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  1. Home
  2. / Investing
  3. / Consumer Staples

This Issue Is Too Big for Chipotle to Wrap in a Tortilla

The elephant in the room: Too many locations.
By BRIAN SOZZI Mar 17, 2017 | 12:00 PM EDT
Stocks quotes in this article: CMG, SBUX, BBY, UA, DB

Kudos to Chipotle (CMG) for finally showing a desire to change in recent months. But founder and CEO Steve Ells may want to refrain from slapping himself on the back.

On Friday, the embattled burrito joint disclosed that four of its directors -- three of whom were ridiculously over-tenured -- would not stand for re-election. Of course, Chipotle didn't say this in the SEC filing, but the decision likely comes amid pressure from activist investor and Chipotle shareholder Bill Ackman. That's something they deny, however. 

"I would also note that these changes are not the result of pressure from Mr. Ackman and Pershing Square, but rather are the product of individual decisions," Chipotle spokesman Chris Arnold told TheStreet via email. "Our relationship with Mr. Ackman and Pershing Square has been constructive throughout, and Mr. Ackman was instrumental in bringing on two of the directors who joined the board last year."

The news opens up the possibility of Ackman getting some more of his own people -- if not himself -- on the board of a company that badly needs in-depth financial experience and up-to-date restaurant industry knowledge. Two of the clowns leaving the board arguably lacked those things.

The third departure, Stephen Gillett, comes as a surprise as he is a well-regarded tech-industry executive who was instrumental in helping Starbucks (SBUX) and Best Buy (BBY) develop their digital presence. I have talked to Gillett several times through the years, and am quite sure he will end up somewhere that deserves his immense talents. Chipotle doesn't deserve them at this juncture.

Says Arnold, "Mr. Gillett had a significant impact in his time as a director. When Stephen joined the board, we were looking to strengthen leadership in the IT area. He was instrumental in recruiting Curt Garner, who is now our chief digital and information officer, so Stephen completed his main objective here.

"With the addition of Curt to our leadership team and the four new directors we named last year, it simply made the timing work well for Stephen to move on," Arnold added. 

Despite the efforts to clean up its operations and board, and in the process repair its image on Wall Street, Chipotle is still not addressing the elephant in the room. That is, why in the world the company continues to open restaurants at an insane pace. Last year, the company opened up a mind-boggling 240 restaurants even as it struggled with its operations, store traffic and marketing efforts in the wake of the E. coli scandal. This year, Chipotle plans to open as many as 210 restaurants in spite of continuing to deal with the host of challenges from a year ago. 

Chipotle must curtail its out-of-control restaurant openings in order to get its operations in line. There are tons of Chipotle restaurants that are operating below the high standards that at one time got people excited about visiting the chain. Moreover, such an aggressive pace of openings calls into question if the best sites are being selected, or is Chipotle simply opening locations in deserted strip malls for the sake of pleasing Wall Street.

Look what has happened to fellow former high-flier Under Armour (UA) -- the company expanded its brand into too many venues, the product got cheapened, consumers noticed, earnings came under pressure, and now the stock is reeling. This is often the case with high-growth companies that eventually overexpand to keep Wall Street's voracious appetite for growth satisfied. 

Until Chipotle reins itself in, the stock is a dog with fleas. And views such as this from Deutsche Bank (DB) should remain top of mind with investors. 

"Our sell rating remains focused on the combination of near-term concerns, long-term structural issues and valuation," said analyst Brett Levy.

This report has been updated with company comments.

Jim Cramer and the AAP team hold a position in Starbucks for their Action Alerts PLUS Charitable Trust Portfolio. Want to be alerted before Cramer buys or sells SBUX? Learn more now.

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TAGS: Investing | U.S. Equity | Consumer Staples | Consumer Discretionary | Consumer | E-Commerce

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