Chipotle Mexican Grill, Inc. — Q1 2014 Form 10-Q
Business context and period: The filing covers the three months ended March 31, 2014, compared with the three months ended March 31, 2013. Chipotle operates fast-casual restaurants; at quarter-end it reported 1,637 restaurants across its concepts and markets, including 1,614 Chipotle restaurants in the United States. It opened 44 restaurants during the quarter.
Financial performance
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Revenue | $904.2 million | $726.8 million | +24.4% |
| Income from operations | $135.7 million | $120.0 million | +13.0% |
| Net income | $83.1 million | $76.6 million | +8.5% |
| Diluted EPS | $2.64 | $2.45 | +7.8% |
| Net cash from operating activities | $179.8 million | $125.3 million | +$54.5 million |
- Comparable restaurant sales increased 13.4%, versus 1.0% a year earlier; average restaurant sales were $2.226 million, up 5.7%. Management attributed comparable-sales growth chiefly to increased customer visits. New restaurants also contributed to revenue growth.
- Operating margin was approximately 15.0%, down from 16.5%; net margin was approximately 9.2%, down from 10.5%.
- Food, beverage and packaging costs rose to 34.5% of revenue from 33.0%, reflecting inflation, particularly in beef, avocados and dairy. Labor costs improved to 23.0% of revenue from 23.6%; occupancy declined to 6.1% from 6.6%. Other operating costs were 10.5% of revenue in both periods.
- General and administrative expense increased 51.4% to $66.9 million, or 7.4% of revenue versus 6.1%, mainly due to higher stock-based compensation, payroll and benefits, and litigation costs. The filing reports $27.4 million of stock-based compensation expense in the cash-flow reconciliation, compared with $15.4 million in Q1 2013.
- Capital expenditures were $47.2 million, compared with $36.5 million. Cash and cash equivalents ended the quarter at $411.6 million, up from $323.2 million at year-end; cash and investments totaled approximately $1.02 billion. The balance sheet reports no borrowings or other debt.
- Current assets were $790.8 million and current liabilities $227.2 million. Management said cash, investments and operating cash flow should fund planned needs for the foreseeable future. The company reported no off-balance-sheet arrangements.
Material changes, outlook and risks
- Management expected to open 180–195 restaurants in 2014, including a small number of ShopHouse and/or Pizzeria Locale locations. It projected 2014 comparable-sales growth in the high single digits, excluding the effect of a planned mid-single-digit menu price increase beginning in Q2.
- Management expected food costs as a percentage of revenue to be higher for full-year 2014 than in 2013, even after the menu price increase. It also anticipated slightly higher marketing spend as a percentage of revenue, with larger increases in Q2 and Q3 for a new advertising campaign, and higher G&A as a percentage of revenue.
- The estimated 2014 effective tax rate was 39.1%, compared with 38.7% for 2013; the Q1 2014 rate was 39.1%, versus 36.3% a year earlier. Management cited expiration of federal tax credits as a factor.
- Commodity prices are a material exposure; most purchases are effectively at spot prices. Management noted inflation and supplier, weather, demand and availability risks. Some restaurants served conventionally raised beef, and a small number served commodity chicken temporarily, due to supply constraints.
- Federal authorities were conducting civil and criminal investigations related to employee work-authorization compliance and related disclosures. The company said it could not estimate potential fines, penalties or other liabilities. A consolidated shareholder derivative action concerning these matters and other allegations had a proposed settlement subject to court approval; associated attorneys’ fees had already been accrued. The company said other ordinary-course claims were not expected to have a material adverse effect.
- The company repurchased approximately 23,000 shares for $12.7 million in Q1; $77.5 million remained under the then-current authorization. On April 17, 2014, the board authorized an additional $100 million of repurchases. Purchases remain subject to market conditions and may be modified or discontinued.
- Disclosure controls were concluded to be effective as of March 31, 2014; the company reported no material change in internal control over financial reporting and no material change to its risk factors since its 2013 Form 10-K.
Important facts for investors to verify
- Whether comparable-sales momentum and planned menu pricing offset continued food-cost inflation without materially affecting customer visits.
- Restaurant opening execution, new-unit economics and the contribution of non-comparable restaurants to growth.
- Trends in stock-based compensation, G&A, operating margin and the effective tax rate.
- Developments, potential costs and operational effects of the work-authorization investigations and the court’s decision on the proposed derivative-action settlement.
- Cash and investment balances, capital spending and the pace and terms of share repurchases.