Chipotle Mexican Grill, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. All figures are unaudited. Chipotle operated 2,710 restaurants at quarter-end, including 2,666 Chipotle restaurants in the U.S., 40 internationally, and four Pizzeria Locale restaurants. The company reports one operating segment.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $1.601 billion | $1.404 billion | $4.377 billion | $4.146 billion |
| Operating income | $107.1 million | $115.6 million | $173.3 million | $345.8 million |
| Net income | $80.2 million | $98.6 million | $164.8 million | $277.7 million |
| Diluted EPS | $2.82 | $3.47 | $5.81 | $9.83 |
| Operating cash flow | Not separately provided | Not separately provided | $548.7 million | $535.0 million |
| Capital expenditures | Not separately provided | Not separately provided | $246.8 million | $238.0 million |
Q3 revenue increased 14.1% year over year; comparable restaurant sales rose 8.3%. Digital sales grew 202.5% to $776.4 million, or 48.8% of sales. Delivery service revenue was $20.1 million, up 215.5%. Q3 food and beverage revenue was $1.581 billion, up 13.2%.
Profitability weakened despite higher sales: Q3 operating income declined 7.4% and net income declined 18.6%. Restaurant operating costs rose to 80.5% of revenue from 79.2%. Food, beverage and packaging costs were 32.3% of revenue (32.3% is the reported value; prior year was 33.2%); labor was 25.3% versus 26.6%; occupancy was 6.1% versus 6.5%; and other operating costs increased to 16.8% from 12.8%, primarily reflecting delivery expense and promotion timing. The filing reports Q3 effective tax rates of 24.7% versus 17.9%; the nine-month rates were 6.4% versus 22.3%.
At September 30, cash and cash equivalents were $662.4 million, current investments $342.8 million and long-term investments $61.5 million. Management described cash and marketable investments as $1.1 billion, excluding $27.6 million of restricted cash. The company had no borrowings on its $600 million revolving facility, which expires May 7, 2021. Operating lease liabilities totaled approximately $3.09 billion. Total liabilities were $3.83 billion and shareholders’ equity was $1.81 billion.
Changes and notable items
- Nine-month revenue increased 5.6%, but operating income fell 49.9% and net income fell 40.7% year over year. Comparable sales increased only 0.5% for the nine-month period; growth was primarily from restaurants outside the comparable base.
- COVID-19 disrupted dine-in operations and increased delivery-related costs. By September 30, most dining rooms had reopened with restrictions; about 10 restaurants remained temporarily closed. Management cited elevated beef prices, a greater mix of steak, fewer high-margin beverage sales and employee support costs as pressures, partly offset by menu pricing, lower avocado costs, sales leverage and improved labor efficiency.
- Q3 included 43 Chipotle openings and one Pizzeria Locale opening, and three permanent Chipotle closures. Twenty-six of the new restaurants had Chipotlanes. For the first nine months, Chipotle opened 99 restaurants and permanently closed eight.
- Q3 diluted EPS included a $0.94 after-tax impact from legal proceedings, restaurant impairment and closure costs, corporate restructuring and other adjustments. The filing does not provide a complete component-by-component reconciliation in the supplied text.
- Impairment, closure and asset disposal costs were $8.0 million in Q3 and $22.7 million for the nine months; management attributed the increase in part to COVID-related deterioration in near-term restaurant cash-flow assumptions.
Outlook, risks and contingencies
Management said cash from operations and existing cash and investments should fund operating needs and planned capital spending for the foreseeable future. If comparable-sales improvement continued, it expected the possibility of positive cash flow through the end of 2020; this was conditional, not a formal earnings forecast. The company remained confident it could more than double its U.S. restaurant count over the long term. A specific new-restaurant opening target for the next year is not clearly stated in the supplied filing text.
Management warned that COVID-19 could continue to affect sales, operations, supply chains and liquidity. It had suspended share repurchases and did not expect to resume them until the economic environment stabilized. The credit facility has leverage, fixed-charge coverage and investment/capital-expenditure covenants. Commodity prices, supplier availability, litigation, seasonal sales patterns and execution of the new ERP system are additional considerations. Management reported disclosure controls were effective as of quarter-end and noted ERP implementation during Q3.
The DOJ deferred-prosecution agreement requires a $25 million fine, paid in full during 2020, and continued food-safety compliance measures. Accrued liabilities included $46.0 million for estimated liabilities, of which $30.8 million was accrued in Q3, primarily for ordinary-course legal proceedings. A shareholder class action was dismissed and an en banc rehearing request was denied in October 2020. The company said other claims were not expected to materially affect its financial position, while acknowledging that adverse outcomes could do so.
Important facts for investors to verify
- Whether comparable-sales gains and digital demand persist as dining-room restrictions and customer behavior change.
- Whether delivery growth can be sustained without further pressure on restaurant-level margins and operating costs.
- The nature, timing and ultimate cost of legal matters underlying the $46.0 million accrued liability.
- COVID-19 exposure to sales, food and packaging costs, staffing, suppliers and restaurant impairment assumptions.
- Liquidity and covenant headroom under the revolving facility, and the company’s plans for capital spending and any resumption of buybacks.
- Successful operation of the newly implemented ERP system and the scale of lease obligations relative to cash generation.