Shares of Chipotle Mexican Grill (NYSE:CMG) fell 7% on August 13 after the company announced the abrupt impending departure of its CEO Brian Niccol, who had led the fast-casual restaurant chain since 2018. Niccol will take on the same role at Starbucks at the end of the month.

This news has surprised Chipotle’s investors, as Niccol has been responsible for the company’s digital-driven turnaround strategy for the past six years. Did the market overreact to the news, creating a good buying opportunity for long-term investors? Or will Chipotle’s growth engine stall without its star CEO?

How Brian Niccol turned Chipotle around

From 2014 to 2018, Chipotle’s revenue grew at a compound annual growth rate (CAGR) of just 4%. Comparable restaurant sales (comps) rose 16.8% in 2014, but that key metric remained almost flat in 2015 before declining in 2016 and 2017.

The reasons for this downturn were a number of cases of food poisoning, the slow rollout of the mobile app and tougher competition in the fast-casual dining market.

Under Niccol, Chipotle added takeout ordering options, a rewards program and more analytics tools to its mobile app. By collecting more data about its customers, the company was able to develop clearer strategies to shape its menus, attract repeat customers and develop new marketing campaigns.

Niccol also stopped Chipotle’s deep discounts and promotions – introduced to win back customers after the food poisoning outbreaks – and instead invested in new TV, social media and digital advertising. All of these efforts bore fruit in 2018, when sales rose 4%.

From 2018 to 2023, Chipotle’s revenue grew at a compound annual growth rate of 15%, while earnings per share (EPS) grew at a compound annual growth rate of 47%. Revenues increased each year, the company continually opened new locations, and increased its restaurant-level operating margins.

Data source: Chipotle.

Chipotle has been able to maintain these impressive growth rates despite temporarily halting its restaurant operations at the start of the pandemic. In addition, the company has successfully combatted inflationary headwinds of the past two years by increasing menu prices and opening new drive-thru “Chipotlanes” to expedite orders.

Will Niccol’s departure change this development?

From 2023 to 2026, analysts expect Chipotle’s revenue to grow at a compound annual growth rate of 14%, while earnings per share will grow at a compound annual growth rate of 21%. However, Niccol’s departure could raise doubts about whether the company can meet those expectations.

The story continues

Scott Boatwright, chief operating officer since 2017, will take over as interim CEO. In a press release, Chipotle says Boatwright “played a critical role as part of the leadership team that developed and executed the turnaround strategy that has delivered incredible results since it began in 2018,” and he will “continue to execute the company’s strategic plan without interruption.” Jack Hartung, president of strategy, finance and supply chain, also plans to stay indefinitely to support Boatwright’s CEO transition rather than retiring next year.

So while Niccol’s sudden departure is jarring, Chipotle will likely stick to the same strategies that have worked so well over the past six years. In other words, Chipotle’s growth will not stall once Niccol moves to Starbucks.

But Chipotle is still perfectly priced

Niccol’s departure is disappointing, but for bulls, it’s not an event that will destroy their theses. The main problem with Chipotle, however, is that it was already priced perfectly. Even after the recent pullback, the stock is still up more than 220% over the past five years and trades at 48 times this year’s earnings. The company could perhaps justify that lofty valuation if it maintains its momentum, but we don’t yet know if Boatwright can keep the company on its current trajectory.

Therefore, I think investors can still secure some shares of Chipotle after the recent downturn, but they may want to wait a few more quarters to see if the company sticks to Niccol’s balanced expansion or trips over its own feet.

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Leo Sun does not own any of the stocks mentioned. The Motley Fool holds positions in and recommends Chipotle Mexican Grill and Starbucks. The Motley Fool recommends the following options: short September 2024 $52 puts on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.

Chipotle’s Stock Plunges as Company Loses Star CEO: Time to Buy? was originally published by The Motley Fool