The departure of CEO Brian Niccol has brought uncertainty to the investment case for Chipotle (NYSE: CMG) stock. Niccol was the company's most successful CEO since founder Steve Ellis stepped down, and his process improvements and innovations helped Chipotle stock rise by around 775% during his six-year tenure at the company.
Now, with Niccol's sudden departure for the Starbucks job, investors are right to wonder what is next for the company, and the significant decline in Chipotle stock reflects this concern. Should investors take advantage of the discounted stock price or take the drop as a sign to get out?
Chipotle under new leadership
Admittedly, one can understand why Chipotle stock sold off following the announcement. It had already declined significantly since June, when its P/E ratio briefly topped 70.
Also, Niccol's announcement that he was leaving to go to Starbucks was unexpected, so Chipotle investors did not know what would happen to the company following such a move.
Fortunately for bulls in the restaurant stock, Chipotle has moved to reassure investors. One decision was to promote Scott Boatwright to the interim CEO position. Boatwright has served as Chipotle's chief operating officer since 2017.
Under Boatwright's tenure, the company addressed the periodic outbreaks of norovirus and other pathogens, and imposed stricter food handling procedures to preserve the cleanliness of its food. It also encouraged sick workers to stay home to minimize the chances of foodborne illnesses.
Additionally, Boatwright helped integrate technology into the company. During his tenure, Chipotle launched its digital ordering site, which now accounts for around 35% of its food and beverage revenue.
Admittedly, Boatwright's interim CEO title does not answer the question of who Chipotle's permanent CEO will be. Nonetheless, it buys the company time to find the person while minimizing the disruption caused by Niccol's departure.
The financial state of Chipotle
Chipotle has also moved to minimize disruption on the finance side of the business. Jack Hartung, the chief financial and administrative officer and president of strategy, finance, and supply chain, agreed to delay his retirement "indefinitely" to ensure a smooth transition.
Hartung has worked in various positions within Chipotle since 2002. Today, he oversees the finance, tax, and investor relations functions within the company. That should increase Chipotle's chances of maintaining its relatively rapid growth.
In the first half of the year, revenue of nearly $5.7 billion rose 17% from year-ago levels. A rise in comparable restaurant sales and the addition of 262 new restaurants over the last year contributed to the increase. Also, Chipotle earned $815 million in net income in the first half of the year, 29% more than in the same period in 2023.
These increases put Chipotle in charge of its financial destiny, and with no changes on the finance side of the business, its numbers could continue to rise at a similar pace.
Investors should also remember that Niccol's departure occurred late in the third quarter. Thus, its financials are not likely to change significantly from previous forecasts, and investors will have to wait for the fourth-quarter results next year to see how its financials fare under new leadership.
Should I buy Chipotle?
Buying a stock after a CEO's departure usually carries significant risk, but buying now could benefit risk-tolerant investors. Ultimately, Niccol left Chipotle in better shape than he found it. With the food safety issues apparently behind it, Chipotle can focus more on service and expansion.
Admittedly, a change for the worse is not impossible, and the lack of a permanent CEO leaves plenty of room for uncertainty.
However, the moves to keep Boatwright and Hartung should minimize the chances of any negative impact. With these leaders having handled operations and finance, the company should remain on the current operational and growth trajectories, a reassuring sign for Chipotle investors.
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Will Healy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chipotle Mexican Grill and Starbucks. The Motley Fool recommends the following options: short September 2024 $52 puts on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.
