Chipotle Mexican Grill, Inc. — Q2 2022 Form 10-Q
Business context and reporting period. Unaudited results cover the quarter and six months ended June 30, 2022, compared with the same periods in 2021. Chipotle operated 3,052 restaurants at quarter-end: 2,999 in the U.S., 49 internationally, and four Pizzeria Locale restaurants. The company reports one segment.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $2,213.3 million | $1,892.5 million | $4,233.9 million | $3,634.1 million |
| Operating income | $337.6 million | $245.5 million | $527.8 million | $407.0 million |
| Net income | $259.9 million | $188.0 million | $418.2 million | $315.1 million |
| Diluted EPS | $9.25 | $6.60 | $14.83 | $11.04 |
| Operating margin | 15.3% | 13.0% | 12.5% | 11.2% |
| Net margin | 11.7% | 9.9% | 9.9% | 8.7% |
Q2 revenue increased 17.0% year over year; comparable restaurant sales rose 10.1%. Management attributed comparable-sales growth chiefly to menu price increases and, to a lesser extent, higher transactions, partly offset by smaller group sizes. In-restaurant sales rose 35.9%; digital sales were 39.0% of food and beverage revenue, down from 47.4% as in-restaurant sales recovered.
Q2 restaurant operating costs were 74.8% of revenue, versus 75.5% a year earlier. Food, beverage and packaging costs were 30.4% of revenue in both periods; labor costs increased to 24.8% from 24.5%, while occupancy and other operating costs improved as percentages of revenue. Inflation in food, wages, utilities and packaging remained a pressure. Q2 diluted EPS increased 40.2%; the filing notes a net $0.05 per-share impact from specified expenses, partly offset by an unrealized investment gain.
Cash, liquidity and debt. Six-month operating cash flow was $569.7 million, compared with $562.9 million. Investing activities used $249.2 million, including $196.5 million of property and equipment purchases; financing activities used $614.4 million, chiefly reflecting $521.9 million of treasury-stock purchases. Cash, cash equivalents and restricted cash totaled $551.8 million at June 30, down from $846.2 million at year-end 2021. Cash and marketable investments were approximately $1.1 billion, excluding restricted cash and non-marketable investments. The company had no borrowings under its $500 million revolving facility, which expires in April 2026, and reported compliance with its covenants.
At quarter-end, total assets were $6.55 billion and shareholders’ equity was $2.15 billion. Long-term operating lease liabilities were $3.39 billion; these lease obligations are significant even though the company reported no drawn debt.
Material changes and notable items
- Six-month revenue increased 16.5%; comparable sales increased 9.5%. The company opened 93 restaurants in the first half, including 42 in Q2, and permanently closed two in the first half.
- Q2 general and administrative expense declined 3.6%, primarily because prior-year stock-based compensation included expense from a modification of 2018 performance awards.
- Interest and other income included a $3.3 million gain related to the Tractor Beverages investment and a $7.1 million gain on Tractor warrants following an unrelated investment transaction. These gains increased reported income.
- The board approved an additional $300 million of repurchase authorization in May. The company repurchased $521.9 million of stock in the first half; $319.7 million remained authorized at June 30.
- Chipotle announced a $50 million Cultivate Next venture fund; no investments had been made from the committed funds by June 30.
Outlook, risks and contingencies
Management said it remained confident in the opportunity to more than double Chipotle restaurants in North America and expected to continue investing in new restaurants, existing locations and share repurchases. It stated that cash, investments and operating cash flow should meet foreseeable needs and that positive cash flow was expected for the foreseeable future, assuming no significant decline in comparable sales. The filing does not provide a specific full-year revenue, earnings or restaurant-opening target.
Key risks include food and packaging inflation, labor costs and availability, supply-chain disruption, consumer resistance to menu-price increases, food safety, competition, technology and cybersecurity, COVID-19 impacts, and execution of restaurant growth. The company reported an accrued legal liability of $31.1 million, including for ongoing New York City Fair Work Week and earned sick-time proceedings; mediation was ongoing. Management did not expect losses above the accrued amount to be material. It reported no material changes to previously disclosed risk factors and effective disclosure controls.
Important facts for investors to verify
- Whether pricing can continue to offset food, labor, utility and packaging inflation without weakening traffic or customer demand.
- How much reported earnings benefited from the Tractor-related investment gains and other nonrecurring items.
- The pace and returns of restaurant openings, capital spending and Chipotlane development.
- Whether buybacks at the reported pace remain consistent with liquidity needs and the company’s growth plans.
- Developments in the New York City proceedings and other legal matters, and whether accrued reserves remain adequate.