Chipotle's new CEO says the brand 'has been invisible'

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Chipotle Give Us A Real Credit: Chipotle

Chipotle Mexican Grill, to put it bluntly, "has been invisible."

That's the frank assessment CEO Brian Niccol issued more than once during his first quarterly call at the chain, which he joined in early March after running Taco Bell.

Niccol, who quickly hired his former Taco Bell colleague Chris Brandt as chief marketing officer, is clearly eager to help Chipotle recover. The CEO suggested there are short-term and long-term plans being cooked up to help bring people back to the "Food with Integrity" chain, which has yet to fully bounce back after food safety issues arose in 2015.

"Chipotle is such a strong brand with incredible equity," Niccol said in his opening remarks. Still, he says, Chipotle is "a story of recovery" and it hasn't done a great job of connecting with customers.

Early plans include increasing marketing and promotional spending for the rest of this year after it fell in the first quarter. Chipotle is also working on growing in areas such as delivery, mobile ordering and catering (catering's currently only about 1 percent of sales) to boost loyalty to the chain that lost its way after being a hallmark of the success of the fast-casual industry.

"With the most recent advertising, we made a little pivot towards reminding people what is great about the ingredients," says Niccol. "Reminding people why they feel good about eating Chipotle, I think, is always a good approach."

Ads that are currently running feature close-ups of ingredients, including one spot that focuses on chicken, guacamole and other foods being prepared.

Brandt, "a seasoned veteran" who joined April 2, is "quickly assessing the changes needed across marketing so we can get back to emphasizing the craveability of our food and expanding brand loyalty among consumers," said Niccol. "I'm confident Chris will quickly find ways to increase our brand relevance and ensure our advertising spend is working harder for us."

Marketing and promotional costs were only 1.8 percent of sales in the quarter, a decline from the year-ago period. The company expects marketing and promotional costs of about 3 percent of sales for the year, with spending around 3.5 percent to 4 percent of sales in the current second quarter.

"I believe the brand has been invisible and I think as the brand becomes visible and we lead culture, that's going to be a huge opportunity going forward," Niccol said during a question and answer session. "This brand needs to be leading culture, not reacting to it. And the people that are loyal to this brand, that's what they want to be a part of."

Based on some of Niccol's comments on the call, Chipotle may do more with marketing and innovation to boost sales during different parts of the day, but that approach seems more about hours when it's already open than expanding into a different time of day like breakfast. Chipotle might consider drive-thru locations in the long-term to improve the chain's accessibility. Right now, it's reviewing some locations, less than 100, that have negative cash flow. And he doesn't seem likely to push Chipotle to use a franchise model like the heavily-franchised operation he ran at Taco Bell.

Chipotle's first-quarter same-store sales rose 2.2 percent, topping analysts' estimates of a 1.3 percent increase, according to Consensus Metrix. It was the chain's sixth consecutive quarterly increase and its largest percentage increase since the second quarter of 2017. Chipotle expects same-store sales to rise in a low-single-digit percentage range for 2018 and says results in April have been similar to the first quarter.

The first-quarter sales strength stemmed in part from a 4.9 percent increase in prices over the past year, while the number of transactions in the quarter declined.

Why the price hike? One big reason was the cost of avocados, which jumped and "took a bite out of our margins last year," as Chief Financial Officer Jack Hartung said, noting that nearly 50 percent of transactions include guacamole. Costs are also higher for preservative-free tortillas, Chipotle said.

Chipotle plans to host another call with the investment community to lay out more of its strategy sometime before it reports second-quarter results. Investors were pleased with the results, sending the company's shares up 10 percent in after-hours trading on Wednesday.

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