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Chipotle Mexican Grill: The Important Story Everyone Is Missing

By John Maxfield - Apr 27, 2016 at 12:37PM

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The burrito chain isn't letting its food-borne illness crisis go to waste.

Image source: Wikimedia Commons.

If you were disappointed by Chipotle Mexican Grill's (CMG -0.33%) first-quarter results, which caused its share price to fall more than 6% on Wednesday, then you're not alone.

There's no getting around the fact that its results were dismal, reflecting the impact of its food-borne illness crisis at the end of last year. Consider the following:

  • It reported its first quarterly loss as a publicly traded company.
  • Revenue fell by 23% compared to the first quarter of 2015.
  • Same-store sales were off by 29.7% on a year-over-year basis.

But Chipotle isn't letting its share price plunge in vain. Since the beginning of the year, it has repurchased $645 million worth of common stock at an average price of $463 per share. That equates to a 40% discount to Chipotle's 52-week high.

All told, the fast-casual chain has bought back 2 million shares of stock since a spate of food-borne illness crises erupted in the second half of 2015. By doing so, it will have reduced its outstanding share count by more than 6%.

Data source: Chipotle Mexican Grill. Chart by author.

This may seem like an odd use of capital at a time when Chipotle is still reeling from the effects of these incidents. But unless your strategy is to buy high and sell low -- which, admittedly, is what most companies do when executing buyback programs -- this is exactly when a company should be repurchasing stock.

If you look at the top-performing CEOs since World War II, as William Thordike does in The Outsiders, the one thing they shared was a hyper-rational approach to capital allocation. "When their stock was cheap, they bought it (often in large quantities), and when it was expensive, they used it to buy other companies or to raise inexpensive capital to fund future growth," Thorndike writes.

The eight CEOs profiled by Thorndike offer compelling proof of the virtue of this approach. On average, they outperformed the S&P 500 by more than 20 times during their respective tenures. Even the indomitable Jack Welch, the former CEO of General Electric and a commonly cited prototype of an extraordinary executive, paled in comparison.

To think that Chipotle's issues right now are anything but temporary is to ignore the fact that almost every other major food chain in the United States has survived a similar crisis in the past. People died from an E. coli outbreak at Jack in the Box in 1993, yet its stock has since returned nearly 3,500%.

My point is that Chipotle will recover. It may take a year (or two). But when it does, investors who buy in now will benefit immensely from the company's unusually shrewd approach to capital allocation.

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