Chipotle Management Change Compounds Investor Concerns

The recent management change at Chipotle Mexican Grill, Inc. CMG further compounds investor concerns, triggering more bearish views from Wall Street.

Chipotle said founder Steve Ells is assuming the role of sole-CEO as co-CEO Monty Moran steps down amid the slower-than-expected sales recovery has exposed too much complexity in the business operations. The announcement comes barely a week after the stock had one of its worst trading days in all of 2016.

Lingering Headwinds

The latest overhaul of the top management created investor anxiety for those hoping for some sort of a recovery in comps following the food safety crisis and the resultant drag on throughput and the customer experience.

“While there has been criticism of the Company's co-CEO structure, we believe this move signals both continued challenges to recover lost sales and profits, as well as personnel and execution issues in the stores,” Stephens analyst Will Slabaugh wrote in a note.

Slabaugh maintains his Underweight rating on the stock and lowered his price target to $325 (from $350), as he believes current valuation does not accurately reflect the lack of sales and earnings visibility over the next 12–18 months.

The analyst is concerned that sales recovery at Chipotle remains tepid as its two-year stack comp trend has remained flat at -19.3 percent for the first three quarters of the year.

These Things Take Time

Importantly, Slabaugh noted it would take time for Chipotle to return to normalized margin structure due to the increased operational complexity from the food safety crisis.

As such, the analyst cut his fourth quarter, FY 2016, and 2017 adj. EPS estimates to $0.75, $1.52, and $8.25 (from $1.10, $1.88, $9.75).

Another Voice From The Street

Meanwhile, Oppenheimer reiterated its Perform rating on the stock post the management change. But, the brokerage said the ongoing issues at Chipotle such as higher service times and tepid guest experience would make it tough for the restaurant operator to reach its $10 EPS goal.

“If we assume a high-single-digit comp in '17 (in-line with guidance and Street), we still have a very difficult time getting near $10 of EPS (mgmt's outlook),” analyst Brian Bittner wrote in a note.

“Given that this comp assumption is an aggressive base-case, the potential earnings downside keeps us from recommending shares in the $380 range,” Bittner added.

Also, Guggenheim's Matt DiFrisco recently downgraded Chipotle to Sell from Hold with $315 price target, saying the expectations for recovery were overly optimistic and it appears management is validating.

At last check, shares of Chipotle fell 1.55 percent to $376.42.