Chipotle Mexican Grill, Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018; comparisons are with the same 2017 periods. Chipotle operated 2,463 restaurants at quarter-end. Amounts below are in millions unless otherwise noted.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $1,225.0 | $1,128.1 | $3,639.9 | $3,366.3 |
| Income from operations | $58.0 | $30.9 | $218.8 | $210.8 |
| Net income | $38.2 | $19.6 | $144.5 | $132.5 |
| Diluted EPS | $1.36 | $0.69 | $5.17 | $4.62 |
Revenue rose 8.6% in Q3 and 8.1% for the nine months. Q3 operating income increased 87.9% and net income increased 94.8%; nine-month operating income rose 3.8% and net income rose 9.1%. Calculated operating margin was approximately 4.7% in Q3 versus 2.7% and 6.0% for the nine months versus 6.3%. The nine-month comparison included substantially higher impairment and closure costs.
- Comparable sales: up 4.4% in Q3 and 3.3% year to date. Average check increased, supported by menu pricing; comparable transactions declined 1.1% in Q3 and 2.1% year to date. Menu price increases contributed 3.8% and 4.3%, respectively.
- Restaurant costs: food, beverage and packaging were 33.4% of Q3 revenue (35.0% prior year) and 32.8% year to date (34.3%). Total restaurant operating costs were 80.7% of nine-month revenue versus 82.4%. Wage inflation pressured labor costs; avocado cost relief and pricing helped food costs.
- Cash flow and investment: nine-month operating cash flow was $492.5, versus $379.3; capital expenditures were $210.0, versus $165.5. Investing cash outflow was $212.2 and financing cash outflow was $121.2, including $116.4 used to acquire treasury stock.
- Liquidity and balance sheet: cash and cash equivalents were $343.0 and investments were $327.8 at September 30; management cited $670.8 of cash and short-term investments. Current assets were $793.1 and current liabilities $402.8. Total liabilities were $795.0 and shareholders’ equity $1,435.8. No debt balance is listed in the presented balance sheet; the company reported no off-balance-sheet arrangements.
Material changes and unusual items
- Impairment, closure costs and asset disposals were $56.6 for the first nine months, versus $10.0 a year earlier, primarily from planned or completed restaurant closures and office closures. Depreciation and amortization increased 22.0% year to date, including accelerated depreciation.
- Corporate restructuring costs were $28.5 year to date. The company expects total restructuring costs of approximately $44–$58 through 2019, plus about $2 of incremental stock-based compensation.
- The company planned to close approximately 55–65 restaurants and expected restaurant exit costs of $37–$43 through 2019, plus $7–$8 of accelerated depreciation. By September 30, it had closed 33 Chipotle and five Pizzeria Locale restaurants under the initiative.
- Q3 general and administrative expenses included restructuring costs, a biennial managers’ conference, higher headcount and initiatives; these were partly offset by comparison with a $30 charge related to the 2017 data-security incident.
- Adoption of the new revenue-recognition standard did not materially affect the financial statements. The company expects the lease standard, effective January 1, 2019, to add material lease assets and liabilities to the balance sheet; it did not expect a material income-statement impact.
Outlook, risks and contingencies
- Management expected full-year 2018 comparable sales growth in the low- to mid-single digits, including menu-price increases; 2018 openings were expected at the lower end of 130–150, with approximately 140–155 openings expected in 2019. Full-year marketing expense was expected to be at or slightly above 3% of revenue, and repair and maintenance costs were expected to remain elevated.
- Digital and other out-of-restaurant orders represented 10.2% of nine-month revenue, up from 8.3% in 2017. Management described continued investment in digital platforms and dedicated make lines.
- Management said cash, investments and operating cash flow should meet foreseeable needs. Key sensitivities include commodity prices, wage inflation, customer response to menu pricing, and the execution and cost of restructuring and restaurant closures.
- The company had accrued $28.7 for anticipated payment-card network claims related to the 2017 security incident; actual liabilities may be higher or lower, and legal costs could exceed insurance limits. Related class actions remained pending, and the company could not reasonably estimate potential liability.
- Federal food-safety criminal-investigation subpoenas remained outstanding; the company said it could not determine whether fines or penalties would result. Shareholder litigation also remained pending. The filing states outcomes and potential liabilities in these matters could not be reasonably estimated.
- The estimated nine-month effective tax rate was 35.8%, affected by the federal rate reduction under the Tax Cuts and Jobs Act, state taxes, nondeductible items and other tax effects.
Important facts for investors to verify
- Whether comparable-sales growth can persist as transactions were lower and pricing supported average check.
- Actual costs, timing and realized benefits of the planned restaurant closures and corporate restructuring.
- Progress on digital sales and restaurant openings, and the related capital and operating costs.
- Potential outcomes and insurance coverage for data-security, food-safety and shareholder matters.
- The eventual balance-sheet effect of lease-standard adoption and the company’s cash needs for leases, capital spending and repurchases.