Chipotle Mexican Grill, Inc. — FY2010 Form 10-K
Reporting period: Fiscal year ended December 31, 2010; comparisons are primarily with FY2009. The company operated 1,084 restaurants at year-end, including 1,081 in the U.S., two in Canada and one in the U.K. It reports one operating segment.
Financial performance
| Metric | FY2010 | FY2009 | Change / context |
|---|---|---|---|
| Revenue | $1,835.9 million | $1,518.4 million | Up 20.9% |
| Comparable restaurant sales | +9.4% | +2.2% | 2010 growth was driven primarily by customer visits |
| Operating income | $287.8 million | $203.7 million | Up 41.3%; operating margin approximately 15.7%, versus 13.4% |
| Net income | $179.0 million | $126.8 million | Up 41.1%; net margin approximately 9.7%, versus 8.4% |
| Diluted EPS | $5.64 | $3.95 | Up approximately 42.8% |
| Cash from operations | $289.2 million | $260.7 million | Up 10.9% |
| Capital expenditures | $113.2 million | $117.2 million | Primarily restaurant development and reinvestment |
| Cash and current investments | $349.6 million | $269.6 million | Company-reported cash and short-term investment balance |
| Total assets / liabilities | $1,121.6 million / $310.7 million | $961.5 million / $258.0 million | Shareholders’ equity was $810.9 million at 2010 year-end |
Food, beverage and packaging costs were 30.6% of revenue, compared with 30.7% in 2009; labor costs were 24.7%, versus 25.4%. Occupancy costs were 7.0%, versus 7.5%, and other operating costs were 11.1%, versus 11.5%. The effective tax rate was 38.1%, compared with 37.9%.
Liquidity, debt and capital allocation
- Current assets were $406.2 million and current liabilities were $123.1 million at year-end, a current ratio of approximately 3.3.
- No borrowings were outstanding under the $25 million revolving credit facility at December 31, 2010; the company was in covenant compliance. It gave notice to terminate the facility effective February 23, 2011, planning to rely on cash, investments and operating cash flow.
- Operating lease commitments totaled $1.873 billion, including $114.8 million due within one year. These are contractual commitments, not reported borrowings. Deemed landlord financing was $3.8 million.
- FY2010 stock repurchases totaled $115.9 million under authorized programs; $70.1 million remained available at year-end. The company paid no cash dividends and did not anticipate doing so in the foreseeable future.
Material changes, outlook and commentary
- Revenue increased 20.9%, supported by 128 net restaurant additions and stronger comparable sales; the year-end restaurant count rose from 956 to 1,084. Average restaurant sales increased to $1.840 million from $1.728 million.
- Management expected to open 135–145 restaurants in 2011, with openings weighted toward the fourth quarter. Planned 2011 capital expenditures were approximately $131 million, including $111 million for new restaurants. Average development cost per restaurant was expected to remain near 2010’s $795,000.
- Management forecast low-single-digit comparable sales growth in 2011, citing difficult comparisons and continued consumer uncertainty. It expected food costs as a percentage of revenue to rise because of inflation, weather-related crop impacts and Food With Integrity sourcing initiatives; restoration of naturally raised chicken availability was also expected to increase costs.
- Food costs benefited in 2010 from favorable rice and corn prices and use of commodity chicken in some markets amid supply constraints. Naturally raised chicken was available in 86% of restaurants at year-end; shortages were expected to continue at least through the first half of 2011.
- Management reported $349.6 million in cash and short-term investments and believed cash and operating cash flow would cover capital needs for at least 24 months. Planned new concept exploration included one Asian-inspired restaurant in 2011; the company said its primary focus remained Chipotle growth.
Risks, contingencies and unusual items
- Potential McDonald’s tax indemnity: The company estimated a possible indemnification obligation exceeding $450 million if its 2009 share conversion caused McDonald’s 2006 exchange offer to lose tax-free status. The amount could vary substantially, and the filing does not establish that payment is due.
- Litigation: California ADA cases followed an appeals court ruling that the former serving-line design violated the ADA; potential liability could not be reasonably estimated. A California employment-practices case also remained subject to appeal, with potential liability not estimable.
- Work authorization audits: A 2010 Minnesota audit led to termination of approximately 450 employees. DHS also requested records for Virginia and Washington, D.C.; the company could not determine whether fines or other liabilities would result.
- Supply, food safety and cost exposure: The company depends on selected suppliers for key ingredients and has limited long-term supplier contracts. Shortages, food-borne illness, weather, commodity inflation and the higher cost or limited availability of naturally raised ingredients could affect menu availability, traffic and margins.
- Other operating risks: Rapid expansion, new-market execution, employee hiring and retention, wage and health-care costs, competition, consumer spending, seasonality, and regulatory requirements could pressure results. Management also noted potential long-term expense increases from health-care reform.
- Auditors issued unqualified opinions on the financial statements and internal control over financial reporting; management concluded disclosure controls and internal controls were effective at year-end.
Most important facts for investors to verify
- Whether the 2011 plan delivered the expected 135–145 openings and low-single-digit comparable sales growth, and how the fourth-quarter-weighted schedule affected results.
- Actual food-cost inflation and naturally raised ingredient availability, particularly chicken, beef, dairy and avocados, and the resulting margin impact.
- The status and potential financial exposure of the McDonald’s tax indemnity, ADA litigation, employment litigation and work authorization audits.
- Cash generation and capital spending relative to restaurant expansion, repurchases and substantial long-term operating lease commitments.
- Whether new restaurants and international locations achieved expected sales and profitability while the company maintained its operating culture and food-safety standards.