Chipotle Mexican Grill, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter ended September 30, 2017; comparative results are for the three and nine months ended September 30, 2016. Financial figures below are in millions of dollars except per-share amounts. The statements are unaudited.
Business context
Chipotle operated 2,374 restaurants at quarter-end: 2,330 U.S. Chipotle locations, 36 international Chipotle locations and 8 non-Chipotle restaurants. The company reports one operating segment. Management said its 2017 focus was restoring sales and profitability growth and improving the guest experience.
Financial performance and liquidity
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $1,128.1 | $1,037.0 | $3,366.3 | $2,869.8 |
| Operating income | $30.9 | $9.7 | $210.8 | $4.0 |
| Net income | $19.6 | $7.8 | $132.5 | $7.0 |
| Diluted EPS | $0.69 | $0.27 | $4.62 | $0.23 |
| Operating cash flow | Not separately provided for the quarter | $378.8 | $281.1 |
- Revenue increased 8.8% in Q3 and 17.3% for the nine-month period. Comparable restaurant sales rose 1.0% and 8.3%, respectively.
- Restaurant operating costs were 82.4% of revenue for the first nine months, down from 87.5% a year earlier. Nine-month food, labor, occupancy and other operating costs were 34.3%, 26.8%, 7.2% and 14.2% of revenue, respectively.
- Cash and cash equivalents were $113.5 at September 30; current investments were $434.9. Management reported cash and short-term investments of $548.4 and said these resources, with operating cash flow, should meet foreseeable needs. No borrowings or debt are listed on the balance sheet.
- Total assets were $2,064.4, total liabilities $677.3 and shareholders’ equity $1,387.1. Capital expenditures were $165.5 for the first nine months; share repurchases used $209.6 of cash.
Material changes versus the prior period
- Nine-month revenue and comparable sales improved substantially from 2016, when comparisons reflected unusually weak sales. Growth also benefited from restaurants outside the comparable base and prior-year Chiptopia rewards-related revenue deferrals.
- Profitability recovered: nine-month operating income was $210.8 versus $4.0, and net income was $132.5 versus $7.0. Improved cost ratios reflected lower promotional spending, sales leverage and labor efficiencies, among other factors.
- Q3 general and administrative expense included a $30.0 pretax accrual for anticipated payment-card-network claims and assessments tied to the data security incident. The charge reduced Q3 net income by $18.2 after tax, or $0.64 per diluted share.
- Chipotle repurchased 545,000 shares for $207.2 during the first nine months. At September 30, $95.4 remained under existing authorizations; an additional $100.0 authorization was announced October 24, 2017.
Outlook, commentary, risks and unusual items
- Management expected full-year 2017 comparable restaurant sales growth of about 6.5%, including anticipated effects of a Q4 menu-price increase and queso rollout. The filing notes that Q3 sales were adversely affected by news of a norovirus incident at a Sterling, Virginia restaurant and, to a lesser extent, Hurricanes Harvey and Irma.
- Expected 2017 restaurant openings were slightly below the prior 195–210 range; 2018 openings were projected at approximately 130–150 as management prioritized restaurant operations and guest experience. Chipotle opened 145 restaurants and closed or relocated 21 in the first nine months, including all 15 ShopHouse locations.
- Management expected full-year food costs as a percentage of revenue to be consistent with the first nine months. It anticipated higher Q4 marketing spending and said other operating costs as a share of revenue would rise from the nine-month level, while remaining below full-year 2016. Estimated full-year 2017 effective tax rate was approximately 39.1%.
- The April 2017 payment-system malware incident potentially exposed payment-card track data at most restaurants, primarily March 24–April 18; the company said it removed the malware and that no other customer information was affected. Insurance was expected to cover substantially all investigation costs, but coverage may not cover all legal expenses or liabilities. Related customer, financial-institution and shareholder litigation is pending; outcomes and potential liabilities could not be reasonably estimated.
- A federal grand jury investigation into company-wide food-safety matters continues, including a July 2017 subpoena concerning illness incidents at one Virginia restaurant. Potential fines or penalties could not be estimated. The filing also reports a proposed settlement, preliminarily approved, in certain shareholder derivative actions.
- Commodity prices, especially food inputs, remain a risk; most purchases are effectively at spot prices. The company reported no off-balance-sheet arrangements and said disclosure controls were effective at September 30, 2017.
Important facts for investors to verify
- Whether the approximately 6.5% 2017 comparable-sales outlook was achieved, and how the menu-price increase and queso affected traffic and average check.
- Final payment-card assessments, insurance recoveries, litigation exposure and any further costs from the security incident.
- Whether restaurant-level cost improvements persisted amid wage inflation, avocado and beef price changes, and higher marketing spending.
- Actual restaurant openings, closures and capital spending compared with management’s 2017 and 2018 plans.
- Cash and investment balances, continued share repurchases, and the eventual balance-sheet impact of lease accounting adoption planned for January 1, 2019.