As we’ve seen with Olive Garden, where activist investors mocked the menu and accused staff of wasting breadsticks before claiming seats on the board, a brash stakeholder with big ideas can bring about change in a slumping company. Could a similarly vocal new investor in Chipotle provide the jolt the burrito chain needs to get over the sagging sales that followed a rash of food-borne illnesses?
It’s certainly a possibility now that activist investor Bill Ackman’s Pershing Square Capital Management has taken a 9.9% stake in the fast-casual restaurant, the Wall Street Journal reports.
Pershing Square’s new investment, worth about $1.2 billion, now makes it the second biggest holder of Chipotle shares.
In a filing disclosing the investment, Pershing says that it believes Chipotle “has a strong brand, differentiated offering, enormous growth opportunity, and visionary leadership.”
For now, the vague plan is for Pershing to work with Chipotle on its board, costs, and strategic plans.
Research analysts at Morgan Stanley tell Reuters that while the road to recovery might be long for Chipotle, Pershing Square Capital’s investment could get the ball moving more quickly.
“We see no quick fix to what [Chipotle] really needs, a revitalization of top line,” the analysts say. “But the presence of a large and vocal investor may provide management with more incentive to hasten their turnaround efforts, which appear to have stalled.”
However, some question whether Chipotle is suited to Ackman’s particular brand of activism.
“It’s a trendy company that investors like to short, and Ackman appears to be trying to come to its rescue,” notes Bloomberg Gadfly’s Shelly Banjo and Tara Lachapelle. “We’ve seen Ackman try this role at J.C. Penney and Target, only to find that fixing consumer companies is harder than it looks.”
They argue that, unlike some of Ackman’s previous big successes, there is not necessarily a clear path to a reinvigorated Chipotle.
Chipotle has spent the better part of 2016 trying to dig its way out of a food-borne illness and safety hole and attempting to bring in customers by giving away free food — to kids, college students, and others — launching limited-time promotions, and a temporary loyalty program.
Those measures don’t seem to be helping the company rebound. A survey recently found that 25% of former customers have stopped going to the restaurant or have been stopping by less frequently.
Despite the hefty investment from Pershing Square, some analysts don’t see Chipotle’s recovering anytime soon. In fact, Howard Penney of Hedgeye Risk Management tells the WSJ that he believes Chipotle shares would call a total of 50% soon — it’s already called 42% in the last 12 months.
“Management doesn’t know what they’re doing” he said. “The only thing they know how to do is give food away.”
Still, the WSJ notes that Ackman is well-known for propping up once popular that have fallen on hard times. Previous investment shave included Proctor & Gamble, McDonald’s, and Burger King.
Morgan Stanley analysts see no quick fix at Chipotle, say Ackman may help [Reuters]
Pershing Square Reveals 9.9% Stake in Chipotle [The Wall Street Journal]
by Ashlee Kieler via Consumerist