Business context and reporting period
Chipotle Mexican Grill, Inc. filed this Form 10-K for the fiscal year ended December 31, 2018. It operated 2,491 restaurants at year-end, primarily in the United States. The filing reports annual results; fourth-quarter figures are noted separately below. Amounts are in U.S. dollars.
Financial performance and liquidity
| Metric | FY 2018 | FY 2017 | Change |
|---|---|---|---|
| Revenue | $4,865.0 million | $4,476.4 million | +8.7% |
| Operating income | $258.4 million | $270.8 million | -4.6% |
| Net income | $176.6 million | $176.3 million | +0.2% |
| Diluted EPS | $6.31 | $6.17 | +2.3% |
| Cash provided by operating activities | $621.6 million | $468.2 million | +32.8% |
| Capital expenditures | $287.4 million | $216.8 million | +32.6% |
- Operating margin was approximately 5.3% versus 6.1% in 2017; net margin was approximately 3.6% in both years.
- Restaurant operating costs were 81.3% of revenue, down 1.8 percentage points, reflecting sales leverage and lower marketing and promotional expense, partly offset by wage inflation.
- Comparable restaurant sales increased 4.0% for the year, compared with 6.4% in 2017. Full-year comparable transactions declined 0.8%; menu price increases contributed 4.0% to comparable sales.
- Average restaurant sales were $2.004 million, up from $1.940 million. Digital orders were 10.9% of revenue for the year, rising from 8.9% in Q1 to 12.9% in Q4.
- Year-end cash and cash equivalents plus current investments totaled approximately $676.8 million. Current assets were $814.8 million and current liabilities $450.0 million.
- The filing reports no off-balance-sheet arrangements and does not identify conventional borrowings as a material funding source. Lease commitments were $3.95 billion; the company expected to recognize approximately $2.7 billion of operating lease liabilities upon adopting the new lease standard on January 1, 2019.
Material changes and unusual items
- Revenue grew through new restaurant openings and comparable sales; however, operating income fell despite higher sales, and net income was essentially unchanged.
- General and administrative expense increased 26.7% to $375.5 million, including restructuring and other unusual costs, higher incentive and retention compensation, and a managers’ conference. Depreciation and amortization rose 23.6% to $202.0 million.
- Impairment, closure costs and asset disposals rose to $66.6 million from $13.3 million in 2017. The company recorded $42.6 million in corporate restructuring costs and approximately $35.8 million in restaurant exit costs during 2018.
- Chipotle closed or relocated 48 restaurants, and closed five Pizzeria Locale restaurants and one TastyMade restaurant. It opened 137 restaurants, versus 183 in 2017.
- The effective tax rate declined to 34.2% from 36.1%, primarily reflecting federal tax credits and tax-law effects, partly offset by equity-award tax impacts.
- The company repurchased $160.9 million of shares during 2018. At year-end, $57.6 million remained under existing authorizations; an additional $100 million authorization was announced in February 2019.
Outlook, risks and contingencies
- Management expected 2019 comparable restaurant sales growth in the mid-single-digit range, 140–155 new restaurant openings, and approximately $300 million in capital expenditures. Most planned capex was for existing restaurants, remodels and equipment; about $130 million was expected for new restaurants before landlord reimbursements.
- Management expected additional 2019 corporate restructuring costs of approximately $5–$15 million and restaurant exit costs of approximately $1–$7 million. It cautioned that realizing the intended benefits of restructuring was uncertain.
- Key risks include further food-safety incidents and damage to brand perceptions; competitive pressure; wage and food-cost inflation; supply constraints for responsibly sourced ingredients; and execution, staffing and cost risks from digital ordering, delivery, restaurant openings and technology upgrades.
- The 2017 payment-card security incident resulted in an accrued liability of $29.3 million at year-end. Related claims and assessments could ultimately be higher or lower; litigation and potential costs beyond insurance remain uncertain.
- The company continued to cooperate with a federal food-safety investigation. It could not reasonably estimate whether fines or penalties would result. Shareholder and other legal proceedings also remain pending, with outcomes or potential liabilities not reasonably estimable for certain cases.
- Management and the auditor reported effective internal control over financial reporting, and the auditor gave an unqualified opinion on the financial statements.
Most important facts for investors to verify
- Whether the mid-single-digit 2019 comparable-sales outlook was achieved, and how much came from transactions versus pricing.
- Whether digital, delivery and catering growth translated into profitable sales after third-party fees and operating costs.
- Actual 2019 restructuring, closure and capital-expenditure costs versus the stated ranges and plans.
- Changes in food-safety-related legal exposure, the federal investigation and the $29.3 million payment-card incident accrual.
- The effect of lease-standard adoption and the company’s substantial lease commitments on reported assets, liabilities and future cash flows.
- Whether operating margins recover amid wage inflation, rising depreciation and ongoing investment in restaurants and technology.