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Stock Analyst Update

Chipotle CEO Search Signals Openness to Changes

While changes would take time to implement, new leadership could help to improve the brand-intangible asset behind Chipotle's narrow economic moat.

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While  Chipotle's (CMG) search for a new CEO acknowledges that turnaround efforts following 2015's food safety incidents haven't been sufficient, we believe investors should take this as a signal that the company is open to more aggressive measures to drive sales and improve operations, or perhaps even more significant transformative actions. Future changes will ultimately depend on the replacement for CEO Steve Ells, who will transition to executive chairman focusing on innovation upon completion of the search. We expect the company to evaluate potential candidates who have led previous turnarounds in the quick-service restaurant space as well as current and former executives at chains that have had success integrating mobile platforms with in-restaurant experience. However, as we said when activist Pershing Square first acquired a stake, we'd expect a new CEO to evaluate new operational improvements (such as new restaurant formats, daypart expansion, and a more substantive loyalty program) and corporate cost reductions, but also more aggressive steps like a shift to a franchised business model, capital structure changes, or even new ownership. While changes would take time to implement, we believe new leadership could help to improve the brand intangible asset behind Chipotle's narrow economic moat while accelerating efforts to correct taste and throughput disruptions that may have resulted from recent food safety measures and drive more consistent traffic over time.

There is no change to our $350 fair value estimate or Standard stewardship rating; we will wait for the new CEO appointment before making changes to our longer-term assumptions. Our model continues to assume low- to mid-single-digit comps and a deceleration to mid-single-digit unit growth over the next five years (resulting in high-single-digit revenue growth), with operating margins recovering to the midteens over the same period (but below the high teens posted just a few years ago).

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R.J. Hottovy does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.