A little Taco Bell can go a long way for a cash-strapped college student, and the same thing can be said about Chipotle Mexican Grill (CMG +1.30%) last week. Shares of the out-of-favor burrito roller roared back into market fancy last week, soaring 19.6% after the announcement that Brian Niccol -- CEO at Yum! Brands' (YUM +0.10%) Taco Bell chain -- will take over as its new helmsman on March 5. Founder and current CEO Steve Ells will retreat to the executive chairman role.
There was a fair share of ribbing on social media given the reputation that Yum! Brands has for cranking out cheap and often unhealthy fare through Taco Bell, KFC, and Pizza Hut. Would a dollar menu be coming to Chipotle? Will a waffle burrito or a Doritos-dusted barbacoa taco be the next new item? However, many analysts and most investors clearly liked the move for a concept that's been struggling with the status quo. Chipotle stock was the S&P 500's biggest gainer on Wednesday when the news was announced, repeating the feat on Friday. The shares declined slightly in the three other days of the week, but the end result was a gain of nearly 20% for the week.
Image source: Chipotle Mexican Grill.
Thinking outside of the bowl
Yum! Brands doesn't exactly jibe with Chipotle's "food with integrity" mantra, but it's easy to see why the market rallied behind the move. Chipotle hasn't been the same since its performance peaked three years ago. The common scapegoat is the wave of food-borne illness outbreaks that began in the fall of 2015, but comps and margin were already starting to sour ahead of the unflattering headlines.
Chipotle also failed to make things better on its own. New items that it has or has planned to roll out to spur sales lately have flopped. Chorizo as a protein lasted on the menu for less than a year. Queso has been widely criticized on social media since its September rollout, and it hasn't been the incremental sales booster that Chipotle sorely needs. The bunuelos dessert offering that was supposed to drum up higher sales is now on hold after faltering at Chipotle's test kitchen. Taco Bell may have its knocks, but the one thing it knows how to do well is land hit products. It won't be a surprise to see Chipotle pick up the pace on new items, hoping that some of them stick better than its queso.
Chipotle had to do something. Its turnaround is taking too long. Revenue is growing only because of expansion and being pitted against weak sales in the prior two years. The $1.34 a share that the chain earned in its latest quarter was a third of what it earned during the same period three years ago. If Niccol can upgrade Chipotle's branding and menu innovations without sacrificing quality, it will be better than what any insider could do at this point with a model struggling to regain its relevance in a competitive marketplace.
Yum! Brands investors may not miss Niccol. Yum! Brands stock actually inched higher on Wednesday following the news. Chipotle just needs him more right now. He'll have to prove himself to keep these gains coming at Chipotle, but having a fast-casual pioneer shaking things up makes too much sense now.
