Investors in Chipotle Mexican Grill (CMG 0.28%) must be feeling as fortunate as someone scoring free guacamole at one of the chain's eateries. The stock has more than tripled since bottoming out in early 2018 -- just around the time former Taco Bell chief Brian Niccol was tapped as the new CEO -- and it seems to be nothing but blue skies on the horizon for the cult fave.
Things aren't perfect. Some inherent risks come with investing in restaurant stocks, and Chipotle itself also comes with its own set of unique challenges to its recent gains. Let's grab a seat and go over some of the things that could derail Chipotle's hard-earned turnaround.
1. Another foodborne illness outbreak can sting the brand
Folks singing Chipotle's praises no longer need to preface the flattery by pointing out that the chain had a few brand-tarnishing incidents of customers getting sick after eating some of its grub. Consumers have forgiven if not forgotten the outbreaks, and business is booming again. Chipotle just rattled off its seventh consecutive quarter of positive comps, and margins are starting to widen again.
We trust Chipotle again, and that's even with an incident as recent as the summer of 2018, when more than 700 customers in Ohio got sick after eating food that was eventually determined to have been left at unsafe temperatures. This was the seventh incident and also the largest in terms of the number of affected customers. Chipotle has come far since being rocked four years ago with the first of the health scares. It can't afford a return to the times when the integrity of its "food with integrity" mantra was questioned.
2. Niccol can move on
Chipotle turned heads when founder Steve Ells handed the CEO keys to the head of Taco Bell, but Niccol has been everything that the chain needed. He has shaken up the menu with limited-time offerings, a Taco Bell staple. Niccol is also adding drive-thru lanes -- Chipotlanes, as they call them -- in new locations that can handle them. He has improved efficiency while staying true to the brand's penchant for quality and ethically sourced ingredients, and it wasn't a surprise when CNN named him CEO of the year in 2018.
There is no reason for Niccol to leave. He is generating more accolades than he did during his time at Taco Bell, and he is being compensated largely in stock and equity equivalents that are buoyant currency with the shares on fire. However, it's easy to see how his departure could rattle investor confidence even more than when Ells handed off the CEO gig.
3. Recession pokes holes in any stuffed burrito
Let's wrap this up by talking about the economy. Chipotle isn't immune to recessionary slowdowns. It's a chain that thrives on workplace lunch orders and busy commuters who don't have the time or desire to cook after work. Most restaurant operators struggle when unemployment rises, and disposable income isn't as disposable as it used to be.
Chipotle held up somewhat well during the last major economic meltdown nearly a dozen years ago. It experienced an uptick on weekends to offset the weekday slump, largely because folks viewed it as comfort food. The fast-casual niche is more crowded now, and that includes a lot more Chipotle locations than before. If the economy slips, so should Chipotle's traffic trends, especially if the now red-hot digital sales take a breather given the higher consumer costs for delivery through third-party providers. Today's healthy economy isn't the reason for Chipotle's revival, but it's an important piece of the engine.