Chipotle Mexican Grill (NYSE:CMG) finally has a fresh start. The company replaced founder Steve Ells as CEO as with former Taco Bell CEO Brian Niccol — and that gives it a leader who’s more flexible and less married to some of the company’s business model.
It’s not entirely fair to give Niccol credit for Chipotle’s strong first quarter since he took over with less than a month to go in the period. Still, his being named to the position offered a clear sign that the company was willing to shake things up. That’s a big positive for a company that has often been perceived as arrogant by many of its detractors.
The turnaround has started
Chipotle had a very strong first quarter of 2018. Overall revenue increased 7.4% to $1.1 billion, and comparable-restaurant sales rose by 2.2%. In addition, diluted earnings per share came in at $2.13, a 33% increase from $1.60 in the same quarter a year ago. The company also opened 35 new locations while closing two during the quarter.
“While the company made notable progress during the quarter, I firmly believe we can accelerate that progress in the future,” Niccol said in the Q1 earnings release. “We are in the process of forming a path to greater performance in sales, transactions, margins and new restaurants.”
Change is coming
While Ells had done a lot to improve Chipotle’s operations and technology, he was seemingly resistant to menu innovation. The company built its business by offering a fairly stable menu. New product introductions were slow, at least partly because the chain had high standards.
That’s why it took so long for Chipotle to add queso to its menu and perhaps at least partly why it has not been universally well received. Niccol is expected to be more open to bigger changes on a faster scale. Nothing official has been announced, but that could mean adding breakfast, building drive-thru capability in some markets, and embracing seasonal or limited-time offerings.
Niccol’s comments in the earning release hinted at changes being ahead. He lacked specifics but elaborated on the overall direction.
“It will also require a structure and organization built for creativity, action, and accountability,” he said. “Finally, Chipotle will have a culture that is centered on running great restaurants, putting the customer first, innovating for today and tomorrow, supporting each other, and delivering on commitments.”
Best of both worlds
Niccol isn’t going to turn Chipotle into Taco Bell. He won’t lower the food quality or start selling gimmick tacos. What he will do is bring more operational flexibility. The company will respond better to its customers and will at least consider more timely menu changes.
Chipotle won’t become a low-cost player. It’s going to remain a value based on the quality of its food, not one a pure-price basis.
The new CEO, however, should be able to make the company seem less staid and set in its ways. Adding breakfast, which Niccol successfully did at Taco Bell, may be the biggest opportunity for Chipotle. It adds same-store sales while only fractionally changing operating costs since the stores already exist.
Chipotle has always had a good product. Niccol will make the brand relevant again. This stock was on the comeback trail under Ells’ steady hand. With a new, more dynamic leader on board, that comeback should only accelerate.