Chipotle Mexican Grill(NYSE: CMG) stock has been an incredible investment for shareholders who have taken the long view. It's a perpetual market-beating stock, backed up by reliably phenomenal performance.
But its stock tanked last week after it let investors know that CEO Brian Niccol, who has effectively made it into what it is today, is leaving. Does this mean that its run is over? Let's see where it might be in five years from now, and whether or not it makes sense to buy it today.
Where Chipotle is today
Chipotle is in a great position today. Without the news of Niccol's departure, there hasn't been much to be worried about. It's performed flawlessly over the past few years despite major pressure from a global pandemic and inflation. It's practically floated through these challenges with sales increases, expanding margins, and high profitabiliity.
That was easily demonstrated in the second quarter. Sales increased 18.25% year over year driven by an 11.1% increase in comparable sales. Operating margin expanded from 17.9% last year to 19.2% this year, and earnings per share (EPS) increased from $0.25 last year to $0.33 this year.
It also received a lot of attention for a stock split that went through in June. It was one of the largest ever on the stock market, breaking up each share into 50 pieces. Stock splits imply that a company is doing well enough to have its stock price swell, and with a four-digit price, it may have been inaccessible to some investors. Stock-split stocks usually go on to further gains, although like any stock, that means long term.
Chipotle has what it takes to keep going. The comparable-growth metric is a good indication that fans are coming back for more, and it's showing resilience while many other restaurant chains have been struggling. Many restaurant chains have cropped up over the years trying to be the next Chipotle, but so far, none has come close to its success.
The company is still expanding at a fast rate, and it plans to open about 300 stores this year. At that pace, it should have 5,000 stores in five years from now. It's just getting started in some new European markets, and it recently signed its first deal for franchises with a partner in the Middle East. That will add to new-store count over the next five years, and it could be much bigger internationally.
What the CEO change could mean for the company
The question on everyone's mind is how much of the future success will hinge on the CEO? I think most investors, and most of Chipotle's team, were surprised at this announcement. It looks like it was an unexpected and quick process for Starbucks to nab Niccol, and Chipotle may not have been prepared for this.
In the meantime, longtime CFO Jack Hartung, who had planned to retire, is staying on indefinitely to help steer the ship forward. COO Scott Boatwright has been appointed interim CEO, which on the surface is a solid choice. As the COO, he's been responsible for the company's processes, and that's one of the main things Niccol fixed when he came onboard just a year after Boatwright. In fact, that's one of the main reasons for Chipotle's success and why Starbucks is hopeful about what Niccol can do to turn it around. The interim transition should go smoothly, with little reason to worry about any quick changes or problems.
That makes it harder to envision where Chipotle might be in five years, though. The work of the new CEO would be more about not messing up whatever already exists than to implement any unnecessary changes that could rock the boat. But new CEOs like to create their own teams and do things their own way.
It's not always like that. Costco Wholesale got a new CEO and CFO this year, and no one really blinked. The CEO is a longtime Costco veteran who wasn't going to reinvent the wheel. Similarly, Visa got it's own new CEO last year, and things have been proceeding as expected.
What makes this potentially different is that it doesn't look like this was an organized move with a succession plan in place. It's also at a time of volatility for the restaurant industry.
Reasons for confidence and caution
Chipotle may have needed Niccol to get to where it is today, but it should be able to find an effective leader to keep up the good work. At the same time, it's an unknown for now, which always comes with some risk.
In five years, the likelihood is that Chipotle chugs along the way it has for the past few years. It will be bigger, with higher sales and more profits. It should have a competent CEO to lead it there, and it should continue to be a market-beating stock.
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Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chipotle Mexican Grill, Costco Wholesale, Starbucks, and Visa. The Motley Fool recommends the following options: short September 2024 $52 puts on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.
