Chipotle Mexican Grill, Inc. — 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. This is an annual report, not a standalone fourth-quarter filing; fourth-quarter results are included below where reported. Dollar figures are in U.S. dollars.
Business context
Chipotle operated 1,410 restaurants at year-end, including five in Canada, five in London, one in Paris and one ShopHouse location. The company operates one reportable segment and generates substantially all revenue in the United States. It opened 183 restaurants in 2012 and bases its concept on a focused menu, fresh ingredients and its “Food With Integrity” sourcing approach.
Financial performance and liquidity
| Metric | 2012 | 2011 |
|---|---|---|
| Revenue | $2,731.2 million | $2,269.5 million |
| Operating income | $455.9 million | $350.6 million |
| Net income | $278.0 million | $214.9 million |
| Diluted EPS | $8.75 | $6.76 |
| Operating margin | 16.7% | 15.4% |
| Net margin | 10.2% | 9.5% |
| Cash from operations | $420.0 million | $411.1 million |
| Capital expenditures | $197.0 million | $151.1 million |
- Revenue increased 20.3%, net income increased 29.3%, and diluted EPS increased 29.4% year over year.
- Comparable restaurant sales increased 7.1% for 2012, versus 11.2% in 2011. Average restaurant sales rose to $2.113 million from $2.013 million.
- Food, beverage and packaging costs were 32.6% of revenue, up from 32.5%; labor costs were 23.5%, down from 23.9%; occupancy costs were 6.3%, down from 6.5%. Higher food inflation was partially offset by pricing and lower avocado costs.
- Cash from operations less capital expenditures was approximately $222.9 million. Cash and current investments totaled $472.9 million; long-term investments were $190.9 million. Current assets were $546.6 million and current liabilities $186.9 million.
- The balance sheet reports no conventional borrowings; deemed landlord financing was $3.5 million. However, operating lease commitments totaled $2.466 billion, including $159.0 million due within one year.
- Fourth-quarter 2012 revenue was $699.2 million, operating income $102.2 million and net income $61.4 million. Comparable sales growth was 3.8%, down from 11.1% in fourth-quarter 2011.
Changes, outlook and management commentary
- Revenue growth accelerated through restaurant expansion, but comparable-sales growth slowed during 2012: quarterly increases fell from 12.7% in Q1 to 3.8% in Q4. Management attributed 2012 comparable-sales gains to customer visits and menu-price increases.
- Management expected 165–180 restaurant openings in 2013, comparable sales to be flat to low-single-digit growth assuming no menu-price increases, and food costs as a percentage of revenue to rise amid continued inflation. It said price increases later in 2013 were possible.
- Planned 2013 capital expenditures were approximately $210 million. Management expected average development costs for new restaurants to be similar to 2012 levels. The expected 2013 effective tax rate was 38.5%; marketing and promotional spending as a percentage of revenue was expected to increase.
- Some restaurants temporarily served conventionally raised beef during 2012 and early 2013 because of supply constraints; management said further temporary substitutions were possible. ShopHouse was not expected to contribute meaningfully to growth for several years.
- Chipotle repurchased $206.4 million of stock in 2012 and announced an additional $100 million authorization in February 2013. It does not anticipate paying cash dividends in the foreseeable future.
Risks, contingencies and unusual items
- Key risks include food and labor cost inflation, supply limitations for responsibly sourced ingredients, food-safety events, hiring and retention challenges, execution of rapid expansion, competition, and consumer sensitivity to pricing. New restaurants may take 24 months or more to reach normalized sales and profitability.
- The U.S. Attorney’s office and SEC were investigating employee work-authorization compliance and related disclosures; the company said the potential fines or liabilities could not be determined. Shareholder derivative and securities class-action cases were also pending, with outcomes not reasonably estimable.
- A potential indemnity to McDonald’s related to the 2006 separation and 2009 share conversion was estimated by the company to exceed $450 million, with the amount dependent on factors beyond its control.
- Other matters include employment and accessibility litigation and ordinary-course claims. The company said it could not estimate aggregate exposure for certain matters. Estimated insurance liabilities were $27.8 million.
- In Q4, the company changed its estimated gift-card breakage rate from 5% to 4%; the filing does not clearly quantify the change’s effect on 2012 revenue or earnings. Stock-based compensation expense was $66.3 million, including a $5.6 million cumulative adjustment related to performance-based awards.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective at year-end.
Important facts for investors to verify
- Whether comparable-sales trends stabilized after the quarterly deceleration, and whether 2013 openings met the 165–180 target.
- Actual food-cost inflation, menu pricing actions and resulting restaurant margins, especially given reliance on limited suppliers for key ingredients.
- Cash generation and investment levels relative to expansion, repurchases and the substantial lease commitment profile.
- Developments and potential financial consequences of the work-authorization investigations, shareholder litigation and McDonald’s-related indemnity.
- The quantified effect, if any, of the revised gift-card breakage estimate and performance-based stock compensation on reported results.