April price.
This means there is not yet much premium being paid for Brian Niccol, who was hired as the new CEO in March, or his strategy for updating the menu to make it more like Taco Bell, the YUM! Brands (NYSE:YUM) subsidiary from which he was hired.
Analysts at RBC are now pounding the table for the stock, boosting their price target to $510 per share based on Niccol’s new menu and digital ordering.
It’s a battlefield, however. Other brokers are turning negative, calling Chipotle stock “too spicy” even though the market cap of $12 billion is now less than three times last year’s $4.3 billion in revenue, against 3.6 times revenue for Starbucks (NASDAQ:SBUX), whose restaurants, like Chipotle’s, are company-owned.
Niccol and Chipotle Stock
A lot has already changed at Chipotle under Niccol. Chipotle has copied Starbucks with a new rewards program based on an app, launched a new ad campaign called “For Real,” and begun testing snack products, such as nachos.
Chipotle is closing 65 stores while Niccol complains like a new football coach about inheriting a “lack of discipline.” New chief marketing officer Chris Brandt, who also came from Taco Bell, is demanding performance from its TV ads, increased sales from its latest campaign on AT&T’s (NYSE:T) Turner Networks.
Niccol is reinventing the company from the inside-out, moving its headquarters from Denver to Newport Beach, California, close to where he lives. It’s a quick way to clear out the executive suite inherited from founder Steve Els; Chipotle’s food safety chief already is headed for the door.
Sales are rising again, albeit by single-digit rates, as the company trots out new ingredients like bacon and signs on for delivery through DoorDash, with which it’s also pushing its rewards program. Despite a series of health scares that eventually forced out Ells, Chipotle retains its name recognition and much of its reputation.
Niccol is trying to differentiate Chipotle with what he calls “radical transparency” but the new menu looks very Taco Bell-like, with test products like tostadas, quesadillas, and chocolate shakes.
The aim is to move Chipotle beyond its roots at lunch, into the late afternoon and evening snack periods dominated by Taco Bell. Extending the restaurant into different day parts should increase sales without dramatically increasing costs.
For now, there is no alternative for shareholders but to hope Niccol is right, that America wants a “fresh” version of Taco Bell, and that it wants Mexican food ordered digitally or delivered the way it likes its coffee.
Analysts are betting he is right, expecting Chipotle stock to show revenue of $1.23 billion for the September quarter, which will be reported tomorrow, and with earnings of about $2.00 per share.
Even if Niccols fails, there should be alternatives, albeit at lower prices. Chipotle could switch to a franchise system, as McDonald’s (NYSE:MCD) has, lowering its take but hiking its profitability. Or the company, with its high name recognition, could put itself up for sale.
Chipotle is following a different path from the rest of its industry, which is undergoing consolidation and has bought into franchising big-time. A company like Restaurant Brands International (NYSE:QSR) might find it a tasty morsel, a bolt-on to such chains as Popeye’s, Burger King and Tim Horton’s.
Chipotle also was a spin-off from McDonald’s, which might be interested in getting into Mexican food.
For now, buying Chipotle means buying Brian Niccol. If he can beat those earnings estimates, I’d be a buyer. But he’s not the only game in town, and the Chipotle story will continue.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new mystery thriller, The Reluctant Detective Finds Her Family, 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 shares in T.