Chipotle Mexican Grill, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; comparisons are with Q1 2015 unless noted. Amounts below are in U.S. dollars; financial statement amounts are in millions unless otherwise stated.
Business context
Chipotle operated 2,066 restaurants at quarter-end, including 2,023 U.S. Chipotle restaurants, international Chipotle locations, 14 ShopHouse restaurants, and four Pizzeria Locale restaurants through a consolidated entity. The company reported one operating segment. Management said food-borne illness incidents and unfavorable publicity beginning in late 2015 severely affected sales and profitability.
Financial performance
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Revenue | $834.5 million | $1,089.0 million |
| Comparable restaurant sales | Down 29.7% | Up 10.4% |
| Operating income (loss) | $(46.6) million | $197.8 million |
| Net income (loss) | $(26.4) million | $122.6 million |
| Diluted EPS | $(0.88) | $3.88 |
| Operating cash flow | $61.7 million | $242.7 million |
| Capital expenditures | $62.9 million | $59.4 million |
Revenue fell 23.4%, with the comparable-sales decline partly offset by new restaurants. Average restaurant sales were $2.230 million, down 11.4%; management noted this trailing-12-month measure still included roughly seven months before the illness-related sales impact. The comparable-sales decline reflected fewer transactions primarily, and lower average check to a lesser extent.
Margins deteriorated sharply as sales fell against restaurant costs that did not decline proportionately: food, beverage and packaging costs were 35.3% of revenue versus 33.9%; labor 30.9% versus 22.4%; occupancy 8.5% versus 5.8%; other operating costs 18.6% versus 10.4%; and general and administrative costs 7.4% versus 5.8%. Operating margin was approximately negative 5.6%, versus positive 18.2% a year earlier. Net margin was approximately negative 3.2%, versus positive 11.3%.
Cash and cash equivalents were $250.8 million at March 31, 2016, and investments were $455.7 million, primarily U.S. Treasury notes; together these totaled about $706.5 million. Current liabilities were $272.0 million and total liabilities were $600.6 million. The filing reports no debt balance. Operating cash flow was positive but substantially below the prior-year quarter. Investing cash flow was $522.7 million, largely reflecting $540.6 million of investment-sale proceeds. Financing cash outflow was $583.1 million, primarily due to share repurchases. The company stated cash, investments, and operating cash flow should meet foreseeable needs.
The company repurchased 1.243 million shares during the quarter for approximately $576.6 million, at a reported average price of $463.88 per share. About $139.8 million remained authorized for repurchases at quarter-end. Current assets declined from $814.6 million at December 31, 2015, mainly as current investments were sold or reclassified; total assets declined from $2.725 billion to $2.141 billion, while treasury stock increased.
Outlook, risks, and unusual items
- Management could not estimate future comparable-sales changes because of uncertainty related to the food-borne illness incidents.
- Management expected food, beverage, and packaging costs to remain consistent as a percentage of revenue with Q1 2016. It expected other restaurant-level operating costs as a percentage of revenue to be higher for full-year 2016 than in 2015, but below Q1 levels.
- Management forecast 220–235 new restaurant openings in 2016, including a small number of international, ShopHouse, and Pizzeria Locale locations, and approximately $300 million of full-year general and administrative expense. It estimated a 38.4% full-year effective tax rate, compared with 38.2% in 2015.
- The quarter included $18.0 million of income tax benefit on the pretax loss. A cumulative $6.0 million reduction in estimated stock-based compensation expense ($3.7 million after tax, or $0.12 per share) resulted from revising expected vesting of performance-based awards.
- A federal grand jury investigation, involving the U.S. Attorney’s Office and FDA criminal investigators, expanded to company-wide food-safety matters dating back to January 1, 2013. The company said it would cooperate; potential fines or penalties could not be estimated.
- The company disclosed a shareholder class action alleging misleading statements about food-safety controls, several derivative actions alleging fiduciary-duty breaches, and continuing government civil and criminal investigations concerning employee work-authorization compliance and related disclosures. Outcomes and potential liabilities were not reasonably estimable. The company said it intended to defend the actions vigorously.
- Commodity prices, supplier availability, weather, seasonality, and interest rates may affect results. Management cited continued marketing and food-safety spending as part of efforts to regain customers. No material risk-factor changes from the 2015 Form 10-K were reported.
Important facts for investors to verify
- Whether comparable sales and customer transactions recover, and how food-safety publicity affects demand.
- Whether restaurant-level costs, promotional spending, and margins track management’s expectations.
- The scope, duration, and financial consequences, if any, of the food-safety and employment-verification investigations and shareholder litigation.
- Cash generation and liquidity after substantial repurchases, planned restaurant openings, and ongoing capital expenditures.
- The effect of the stock-compensation estimate change and other tax adjustments on reported earnings and future comparisons.