On the Margin
Chipotle girds for battle with activist

Chipotle girds for battle with activist

This post is part of the On the Margin blog.

Bill Ackman is a well-known activist investor with a penchant for taking on big companies. How big? A decade ago, he took on McDonald’s Corp., by far the biggest restaurant chain in the world, and one of the best-known brands ever.

So it's understandable that Chipotle Mexican Grill Inc., Ackman’s latest target, who is now the company's second-largest shareholder, would enlist some help in its fight against the investor.

According to Reuters, Chipotle has hired Goldman Sachs and Morgan Stanley; the law firm of Wachtell, Lipton, Rosen & Katz; and the crisis public relations firm Joele Frank. Their job: To help defend the chain from Ackman.

In September, Ackman took a 9.9-percent position in Chipotle and declared himself an activist, meaning he will recommend changes to the board and management. He is known in the restaurant industry for pushing for more franchising, selling real estate, and spinning off ancillary concepts.

By hiring a high-powered group of advisers, Chipotle is clearly preparing itself for a major battle.

Chipotle might better prepare itself for its activist by finding a way to improve same-store sales, which have remained stubbornly low despite numerous efforts to generate traffic through burrito and chip giveaways.

Earlier this week, Chipotle reported that same-store sales declined 21.9 percent in the third quarter ended Sept. 30. That was an improvement from the second quarter, and an improvement from the first quarter, when same-store sales fell 29.7 percent.

It’s a slow improvement, considering that it’s been a year since news of Chipotle’s foodbone illness outbreaks broke.

But remember: Same-store sales only take into account a specific period of time. To get a more accurate picture of performance, it helps to look at the previous year, too. And, as it seems, Chipotle’s improvement could be partly the result of easier comparisons.

In the first quarter, Chipotle’s two-year same-store sales fell 19.3 percent. In the second quarter, the two-year number was the same, down 19.3 percent. The third? You guessed it: down 19.3 percent.

To be sure, traffic has improved, in large part because of giveaways. But the numbers illustrate the complexity of Chipotle’s issue. At a time when other chains that have faced these sorts of problems demonstrate marked improvement, Chipotle’s recovery appears stuck in the mud.

That’s why the company's stock price has fallen to a low of $362 per share, the lowest point since 2013. And there is sharp disagreement among analysts about where the stock will go — analysts’ price targets range from $215 to $547, according to Nasdaq, and there as nearly as many Sell ratings on the stock (five) as Strong Buy (six).

As Bloomberg’s Shelly Banjo said recently, Bill Ackman has some work to do.

Jonathan Maze, Nation’s Restaurant News senior financial editor, does not directly own stock or interest in a restaurant company.

Contact Jonathan Maze at [email protected]
Follow him on Twitter: @jonathanmaze

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