Chipotle Mexican Grill, Inc. — FY2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015; the filing also provides fourth-quarter results. Unless otherwise noted, amounts below are in U.S. dollars.
Business context
Chipotle operated 2,010 restaurants at year-end: 1,971 Chipotle locations, 13 ShopHouse restaurants, and three Pizzeria Locale restaurants, plus Chipotle locations in Canada and Europe. The company reported one operating segment. It opened 229 restaurants during 2015.
Financial performance and liquidity
| Metric | FY2015 | FY2014 | Change / context |
|---|---|---|---|
| Revenue | $4.501 billion | $4.108 billion | Up 9.6% |
| Comparable restaurant sales | +0.2% | +16.8% | Q4 2015: down 14.6%; December: down 30% |
| Operating income | $763.6 million | $710.8 million | Up 7.4%; operating margin approximately 17.0%, versus 17.3% |
| Net income | $475.6 million | $445.4 million | Up 6.8%; net margin approximately 10.6%, versus 10.8% |
| Diluted EPS | $15.10 | $14.13 | Up 6.9% |
| Operating cash flow | $683.3 million | $682.1 million | Nearly flat |
| Capital expenditures | $257.4 million | $252.6 million | Cash flow less capital expenditures was approximately $425.9 million |
| Cash and current investments | $663.2 million | — | Also held $622.9 million of long-term investments |
| Total liabilities / equity | $597.1 million / $2.128 billion | $514.9 million / $2.012 billion | No conventional borrowing balance is separately reported; operating lease commitments totaled $3.468 billion |
Food, beverage and packaging costs were 33.4% of revenue, down from 34.6%; labor costs rose to 23.2% from 22.0%. Occupancy was 5.8% versus 5.6%, and other operating costs were 11.4% versus 10.6%. The effective tax rate was 38.2%, compared with 37.6%. Year-end current assets were $814.6 million and current liabilities were $279.9 million.
Material changes versus the prior comparable period
- Revenue growth slowed to 9.6% from 27.8%, while comparable sales growth fell to 0.2% from 16.8%. New restaurants were the primary driver of 2015 revenue growth.
- Food-safety incidents beginning in late 2015 sharply weakened sales: Q4 comparable sales fell 14.6%, and management reported a decline of more than 36% in January 2016.
- Q4 revenue was $997.5 million versus $1.070 billion a year earlier; Q4 operating income was $103.6 million versus $187.9 million, and net income was $67.9 million versus $121.2 million.
- FY2015 included approximately $16 million of non-recurring costs related to food-safety incidents. The filing also cites a $12.2 million cumulative reduction in stock-compensation expense from a revised estimate of performance awards expected to vest.
- The company repurchased $485.8 million of shares during 2015. It reported $116.4 million remaining under an existing authorization at year-end.
Outlook, risks and unusual items
- Management expected to open 220–235 restaurants in 2016 and forecast approximately $260 million of capital expenditures, including about $200 million for new restaurant construction before landlord reimbursements.
- Because of the sales decline and related costs, management expected first-quarter 2016 net income to be approximately break-even. It could not provide estimates for future comparable-sales trends.
- Enhanced food-safety procedures were expected to raise food costs as a percentage of revenue. Management estimated the ongoing net food-and-labor cost impact at approximately 2% when fully implemented and operations normalized. Lower sales and increased promotions were also expected to pressure margins.
- The company planned substantial marketing and free or discounted food promotions in the first half of 2016 to regain customers. Management cautioned that these efforts might not restore sales.
- A federal criminal investigation into food-safety matters was ongoing; the filing said potential fines or penalties could not then be reasonably estimated. The company also disclosed customer claims, lawsuits, and a shareholder class action, with outcomes and potential liabilities uncertain.
- Other risks include ingredient supply constraints and cost inflation, labor costs and staffing, competition, restaurant development and lease costs, and the possibility of further food-safety incidents. Food costs as a percentage of revenue were expected to increase in 2016; occupancy and other operating costs were also expected to rise as a percentage of revenue.
- The company reported effective disclosure controls and internal control over financial reporting; Ernst & Young issued unqualified opinions on the financial statements and internal-control audit.
Important facts for investors to verify
- Subsequent comparable-sales trends, customer recovery, and whether planned promotions restore traffic and repeat visits.
- Implementation and effectiveness of enhanced food-safety procedures, including their actual labor and food-cost impact.
- Investigation, litigation, and claims developments, including any fines, settlements, or additional costs.
- Cash generation, investment balances, share repurchases, and the funding implications of restaurant growth and substantial operating lease commitments.
- Whether new restaurant openings meet the stated plan and achieve expected sales and returns amid depressed demand and elevated operating costs.