Chipotle Mexican Grill, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; balance-sheet comparisons are with December 31, 2017. Chipotle operated 2,441 restaurants, including 2,397 U.S. and 37 international Chipotle locations and seven Pizzeria Locale restaurants. The company reports one operating segment.
Financial performance and liquidity
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Revenue | $1,148.4 million | $1,068.8 million | +7.4% |
| Income from operations | $92.8 million | $73.2 million | +26.8% |
| Net income | $59.4 million | $46.1 million | +28.9% |
| Diluted EPS | $2.13 | $1.60 | +$0.53 |
| Operating margin | 8.1% | 6.8% | +1.3 percentage points |
| Net margin | 5.2% | 4.3% | +0.9 percentage points |
| Cash from operations | $201.1 million | $150.6 million | +$50.5 million |
| Capital expenditures | $57.5 million | $57.1 million | +$0.4 million |
Restaurant operating costs (food, labor, occupancy and other operating costs) were 80.5% of revenue, down from 82.3%. Food, beverage and packaging costs fell to 32.4% of revenue from 33.8%; labor costs rose to 27.8% from 26.9%; occupancy was 7.4% in both periods; and other operating costs declined to 12.9% from 14.1%.
At March 31, cash and cash equivalents were $231.8 million, current investments $298.8 million, and long-term investments $49.4 million. Total assets were $2.10 billion and total liabilities $733.4 million. The balance sheet presents no borrowings or debt line; confirm whether any debt obligations exist outside the figures shown. Operating cash flow less capital expenditures was approximately $143.6 million. The company said cash, investments and operating cash flow should cover foreseeable needs. It repurchased $68.0 million of stock during the quarter; $50.2 million remained under prior authorizations at quarter-end, and an additional $100 million authorization was announced April 25.
Material changes and management commentary
- Comparable restaurant sales increased 2.2%, versus 17.8% a year earlier; the 2018 increase included a 4.9% benefit from menu price increases and was offset by 3.5% fewer transactions. The prior-year comparison was affected by Chiptopia rewards revenue recognized in Q1 2017.
- Revenue growth also reflected $61.5 million from restaurants outside the comparable base, partly offset by $5.0 million related to restaurants closed since January 1, 2017. Out-of-restaurant orders rose to 8.8% of revenue from 7.9%.
- Management attributed improved restaurant cost ratios primarily to reduced promotional and marketing spend, partly offset by wage inflation. Marketing and promotional costs were 1.8% of revenue versus 3.4% a year ago.
- G&A increased 11.0% to $77.1 million, while depreciation and amortization increased 19.4% to $46.9 million. The latter included accelerated depreciation ahead of restaurant refresh and equipment projects.
- The company opened 35 restaurants and closed or relocated two. It expects approximately 130–150 openings in 2018 and is evaluating possible closures of underperforming locations. The only TastyMade restaurant closed during the quarter, with substantially all of its long-lived assets written down.
- Brian Niccol became CEO on March 5, 2018; founder Steve Ells became executive chairman.
Outlook, risks and unusual items
- Management expects low-single-digit comparable sales growth for full-year 2018, including menu price increases. It plans further digital-ordering investment and restaurant upgrades.
- Marketing and promotional expense is expected to be at or slightly above 3.0% of revenue for 2018; repairs and maintenance are expected to remain elevated. Management expects full-year G&A to rise year over year and depreciation to remain consistent with Q1 as remodel work continues.
- The estimated 2018 effective tax rate is 32.5%–33.5%, including approximately 4% related to stock-based compensation. Management expects about 29% in Q2 and Q3 and a rate as high as 38.5% in Q4; Q1’s rate was 36.9%, including an 8.1% impact from discrete items, primarily stock-compensation tax effects.
- Adoption of the new lease standard is expected in 2019 and will materially increase recognized balance-sheet assets and obligations; income-statement and cash-flow effects were still being assessed. Revenue-recognition adoption did not affect the financial statements.
- A 2017 payment-card security incident may result in further claims and legal costs. Chipotle accrued $30.0 million for anticipated payment-card-network claims and assessments; ultimate liabilities could be higher or lower, and litigation costs may exceed insurance limits.
- Federal grand-jury subpoenas concerning food-safety matters include follow-up requests related to illness incidents in Virginia and Los Angeles. The company could not estimate potential fines or penalties. Shareholder and securities litigation also remained subject to proceedings; a consolidated derivative-action settlement was approved in April 2018, subject to possible appeals. The company said other ordinary-course claims were not expected to have a material adverse effect.
- Risks include food and packaging commodity-price volatility, wage inflation, customer response to pricing, food safety, and seasonality. Management reported no material change in risk factors and no off-balance-sheet arrangements.
Important facts for investors to verify
- Whether comparable-sales and transaction trends improve as marketing spending rises, and how the low-single-digit full-year sales outlook develops.
- Restaurant margin effects from wage inflation, higher planned marketing and maintenance spending, and remodel-related depreciation.
- The ultimate cost, insurance recovery and litigation exposure from the payment-card incident and food-safety investigations.
- The final impact of the 2019 lease-standard adoption and any updates to the provisional tax accounting under the Tax Cuts and Jobs Act.
- Restaurant opening and closure plans, capital spending, and the pace and price of share repurchases.