Chipotle Mexican Grill, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Chipotle operated 2,595 U.S. and 40 international Chipotle restaurants, plus three Pizzeria Locale restaurants, at quarter-end.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue | $1,410.8 million | $1,308.2 million | +7.8% |
| Operating income | $71.1 million | $110.2 million | -35.4% |
| Net income | $76.4 million | $88.1 million | -13.3% |
| Diluted EPS | $2.70 | $3.13 | -13.7% |
| Cash provided by operations | $182.1 million | $182.6 million | Nearly unchanged |
Operating margin declined to approximately 5.0% from 8.4%; net margin was approximately 5.4% versus 6.7%. Restaurant operating costs rose to 82.4% of revenue from 79.0%. At March 31, cash and cash equivalents were $500.3 million, investments were $381.0 million, and restricted cash was $28.0 million. The company reported no material off-balance-sheet arrangements; the balance sheet presents no borrowings as a separate debt line. Long-term operating lease liabilities were $2.76 billion.
Performance changes and business drivers
- Comparable restaurant sales increased 3.3%, with transactions down 1.4%; the reported comparison included a 1.3% leap-day benefit. Comparable sales grew 14.4% through February, then fell 16.0% in March and 35.0% for the week ended March 29.
- Digital sales rose 80.8% to $371.8 million, or 26.3% of quarterly sales. In March, digital sales rose 102.6% year over year and reached 37.6% of sales.
- Food, beverage and packaging costs were 32.8% of revenue versus 32.2%; labor was 27.9% versus 26.7%; other operating costs were 14.9% versus 13.4%. Management cited ingredient costs, wage pressures, COVID-related assistance pay and bonuses, free delivery promotions, and the difficulty of adjusting purchasing and staffing to rapidly lower sales.
- Q1 included $12.8 million of restaurant asset impairment, corporate restructuring and certain other costs, per management’s highlights. Impairment, closure and asset-disposal expense was $9.3 million versus $6.9 million; COVID-related changes in expected restaurant cash flows contributed to higher impairments.
- The effective tax rate was -3.4%, versus 22.2%, primarily due to excess tax benefits from stock-based compensation. This tax benefit helped net income exceed operating-income trends.
COVID-19, outlook, liquidity and contingencies
- Dining rooms were closed, remaining open restaurants offered takeout, digital ordering and delivery, and about 100 locations were temporarily closed at quarter-end. Management withdrew its fiscal 2020 comparable-sales and new-restaurant-opening guidance due to uncertainty.
- Management suspended share repurchases in March, reduced discretionary costs and delayed most remodels and some construction. It reported $881.2 million of cash and short-term investments and expected about $100 million of near-term liquidity benefit from CARES Act tax provisions. Management believed available cash and operating cash flow would fund foreseeable needs, while noting a longer-than-expected recovery could require further conservation.
- Management reported no significant supply-chain disruptions to date but warned that COVID-19 could affect suppliers, staffing, customer traffic, construction, and costs. Landlord rent deferrals or abatements were under discussion; outcomes were uncertain. Previously planned fiscal 2020 guidance was withdrawn, not replaced with specific numerical guidance.
- On April 21, 2020, after quarter-end, Chipotle signed a three-year Deferred Prosecution Agreement to resolve a DOJ food-safety investigation. It requires a $25 million fine and continued food-safety compliance measures; the DOJ agreed to seek dismissal after the term if the company complies. A $45.6 million estimated liability was included in accrued liabilities at March 31; the filing does not clearly identify that balance as the DPA fine.
- A shareholder securities class action remained on appeal; the company said potential liability could not be reasonably estimated. The company also disclosed general litigation exposure and risks of additional costs or reputational harm if it breaches the DPA.
Important facts for investors to verify
- Subsequent-quarter sales, traffic and digital-sales trends as dining-room restrictions changed, and whether restaurant costs normalized.
- Liquidity and cash use, including CARES Act benefits, capital spending, and the timing and amount of the DOJ fine payments.
- Progress and compliance under the three-year DPA, including any developments affecting food-safety obligations or litigation exposure.
- Whether delayed openings, remodels, supplier availability, staffing, and lease discussions materially affect operations or the company’s recovery.