(Reuters) - Chipotle Mexican Grill Inc CMG.N is searching for a turnaround expert to replace founder and Chief Executive Steve Ells, who said on Wednesday he would step aside after failing for two years to rescue the burrito chain's sales and reputation from a string of food safety lapses.
Investors welcomed the move, sending Chipotle shares up more than 5 percent to $301.99. The stock is still down more than 20 percent this year and has tumbled from a high of $742 in 2015, when sales-crushing E.coli, salmonella and norovirus outbreaks sickened hundreds of U.S. customers.
In response, Chipotle shook up its board, revamped food safety and gave away millions of dollars in free food with little effect. A new norovirus outbreak and lackluster launch of ‘queso’ dip earlier this year only amplified concerns about Ells’ leadership.
Hedge fund manager William Ackman, whose Pershing Square Capital Management LP is Chipotle’s largest investor with a 10 percent stake, soured on Ells, failing to mention him at all in a recent investor letter that complimented other Chipotle top executives after praising him only months before.
Ackman told Reuters on Wednesday he supported Ells’ decision to go and was “as excited as ever about the future of the company.”
Chipotle said on Wednesday it hired executive recruitment firm Spencer Stuart to find a “new leader with demonstrated turnaround expertise” to replace Ells, who will stay on as executive chairman once a new CEO is found.
“Bringing in a new CEO is the right thing to do for all our stakeholders,” Ells said in a statement. “Simply put, we need to execute better to ensure our future success.”
Ells, who spent most of his time in Manhattan rather than Chipotle’s Denver headquarters, shared the blame for Chipotle’s problems with former co-CEO Monty Moran. But when Moran left under pressure in December, it made Ells the sole target of investors’ unhappiness.
Ackman, an activist investor who makes a living by pushing companies to perform better, has a reputation for firing chief executives. He never made a public move against Ells, but people familiar with the matter said Ackman was closely involved in Ells’ decision to step aside.
“It seems extremely likely (Pershing Square) played an important role in convincing Ells to step down,” said Rich Clayton, research director at CtW Investment Group, an investor in Chipotle that has sparred with the company over lavish executive pay and lax corporate governance.
Fixing Chipotle has special urgency for 51-year-old Ackman as he seeks to climb back from two years of double-digit losses sustained largely on a disastrous 2015 bet on Valeant Pharmaceuticals VRX.TO.
Chipotle was one of Pershing Square’s three biggest losers in the first 10 months of 2017, costing one of the hedge fund firm’s portfolios 3.2 percent in returns, Ackman told investors.
CEDING THE HELM As results failed to improve this year, Chipotle beefed up its ranks with executives from fast-food chains.
In May, it hired Scott Boatwright from Arby's to be its first chief restaurant officer. It added former Yum Brands Inc YUM.N executive Laurie Schalow as its first chief communications officer in August.
Chipotle director Ali Namvar, a partner at Pershing Square, joins fellow board members Robin Hickenlooper and Ells himself in overseeing the search for Chipotle’s new CEO.
Board member Matthew Paull, a former McDonald's Corp MCD.N chief financial officer who is also a Pershing Square advisory director, could be a contender, according to CtW's Clayton.
McDonald's has a deep talent bench and Chipotle could use its Paull connection for recruitment there, said Sanford Bernstein analyst Sara Senatore, who added that executives with experience at Starbucks Corp SBUX.O could also fit in well.
A typical CEO search takes three to six months, according to Court Williams, CEO of HVS Executive Search. Chipotle might benefit from looking in the hospitality and retail industries for “fresh eyes and an unbiased perspective,” he said.
Additional reporting by Sruthi Ramakrishnan and Siddharth Cavale in Bengaluru; Editing by Peter Henderson and Meredith Mazzilli
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