Chipotle Mexican Grill, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021; comparisons are with the corresponding 2020 periods. Chipotle operated 2,888 Chipotle restaurants and four Pizzeria Locale restaurants at quarter-end.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total revenue | $1.952B | $1.601B | $5.586B | $4.377B |
| Comparable restaurant sales growth | 15.1% | 8.3% | 20.8% | 0.5% |
| Income from operations | $239.7M | $107.1M | $646.6M | $173.3M |
| Net income | $204.4M | $80.2M | $519.5M | $164.8M |
| Diluted EPS | $7.18 | $2.82 | $18.22 | $5.81 |
| Operating margin | 12.3% | 6.7% | 11.6% | 4.0% |
Q3 digital sales were $840.4M, or 42.8% of sales. Management attributed sales growth to higher transactions and average check, menu pricing, recovering in-restaurant demand, digital strength, and new menu items. Restaurant operating costs were 76.5% of revenue, down from 80.5%; food costs improved with menu pricing, while wage inflation and higher beef and freight costs were offsets. Q3 labor costs rose to 25.8% of revenue from 25.3%. Nine-month general and administrative expense rose 30.6%, including higher stock-based compensation and corporate initiative costs.
Cash, liquidity, debt, and capital allocation
- Operating cash flow was $843.7M for the nine months, versus $548.7M; capital expenditures were $320.6M, versus $246.8M.
- Cash and cash equivalents were $721.1M at September 30, 2021. Cash and marketable investments totaled approximately $1.2B, excluding restricted cash and non-marketable investments.
- No borrowings were outstanding on the new five-year $500M revolving credit facility. The facility has leverage and fixed-charge coverage covenants.
- Long-term operating lease liabilities were $3.275B; total operating lease liabilities were approximately $3.490B. The filing reports no material off-balance-sheet arrangements.
- Chipotle repurchased $300.7M of treasury stock during the nine months. $209.8M remained authorized for repurchases, including an additional $100M authorization announced October 21, 2021.
Material changes, outlook, and risks
- Revenue and profitability rose substantially year over year, supported by comparable-sales growth and new restaurant contributions. Q3 comparable sales increased 15.1%; 41 restaurants opened, including 36 with Chipotlanes. Management cited a long-term opportunity to more than double North American restaurant count.
- Management expects cash from operations and existing cash and investments to cover foreseeable needs, and expects positive cash flow for the foreseeable future assuming no significant decline in comparable sales. It provided no specific earnings or comparable-sales forecast in this filing.
- Q3 diluted EPS included an estimated $0.16 per share after-tax benefit from a federal tax return-to-provision adjustment, partially offset by expenses including the 2018 performance-stock-award modification. The modification generated $55.5M of stock compensation expense in the first nine months of 2021.
- COVID-19 may continue to affect operations, staffing, supply chains, and costs. Management reported freight and ingredient inflation and identified labor availability and cost, food safety, supplier performance, competition, digital and delivery reliance, and cybersecurity among key risks.
- A New York City proceeding alleges Fair Work Week and sick-time violations at substantially all city restaurants; mediation was ongoing, and the company said potential liability could not be reasonably estimated. Accrued legal liabilities were $33.1M. The filing says other ordinary-course claims are not expected to have a material adverse effect, but outcomes remain uncertain.
- The effective tax rate was 14.7% for Q3 and 19.5% for the first nine months, affected by equity-related tax benefits and a tax accounting method change. The company recorded an $11.4M employee retention credit for the 2021 periods and remitted $70.8M of deferred Social Security payroll taxes in Q3.
Important facts for investors to verify
- Whether comparable-sales momentum and digital demand persist, and how menu pricing affects traffic and average check.
- Whether wage, freight, beef, and other input-cost inflation erodes restaurant-level margins.
- The timing, cost, and returns of planned restaurant openings and Chipotlane investments.
- Resolution and potential financial exposure of the New York City employment-law proceeding and other legal claims.
- The sustainability of reported earnings given the tax benefit, stock-based compensation, and other unusual or timing-related items.