Chipotle Board to Lose 4 More Directors

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Under pressure from activist investor Bill Ackman and his Pershing Square Capital Management fund, Chipotle Mexican Grill Inc. (NYSE: CMG) in December expanded its board of directors from nine to 12 and replaced four members, adding two named by Ackman. On Friday morning, the company announced that four more directors of the board’s 12 members would not stand for reelection at the May shareholder meeting.

Among the casualties last December was Chipotle’s co-CEO Monty Moran, although CEO Steve Ells said the decision on Moran’s departure was not the result of Pershing Square’s acquisition of approximately a 10% stake in the company.

The directors who will not be seeking reelection this year include John Charlesworth, Patrick Flynn, Darlene Friedman and Stephen Gillett. Charlesworth has been a company director for 18 years, Flynn has served for 19 years, Friedman has held a seat for 22 years, while Gillett has been a board member for two years.

An E-coli outbreak in October 2015 has had a devastating effect on the company and its share price. Shares traded around $750 before the outbreak was announced and posted a two-year low of around $350 last October. The U.S. Food and Drug Administration (FDA) declared the outbreak over in February 2016, so clearly the company has other problems.

Ackman and Pershing Square announced their stake in Chipotle last September, and by December they had agreed to accept two board seats in exchange for maintaining public silence about the company for two years. Ackman also agreed not to increase his stake in Chipotle to more than 12.9%, also for a two-year period.

Two of the retiring board members, Charlesworth and Flynn, had long careers with McDonald’s Corp. (NYSE: MCD). McDonald’s took a minority stake in Chipotle in 1998 and by 2005 owned 90% of the company. In 2006, McDonald’s divested its interest in Chipotle for $1.5 billion.

Until the E-coli incident, McDonald’s decision was often viewed as one of the dumbest choices ever made. Ackman called Chipotle undervalued and an attractive investment last year when he announced his firm’s new stake in the chain. But aside from the addition of two of his appointments to the board, nothing much seems to have changed.

In an exclusive interview this morning with CNBC, Doubleline Capital founder and CEO Jeff Gundlach said, “I continue to think Chipotle is a good short. I’ve been short it forever. Made a fortune on it. I think it’s just unbelievable what the PE is and what the competition is.”

Earlier this month Ackman said he has no immediate plans to sell Chipotle stock, though he did say in a federal filing that he may from time to time sell shares in the company. Since Ackman bought his stake last year Chipotle’s stock price is essentially flat.

Chipotle’s stock opened slightly lower Friday but was up about 0.4% to $402.68 by mid-morning. The stock’s 52-week range is $352.96 to $481.63, and the 12-month price target is $407.69.