Chipotle Mexican Grill, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022; comparisons are with the same periods in 2021. Amounts below are in U.S. dollars unless noted. Chipotle operated 3,090 restaurants at quarter-end and reports one operating segment.
Financial performance and liquidity
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total revenue | $2,220.2 million | $1,952.3 million | $6,454.1 million | $5,586.4 million |
| Operating income | $336.3 million | $239.7 million | $864.1 million | $646.6 million |
| Net income | $257.1 million | $204.4 million | $675.4 million | $519.5 million |
| Diluted earnings per share | $9.20 | $7.18 | $24.02 | $18.22 |
| Operating margin | 15.1% | 12.3% | 13.4% | 11.6% |
| Net margin | 11.6% | 10.5% | 10.5% | 9.3% |
Q3 revenue rose 13.7%; food and beverage revenue increased 14.0%, while delivery service revenue fell 10.4%. Comparable restaurant sales increased 7.6% in Q3 and 8.9% for the nine-month period. Q3 diluted EPS grew 28.1% year over year.
Q3 restaurant operating costs were 74.7% of revenue, down from 76.5%. Food, beverage and packaging costs were 29.8% of revenue (30.3% prior year); labor was 25.1% (25.8%); occupancy was 5.2% (5.3%); and other operating costs were 14.5% (15.1%). For the nine months, restaurant operating costs were 75.9% of revenue versus 76.5% in 2021. Food inflation and wage inflation remained cost pressures.
Operating cash flow for the first nine months was $921.6 million, compared with $843.7 million. Investing activities used $646.3 million, including $335.5 million of capital expenditures; financing activities used $722.7 million, including $629.8 million of treasury stock repurchases. Cash, cash equivalents and restricted cash totaled $397.6 million at period-end, down from $846.2 million at year-end 2021. The company reported $1.2 billion of cash and marketable investments, excluding restricted cash and non-marketable investments.
Current assets were $1.08 billion and current liabilities $817.9 million at September 30, 2022. Chipotle had no borrowings on its $500 million revolving credit facility, which expires in April 2026, and reported compliance with its covenants. Operating lease liabilities totaled $3.73 billion, including current and long-term amounts.
Material changes versus the prior comparable period
- Revenue growth reflected comparable sales increases and restaurants not yet in the comparable base, including new openings. Average restaurant sales increased 12.8% to $2.8 million.
- Management attributed Q3 comparable-sales growth mainly to menu price increases; lower group size as in-restaurant dining returned and, to a lesser extent, lower transactions partly offset the increase. In-restaurant sales rose 22.1% year over year. Digital sales declined to 37.2% of food and beverage revenue from 42.8%, primarily reflecting the shift toward in-restaurant sales.
- Restaurant-cost leverage and lower delivery expense improved Q3 operating-cost ratios, partly offset by food and wage inflation. For the nine-month period, food and labor costs as a share of revenue increased year over year.
- General and administrative expense fell 3.4% in Q3 and 4.0% for the nine months, mainly due to lower stock-based compensation compared with the prior-year period, partly offset by corporate initiative costs and other expenses.
- Share repurchases used $629.8 million of cash in the first nine months, versus $300.7 million in 2021. The company had $412.8 million remaining under its repurchase authorization at quarter-end.
Outlook, commentary, risks and unusual items
- Chipotle expects to open 255–285 restaurants in 2023 and says it remains confident in the long-term opportunity to more than double its North American restaurant count. It opened 43 restaurants in Q3, 38 with a Chipotlane. Development timelines faced equipment and materials shortages, construction labor challenges, and permitting, utility and inspection delays; management expected these challenges to continue into 2023.
- Management expects positive cash flow for the foreseeable future, assuming no significant decline in comparable sales, and believes cash, investments and operating cash flow will meet foreseeable needs. Planned cash uses include new restaurant construction, existing restaurant investment and potential repurchases.
- Management cited inflation in ingredients, packaging, utilities and wages; supplier and supply-chain disruption; food safety; labor availability and organizing; competition; technology, privacy and cybersecurity; consumer spending and recession concerns; and litigation among key risks. It noted uncertainty around COVID-19 and its possible effects on operations and supply chains.
- Q3 diluted EPS included a stated $0.31 after-tax impact from employee separation costs, asset impairment, corporate restructuring and expenses related to the 2018 performance-share award modification. A separate $6.7 million incremental stock-compensation charge arose from an employee separation-related award modification.
- In August 2022, Chipotle agreed to resolve New York City Fair Work Week and sick-time proceedings, paying a $1.0 million civil penalty and agreeing to pay up to approximately $20 million in employee compensation. It accrued an estimated total legal liability of $20.2 million; management did not expect additional losses above the accrued amount to be material.
- The Inflation Reduction Act includes a 15% corporate minimum tax and a 1% excise tax on certain stock repurchases, effective for tax years beginning after December 31, 2022. The company said it did not expect a material adverse effect but would continue evaluating the impact.
- The effective tax rate rose to 24.4% for Q3 from 14.7% and to 23.1% for the nine months from 19.5%, primarily due to fewer equity-related tax benefits, reduced return-to-provision benefits and increased tax reserves. Management reported no material change in previously disclosed risk factors and concluded disclosure controls were effective.
Key facts investors should verify
- Whether comparable-sales growth and menu pricing can offset continued food, packaging, utility and labor inflation.
- Whether restaurant openings meet the 2023 target despite construction and permitting delays, and how new Chipotlane locations perform.
- Whether cash generation remains sufficient to fund expansion, capital spending and repurchases while maintaining liquidity.
- The eventual employee compensation paid under the New York settlement and any material developments in other legal matters.
- The effects of evolving tax rules, including the stock-repurchase excise tax, and any changes to capital allocation or operating outlook.