Chipotle Mexican Grill, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015. Chipotle operated 1,831 restaurants, including 1,800 U.S. Chipotle locations, international Chipotle restaurants, ten ShopHouse restaurants, and two Pizzeria Locale restaurants through a consolidated entity. The company reports one operating segment.
Financial performance and liquidity
| Metric | Q1 2015 | Q1 2014 / comparison |
|---|---|---|
| Revenue | $1,089.0 million | $904.2 million; up 20.4% |
| Operating income | $197.8 million; 18.2% margin | $135.7 million; 15.0% margin |
| Net income | $122.6 million; 11.3% margin | $83.1 million; 9.2% margin |
| Diluted EPS | $3.88 | $2.64 |
| Comparable restaurant sales | Up 10.4% | Up 13.4% |
| Operating cash flow | $242.7 million | $179.8 million |
| Capital expenditures | $59.4 million | $47.2 million |
Food, beverage and packaging costs were 33.9% of revenue versus 34.5%; labor was 22.4% versus 23.0%; occupancy was 5.8% versus 6.1%; and other operating costs were 10.4% versus 10.5%. General and administrative expense declined to $63.1 million from $66.9 million, or 5.8% of revenue versus 7.4%. Depreciation and amortization was $30.6 million, and the effective tax rate was 38.4% versus 39.1%.
Cash and cash equivalents were $543.0 million at March 31, up from $419.5 million at December 31, 2014. Current and long-term investments totaled $878.7 million, making cash and investments approximately $1.42 billion. Current assets were $984.7 million and current liabilities $277.1 million. The balance sheet lists no borrowings; total liabilities were $569.4 million. Cash increased $123.5 million during the quarter. Financing cash use included $23.2 million of share repurchases; $179.0 million remained available under repurchase authorizations. The company stated that cash, investments, and operating cash flow should meet foreseeable needs and reported no off-balance-sheet arrangements.
Material changes and management commentary
- Revenue growth reflected 48 net restaurant additions, which contributed $93.9 million of the increase, and comparable sales growth, which contributed $90.9 million. The company opened 49 restaurants in the quarter.
- Comparable sales growth was driven mainly by higher average check, including a 6.1% benefit from the 2014 nationwide menu price increase, and to a lesser extent by increased customer visits. Average restaurant sales were $2.516 million, up 13.0% year over year.
- Management attributed lower food costs as a share of revenue partly to pricing and dairy-price relief, offset by higher beef and tortilla costs. Labor and occupancy ratios benefited from higher sales; lower G&A reflected reduced stock-based compensation and the absence of the prior-year managers’ conference.
- Loss on disposal of assets increased to $4.2 million, including a $2.8 million write-off for an internally developed software program the company chose not to implement.
- Comprehensive income was $117.9 million. Accumulated other comprehensive loss increased to $5.1 million, including the effect of foreign currency translation.
Outlook, risks, and contingencies
- Management expected 190–205 new restaurant openings in 2015 and low-to-mid-single-digit comparable sales growth for the full year. It estimated that the pork shortage could reduce comparable sales by up to 2% until adequate supply was restored.
- After suspending purchases from a pork supplier that failed the company’s animal-housing standards, more than one-third of restaurants were not serving carnitas. The company said some restaurants might temporarily serve conventionally raised beef or chicken if supply constraints required it.
- Management expected food costs as a percentage of revenue to increase slightly for full-year 2015 and other operating costs as a percentage of revenue to rise from Q1 levels. Full-year stock-based compensation was expected to be approximately $80 million; G&A dollars were expected to remain generally consistent with 2014. The estimated 2015 effective tax rate was 38.7%.
- Risks include food and packaging commodity-price volatility, supplier availability, weather and seasonality, wage inflation, and foreign-currency and interest-rate exposure. Most ingredient purchases were effectively at spot prices; some supplier arrangements included minimum purchase obligations.
- The company continued to cooperate with federal investigations concerning employee work-authorization verification and related disclosures, including SEC and U.S. Attorney investigations. Potential fines or other liabilities could not be reasonably estimated. Other ordinary-course claims were not expected by management to materially affect the company, though adverse outcomes could do so.
- Disclosure controls were judged effective at quarter-end. A new human-resources and payroll system was implemented during the quarter and was still being integrated.
Important facts for investors to verify
- Whether pork supply improves as expected and how the shortage affects restaurant availability, customer visits, and comparable sales.
- Whether the 2015 opening target and low-to-mid-single-digit comparable-sales outlook remain achievable, given seasonality and weather impacts.
- Trends in food, labor, and other operating costs, particularly commodity prices and wage inflation, against management’s full-year expectations.
- Developments in the work-authorization and related government investigations, for which potential financial exposure was not estimable.
- Cash-flow quality and use of liquidity, including capital spending, share repurchases, and the composition and maturities of investments.