Chipotle Mexican Grill, Inc. — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012; unaudited results. Chipotle operated 1,350 restaurants at quarter-end, including one ShopHouse location, and reported one operating segment.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $700.5 million | $591.9 million | $2,032.1 million | $1,672.8 million |
| Income from operations | $117.7 million | $98.0 million | $353.7 million | $256.7 million |
| Net income | $72.3 million | $60.4 million | $216.6 million | $157.5 million |
| Diluted EPS | $2.27 | $1.90 | $6.80 | $4.96 |
| Operating margin | 16.8% | 16.6% | 17.4% | 15.3% |
| Net margin | 10.3% | 10.2% | 10.7% | 9.4% |
Q3 revenue rose 18.4% year over year and net income rose about 19.6%; nine-month revenue increased 21.5% and net income about 37.6%. Growth reflected new restaurants and comparable sales. Comparable restaurant sales grew 4.8% in Q3 and 8.3% for the first nine months; average restaurant sales were $2.119 million, up 7.4%.
Q3 food, beverage and packaging costs were 32.6% of revenue (33.1% prior year); labor was 23.2% (23.3%); occupancy 6.2% (6.3%); and other operating costs 10.5% (10.7%). For the first nine months, food costs were 32.3% (32.7%), labor 23.4% (24.0%), occupancy 6.2% (6.5%), and other operating costs 10.2% (10.9%). Q3 G&A rose to 6.9% of revenue from 6.3%, reflecting the managers’ conference, higher stock compensation, contractor insolvencies, and a prior-year deferred compensation gain.
Cash, liquidity and capital
At September 30, cash and cash equivalents were $421.1 million; current and long-term investments totaled $311.8 million. Management reported cash and investments of $732.9 million and said existing liquidity and operating cash flow should cover planned needs for the foreseeable future. Nine-month operating cash flow was $293.9 million versus $290.9 million. Capital expenditures were $137.5 million versus $92.9 million; operating cash flow less these expenditures was approximately $156.4 million, compared with $198.0 million.
The company reported no off-balance-sheet arrangements and no conventional borrowings in the presented balance sheet; deemed landlord financing totaled $3.6 million, including current and long-term portions. Current assets were $656.7 million and current liabilities $159.3 million. Share repurchases used $82.6 million of cash in financing activities; the filing separately reports $71.9 million of repurchases under authorized programs, plus shares surrendered for tax withholding. The October 18 authorization added up to $100 million of potential repurchases.
Outlook, commentary and risks
- Management expected 2012 openings at or above the high end of its prior 155–165 range, after 123 openings through September, and forecast 165–180 openings in 2013, including ShopHouse’s planned Los Angeles-area introduction.
- Management maintained full-year 2012 comparable-sales growth expectations in the mid-single digits and expected 2013 comparable sales to be flat or increase by a low-single-digit amount. It expected the contribution from menu price increases to fall below 1% in Q4 2012 and no further 2012 price increases.
- Food inflation was expected to persist through the remainder of 2012 and into 2013, potentially increasing food costs as a share of revenue. Management also expected increased Q4 marketing spend and higher other operating costs as a share of revenue. The estimated 2012 effective tax rate was 39.0%; renewal of certain federal credits could reduce it by up to 0.4 percentage points.
- Supply constraints led some restaurants to serve conventionally raised beef temporarily; management said this could recur and that affected restaurants disclose it to customers. Commodity prices, supplier arrangements, labor availability, weather, seasonality, and consumer/economic uncertainty are among the operating risks discussed.
- Government investigations concern employee work-authorization verification and related disclosures, including an SEC civil investigation and parallel U.S. Attorney criminal and civil investigations. The company said potential fines or liabilities could not be estimated. Shareholder derivative and securities class-action suits also allege disclosure or fiduciary-duty failures; outcomes and potential liabilities were not estimable. In the ADA matters, class certification was denied, subject to a reconsideration motion; other employment litigation remains pending.
- Stock-based compensation expense was $53.8 million for the first nine months, including a $5.6 million cumulative adjustment related to expected vesting of performance awards. Management reported no material changes in risk factors from its 2011 Form 10-K and no significant changes in critical accounting estimates.
Important facts for investors to verify
- Whether comparable-sales trends and customer visits sustain growth as prior menu-price effects diminish.
- Actual food-cost inflation, particularly for chicken and beef, and any resulting margin impact.
- Restaurant-opening execution, new-unit economics, and progress of the ShopHouse concept.
- Developments and financial consequences, if any, from work-authorization investigations and pending litigation.
- Cash deployment among restaurant investment, share repurchases, and other corporate needs; note that the additional $100 million buyback authorization was announced after quarter-end.
- Seasonality and timing effects: management cautions that quarterly results are not necessarily indicative of full-year performance.