Chipotle Mexican Grill, Inc. — FY2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. This annual filing also reports fourth-quarter results. Chipotle operated 1,230 restaurants, including one ShopHouse, and reported as one operating segment.
Financial performance
| Metric | FY2011 | FY2010 | Change |
|---|---|---|---|
| Revenue | $2.270 billion | $1.836 billion | +23.6% |
| Operating income | $350.6 million | $287.8 million | +21.8% |
| Net income | $214.9 million | $179.0 million | +20.1% |
| Diluted EPS | $6.76 | $5.64 | +19.9% |
| Operating margin | 15.4% | 15.7% | Down 0.3 percentage points |
| Net margin | 9.5% | 9.7% | Down 0.2 percentage points |
Comparable restaurant sales increased 11.2%, versus 9.4% in 2010; growth reflected higher customer visits and menu-price increases, which contributed 2.9%. Average restaurant sales rose 9.4% to $2.013 million. The company opened 150 restaurants and recorded four closures or relocations.
Food, beverage and packaging costs rose to $738.7 million, or 32.5% of revenue, from 30.6% in 2010, mainly due to inflation in avocados, beef, chicken and dairy. Labor costs declined to 23.9% of revenue from 24.7%, while occupancy costs declined to 6.5% from 7.0%. General and administrative expense was $149.4 million, or 6.6% of revenue, versus $118.6 million, or 6.5%.
Operating cash flow was $411.1 million, up from $289.2 million. Capital expenditures were $151.1 million; cash used in investing activities was $210.2 million and cash used in financing activities was $24.3 million. Cash and cash equivalents were $401.2 million, with $55.0 million in current investments and $128.2 million in long-term investments. Current assets totaled $501.2 million and current liabilities $157.5 million. The filing reports no conventional borrowings; deemed landlord financing was $3.7 million. Operating lease commitments totaled $2.116 billion.
Material changes and outlook
- Revenue growth accelerated to 23.6% from 20.9% in 2010, and comparable sales growth strengthened to 11.2% from 9.4%.
- Food costs increased as a share of revenue, partially offset by improved labor and occupancy ratios. Operating and net margins edged lower despite higher income.
- For 2012, management expected 155–165 new restaurants, including one ShopHouse, and mid-single-digit comparable sales growth. About 30% of openings were planned as lower-cost “A Model” restaurants; average development cost was expected to remain near $800,000.
- Management expected food-cost inflation to continue and food costs as a percentage of revenue to rise. It estimated a 2012 effective tax rate of 39.3%, potentially up to 0.4 percentage points lower if certain federal tax credits were renewed.
- Capital expenditures were forecast at approximately $160–$170 million. General and administrative expense as a percentage of revenue was expected to increase, including at least a 50% increase in stock-based compensation expense and up to $5 million for the biennial managers’ conference.
- The company had $6.6 million remaining under its then-current repurchase authorization at year-end; the board authorized an additional $100 million on February 1, 2012. No cash dividends were anticipated.
Risks, contingencies and unusual items
- Supply shortages and higher costs for naturally raised meat and other Food With Integrity ingredients could pressure margins or require menu substitutions. Some markets returned to conventionally raised beef in early 2012.
- Growth depends on securing sites, hiring and training staff, and successfully ramping new restaurants. New locations may take 24 months or more to normalize and may cannibalize existing restaurants.
- Food-safety events, adverse publicity, competition, economic uncertainty, wage and benefit costs, and regulatory requirements could harm traffic, costs or expansion.
- Federal immigration authorities continued reviewing employee work-authorization records in Virginia and the District of Columbia; a U.S. Attorney’s Office criminal investigation was disclosed. Potential fines or other liabilities were not clear.
- ADA serving-line litigation and a California employment-practices case remained unresolved; the filing said outcomes or additional liabilities could not be reasonably estimated.
- A tax indemnity connected to Chipotle’s separation from McDonald’s could exceed $450 million if the share conversion caused the earlier exchange offer to lose tax-free status; the amount could be materially higher.
- The $2.486 million investment in ANGR Holdings, LLC was fully written off after the associated restaurants closed. The auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Investor verification priorities
- Track comparable sales, customer visits, menu-price effects and progress against the 2012 mid-single-digit outlook.
- Check food-cost inflation, naturally raised meat availability, and restaurant-level margin trends.
- Compare planned openings, development costs and capital spending with actual results; assess new-store ramp and cannibalization.
- Monitor stock-based compensation, tax-rate outcomes and share repurchases when evaluating earnings per share and cash use.
- Follow the immigration investigation, ADA and employment litigation, and the potential McDonald’s tax indemnity.