Chipotle Mexican Grill, Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Dollar amounts below are in millions unless noted. The company operated 1,878 restaurants at quarter-end, including Chipotle, ShopHouse and Pizzeria Locale locations, and reported one operating segment.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $1,197.8 | $1,050.1 | $2,286.8 | $1,954.2 |
| Revenue growth | 14.1% | — | 17.0% | — |
| Operating income | $227.4 | $179.8 | $425.2 | $315.5 |
| Operating margin | 19.0% | 17.1% | 18.6% | 16.1% |
| Net income | $140.2 | $110.3 | $262.8 | $193.3 |
| Diluted EPS | $4.45 | $3.50 | $8.34 | $6.14 |
Comparable restaurant sales increased 4.3% in Q2 and 7.1% in the first half, versus 17.3% and 15.5% in the corresponding 2014 periods. Average restaurant sales were $2.530 million, up 9.7% year over year. Growth reflected new restaurant openings and higher comparable sales; the latter was driven mainly by average check, including prior menu price increases.
Q2 food, beverage and packaging costs fell to 33.1% of revenue from 34.6%; first-half costs were 33.5% versus 34.5%. Labor costs rose to 22.6% of Q2 revenue from 21.8% (22.5% versus 22.3% for the half). Occupancy was 5.4% of Q2 revenue and 5.6% for the half; other operating costs were 10.9% and 10.7%, respectively. General and administrative expense declined to 5.9% of Q2 revenue from 7.1% and to 5.8% for the half from 7.3%. Management cited menu pricing and lower dairy and avocado prices as food-cost benefits; wage inflation, staffing inefficiencies and system-related scheduling issues pressured labor.
Cash flow, liquidity and capital
- First-half operating cash flow was $401.1, up from $360.4. Capital expenditures were $114.4; operating cash flow less capital expenditures was $286.7, compared with $257.6 in 2014.
- Cash and cash equivalents were $587.7 at June 30, 2015, versus $419.5 at year-end 2014. Cash and short-term investments totaled $879.2; long-term investments were $600.8.
- Total liabilities were $554.5 and shareholders’ equity was $2,251.7. The balance sheet reports no borrowings or debt; the filing describes no off-balance-sheet arrangements.
- The company repurchased $116.3 of stock in the first half. As of June 30, $85.9 remained under existing authorizations; on July 21, the board authorized an additional $100.0 repurchase.
Outlook, commentary and risks
- Management expected 190–205 new restaurant openings for 2015 and said openings should be at or above the high end; 97 opened in the first half.
- Full-year 2015 comparable sales growth was expected in the low-to-mid single digits. Management estimated the pork shortage reduced Q2 comparable sales growth by about 2%, and expected a 1%–2% negative impact to continue until supply recovered.
- A supplier was suspended after failing to meet the company’s animal-welfare standards, leaving carnitas unavailable in many U.S. restaurants. Management expected new supply to restore availability across restaurants by year-end. Supply constraints could also lead some locations to serve conventionally raised beef or chicken, with customer disclosure.
- Management expected full-year food costs as a percentage of revenue to remain near first-half levels; labor costs as a percentage of revenue to be comparable to the first half; other operating costs as a percentage of revenue to increase modestly; and the full-year effective tax rate to be approximately 38.7%.
- Commodity prices, labor inflation, restaurant execution and seasonality may affect results. The company reported ongoing government civil and criminal investigations related to employee work-authorization compliance and disclosures; potential fines or liabilities could not be estimated. Other ordinary-course claims were not expected to have a material adverse effect.
- An internally developed software program that the company chose not to implement resulted in a $2.8 first-quarter write-off. The company also reported continued integration of a new HR and payroll system; scheduling inefficiencies from system-related reporting challenges affected Q2 labor costs. Disclosure controls were deemed effective at quarter-end.
Most important facts for investors to verify
- Whether pork supply recovered as anticipated and how its availability affected comparable sales and customer demand.
- Whether comparable-sales growth, new openings and restaurant-level cost trends supported the 2015 outlook.
- Whether labor scheduling issues were resolved and wage and benefit inflation remained manageable.
- Any developments, potential liabilities or disclosures arising from the work-authorization investigations.
- Cash deployment, including restaurant investment and the announced share-repurchase authorizations.