Why Have Chipotle Mexican Grill Shares Gained 49% in 2018?

Chipotle's (NYSE: CMG) long, dark night appears to be over. The chain struggled after a 2015 scandal when E. coli outbreaks occurred at a number of its locations. Those struggles appeared to end in 2018 when the company made a major break with its past.

What happened

In late November 2017, Chipotle founder and CEO Steve Ells decided to step aside and become executive chairman of the chain. The company's share price started moving steadily ahead from that moment on.

When former Taco Bell CEO Brian Niccol was given the Chipotle job in mid-February, shares continued to rise. After closing 2017 at $289.03, shares pushed to $431.37 on the final trading day of June, a 49% increase, according to data provided by S&P Global Market Intelligence.

People are in line at a Chipotle.

Chipotle's new CEO wants more people to order digitally. Image source: Chipotle.

So what

Niccol made it clear from the moment of his hiring that he respected the brand and would maintain its quality, but would not be stuck in the past. In a press release, he said:

At Chipotle's core is delicious food, which I will look to pair up with consistently great customer experiences. I will also focus on dialing up Chipotle's cultural relevance through innovation in menu and digital communications. This will attract customers, return the brand to growth, deliver value for shareholders and create opportunities for employees.

The new CEO was not going to offer $1 tacos or partner with snack chips, but he clearly intends to innovate. That includes technical changes like improved ordering technology and adding delivery partners as well as menu innovation.

Now what

Niccol has laid out some good ideas and shown that he's not as slow to change as his predecessor. He still has to prove that his changes are going to work.

Chipotle has posted nice sales gains (7.4% revenue growth and 2.2% comparable-store growth in the first quarter), but it will have to maintain that and maybe even increase it going forward. Menu innovation worked well at Taco Bell, but Chipotle has often failed with new items (chorizo and queso being recent examples).

But Niccol isn't flying blind. He's using the company's New York test kitchen, then doing limited rollouts before launching new items. He's doing that at an accelerated pace, and he has promised that the company will have new seasonal and permanent offerings on its menu soon.

It's likely that this strategy will work. Chipotle's menu had become stale in a market where rivals regularly go over the top with innovation. Niccol's company isn't going to offer wacky snack chip tie-ins, but it will be steadily offering new choices to keep consumers interested.

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Daniel B. Kline has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Chipotle Mexican Grill. The Motley Fool has a disclosure policy.