William Ackman's large stake in Chipotle Mexican Grill Inc. adds
pressure to the struggling burrito chain that has faced
longstanding shareholder concerns about the board and executive
pay.
Judging from the stock bounce Wednesday morning, investors
welcome the move by Mr. Ackman, whose Pershing Square Capital
Management LP late Tuesday disclosed a 9.9% stake in the company.
Chipotle shares rose more than 5% in morning trading.
Chipotle is still reeling from a series of food-safety problems
last year, including a case of salmonella in Minnesota, E. coli in
several states, and norovirus in California and Boston. Its
strategy to lure back customers with free burritos and free
children's meals doesn't appear to be working, while its new
loyalty program hasn't kept restaurants full.
"Most of our loyal customers have returned but not at the same
frequency," Chief Financial Officer Jack Hartung told investors in
July, when the chain reported that same-store sales in the quarter
ended June 30 dropped 24%.
Chipotle's shares have fallen more than 40% in the past
year.
Mr. Ackman, who has previously taken stakes in well-known
consumer brands that fall on hard times said in the regulatory
filing Tuesday that he would seek talks with Chipotle about costs
and the board, among other topics, without being more specific.
Chipotle spokesman Chris Arnold said the company had its first
call with Mr. Ackman on Wednesday and that he expects a meeting
with him soon. "We certainly welcome the opportunity to engage in
conversation with Mr. Ackman, just as we do with all of our
investors," Mr. Arnold said.
Mr. Ackman's past involvement in restaurant companies has
revolved around financial and structural changes. He has also
called on other companies to shed noncore brands, which is
something analysts expect him to do at Chipotle, which owns a small
Asian chain called ShopHouse and has announced plans to open an
upscale burger chain.
In 2005, Mr. Ackman called on Wendy's Co. to spin off its Tim
Hortons coffee chain, which the company did the following year.
Also in 2005, he pressured McDonald's Corp. to separate its
company-owned stores from a holding company for real estate and
franchised restaurants. McDonald's franchised more stores and
bought back stock, but didn't sell its real estate.
Pershing Square helped private-equity firm 3G Capital take
Burger King public in 2012. In 2014, Burger King purchased Tim
Hortons with the help of Warren Buffett in a deal that lowered the
burger chain's tax basis.
Analysts and investors also expect Mr. Ackman to push for board
changes, including a possible seat for his firm. Chipotle's board
earlier this year was criticized for its directors' lack of
experience in dealing with the type of crises that can befall
restaurant companies.
Proxy advisory firm Institutional Shareholder Services in April
recommended that shareholders vote against the re-election of two
Chipotle board members, saying the chain's food safety problems
"exposed a flawed board succession process that has not allowed the
directors' skill sets to keep pace with the company's size and
complexity."
The board is made up of nine directors, five of whom have served
for 17 years or more. Three directors are over 70 years old. And it
is chaired by Chipotle founder and co-CEO Steve Ells.
At Chipotle's annual meeting in May, the targeted board members
were all re-elected, but shareholders approved a nonbinding
proxy-access proposal that would give an investor group that has
owned 3% or more of Chipotle's shares outstanding for at least
three years the ability to nominate its own board candidates. That
beat out Chipotle's more restrictive proxy-access proposal.
Mr. Arnold, the Chipotle spokesman, said Wednesday that Chipotle
may make additional changes to its board and that it is in the
process of adopting new proxy access provisions.
In his filing Tuesday, Mr. Ackman praised Chipotle for its
"visionary leadership," but some analysts don't think that means he
wants Mr. Ells to stay.
"No one can disagree that Steve is visionary, but it doesn't
mean he's right for the job going forward," Hedgeye Risk Management
analyst Howard Penney said.
Shareholder groups have been pushing for changes to executive
compensation for two years.
In 2014, 77% of Chipotle shareholders opposed the company's
compensation terms in a nonbinding say-on-pay referendum after CtW
Investment Group, a union-backed pension-fund firm, encouraged
shareholders to vote against a pay package of $49.5 million for its
two CEOs.
Chipotle pledged at the time to review its compensation
programs. Chipotle's compensation committee in March moved to tie
executive compensation more closely to its share performance,
dictating that shares would have to return to above $700 for 30
consecutive days to trigger new stock awards. The company also said
last month that it has begun looking for a new board member.
Total pay for co-chief executives Monty Moran and Mr. Ells last
year fell by more than 50% each to $13.3 million and $13.6 million,
respectively, and they didn't receive bonuses. But the declines in
compensation stem mostly from a lack of option awards in 2015.
Some shareholders don't think the company has gone far
enough.
"It's like a startup board, but the company has matured," said
Dieter Waizenegger, executive director of CtW Investment Group,
which represents pensions that collectively own about 55,000
Chipotle shares. "They should appoint an independent chairman to
the board and break out of their insularity."
Write to Julie Jargon at julie.jargon@wsj.com and David Benoit
at david.benoit@wsj.com
(END) Dow Jones Newswires
September 07, 2016 14:27 ET (18:27 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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