Chipotle Mexican Grill, Inc. — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. Amounts below are in U.S. dollars; financial statement figures are converted from thousands to millions where indicated.
Business context
Chipotle operated 2,124 restaurants at quarter-end, including 2,078 Chipotle restaurants, 15 ShopHouse restaurants and four Pizzeria Locale restaurants. Management attributed the sharp sales and profit deterioration to food-borne illness incidents and related publicity beginning in late 2015.
Key financial results
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $998.4m | $1,197.8m | $1,832.8m | $2,286.8m |
| Comparable restaurant sales | (23.6%) | 4.3% | (26.5%) | 7.1% |
| Operating income (loss) | $40.9m | $227.4m | ($5.7m) | $425.2m |
| Net income (loss) | $25.6m | $140.2m | ($0.8m) | $262.8m |
| Diluted EPS | $0.87 | $4.45 | ($0.03) | $8.34 |
| Net cash from operations | Not separately presented for Q2 | $179.7m | $401.1m |
Q2 operating margin was approximately 4.1%, versus 19.0% a year earlier; net margin was approximately 2.6%, versus 11.7%. For the first half, operating margin was approximately (0.3%), versus 18.6% in 2015. Comparable sales declines were driven mainly by fewer transactions: down 19.3% in Q2 and 20.2% for the first half, with lower average check also contributing.
Q2 restaurant cost ratios rose year over year: food, beverage and packaging were 34.2% of revenue (33.1%); labor 27.7% (22.6%); occupancy 7.2% (5.4%); and other operating costs 15.2% (10.9%). Management cited sales deleveraging, food-safety procedures and waste, wage and benefit costs, and increased marketing and promotional spending.
Financial position and cash flows
- At June 30, cash and cash equivalents were $190.0m; current investments were $80.2m; and long-term investments were $376.4m. Management reported cash and short-term investments of $270.1m.
- Total assets were $2.102bn, down from $2.725bn at December 31, 2015. Shareholders’ equity was $1.486bn, down from $2.128bn, principally alongside substantial treasury-stock repurchases and lower investment balances.
- Current liabilities were $276.5m and total liabilities were $615.8m. The balance sheet presents no borrowings or debt line; the filing does not provide a separate debt balance.
- First-half operating cash flow was $179.7m. Investing activities provided $458.9m, including $540.6m in proceeds from investment sales, while capital expenditures were $126.7m. Financing activities used $698.0m, including $700.0m for treasury-stock acquisitions. Cash decreased $58.0m to $190.0m.
- The company repurchased 1.469m shares in the first half for $676.9m; $139.5m remained authorized at June 30. Management said existing cash, investments and operating cash flow should cover foreseeable operating and capital needs.
Outlook, commentary and risks
- Management could not estimate future comparable-sales changes because of uncertainty following the food-borne illness incidents. Average restaurant sales were $2.067m, but included about four months before the incidents’ adverse impact.
- Management expected 220–235 new restaurant openings in 2016, including a small number of international, ShopHouse and Pizzeria Locale locations. It expected full-year food, beverage and packaging costs as a percentage of revenue to remain consistent with Q2; other restaurant-level operating costs as a percentage of revenue were expected to rise versus 2015 but be below first-half 2016 levels.
- Full-year 2016 G&A expense was expected to be 10–20% higher than 2015, reflecting the biennial managers’ conference, wage growth and higher anticipated legal costs. The estimated full-year effective tax rate was 38.6%, compared with 38.2% in 2015.
- Chiptopia Summer Rewards began July 1, 2016. Management said the program would involve promotional costs and defer some revenue until rewards were redeemed or expired; its sales impact was uncertain.
- A federal criminal investigation related to food safety, including a subpoena seeking company-wide food-safety records dating to 2013, remained ongoing. The company said it could not estimate potential fines or penalties. The filing also describes a securities class action, shareholder derivative actions and separate government investigations concerning employee work-authorization compliance and related disclosures; outcomes and potential liabilities were not estimable.
- Additional risks include commodity-price exposure, the uncertain effectiveness of promotions, and execution risks in catering and remote ordering. The filing reported no material changes to risk factors other than those described in the 10-Q.
- As an unusual item, a first-quarter revision to estimated performance-based stock awards reduced first-half stock-compensation expense by $6.0m ($3.7m after tax), or $0.12 per share.
Important facts for investors to verify
- Whether customer transactions and comparable sales recover, and whether promotions restore traffic without materially worsening margins.
- Progress and potential financial consequences of the food-safety, securities, derivative and work-authorization investigations and litigation.
- Whether planned restaurant openings and cost expectations are achieved amid continued sales deleveraging.
- Cash and investment deployment, including future share repurchases, capital spending and liquidity needs.