In Comeback Stocks, Investopedia looks up close at companies whose stocks have staged dramatic sustained rebounds, and at their long-term prospects.
The ascent of Chipotle Mexican Grill Inc.'s (CMG) stock to an all-time high in August punctuates a remarkable comeback after plunging and losing two-thirds of its value due to widely publicized food poisoning scandals over several years that tarnished the brand. Shares of the fast-food burrito chain fell nearly 67% from peak to trough in early 2018, but key steps taken by the company have yielded delicious returns for investors. Chipotle shares have risen by more than three-fold since early 2018 through mid-August. The chain's stock is up 90% this year alone compared to the S&P 500’s gain of 15.7%.
“The setback around the food safety issues that they had certainly was one of the most tremendous losses of value ever seen in food service," Chicago-based restaurant consultant Aaron Allen told Barron’s. Since then, he says, "Chipotle has done a really amazing job.”
Chipotle's Comeback Recipe
Chipotle's sales and reputation were badly damaged by a rash of food poisoning reports at its restaurants from 2015 to 2018. Various outbreaks of E. coli and norovirus, a highly contagious virus that causes vomiting and diarrhea, resulted in hundreds of Chipotle customers becoming ill. The first big move was the replacement in February of 2018 of founder and CEO Steve Ells with Brian Niccol, CEO of Taco Bell.
Improving food safety became the number one challenge for the new chief. The restaurant chain adopted a new quarterly food-safety training system and new food-preparation system. Soaps and cleaning supplies that kill norovirus were introduced, and now, one can’t even enter a Chipotle kitchen without having first completed a wellness check. If you’ve vomited in the last three days, you’re not allowed in, according to QSR magazine.
In addition, CEO Niccol has revamped top management, hired new personnel, focused on sourcing fresh food for his restaurants, and spent heavily on new technologies to improve service and speed supplies. Digital sales rose 42% last year and nearly doubled in 2Q. "We are seeing great results from the restructuring," said Niccol in his 2018 letter to shareholders.
- New CEO Niccol is leading Chipotle's digital transformation.
- Restaurant still offers same menu focused on freshness and quality.
- Digital sales were up 99% for 2Q.
- Chipotle's biggest challenge remains to prevent food-safety incidents.
The measures seem to be working. Results of a consumer survey reported by Citigroup earlier this spring indicated that food safety concerns among the chain’s customers were falling. As those faded into the background, the company has been able to be more focused on what it does well, rather than obsessing about what it did wrong.
“I just really believe the brand had gotten into this position of being very defensive, as opposed to talking about what made the brand great,” Niccol told QSR. “This idea of ‘Food with Integrity,’ giving people access to a higher level of food—that just didn’t exist before Chipotle created the category of fast casual.”
While building on Chipotle’s strong culinary roots, Niccol has pushed the chain toward working to improve the customer’s overall experience, especially as the company embarks on a digital transformation. The company since introduced online ordering, a partnership with DoorDash for food delivery, and a Chipotle Rewards program, and plans to add a dedicated drive-through lane at some locations for driver’s who have pre-ordered using a mobile app.
The restaurant’s menu has also seen some updates, but nothing major. Customers can now order San Pellegrino or a Mexican Coke to drink with one of the restaurant’s traditional burritos, tacos, or bowls that made the restaurant a hit in the first place. There are plans to add new items, such as nachos and quesadillas, but the primary focus is on freshness and quality. That includes keeping the Centers for Disease Control and Prevention away.
Earnings and Revenue
Those changes on the operational side of the business are showing up in the financials. The company’s earnings-per-share (EPS) growth over the past five years averaged a dismal negative 9.46% per year. Over the next five years, it’s expected to be 33.39% per year. This year alone, EPS growth is expected to be 47.5%, according to Yahoo! Finance.
In the company’s most recent quarterly earnings report, adjusted earnings came in ahead of estimates, making for a huge surprise and were up 39% from last year’s period. Year-over-year revenue increased by 13.2% to $1.4 billion. Comparable restaurant sales increased by 10% over the year, getting a boost from digital sales, which accounted for 18.2% of total sales for the quarter.
Chipotle is planning to open between 140 and 155 new restaurants this year. And though Chipotle's turnaround seems to be on track, the biggest challenge will be preventing another food-safety issue that could damage the brand if it happens again. The only way to avoid that, CEO Niccol says, is to be "maniacal about our food safety.”