Chipotle: Some Chaos With Your Burrito?

 | Dec 07, 2016 | 8:00 AM EST
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Chipotle's (CMG) shareholders need to take the company's headquarters in Denver with anger in their eyes.

Bring sharp pitchforks. Pack gas-drenched torches. Write up catchy signs against management that will play well on Instagram and Twitter feeds. And most importantly, come up with chants calling for the complete ouster of every single high-powered Chipotle executive listed on its investor relations pages. That includes founder and co-CEO Steve Ells, who basically embarrassed himself presenting at Barclays on Tuesday.

Why show up in front of investors if you have nothing good to say and are prepared to voice hearty skepticism on the absurd earnings guidance put out months ago for 2017? Chipotle never should have presented, which underscores my long-held contention throughout Chipotle's almost two years of struggles that it needs to hire 10 executives from the best-in-class communications team at PepsiCo to help it learn how to manage through crises. PepsiCo's communications execs would never have made the rookie moves seen at Chipotle on Tuesday.

There is no beating around the bush after what Chipotle shared -- the company is in a serious state of internal chaos that should freak out every investor who isn't short the stock. Change must come to the entire executive ranks, and it must come soon (Chipotle signaled some board changes are looming) or the company could see its stock easily plunge another 25% to 30% within the next three months.

Take a gander at what Chipotle basically said at Barclays:

50% of its restaurants are worthy of a C, D or F grade due to slow lines, dirty tables and sloppy soda stations (among other things). That is horrible. I am no fan of McDonald's (MCD) , but I can't imagine that 50% of their restaurants are in such horrendous shape. And shame on Ells for tossing his store workers under the bus -- they would never have been in this spot of handling an insane number of new operating procedures if Ells and his limited, but highly paid, team were doing their jobs correctly.

In these over 1,000 restaurants with poor grades, Chipotle has said the experience is turning off customers and preventing a sustainable sales turnaround. These are core issues that aren't going to be fixed overnight -- it may even take time if Chipotle decides to give employees higher pay to incentivize them to perform up to par. If this persists, Chipotle will badly miss its 2017 guidance and trigger sharp revisions to 2018 Wall Street estimates.

Over time, if it isn't corrected, Chipotle may have to shut locations so that it could better get a handle on operating procedures.

There is a sense that Ells and the entire management team have no clue how to sustainably get people back in the door. Moreover, there is a sense the company is ridiculously behind the curve in mobile ordering and other key aspects of the business, in large part because of the people in the corner offices. How could Shake Shack (SHAK) have an amazing mobile ordering app in about half its restaurants (launched in October) and Chipotle is still fumbling around with mobile ordering. Its digital ordering experience is subpar, bottom line, and someone deserves to be the fall guy for continued operating miscues.

That fall guy is likely to be longtime co-CEO Monty Moran. I am told that Chipotle has reportedly hired a search firm to hire a chief operating officer (a position long held by Moran). Further, Moran wasn't present at Barclays, something that would have never happened years ago (Moran and Ells are longtime friends). I expect Moran to leave very soon. But the entire management team should be sent packing, with Ells moving to a chairman role. Real restaurant professionals need to be running Chipotle -- a real team that has a sense of urgency and the intelligence not to free-wheel it at an investor conference on a slow news day.

In the end, it's likely Chipotle is having yet another horribly weak fourth quarter and that it will slash its dumb 2017 guidance when it reports in a couple of months. Chipotle's concept isn't broken by any means, and that should leave investors somewhat encouraged. But if real people don't come in to run the company, it will be broken beyond repair.

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