Chipotle Mexican Grill, Inc. — Q1 2019 10-Q
Reporting period: Three months ended March 31, 2019, compared with the three months ended March 31, 2018, unless otherwise noted. Chipotle operated 2,504 restaurants at quarter-end, including 2,502 Chipotle restaurants and two Pizzeria Locale restaurants. The company reports one operating segment.
Financial performance and liquidity
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $1,308.2 million | $1,148.4 million | +13.9% |
| Comparable restaurant sales | +9.9% | +2.2% | +7.7 percentage points |
| Income from operations | $110.2 million | $92.8 million | +18.7% |
| Operating margin | 8.4% | 8.1% | +0.3 percentage points |
| Net income | $88.1 million | $59.4 million | +48.3% |
| Diluted EPS | $3.13 | $2.13 | +46.9% |
| Effective tax rate | 22.2% | 36.9% | Down 14.7 percentage points |
| Operating cash flow | $182.6 million | $201.1 million | Down $18.5 million |
Net margin was approximately 6.7%, versus 5.2% a year earlier. Restaurant operating costs (food, labor, occupancy, and other operating costs) declined to 79.0% of revenue from 80.5%. Food costs were 32.2% of revenue (32.4%); labor 26.7% (27.8%); occupancy 6.8% (7.4%); and other operating costs 13.4% (12.9%). Higher marketing and delivery costs contributed to the increase in other operating costs.
Cash and cash equivalents were $277.7 million and investments were $457.4 million at March 31, 2019, for a combined $735.0 million. The company said cash, investments, and operating cash flow should meet foreseeable needs. Capital expenditures were $64.2 million; operating cash flow less these expenditures was approximately $118.4 million. The company had no outstanding debt or committed credit facilities disclosed. It reported $2.67 billion of operating lease liabilities, recognized after adopting the new lease accounting standard; these are lease obligations, not reported borrowings.
Material changes and notable items
- Revenue growth reflected a 9.9% comparable-sales increase, including 5.8% more comparable transactions and a 4.5% increase in average check. Average restaurant sales rose 5.5% to $2.048 million. Menu price increases contributed 2.5% to average check growth.
- Out-of-restaurant orders rose to 15.7% of revenue from 8.8%. Chipotle Rewards launched nationally in Q1; related revenue deferral reduced comparable-sales growth by 0.3%.
- Net income growth was aided by the lower effective tax rate, which management attributed primarily to unfavorable discrete tax items in Q1 2018 and favorable stock-option-exercise items in Q1 2019.
- General and administrative expense increased 33.2% to $102.7 million, including higher performance-based compensation, restructuring costs, and outside services. Restructuring costs were $5.7 million in Q1 and $48 million cumulatively since commencement.
- Cash from operations declined year over year. Investing cash outflow was $93.3 million, including $64.2 million of capital expenditures; financing cash outflow was $63.5 million, including treasury-stock purchases.
- On January 1, 2019, Chipotle adopted lease accounting Topic 842. The adoption added lease assets and liabilities to the balance sheet; comparative 2018 periods were not recast. Total assets at March 31, 2019 were $4.63 billion, versus $2.27 billion at December 31, 2018, largely reflecting lease recognition.
Outlook, risks, and contingencies
- Management expected full-year 2019 comparable restaurant sales growth in the mid-to-high single digits, including the estimated Chipotle Rewards revenue-deferral effect, and planned approximately 140–155 new restaurant openings. Chipotle opened 15 and closed two restaurants in Q1.
- Management estimated total corporate restructuring costs of approximately $49–$58 million, including costs already incurred, with a further $1–$9 million expected during the remainder of 2019. The separate restaurant-closure initiative was expected to cost $37–$43 million; $35.9 million had been incurred, and 47 Chipotle and five Pizzeria Locale restaurants had closed under that initiative.
- Food, packaging, utility, and other commodity costs remain exposed to market, weather, supply, and foreign-demand factors. A majority of purchases are effectively at spot prices; cost increases may not be fully offset by menu pricing.
- Chipotle accrued $24.7 million for anticipated payment-card network claims and assessments related to the 2017 data-security incident. Settlements were reached in two related actions; one was finalized and court approval of the other was pending. Management did not expect the settlements to have a material financial impact, but the latter settlement could exceed estimates or insurance coverage.
- A grand jury subpoena received April 18, 2019 sought information about food-illness incidents at specified restaurants. Chipotle said it would cooperate; potential fines or penalties could not be estimated. Shareholder litigation remained subject to appeal or further proceedings, with outcomes and potential liabilities not reasonably estimable.
- The company repurchased 92,545 shares in Q1 for approximately $52.5 million under its publicly announced program; $105.1 million remained authorized at quarter-end. Seasonal sales patterns and the timing of openings, closures, compensation, and unusual events can affect quarterly results.
Important facts for investors to verify
- Whether comparable-sales momentum and digital/out-of-restaurant order growth support the 2019 outlook, and how loyalty rewards affect reported revenue.
- Whether restaurant-level cost improvements persist amid wage inflation, commodity exposure, and higher marketing and delivery expenses.
- The pace and total cost of corporate restructuring and restaurant closures, compared with management’s estimates.
- The cash-flow and balance-sheet implications of lease commitments, including the $2.67 billion recorded lease liability and future lease payments.
- Developments in food-safety investigations and data-security claims, including possible uninsured costs or penalties.
- The extent to which Q1 earnings growth reflects ongoing operations versus the unusually favorable year-over-year tax-rate comparison.