Chipotle Mexican Grill, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; financial comparisons are with the three months ended March 31, 2012 unless noted. Chipotle operated 1,458 restaurants at quarter-end, including one ShopHouse location, versus 1,262 a year earlier. Amounts below are in millions except per-share data and percentages.
Financial performance and liquidity
| Metric | Q1 2013 | Q1 2012 / prior date | Change |
|---|---|---|---|
| Revenue | $726.8 | $640.6 | +13.4% |
| Operating income | $120.0 | $102.2 | +17.4% |
| Operating margin | 16.5% | 16.0% | +0.5 percentage points |
| Net income | $76.6 | $62.7 | +22.2% |
| Net margin | 10.5% | 9.8% | +0.7 percentage points |
| Diluted EPS | $2.45 | $1.97 | +24.4% |
| Cash from operations | $125.3 | $29.4 | +$95.9 |
| Capital expenditures | $36.5 | $41.9 | -$5.4 |
| Cash and cash equivalents | $346.9 | $322.6 at Dec. 31, 2012 | +$24.4 |
| Total assets | $1,712.7 | $1,668.7 at Dec. 31, 2012 | +$44.0 |
| Total liabilities | $424.6 | $422.7 at Dec. 31, 2012 | +$1.8 |
Food, beverage and packaging costs were 33.0% of revenue, up from 32.2%; labor costs were 23.6%, versus 23.7%; occupancy was 6.6%, versus 6.3%; and other operating costs were 10.5%, versus 10.3%. General and administrative expense declined to 6.1% of revenue from 7.7%, principally reflecting lower stock-based compensation and employer taxes. The effective tax rate was 36.3%, compared with 39.0%.
Cash, current and long-term investments totaled approximately $703.0 million at March 31. Current assets were $575.5 million and current liabilities $182.1 million. No debt is presented on the balance sheet, and the company reported no off-balance-sheet arrangements. Operating cash flow benefited from working-capital movements, including income tax payable/receivable; the filing does not attribute the full year-over-year increase to recurring operating performance. Investing used $51.6 million, while financing used $49.0 million, primarily reflecting $51.0 million of share repurchases. The company repurchased 186,060 shares at an average $314.20 and had $149.2 million available under authorizations.
Material changes and operating trends
- Revenue growth was driven mainly by restaurant expansion: 48 openings in Q1 2013 versus 32 in Q1 2012. Comparable restaurant sales rose 1.0%, sharply below the prior-year 12.7%; average restaurant sales were $2.105 million versus $2.072 million.
- Management attributed comparable-sales growth primarily to increased customer visits and the impact of Pacific-region menu price increases from March 2012. Leap day and the timing of Easter adversely affected the comparison.
- Food cost inflation, particularly in salsa ingredients and produce, dairy, and chicken, pressured restaurant margins. Avocado price relief and prior menu pricing partly offset the pressure.
- Quarterly income taxes included a $3.275 million benefit from federal tax credits enacted in January 2013 relating to 2012, lowering the quarter’s effective tax rate by 2.7 percentage points.
Outlook, risks and contingencies
- Management expected to open 165–180 restaurants in 2013, including any ShopHouse openings, and forecast full-year comparable restaurant sales growth of flat to low single digits, assuming no menu price increases.
- Management expected food-cost inflation to continue and food costs as a percentage of revenue to rise. It said menu price increases later in 2013 were possible, depending on economic conditions, consumer confidence, and sales trends. Marketing and promotional spending was expected to increase during the remainder of the year.
- Management estimated a 2013 annual effective tax rate of 38.5%, compared with 39.3% for 2012. It believed cash, investments, and operating cash flow would fund foreseeable capital, working-capital, and corporate needs.
- Some locations temporarily served conventionally raised beef because of supply constraints; further temporary use of conventionally raised meats was possible. Management said affected restaurants disclose the change to customers.
- Government civil and criminal investigations concern employee work-authorization compliance and related disclosures. In April 2013, the U.S. Attorney’s civil division requested employee work-authorization documents dating back to 2007. The company said it was cooperating, but could not estimate potential fines or liabilities. It warned that large-scale employee terminations could disrupt operations and raise training costs.
- Other disclosed litigation includes California ADA cases, shareholder derivative actions, and securities class actions. The company said outcomes and potential liabilities could not be reasonably estimated for the specified cases. It did not believe ordinary-course claims would materially affect its financial position, results, liquidity, or capital resources, while noting that more or larger successful claims could have adverse effects.
- Results are seasonal and affected by weather, trading days, new-store ramp-up, and marketing timing; interim results are not necessarily indicative of full-year results. The filing reported no material change in risk factors from the 2012 Form 10-K.
Important facts for investors to verify
- Whether weak comparable-sales growth improves, and how much future revenue depends on new restaurant openings.
- Food inflation, menu pricing, and marketing spending effects on restaurant-level and operating margins.
- The sustainability of operating cash flow, given significant tax-related and other working-capital movements.
- Developments, potential costs, and operational effects of the work-authorization investigations and shareholder litigation.
- Actual restaurant openings, comparable-sales results, and effective tax rate versus management’s stated outlook.