Chipotle Mexican Grill, Inc. — 2014 Form 10-K
Business context and reporting period. Fiscal year ended December 31, 2014; the filing also provides unaudited fourth-quarter results. Chipotle operated 1,783 restaurants across its Chipotle, ShopHouse and Pizzeria Locale concepts. The company reports one operating segment.
Financial performance and position
| Metric | FY 2014 | FY 2013 | Change |
|---|---|---|---|
| Revenue | $4,108.3 million | $3,214.6 million | +27.8% |
| Operating income | $710.8 million | $532.7 million | +33.4% |
| Net income | $445.4 million | $327.4 million | +36.0% |
| Diluted EPS | $14.13 | $10.47 | +34.9% |
| Operating margin | 17.3% | 16.6% | +0.7 percentage points |
| Net margin | 10.8% | 10.2% | +0.7 percentage points |
| Comparable restaurant sales | +16.8% | +5.6% | Accelerated |
- Revenue growth reflected 192 restaurant openings and 16.8% comparable-sales growth, driven mainly by more customer visits; menu price increases contributed 3.8 percentage points to comparable-sales growth. Average restaurant sales rose 14.0% to $2.472 million.
- Food, beverage and packaging costs increased to 34.6% of revenue from 33.4%, primarily because of beef, avocado and dairy inflation. Labor costs improved to 22.0% from 23.0%; occupancy costs to 5.6% from 6.2%.
- Operating cash flow was $682.1 million, up from $528.8 million. Capital expenditures were $252.6 million, including approximately $24 million for a corporate aircraft; cash flow after capital expenditures was approximately $429.5 million.
- Cash and cash equivalents were $419.5 million; current investments were $338.6 million and long-term investments $496.1 million. Management reported $758.1 million in cash and short-term investments and said available cash, investments and operating cash flow should meet foreseeable needs.
- Current assets were $878.5 million versus current liabilities of $245.7 million. Total liabilities were $533.9 million and shareholders’ equity was $2,012.4 million. The filing reports no off-balance-sheet arrangements and no conventional borrowing debt; substantial operating-lease commitments remain.
- Operating lease commitments totaled $3,044.2 million, including $206.4 million due within one year. The company paid $88.0 million for share repurchases in 2014 and had $102.2 million remaining under authorizations at year-end; it announced an additional $100 million authorization in February 2015. It does not expect to pay cash dividends in the foreseeable future.
Fourth-quarter snapshot
For the quarter ended December 31, 2014, revenue was $1,069.8 million, operating income $187.9 million and net income $121.2 million, versus $844.1 million, $129.1 million and $79.6 million, respectively, in fourth-quarter 2013. Comparable restaurant sales increased 16.1%, compared with 9.3% a year earlier.
Material changes, outlook and commentary
- Management expected 2015 comparable restaurant sales growth in the low- to mid-single-digit range, as comparisons become more difficult, especially in the final three quarters.
- Chipotle planned to open 190–205 restaurants in 2015. Planned capital expenditures were approximately $235 million, including about $180 million for new restaurant construction before landlord reimbursements.
- Management expected 2015 food costs as a percentage of revenue to be similar to 2014 or rise slightly, with beef-cost pressure partly offset by dairy-cost relief. Labor costs were expected to rise slightly as a percentage of revenue, partly due to healthcare-law and minimum-wage costs. Marketing spend as a share of revenue was expected to remain similar or increase slightly. The projected 2015 effective tax rate was 39.0%.
- In January 2015, Chipotle suspended purchases from a pork supplier that failed its animal-housing standards. The company said it could not supply compliant pork to all locations and expected carnitas to be unavailable in about one-third of U.S. restaurants until alternative supply was secured. It also expected some restaurants to serve conventionally raised beef in 2015 because of supply constraints.
- Food-supply and commodity inflation, labor availability and costs, restaurant-opening execution, competition, seasonality, food safety, and customer response to prices are significant operating risks. The company also disclosed ongoing civil and criminal government investigations concerning employee work-authorization compliance and related disclosures; potential fines or other liabilities could not be estimated.
- The company’s reported results include higher stock-based compensation and costs for its biennial managers’ conference. Its financial statements received an unqualified audit opinion, and management and the auditor reported effective internal control over financial reporting.
Important facts for investors to verify
- Whether comparable-sales growth moderated as forecast and how much future growth depends on new restaurants versus existing locations.
- Whether food inflation, particularly beef costs, and labor and healthcare expenses pressure margins in 2015.
- How quickly compliant pork supply is restored, and the sales, customer and food-disposal effects of the carnitas interruption.
- Progress on the 190–205 planned openings, development costs, new-unit ramp-up and returns on capital.
- Updates and potential financial or reputational consequences from the work-authorization investigations, employment litigation and other contingencies.
- Liquidity and capital allocation, including lease obligations, planned capital spending, and execution of the announced repurchase authorizations.