We think investors should walk away from Chipotle's (CMG) strategic update call with optimism regarding new CEO Brian Niccol's ability to reinvigorate the brand intangible asset behind our narrow moat rating. Niccol and the overhauled executive team are saying all the right things to drive guest traffic over the near term (most notably, digital order pickup shelves, in-app delivery and catering functionality, and an afternoon taco/drink value platform) while shoring up the expense structure (a corporate reorganization that eliminates multiple layers of corporate expenses and closes 55-65 underperforming stores). We're also intrigued by where the brand can go in the longer term under Niccol's leadership, including several new products in the pipeline (quesadillas, nachos, avocado tostadas, chocolate milkshakes) that should stimulate consumer curiosity without adding undue operational complexity; the introduction of a rewards program; and other hints from the “Chipotle of the Future” presentation on its June 27 investor call (including new ingredients, sauces, and portion sizes, as well as the possibility of technology-infused layouts). However, while we share the market's enthusiasm about Chipotle's new strategic vision, we caution investors that this is not an overnight turnaround and it will take time for the brand to regain consumer trust. Also, there will be additional costs involved, including $115 million-$135 million in restructuring and store closure costs, $10 million in deferred tax write-offs, and incremental capital expenditures and expenses tied to employee training and new equipment for its new menu items.
With the added visibility over near- and medium-term sales catalysts, we’re planning about a 10% increase to our $375 fair value estimate. While we think the market has appropriately priced in Chipotle's updated strategic vision, we would not be surprised to see market optimism keep the stock ahead of our fair value estimate over the foreseeable future.
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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.