Chipotle Mexican Grill, Inc. — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. This annual filing also reports fourth-quarter results. Chipotle operates company-owned fast-casual restaurants and reports one operating segment. It ended the year with 2,764 Chipotle restaurants and four non-Chipotle restaurants.
Financial performance and liquidity
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Total revenue | $5.985 billion | $5.586 billion | +7.1% |
| Comparable restaurant sales | +1.8% | +11.1% | Slowed |
| Income from operations | $290.2 million | $444.0 million | -34.6% |
| Net income | $355.8 million | $350.2 million | +1.6% |
| Diluted EPS | $12.52 | $12.38 | +1.1% |
| Cash from operating activities | $663.8 million | $721.6 million | -8.0% |
| Capital expenditures | $373.4 million | $333.9 million | +$39.4 million |
Operating margin fell to about 4.8% from 8.0%; net margin was about 5.9% versus 6.3%. Operating cash flow less capital expenditures was approximately $290.5 million, down from $387.7 million. The 2020 effective tax rate was negative 21.1%, reflecting a $62.0 million income tax benefit, including a $110.8 million benefit associated with carrying back an estimated federal tax loss. Without this unusual tax benefit, net income would have been materially lower; management reports diluted EPS also included a $3.79 tax benefit and a $2.00 after-tax impact from legal, restructuring, restaurant closure and certain other costs.
At year-end, cash and cash equivalents were $608.0 million, current investments $343.6 million and long-term investments $102.3 million; management described cash and marketable investments as approximately $1.1 billion, excluding restricted cash. The company had no borrowings under its $600 million revolving credit facility, which was due to expire in May 2021. It reported no outstanding debt, but had substantial lease obligations: $3.16 billion in present-value operating lease liabilities. Current assets were $1.42 billion and current liabilities $822.2 million.
Material changes and operating trends
- Digital sales grew 174.1% and accounted for 46.2% of 2020 sales, versus 10.9% in 2019, as customers shifted to delivery and pickup during the pandemic.
- Restaurant operating costs rose to 82.6% of revenue from 79.5%. Higher delivery expenses, COVID-related employee assistance and leave costs, elevated beef prices, a greater mix of steak and fewer high-margin beverage sales contributed. Menu price increases, lower avocado costs and digital-related labor efficiencies partly offset the pressure.
- Food, beverage and packaging costs declined to 32.3% of revenue from 33.1%; labor costs increased to 26.6% from 26.4%; other operating costs rose to 17.2% from 13.6%.
- Chipotle opened 161 restaurants, including 100 with a Chipotlane, and permanently closed nine Chipotle restaurants. Average restaurant sales were $2.223 million, compared with $2.205 million.
- Fourth-quarter revenue was $1.608 billion, operating income $116.9 million and net income $191.0 million. Fourth-quarter diluted EPS was $6.69.
Outlook, risks and unusual items
- Management expected approximately 200 new restaurant openings in 2021 and about $390 million of capital expenditures, including approximately $220 million for new restaurants and $120 million for existing restaurants. New-store development costs were expected to remain elevated, in part because of Chipotlanes.
- Management said cash, investments and operating cash flow were expected to cover foreseeable needs, assuming no significant comparable-sales declines. It did not provide specific 2021 revenue or earnings guidance.
- COVID-19 restrictions, customer traffic, staffing, supplier continuity and additional health and safety costs remained uncertain. Management noted that the pandemic could continue to affect results and that the duration and recovery path could not be predicted.
- In April 2020, Chipotle agreed to a three-year Deferred Prosecution Agreement concerning historical food-safety matters. It paid a $25 million fine and must maintain and enhance its food-safety compliance program; noncompliance could lead to prosecution or civil action.
- The company disclosed a $53.2 million accrued legal liability. It also faces ordinary-course employment, personal injury, lease and other claims; management said their ultimate outcomes were not predictable, while not expecting the other claims to materially harm the company overall.
- Key risks include food safety and reputational damage, delivery platform dependence and costs, labor availability and wage inflation, food and supply price volatility, cyber and privacy incidents, and the ability to sustain growth and secure suitable sites. Several ingredients are sourced from a limited number of suppliers.
- Share repurchases were suspended in March 2020. Management said purchases might resume in the first or second quarter of 2021 if business improved and the economy stabilized. No cash dividends were anticipated in the foreseeable future.
Most important facts for investors to verify
- How much of 2020 net income and EPS depended on the tax benefit, and whether operating profitability recovers as pandemic-related costs and sales mix change.
- Whether digital growth can remain profitable given delivery costs, third-party platform dependence and customer experience risks.
- Whether comparable sales, staffing and restaurant operations recover, and whether the 2021 opening and capital-spending plans are achieved.
- Progress and compliance under the Deferred Prosecution Agreement, along with developments in the accrued legal matters.
- The terms and renewal status of the $600 million revolving facility, and the company’s ability to meet long-term lease obligations while funding planned investment.