How the Turnaround Is Taking Hold at Chipotle Mexican Grill

By Motley Fool Staff Markets Fool.com

In this Market Foolery segment, the castdigs into the latest report from Chipotle Mexican Grill(NYSE: CMG). It appears that the fast casual chain's recovery is underway and gaining traction, but it has a long way to go before it reaches pre-outbreak growth and profitability. The Fools also talk about just what the company is doing to build further momentum.

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A full transcript follows the video.

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This video was recorded on April 26, 2017.

Chris Hill:First quarterprofits came in higher than expected. Same store sales were up 18%. I realize that is off of,go back a year in time, off a terrible quarter a year ago. Still,it's nice to see that it's up 18%. Stock up a little bit, not amazing, although it has risen about 30% in the last six months. So, I don't know,maybe we shouldn't expect too much of a pop off of this.

David Kretzmann:Yeah,I think the key for investors is,the metrics are moving in the right direction.I think you can safely say the turnaround has begun. As long as they can keep moving at this pace, I think good things are ahead for shareholders. But, it will still take time. It'llprobably be at least a year and a half, I think, before we get back to those pre-crisis levels, as far as metrics go. But, yeah, same-store sales up about 18%, theirrestaurant level operating margins are trending up. This quarter was almost at 18%,but that's still quite a bit lower than the 28%restaurant level operating margin we sawright before the crisis hit in 2015. All those metrics like restaurant sales, sales as a whole across the company, margins, they'removing in the right direction, it's adefinitive turnaround fromwhere the company has been going for the past year and a half but still some work to do to get back to those pre-crisis levels.

Aaron Bush:Yeah,when I was reading through the call, andwhat they've been doing to move back to the levels that they were, I think I was pretty impressed with what they were doing. Ifyou look, for example, at theonline sales, that increased 54% over the past year. I know that's something in the past we've talked about.Chipotle is not very good at that compared to others. So,it seems like they're moving in the right direction. Still have room to improve. They're revamping their restaurant tour program, which also was a pain point.

Hill:Is this the management program?

Bush:Yes,this was their management program. Chipotle has always promoted internally. But, if you grow too fast andpromote too quickly, that can lead to problems,especially if you incentivize poorly. So,they've been doing a lot of work aroundfiguring out what metrics are best toincentivize their managers and field team leaders. It looks like that is improving. Just,how they're interacting with consumers and turnover of their leaders. That's good. They also just closed, this quarter, 15 ShopHouse locations. So, they're moving past that --

Kretzmann:Stillsad about that, though.

Bush:Yeah,it's unfortunate for those of us, in the past, who were optimistic at some point. But it's good that they are diverting those resources, now, to higher-impact endeavors.

Hill:I'm aChipotle shareholder.I'm glad they decided to pull the plug on ShopHouse,because I got tired of wondering when they were going to roll it out. The first couple of years, what you heard was a lot of, "They'retaking their time, they're not going to rush it." But at some point, you move so slowly thatit's natural to ask the question, "What is wrong with this concept?" Either it's ready to be rolled out or it's not. Thefact that they said, "We're packing it in on that, we're going to focus on the main brand locations and go from there," I'm glad.

Kretzmann:Yeah, andon top of everything else Chipotle was dealing with for the past year, I think trying to work out issues at ShopHouse, it was just becoming a distraction. To me, that really was the theme of this quarter, it was very clear that Chipotle is refocusing. And I think part of that is boosted by Steve Ells taking over the sole leadership role as CEO. Monty Moran, who was co-CEO for a while, retired late last year. So I think you're seeing that focus from Steve Ells. And in the call, he mentioned revamping thatrestaurant tour program, as Aaron mentioned. But the focus of that is a "relentless focus on customer experience." So, sort of a Jeff Bezos-esque comment there, really trying to figure out what the priority is there for their management program. And they mentioned that they now have the lowest turnover with general managers in more than eight years.

Hill:That's great.

Kretzmann:Yeah. A lot of thingsmoving in the right direction. I think you're seeing, internally, a refocus on prioritizing the guest experience. As they get traffic into the stores, their throughput should really be able to increase with digital orders, because they're starting to launch kitchens in the back of the restaurants specifically for digital. That should theoretically take people out of that front line, more people can go through thatfront line. Therestaurant, in other words, will be able topump out more burritos, more orders. If they can get that traffic back to pre-crisis levels andhopefully beyond that, these stores could be much more profitable than they were a few years ago, and they were incredibly profitable then.

Hill:Yeah. And that is, in some ways, the promise of this investment, if you're a shareholder or a potential shareholder. Because the headlines have been so bad, and rightly so, for the last couple years. But you go back to 2013 and 2014, and they were putting up these type of same-store sales numbers, not off of a low base, off of a pretty high base. So, when they would come in with double-digit comp increases, that's just breathtaking. So, the idea that they're looking at whatPanerahas been doing and saying, "How can we do that? How can we up the people walking in and picking up their food and walking out? If we can get our throughput even higher, that's great."

Bush:I think the biggest news out of all of this is they're going to start testing two new desserts.

Hill:[laughs] Is that the big news? What are the desserts they're testing?

Bush:They only announced one of them. It's calledbuuelos. It's these fried tortilla strips with honey, cinnamon, and sugar. So, super healthy.

Kretzmann:Fitsright with their healthy ingredients theme.

Hill:I hear that honey is supposed to be healthy,I've heard that from time to time.

Kretzmann:Cinnamon, I think.

Hill:Cinnamon is a spice.

Kretzmann:Sugar ...

Bush:Justignore that it's fried.

Hill:You know,it's dessert, it's not supposed to be healthy if it's dessert.

Aaron Bush owns shares of Chipotle Mexican Grill. Chris Hill owns shares of Chipotle Mexican Grill. David Kretzmann owns shares of Chipotle Mexican Grill and Panera Bread. The Motley Fool owns shares of and recommends Chipotle Mexican Grill. The Motley Fool owns shares of Panera Bread. The Motley Fool has a disclosure policy.