Shares in Chipotle Mexican Grill rallied after founder Steve Ells agreed to step down as CEO, clearing the way for a new leader with the operational expertise that the burrito chain says will help pull it out of a two-year slump.
Ells, a trained chef who started the company in 1993, will hand over the reins once a new CEO is found, Chipotle said Wednesday. He will continue as head of the board, taking the title of executive chairman.
Chipotle has struggled to bounce back from an E. coli crisis in 2015 that sickened customers around the U.S. While the company had begun to restore its reputation in the past year, a norovirus incident in Virginia and a viral video of mice at a Dallas location sparked a fresh round of negative headlines.
"It is clear that we need to move faster to make improvements," Ells said in a statement. "Simply put, we need to execute better to ensure our future success."
Investors applauded the move. The stock jumped as much as 5.4 percent to $301.32 on Wednesday, marking the biggest intraday gain since April. It had been down 24 percent this year through Tuesday's close.
Ells had to navigate a minefield of problems over the past two years, beginning with a string of foodborne-illness outbreaks. Norovirus, E. coli and salmonella contaminations sickened about 500 diners between July and December of 2015. Last year, one of the company's top four executives was arrested on cocaine charges. Mark Crumpacker, who led marketing efforts since 2009, returned to work in September 2016 after completing a rehabilitation program.
The Denver-based company also lacked an operations expert during a time when its food-safety protocols were under fire. Ells previously had a co-CEO, Monty Moran, who was more focused on day-to-day operations. But Moran left that role in December 2016, leaving Ells in sole control.
"It's been mismanaged for two years," says Michael Halen, an analyst at Bloomberg Intelligence. "They need someone who can turn around horrible sales and operations."
Chipotle's board has formed a search committee that includes Robin Hickenlooper and Ali Namvar, two directors who were added in an overhaul last year backed by investor Bill Ackman. Ells, 52, also will serve on the committee, which he said would seek an experienced leader who can improve "customer experience, operations, marketing, technology, food safety and training."
Also: A data breach and hurricanes
"Bringing in a new CEO is the right thing to do for all our stakeholders," he said. "It will allow me to focus on my strengths, which include bringing innovation to the way we source and prepare our food."
Ells has been knocked for lacking the operational chops needed to handle a large restaurant chain. Chipotle also suffered a data breach earlier this year, an incident that hurt its earnings and contributed to another stock slump. This year's hurricanes hammered Chipotle as well. It had 425 restaurants in the direct path of the storms.
Ackman, a billionaire hedge-fund manager, is Chipotle's biggest investor. His firm, Pershing Square Capital Management, took a 10 percent stake in the restaurant chain last year. He described the company then as an undervalued business with a "strong brand, differentiated offering, enormous growth opportunity and visionary leadership."
Pershing Square said on Wednesday that it fully supported Ells's decision to step aside. "We remain excited as ever about the future of the company," the firm said in an email.
Even though investors seem happy with the decision, the uncertainty of a CEO transition could bring additional pressure, said William Blair & Co. analyst Sharon Zackfia. She cut her rating to neutral, down from the equivalent of a buy.
Chipotle director Neil Flanzraich said on Wednesday that Ells's vision was key to creating and expanding the chain, which helped pioneer the use of fresher ingredients and more menu transparency. But the company now has more than 2,350 restaurants—and difficult problems.
The executive-recruitment firm Spencer Stuart will assist with the search for a new leader.
"Now is the right time to identify a new CEO who can reinvigorate the brand and help the company achieve its potential," Flanzraich says. "We are committed to recruiting a world-class CEO for this incredible opportunity."
-- Bloomberg News