Chipotle Mexican Grill (CMG 0.49%) And Starbucks (SBUX 1.72%) recently saw their shares move in opposite directions. On August 13, Chipotle announced that its CEO, Brian Niccolò — who had led the fast-casual restaurant’s impressive turnaround over the past six years — would be leaving at the end of the month to become the new CEO of Starbucks.

Chipotle shares have since fallen 6%, while Starbucks shares have risen 23%. That move suggests that investors expect Chipotle to struggle without its star CEO, but they also hope he can revive Starbucks’ growth. Should investors follow Starbucks’ lead and sell Chipotle? Or should investors stick with Chipotle and avoid Starbucks’ hype-driven rally?

Image source: Getty Images.

Can Chipotle Continue to Grow Without Niccol?

Chipotle’s comparable restaurant sales declined in 2016 and 2017, a slowdown caused by multiple food poisoning outbreaks, lackluster adoption of its mobile app and stiff competition from other fast-casual chains.

To revitalize its business, Chipotle hired Brian Niccol, the CEO of Yum Brands‘ Taco Bell, as the new leader in 2018. Under Niccol, it launched new options for ready-to-go ordering, expanded its mobile app with more features and analytics tools, and rolled out a rewards program to retain loyal customers.

Niccol also halted Chipotle’s margin-crushing discounts and promotions and reallocated spending to new TV, social media and digital ads to revitalize its brand. The company also repeatedly raised its menu prices to combat inflation.

Those efforts paid off, with comps up 4% in 2018 and remaining positive for the next five years. It expanded its store count from 2,491 in 2018 to 3,437 in 2023, and revenue had a five-year compound annual growth rate (CAGR) of 15%, while earnings per share (EPS) had a CAGR of 47%. As a result, its stock price has increased by more than 220% over the past five years.

Scott Boatwright, the company’s chief operating officer since 2017, will succeed Niccol as interim CEO. The company insists Boatwright will continue to pursue Niccol’s current strategies “without interruption,” but investors will have to watch to see if the company can continue to grow its comps as it opens new stores and expands its operating margins at the restaurant level.

Analysts expect Chipotle’s revenue and profit to grow 15% and 21%, respectively, this year, but the stock is still highly valued at 48 times forward earnings.

Can Niccol Revive Starbucks?

Starbucks shares rose after Niccol’s appointment, but have fallen 2% over the past five years. The chain’s comps fell in fiscal 2020 (which ended September 2020) as the pandemic spread, and rose 20% in fiscal 2021, 8% in fiscal 2022 and 8% in fiscal 2023.

Starbucks’ growth stalled in fiscal 2024. Global comps rose 5% in the first quarter, but fell 4% in the second quarter and were down 5% in the third quarter. During those two quarters, comps fell by low single digits in North America and low double digits in China.

In North America, Starbucks slightly offset the decline in transactions with a small increase in average ticket size. But in China, both total transactions and average ticket size declined. That’s a stark picture, given that the U.S. and China are Starbucks’ two largest markets.

The slowdown can be attributed to the impact of inflation on discretionary spending and the company’s limited pricing power in an increasingly saturated market. There is stiff competition from Dutch Bros in the US, Luckin Coffee in China and other companies — and that pressure is not going to let up anytime soon.

Laxman Narasimhan, who succeeded Howard Schultz as CEO in April, couldn’t fix those problems before he was fired. Starbucks is giving Niccol a massive $113 million pay package to get his company back on track, but it will be an uphill battle.

Starbucks is a much bigger company than Chipotle, and Niccol doesn’t have much experience in China. The digital flywheel has also matured, so Niccol can’t just scale up his digital capabilities like he did with Chipotle.

Analysts expect Starbucks’ revenue and profit to rise 2% and 1%, respectively, in fiscal 2024 as the company struggles to grow in the U.S. and China. At 24 times expected earnings, the stock doesn’t seem cheap given that lackluster growth.

The Better Buy: Chipotle

Chipotle’s stock is more expensive, but it doesn’t face as many existential challenges as Starbucks. The loss of its turnaround CEO is disappointing, but the company is still led by the chief operating officer who spent the last six years executing those turnaround strategies. So if you think Chipotle can maintain its current momentum, it still deserves its premium valuation.

Starbucks is in deeper trouble. Hiring Niccol is a step in the right direction, but there’s no guarantee he can solve the ongoing challenges. For now, I’d stick with Chipotle rather than chase Starbucks’ recent rally.