Can Chipotle Mexican Grill Gain From Sequoia’s Stake In Its Shareholding?
Recently the Sequoia Fund in a letter to its shareholders announced that it had taken stake in Chipotle Mexican Grill (NYSE: CMG) in Q2 2016, itss stock having been depressed by a series of contamination events at its outlets. This investment was based on discussions fund managers had with a number of food safety experts to verify the efficacy of Chipotle management’s new food safety practices in all of its stores. The fund also held conversations with dozens of industry veterans to develop a timeline for Chipotle’s recovery. Sequoia expects Chipotle to suffer through a “slow and bumpy” recovery, but believes that company has an opportunity to more than double its U.S. store base over time. We believe this investment can work in Chipotle’s advantage to rebuild its reputation as it provides an independent positive assessment of the company’s efforts around food safety.
See Our Complete Analysis For Chipotle Mexican Grill
Supports Food Safety Initiatives Which Are Critical To Woo Customers Back
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After the e-coli viral outbreaks in several of its restaurants last year, Chipotle has taken a number of measures to ensure food safety. These initiatives include maintaining better control over the supply of ingredients and hiring industry veterans to manage its food safety program. However, an independent assessment of these initiatives with a positive outlook works as a stamp of approval for these initiatives. Sequoia in its letter to its shareholders mentioned that Chipotle was one of the most successful restaurant concepts of the past thirty years and its high quality food made from fresh ingredients served in a fast casual environment led to its rapid expansion. While these core qualities remain, the pathogen outbreaks impacted the company significantly, which it is now addressing. Sequoia believes in Chipotle’s recovery, albeit slowly and this assessment should have a positive impact on the company.
Chipotle is working on a dual strategy of stringent food safety norms and promotions to attract customers. Our price estimate for the company at $433 is around 5% higher than its current market price. We expect a steady increase in the average number of customer visits per restaurant per year from around 164,000 in 2016 to nearly 185,000 by the end of our forecast period.
A faster pace of increase in the number of consumers visiting the company’s restaurants can lead to an upside in our price estimate.
We believe Chipotle is taking the right initiatives to strengthen its food safety and communicate this effectively to consumers. It is launching several promotions to attract consumers to its restaurants so that they can see these efforts first hand. The company needs to work on gaining its reputation back and the investment by Sequoia provides the much needed stamp of approval. With a strong business model and an innovative concept, Chipotle should be able to bounce back over the long term.
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