By all outward appearances, Carl Icahn and Bill Ackman have thoroughly enjoyed seeing who has the most guts when it comes to Herbalife (HLF) . Icahn has come out ahead in this big-boys'-only game, while Ackman has been left holding the bag and unsavory losses.
Now it may be time for Icahn to ruffle Ackman's feathers once again, this time betting against Chipotle (CMG) . From what we can decipher (Ackman and his people have not commented beyond the disclosure of his stake last week), Ackman loves Chipotle burritos, digs what Steve Ells founded and believes the beat-up burrito player could be turned around. He will meet with management, dump off an impressive slideshow into their laps and then the waiting game begins on what -- if any -- changes Ells and the very few senior level Chipotle execs and subpar board decide to do.
While this is unfolding, Icahn would be wise to short Chipotle. It's not that Chipotle's sales in 2017 won't be better than they have been this year (could hardly be worse), or that people no longer want the taste of a giant, high-caloric burrito. But there are a couple stone cold truths that Chipotle's troubles over the past year have brought to life. Those are issues that aren't going to be fixed overnight and, indeed, call into question why the company is still valued as a high-growth restaurant concept that is blowing away analysts' sales and earnings estimates.
Here are three issues I see right now with Chipotle.
The wave of free burrito and chip coupons Chipotle has sent out has eroded its value proposition.
Granted, Chipotle had to do something to get traffic back after the food safety issues last year. But all of the food giveaways have people questioning why they were paying $10 for a burrito. In effect, Chipotle has morphed into the king of fast food discounts like McDonald's (MCD) , but it is valued as a premium player in the restaurant business. Another good example is Gap (GPS) . After years of letting customers down with styles and fits, it's in a perpetual state of discounting to try to drum up business. Chipotle has permanently opened the floodgates to being just another restaurant and that is very likely to lead to continued disappointment with the quarterly numbers this year.
The company has zero digital strategy.
It's actually embarrassing how far Chipotle has fallen behind Starbucks (SBUX) , Domino's (DPZ) , Papa John's (PZZA) , and Panera Bread (PNRA) on digital. This is a massive problem that is shutting Chipotle out of driving tons more sales. With each Apple Watch 2 sale one should be thinking Chipotle wins. Ditto sales of the new iPhone. In effect, Chipotle's lacking digital strategy is sending people to other fast food chains. Developing a strong digital platform -- like the pizza players -- will take years for Chipotle. Ackman isn't going to snap his fingers and make a national digital ordering platform on par with Starbucks happen overnight. So, Chipotle loses business to companies that have upped their food quality games and do digital well, such as Panera.
The Mexican concept is limited in terms of what could be sold.
I remember asking Chipotle's co-CEO Monty Moran a few years back why the company doesn't sell breakfast. He flat out told me it's because workers arrive to the restaurant early to hand cut the veggies and meat for lunch and dinner. The explanation made sense at the time. But upon deeper reflection, the reality is that Chipotle can't do breakfast. Who is going to spend $10 on a breakfast burrito? If they do spend $10 for a breakfast burrito, they are unlikely to spend another $10 for a burrito during lunch. And make no mistake, given where Chipotle has its locations in high-wage-inflation areas a breakfast burrito would have to be sold for $10. Moreover, Taco Bell's so-so results with breakfast demonstrate how hard it is for a Mexican-themed concept to compete with the burger guys who get credit among people for selling reasonably tasty and affordable egg sandwiches.
While on the topic, brunch has become a big thing, so much so that Starbucks has entered the category. Chipotle's line and kitchen aren't equipped to handle brunch, and what would they serve? In fact, why isn't Chipotle staying cool and teaming up with the growing number of street taco venders parking near their restaurants? The point here is that Chipotle's concept has its limits and what's currently on the menu isn't keeping pace with the next generation of Mexican-themed concepts.
Under Armour (UA) should be worried about the impact of the new Nike (NKE) -based Apple Watch. For starters, the thing is probably going to be decently popular with workout enthusiasts, which could dent sales of Under Armour's connected fitness hardware that launched in partnership with HTC earlier in the year. Secondarily, what looks to be a reboot of Nike's digital strategy could force Under Armour to spend more than it would like to acquire more fitness app players. The market has given Under Armour a pass so far with respect to its digital division -- which is losing money -- but it's unlikely to keep doing so, meaning Under Armour will need more scale in order to satisfy Wall Street and fend off new advances by Nike. Remember, Under Armour's success with digital apps has come in large part as Nike has been out of the market post the discontinuance of the Fuelband. Now that it has made a statement with Apple, the arms race for users and hardware customers is back in action.