Credit Suisse Not Swayed by Chipotle’s Leadership Change

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Chipotle Mexican Grill Inc. (NYSE: CMG) has been under fire for a long time now, since its E. coli outbreak back in 2015. At the time many called for CEO Steve Ells to step down, and they finally got their wish. Chipotle announced on Wednesday that Ells would be stepping down as CEO, though he will retain his seat on the board. While many investors cheered this announcement, sending the stock higher, it remains to be seen if this will sway any analysts.

According to the burrito chain, the board has formed a search committee comprised of directors Robin Hickenlooper and Ali Namvar, as well as Ells, to identify a new leader with demonstrated turnaround expertise to help address the challenges facing the company, improve execution, build customer trust and drive sales.

Ells commented on the search:

Bringing in a new CEO is the right thing to do for all our stakeholders. It will allow me to focus on my strengths, which include bringing innovation to the way we source and prepare our food.

Following the announcement, the stock jumped 5.6% in response. This comes after falling 24% year to date.

Credit Suisse was one of the first firms to weigh in on Chipotle. It maintained a Neutral rating with a $275 price target, implying downside of 9% from the most recent closing price of $301.99. Credit Suisse detailed in its report:

We view CEO Ells’ decision to step down as a good first step in the recovery process for CMG. Ells’ strengths as an innovator and visionary did not seem well-suited to the difficult challenge of turning around CMG’s brand perception and operations. However, in the short run, this change (as well as the language in the press release) suggests fundamentals remain weak. CMG faces an uphill battle in its recovery given significant competitive expansion in the fast casual sector in recent years and rising labor costs. Our 4Q17/FY18 forecasts assume +2%/+4% same store sales (SSS), resp. However, we would not be surprised to see comps weaken near-term as the initial lift from queso fades (launched in Sept), compares normalize, and competitor store growth continues. (Each 1% change in SSS = ~5% to annual EPS.) Our model also assumes an ~100bps increase in restaurant margins next year to ~18%. A new CEO may choose to invest in areas such as digital ordering, loyalty, service, food quality, kitchen equipment and/or the store environment, thus delaying this margin recovery. Tax reform is a potential positive for CMG and could drive ~$2/share upside to 2018 EPS (using 25% Fed+state tax rate). However, the prospects of tax reform remain uncertain, and new mgmt. may choose to reinvest these savings. In terms of M&A, we believe CMG’s ~$8bn enterprise value and high multiple make an acquisition unlikely.

Shares of Chipotle were last seen up about 1% on the day to $304.96, with a consensus analyst price target of $316.89 and a 52-week range of $263.00 to $499.00.

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