Chipotle Mexican Grill, Inc. — Q3 2011 Form 10-Q
Business context and period: Unaudited results for the quarter and nine months ended September 30, 2011, compared with the same 2010 periods. Chipotle operated 1,163 restaurants, including one ShopHouse, across the U.S., Canada, and the U.K. The company reports one operating segment.
Financial results
Amounts are in millions of dollars except per-share data. Figures may not sum due to rounding.
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $591.9 | $476.9 | $1,672.8 | $1,353.4 |
| Operating income | $98.0 | $77.6 | $256.7 | $213.8 |
| Net income | $60.4 | $48.2 | $157.5 | $132.5 |
| Diluted EPS | $1.90 | $1.52 | $4.96 | $4.18 |
- Q3 revenue grew 24.1% and net income grew 25.3%; nine-month revenue grew 23.6% and net income grew 18.8% year over year.
- Q3 food, beverage and packaging costs rose to 33.1% of revenue from 30.6%; nine-month costs were 32.7% versus 30.4%. Labor costs improved as a share of revenue (Q3 23.3% versus 24.2%; nine months 24.0% versus 24.7%). Occupancy, other operating costs, and depreciation also declined as a share of revenue in both periods.
- Operating margin was approximately 16.6% in Q3 versus 16.3% in Q3 2010, and 15.3% for nine months versus 15.8%. Net margin was approximately 10.2% in Q3 versus 10.1%, and 9.4% for nine months versus 9.8%.
- Nine-month cash flow from operations was $290.9 million, versus $196.2 million. Investing activities used $103.1 million, including $92.9 million of capital expenditures; financing activities used $2.9 million. Cash and cash equivalents were $409.9 million at September 30.
- Cash and investments totaled approximately $544.4 million. Current assets were $487.7 million and current liabilities $128.4 million. The balance sheet reports $3.7 million of deemed landlord financing, including current and long-term portions; no conventional borrowings are identified in the provided filing text.
Performance changes and management commentary
- Comparable restaurant sales increased 11.3% in Q3 and 11.2% for the first nine months, driven mainly by higher customer visits and menu price increases. Average restaurant sales were $1.973 million, up 9.2% from $1.806 million.
- Revenue growth also reflected new units: 83 restaurants opened in the first nine months, compared with 67 in 2010. Management attributed higher food-cost ratios to inflation across ingredients, including avocados, beef, chicken, and dairy; menu price increases partly offset the pressure.
- Management expected 2011 openings at or above the high end of its 135–145 range and 155–165 openings in 2012. It forecast low-double-digit comparable-sales growth for full-year 2011 and low-single-digit growth for 2012.
- Management expected food costs as a percentage of revenue to ease in Q4 2011 with seasonal avocado-price relief and menu pricing, but anticipated continued food inflation and a higher food-cost percentage in 2012. Estimated 2011 effective tax rate was 38.4%; management expected a higher tax rate in 2012, potentially moderated if federal credits were renewed.
- The company repurchased $41.8 million of shares in the first nine months; $28.3 million remained authorized at September 30. Management said cash and operating cash flow should cover capital expenditures, working capital, and other needs for at least 24 months.
Unusual items, risks, and contingencies
- The company recognized a $2.5 million loss on its ANGR Holdings equity-method investment, the full amount invested, after the associated restaurants closed; this was included in nine-month interest and other expense.
- ICE’s work-authorization investigation remained ongoing, with a related U.S. Attorney criminal-division investigation. The company could not estimate potential fines or liabilities; employee terminations and retraining had disrupted operations and temporarily increased labor costs.
- ADA-related serving-line litigation and a California employment-practices case remained unresolved; potential additional liabilities could not be reasonably estimated. Management said ordinary-course claims were not expected to have a material aggregate impact, while noting adverse outcomes could affect results or cash flows.
- Key exposures include commodity-price inflation, interest-rate movements on investments, and limited foreign-currency exposure. The filing reported no material changes to previously disclosed risk factors and no off-balance-sheet arrangements.
Important facts for investors to verify
- Whether comparable-sales momentum and planned restaurant openings were achieved, and how much growth came from new locations versus established restaurants.
- Whether menu pricing and seasonal avocado relief offset ongoing food inflation, especially the expected 2012 cost pressure.
- Developments in the ICE and U.S. Attorney investigations, ADA cases, and employment litigation, including any eventual financial or operating impact.
- Use of cash for restaurant investment and share repurchases, and the effect of stock-based compensation and the ANGR investment loss on reported earnings.