A new complaint was filed against Chipotle Mexican Grill, Inc. (CMG) by shareholder (plaintiff) Michael Stradford on November 11, 2024, in the U.S. District Court for the Central District of California. The defendants in the complaint are the company, former CEO Brian Niccol, and President and Chief Strategy Officer John R. (Jack) Hartung, who was also CMG’s former CFO. To learn more about the lawsuit, click here.
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The plaintiff alleges that he bought CMG stock at artificially inflated prices between February 8, 2024, and October 29, 2024 (the “Class Period”) and is now seeking compensation for his financial losses.
Plaintiff’s Allegations
According to the complaint, Chipotle intentionally misrepresented information in its financial statements submitted to the U.S. Securities and Exchange Commission (SEC). In particular, the defendants wilfully misled investors about the consistency of portion sizes being offered to customers worldwide.
For instance, in the annual report for Fiscal 2023 on February 8, 2024, the defendants failed to disclose the competitive risks and the brand’s competitive challenges. Notably, the plaintiff complains that CMG offers inconsistent and sometimes meager portion sizes at different outlets, leading to an undisclosed competitive risk for the brand.
The plaintiff alleges that the defendants failed to exercise proper oversight and control over the preparation and submission of the annual report, allowing the 10K to be filed without appropriate risk disclosures.
Chipotle Mexican Grill’s Misrepresentations
In contrast to the claims made by Chipotle and the defendants, customers started complaining about the varying and small portion sizes of CMG’s offerings. Importantly, several media outlets published stories about CMG’s inconsistent portion sizes between May 29, 2024 and July 4, 2024. Interestingly, a report from Fox Business published on July 4, 2024, disclosed a high portion of inconsistency across CMG’s outlets. Some locations gave twice as much of the portion offered as others. In response, Chipotle denied all the allegations.
Despite the denials, Chipotle decided to take action in July, announcing elevated efforts to maintain portion consistency across the locations.
The truth became crystal clear when the company’s cost of sales started inflating owing to the efforts to maintain consistency portions. In the Q3 FY24 earnings call held on October 29, CMG reported mixed results, with earnings beating estimates but sales missing expectations. The CEO noted that the cost of scales had escalated, negatively impacting its profits. The company’s efforts to ensure consistent offerings led to higher costs. CMG shares fell 7.9% on the news.
To conclude, the defendants allegedly misled investors about the competitive risks involved with the inconsistent portion offerings, inducing them to buy the stock. Despite these unfavorable developments, CMG stock has gained 35.6% so far this year.
