Chipotle's stock is S&P 500's worst performer as CEO's exit triggers 'rock star' jitters

By Emily Bary and Bill Peters

The fast-casual chain's shares trounced the S&P 500 during Brian Niccol's time as CEO - but some analysts think the company will be fine in the long term

Chipotle Mexican Grill Inc. shares slid on Tuesday, making it the S&P 500 Index's worst performer over that time, following the news that Chief Executive Brian Niccol is leaving the fast-casual chain to head up Starbucks Corp.

Some Wall Street analysts think Chipotle (CMG) will be fine longer-term, but nonetheless raised questions about its path forward, and said the suddenness and swiftness of the change caught them off-guard. But judging by Chipotle's stock action in recent years, it's clear why investors are reacting so strongly to Niccol's exit at the end of the month.

From the time Niccol took over the top spot at Chipotle in March 2018 through Monday's close, shares of the company were up 773%. By contrast, the S&P 500 SPX gained 99% over that span.

The 7.5% drop for Chipotle shares on Tuesday marked the stock's worst single-day performance since July 27, 2023, when it lost 9.8%, according to Dow Jones Market Data.

The downward pressure reflects the respect investors have for Niccol's transformation of the chain and the acknowledgment that his business acumen won't be easy to replace. Some analysts said it also reflects concerns about a company whose leadership, more broadly, is in flux, particularly after the recent news of its veteran chief financial officer's coming departure.

Starbucks (SBUX) shares, meanwhile, finished 24.5% higher on Tuesday, their biggest percentage gain on record.

When Niccol took the helm at Chipotle, the chain was recovering from a massive food-safety scare from a few years prior. Since then, those fears faded, and Chipotle has moved deeper into digital ordering, delivery, drive-thru lanes and automation. Higher prices in 2022, while pushing up sales, drove away some lower-income shoppers. But executives more recently have said more customers across all income brackets were buying more burritos and bowls there. And in recent months, Niccol was talking about ways to speed up service.

For now, Chipotle has tapped Scott Boatwright, its chief operating officer, to lead the chain on an interim basis. He brings seven years of experience working at Chipotle.

However, the announcement of Niccol's departure also comes roughly a month after Chipotle's longtime chief financial officer, Jack Hartung, said he would retire in March. On Tuesday, Chipotle said Hartung had agreed to stay with the company indefinitely, albeit in a different role.

"While the loss of Brian is a step back for the brand, we feel the stock would not be down as much if Jack Hartung, current CFO, hadn't announced his intent to retire in 2025," BTIG analyst Peter Saleh said in a research note on Tuesday. "We recognize that Mr. Hartung plans to stay on indefinitely as President of Strategy, Finance and Supply Chain, but believe that he will retire in the near future, and following the appointment of a permanent CEO."

"Furthermore, we believe Chipotle is on excellent footing having executed a proven playbook including shifting to drive-thru development, investing in national advertising, and initiating a rewards program under Mr. Niccol's leadership," Saleh continued.

Saleh also noted that the leadership changes at both Chipotle and Starbucks (SBUX) were "surprisingly swift." He also said he was surprised that neither company was holding an investor call to discuss the management shakeups.

Laxman Narasimhan, who was Starbucks' chief executive, is leaving the coffee chain after a little less than a year and a half on the job. His departure comes after a slowdown in spending at the chain this year - as rivals abroad cut prices and inflation keeps shoppers spooked - and recent reports that two activist investors had taken a stake in the company.

Elsewhere, TD Cowen analyst Andrew Charles noted that Niccol has a big background in marketing, which he used to execute a turnaround at Chipotle and revitalize the brand's image.

See more: Starbucks names its new CEO - the head of Chipotle Mexican Grill

Chipotle's announcement "comes somewhat as a surprise and could create some [near-term] overhang on stock, particularly as the path ahead in strategic initiatives (throughput, automation) that have driven historical outperformance may become shrouded," Jefferies analyst Andy Barish said in a note to clients.

"Interim leadership" in the roles of chief operating officer and president "should allow for a smooth transition, but visibility into [same-store-sales] and margin outperformance will remain dependent on successful execution/expanding against strategic initiatives," Barish said.

Don't miss: Chipotle says it's trying to avoid smaller portions and price increases this year

The restaurant's board of directors signaled that it had prepared for such a transition. Scott Maw, who became Chipotle's board chairman on Tuesday, said in a release that the company had a "robust talent-planning process" and a "deep bench within the organization."

Raymond James analyst Brian Vaccaro said that Tuesday's drop in Chipotle's stock was an opportunity to buy the dip. And he said the move lower "seems consistent with the initial knee-jerk reaction often seen when 'rock star' executives leave a company."

"We suspect Niccol's departure likely reflects an offer 'he could not refuse' to build on his legacy and turnaround an iconic brand such as Starbucks, but importantly do NOT believe it is a negative read on Chipotle's current fundamentals or long-term growth prospects," they said.

"While we await further details on who will be permanent CEO, this pullback could create an attractive buying opportunity as we believe the company's strong sales momentum (positive traffic), operations (throughput, automation), and long-term unit growth opportunity remains firmly intact," he continued.

-Emily Bary -Bill Peters

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08-13-24 1634ET

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