Chipotle Mexican Grill, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Unless noted, amounts below are in millions of dollars. Chipotle operated 2,505 U.S. and 39 international restaurants, plus two Pizzeria Locale restaurants, and reported one operating segment.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $1,403.7 | $1,225.0 | $4,146.1 | $3,639.9 |
| Income from operations | $115.6 | $58.0 | $345.8 | $218.8 |
| Net income | $98.6 | $38.2 | $277.7 | $144.5 |
| Diluted EPS | $3.47 | $1.36 | $9.83 | $5.17 |
| Operating margin | 8.2% | 4.7% | 8.3% | 6.0% |
- Revenue grew 14.6% in Q3 and 13.9% year to date. Comparable restaurant sales increased 11.0% in Q3 and 10.3% year to date. Q3 comparable sales reflected transactions up 7.4% and average check up 3.5%; nine-month figures were up 6.7% and 3.8%, respectively.
- For the first nine months, restaurant operating costs were 79.1% of revenue, down from 80.7%. Food, beverage and packaging costs were 33.1% of revenue versus 32.8%; labor was 26.3% versus 27.3%; occupancy was 6.5% versus 7.1%; and other operating costs were 13.2% versus 13.5%. Sales leverage helped, while ingredient cost inflation pressured food costs.
- Q3 effective tax rate was 17.9%, compared with 36.8%; the nine-month rate was 22.3%, compared with 35.8%. The company attributed the declines mainly to stock-based compensation tax benefits and other tax items, including a prior-year tax-reform expense.
Cash, liquidity and obligations
- Cash and cash equivalents were $386.6 million and short-term investments were $428.8 million at September 30, 2019; management cited combined cash and short-term investments of $815.4 million. Operating cash flow for the first nine months was $535.0 million, versus $492.5 million a year earlier.
- Capital spending on property and equipment was $238.0 million, implying operating cash flow less this spending of approximately $297.1 million. Treasury-stock repurchases used $151.6 million; $107.7 million remained authorized.
- The company reported no outstanding debt or committed credit facilities. Adoption of lease accounting in 2019 added $2.81 billion of operating lease liabilities and $2.48 billion of lease assets at September 30. The 2018 comparison was not restated, limiting balance-sheet comparability. Lease liabilities had a 13.5-year weighted-average remaining term and a 5.24% weighted-average discount rate.
- Total current assets were $954.8 million and current liabilities $634.0 million. Management said cash, investments and operating cash flow should meet foreseeable capital and working-capital needs.
Material changes, outlook and notable items
- Management expected full-year 2019 comparable sales growth in the high single digits. It expected 2019 restaurant openings at or slightly below the low end of its 140–155 range, as Chipotlane site construction could shift some openings into early 2020. The company opened 60 restaurants and closed four in the first nine months.
- Out-of-restaurant orders reached 17.5% of revenue for the first nine months, up from 10.2% in 2018. Management continued investing in digital ordering and dedicated digital make lines.
- Management estimated total corporate restructuring costs of approximately $55–$60 million; $54.7 million had been recognized since the initiative began, including $12.1 million in the first nine months of 2019. Planned restaurant exits were expected to total $37–$43 million, with $36.5 million incurred to date.
- General and administrative expense rose 24.8% year to date, including a $30.8 million increase in estimated legal loss contingencies, higher compensation and stock-based compensation. Impairment, closure and disposal costs declined to $17.4 million from $56.6 million, largely reflecting higher prior-year restaurant and office closure charges.
- The 2017 payment-card data incident settlement received preliminary court approval; a $21.4 million accrual was recorded, and the company did not expect the settlement to exceed insurance coverage or have a material financial impact, though claims could exceed estimates or coverage. A federal grand jury investigation into food-safety matters remained ongoing; the company had cooperated and noted possible further subpoenas. A shareholder class-action dismissal was on appeal, and its outcome or potential liability could not be reasonably estimated.
- Risks discussed include ingredient and commodity price volatility, customer resistance to menu-price increases, interest-rate exposure on investments, and seasonality. The company stated there were no material changes to the risk factors in its 2018 Form 10-K.
Important facts for investors to verify
- Whether comparable-sales momentum and management’s high-single-digit full-year outlook persisted after the reporting date.
- How ingredient inflation, wage pressure and delivery costs affect restaurant margins as sales growth evolves.
- The timing and financial impact of delayed restaurant openings, Chipotlane investment and planned closures.
- Whether legal and food-safety contingencies, including the data-security settlement and government investigation, remain within accrued amounts and insurance coverage.
- The impact of lease obligations and ongoing share repurchases on future cash needs and capital allocation.