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Morningstar | Under New Management: 2018 a Transition Year, but New Strategies Set Up Chipotle for a Comeback

Once the benchmark by which fast-casual restaurant chains measured themselves, Chipotle finds itself in recovery mode after a series of food safety incidents. Chipotle's recovery would be uneven and unlikely to share the same pace that other restaurants in similar situations faced in the past, as it represents a unique situation because the food safety incidents call into question the "Food With Integrity" mantra that its brand was built upon (as evidenced by 2016 comparable sales declines of 20%). We believe Chipotle faces a long road in rebuilding consumer trust and restoring its customer experience/throughput capacity, with an ongoing Department of Justice food safety investigation, the implementation of new food safety protocols, and social media each representing potential threats to its recovery. On top of these risks, we also believe Chipotle will adopt a more traditional QSR playbook, relying on conventional marketing and new product introductions to drive traffic. In our view, this could put longer-term post-recovery comparable sales growth closer to the low- to mid-single-digit range, analogous with much of the quick-service restaurant category, not the 10% growth the chain averaged between 2010 and 2014.That said, we still believe Chipotle possesses several strategic advantages, including a simple but uniquely customizable menu and aesthetically pleasing restaurant designs. We also believe recently appointed CEO Brian Niccol (former CEO of Taco Bell) will drive new approaches to menu innovation, marketing, mobile technologies, and restaurant experience while elevating Chipotle's brand intangible asset. As Chipotle slows its unit growth to 130-150 locations in 2018 (including 55-65 stores closures) and 140-155 locations in 2019, we expect the company to refocus on its customer experience and gradually rebuild the brand equity it once had--aided by restaurant remodeling (including a second make-line for digital ordering at many locations) and employee investments in 2018--with new menu items, online ordering/payments, catering, delivery, drive-thru and other alternative formats, and daypart expansion offering longer-term top-line potential.