Chipotle Mexican Grill, Inc. — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. Unless otherwise noted, financial amounts below are in millions of dollars. Chipotle operated 1,724 restaurants across its concepts and geographies at quarter-end, including 1,698 U.S. Chipotle restaurants, eight ShopHouse locations and an investment in a Pizzeria Locale restaurant. The company reports one operating segment.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $1,084.2 | $826.9 | $3,038.5 | $2,370.4 |
| Revenue growth | 31.1% | 28.2% | ||
| Operating income | $207.4 | $137.2 | $522.9 | $403.6 |
| Operating margin | 19.1% | 16.6% | 17.2% | 17.0% |
| Net income | $130.8 | $83.4 | $324.1 | $247.8 |
| Diluted EPS | $4.15 | $2.66 | $10.29 | $7.93 |
| Comparable restaurant sales growth | 19.8% | 6.2% | 17.0% | 4.3% |
Q3 net margin was 12.1%, compared with 10.1% a year earlier; nine-month net margin was 10.7%, compared with 10.5%. Margins are calculated from reported revenue and income figures.
Costs, cash flow and liquidity
- Food, beverage and packaging costs were 34.3% of revenue in Q3 and 34.5% for the first nine months, versus 33.6% and 33.2%, respectively, in 2013. Management cited inflation, particularly in beef, avocados and dairy.
- Labor costs declined as a share of revenue to 21.2% in Q3 and 22.0% for nine months, from 22.8% and 23.0%. Occupancy costs likewise declined to 5.4% and 5.6%, from 6.1% and 6.2%.
- General and administrative costs increased to 6.6% of Q3 revenue and 7.0% of nine-month revenue, compared with 6.4% and 6.2%. Drivers included stock-based compensation, payroll and bonuses, and the biennial managers’ conference.
- Nine-month operating cash flow was $549.8 million, versus $388.7 million. Capital spending was $160.4 million; operating cash flow less this spending was $389.4 million, compared with $252.1 million in 2013.
- Cash and cash equivalents were $442.6 million at September 30, 2014, up from $323.2 million at December 31, 2013. Cash and investments totaled approximately $1.23 billion, including $347.0 million of current investments and $440.9 million of long-term investments.
- Current liabilities were $265.0 million and current assets were $873.9 million. No borrowings are listed on the presented balance sheet; the filing says there were no off-balance-sheet arrangements or obligations.
- Nine-month treasury-stock repurchases cost $63.4 million; $126.8 million remained available under repurchase authorizations at quarter-end.
Material changes and management outlook
- Revenue growth reflected strong comparable sales and restaurant additions. Comparable sales contributed $161.1 million of Q3 revenue growth and $397.3 million for the first nine months. Customer visits were the primary driver, with higher average check also contributing.
- U.S. menu price increases implemented during Q2 contributed 6.3 percentage points to Q3 comparable-sales growth and 3.0 points to nine-month growth. Catering contributed slightly more than 1% of sales in the first nine months.
- Chipotle opened 132 restaurants in the first nine months. Management expected 180–195 openings in 2014 and 190–205 in 2015, including a small number of international, ShopHouse and Pizzeria Locale locations.
- Management expected full-year 2014 comparable-sales growth in the mid-teens and 2015 growth in the low- to mid-single digits, citing tougher comparisons in 2015. Average restaurant sales were $2.403 million, up 12.3% year over year.
- Management expected food costs as a percentage of revenue to rise in Q4 2014 and full-year 2015. Labor costs were expected to rise as a percentage of revenue in 2015, partly because of the Affordable Care Act and minimum-wage increases.
- Expected 2014 capital expenditures were about $260 million, including approximately $23 million for purchase and refurbishment of a corporate aircraft. Management expected the 2014 effective tax rate to be 38.5%, and estimated 39.1% for 2015 absent extensions of certain tax credits.
Risks, contingencies and notable items
- Federal authorities, including the SEC and the U.S. Attorney’s Office for the District of Columbia, were conducting civil and criminal investigations concerning employee work-authorization compliance and related disclosures. The company said it could not determine whether fines, penalties or other liabilities would result or estimate their amount.
- A consolidated shareholder derivative action concerning work-authorization and other allegations was settled in August 2014. The company had accrued the settlement’s payable amounts in prior periods and agreed to additional oversight procedures; the cases were concluded.
- The company warned that commodity prices are exposed to factors outside its control; most purchases are effectively at spot prices. It also has interest-rate exposure on investments, while foreign-currency exposure was described as limited.
- Some restaurants served conventionally raised beef or chicken during parts of the first nine months because of supply constraints; further temporary substitutions were possible and would be disclosed in affected restaurants.
- Results are seasonal and can be affected by weather, academic calendars, restaurant openings, marketing timing and stock-based compensation. Management cautioned that interim results are not necessarily indicative of full-year results.
- Stock-based compensation expense was $83.0 million for the first nine months of 2014, compared with $51.5 million in 2013. The company also recorded a $1.6 million cumulative expense adjustment in Q2 related to estimated vesting of performance-based awards.
Important facts for investors to verify
- Whether food-cost inflation, minimum-wage changes and health-care costs develop as management expected, and their effect on restaurant margins.
- Whether comparable-sales trends and restaurant-opening targets are achieved, especially against tougher 2015 comparisons.
- Any material developments, liabilities or business effects from the continuing government investigations.
- Actual capital spending, including the corporate aircraft costs, and the pace and price of future share repurchases.
- Whether the projected tax rates change if federal tax credits are extended or other tax assumptions shift.