Chipotle Mexican Grill, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; balance-sheet figures are as of March 31, 2012. Unless otherwise noted, financial amounts are in millions of dollars. The company operated 1,262 restaurants, including one ShopHouse location, and reported one operating segment.
Financial performance
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Revenue | $640.6 | $509.4 | +25.8% |
| Income from operations | $102.2 | $74.8 | +36.6% |
| Operating margin | 16.0% | 14.7% | +1.3 percentage points |
| Net income | $62.7 | $46.4 | +35.1% |
| Net margin | 9.8% | 9.1% | +0.7 percentage points |
| Diluted EPS | $1.97 | $1.46 | +34.9% |
| Cash from operations | $29.4 | $68.3 | Down $38.9 |
| Capital expenditures | $41.9 | $26.4 | +58.4% |
Comparable restaurant sales increased 12.7% (versus 12.4% in Q1 2011), reflecting higher customer visits and menu-price increases that contributed 4.9%. Average restaurant sales were $2.072 million, up 9.9%.
Restaurant costs as a percentage of revenue were: food, beverage and packaging 32.2% (32.0% prior year); labor 23.7% (24.6%); occupancy 6.3% (6.9%); and other operating costs 10.3% (11.3%). General and administrative expense rose to $49.3 million from $32.2 million, or 7.7% of revenue from 6.3%, primarily due to higher stock-based compensation, related payroll taxes, and growth in staffing. The effective tax rate was 39.0%, versus 38.2%.
Cash, liquidity and capital structure
Cash and cash equivalents were $370.2 million, down from $401.2 million at year-end 2011. Cash and investments were reported by management at $613.7 million. Current assets were $551.5 million and current liabilities $124.5 million. Total liabilities were $357.8 million; the filing reports no conventional debt, with deemed landlord financing of $3.6 million in total.
Operating cash flow was $29.4 million, compared with $68.3 million a year earlier. Investing activities used $102.2 million, including $41.9 million of property and equipment purchases and $60.4 million of investment purchases. Financing activities provided $41.4 million, including a $68.4 million excess tax benefit on stock-based compensation, offset by $27.0 million of treasury-stock purchases. Operating cash flow less capital expenditures was negative $12.5 million, a derived measure. The cash-flow comparison is affected by the much larger excess tax benefit in 2012, which appears in financing activities rather than operating activities.
The company repurchased 43,406 shares under publicly announced programs for approximately $16.3 million and reported $90.2 million remaining under the current authorization. It also acquired 28,485 shares for approximately $10.7 million through employee tax-withholding surrenders; these were not program repurchases.
Changes, outlook and management commentary
- Revenue growth reflected restaurant expansion and comparable sales: 32 restaurants opened in Q1 2012 versus 12 in Q1 2011; the quarter ended with 1,262 locations versus 1,095.
- Management expected to open 155–165 restaurants in 2012, including a Paris location and one ShopHouse; about 30% of openings were expected to be A Model restaurants.
- Management projected 2012 comparable restaurant sales growth in the mid-single digits, citing tougher comparisons and economic uncertainty. It did not expect further menu-price increases during 2012.
- Food-cost inflation, particularly for beef and chicken, increased food costs as a share of revenue. Management expected further inflation and a continued increase in that share. Supply constraints could also mean some restaurants periodically serve conventionally raised meats.
- The estimated 2012 annual effective tax rate was 39.0%, compared with 38.5% for full-year 2011. Renewal of certain federal tax credits could lower the estimate by up to 0.4 percentage points.
- Management said cash, investments and operating cash flow should meet foreseeable capital, working-capital and other needs. The company reported no off-balance-sheet arrangements.
Risks, contingencies and unusual items
- Ongoing ADA-related class actions concern serving-line height. The individual plaintiff received minimal damages; the court had not yet ruled on final attorney-fee amounts. The company said additional exposure could not be reasonably estimated.
- Federal immigration authorities’ investigation of employee work-authorization documents remained ongoing, alongside a U.S. Attorney’s criminal investigation. Potential fines or other liabilities could not be determined; employee terminations could disrupt operations and temporarily increase training costs.
- A California employee-practices lawsuit remained subject to appeal over class certification. Other ordinary-course claims were also disclosed; management did not expect them to have a material effect, but acknowledged adverse outcomes could affect results or cash flows.
- Stock-based compensation expense was $20.8 million versus $9.3 million. A $5.6 million cumulative adjustment followed an increased estimate of performance-based awards expected to vest, adding $0.11 to basic and diluted EPS.
- The company began funding deferred-compensation obligations through a rabbi trust in Q1. Trust assets are subject to creditor claims in insolvency and unavailable for general corporate purposes.
- Management cited exposure to interest rates, commodity prices and, to a lesser extent, foreign currency. The filing reported a 0.34% weighted-average rate on cash and specified investment balances.
Most important facts for investors to verify
- Whether comparable-sales growth and restaurant-opening plans tracked management’s 2012 outlook.
- Whether food inflation continued to pressure restaurant margins, and whether pricing or sourcing changes offset it.
- The cash-flow effect of stock-compensation tax benefits and the pace of capital spending and share repurchases.
- Developments and potential financial exposure from the ADA, immigration and employment-related proceedings.
- Whether the estimated tax rate changed, including any renewal of federal tax credits.