Chipotle Mexican Grill, Inc. — Q2 2018 Form 10-Q
Business context and reporting period. The quarter and six months ended June 30, 2018. Chipotle operated 2,467 restaurants, including 2,427 U.S. Chipotle locations, 38 international locations, and two Pizzeria Locale restaurants. The company reports one operating segment.
Financial performance
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $1,266.5 | $1,169.4 | $2,414.9 | $2,238.2 |
| Operating income | $68.0 | $106.7 | $160.8 | $179.9 |
| Net income | $46.9 | $66.7 | $106.3 | $112.9 |
| Diluted EPS | $1.68 | $2.32 | $3.81 | $3.92 |
| Operating cash flow | — | — | $295.4 | $243.6 |
- Revenue increased 8.3% in Q2 and 7.9% for the six-month period. Comparable restaurant sales rose 3.3% in Q2 and 2.8% year to date; transactions declined 1.8% and 2.6%, respectively, while higher average checks and menu pricing supported sales.
- Profitability weakened: Q2 operating income fell about 36% and net income about 30% year over year. Six-month operating income declined about 11% and net income about 6%. Q2 impairment, closure and asset-disposal expense was $45.3 million, versus a $0.4 million credit in the prior-year quarter.
- For the six months, restaurant operating costs were 80.4% of revenue, down from 81.7%. Food, beverage and packaging costs improved to 32.5% from 34.0% of revenue; labor costs increased to 27.4% from 26.5%, largely due to wage inflation.
- Six-month capital expenditures were $128.5 million. Net cash used in investing activities was $151.8 million, including investment purchases and maturities; net cash used in financing was $101.9 million, primarily treasury-stock purchases.
- At June 30, cash and cash equivalents were $225.7 million and investments were $348.3 million. Management reported $573.9 million in cash and short-term investments. Current assets were $720.7 million and current liabilities $355.2 million. The balance sheet reports no borrowings or debt line item.
Material changes and unusual items
- Corporate restructuring: Chipotle announced a new headquarters in Newport Beach, consolidation of some administrative functions in Columbus, and closure of Denver and New York offices. Total estimated restructuring costs are $70–$80 million; $13.8 million of net restructuring costs were recorded through June 30, with $16.8 million accrued. The company expects $57–$66 million of additional costs into 2019, plus an estimated $9–$10 million of incremental stock-based compensation.
- Restaurant closures: The company planned to close approximately 55–65 underperforming restaurants. It closed one Chipotle and five Pizzeria Locale locations in Q2; on July 26 it completed the closure of 29 additional Chipotle restaurants. Recorded non-cash restaurant impairment charges were $25.2 million. Further closure-related lease costs of $8–$17 million and accelerated depreciation of $7–$8 million were expected.
- Share repurchases totaled $96.4 million in the first half; $121.9 million remained authorized at June 30.
- The effective tax rate was 33.3% in Q2 and 35.4% for the first half, compared with 38.1% and 38.0% in 2017. The 2018 rate reflects the federal tax-rate reduction, state taxes, and stock-compensation tax effects.
Outlook, risks and contingencies
- Management expected 2018 comparable-sales growth in the low- to mid-single digits and approximately 130–150 new restaurant openings, at the lower end of that range.
- Management forecast a 2018 effective tax rate of approximately 35.5%–36.5%, marketing and promotional expense at or slightly above 3.0% of revenue, and elevated repair and maintenance costs during 2018.
- Management said cash, investments and operating cash flow should be sufficient for foreseeable capital, working-capital and other needs. Lease accounting changes scheduled for 2019 were expected to add material assets and obligations to the balance sheet; the income-statement and cash-flow effects were still under assessment.
- Risks include restructuring execution, employee attrition and hiring, commodity-price volatility, and potential customer resistance to further menu-price increases. The company continued to cooperate with federal food-safety subpoenas and could not estimate potential fines or penalties.
- For the 2017 payment-card security incident, $30 million was accrued for potential card-network claims and assessments. Related class-action outcomes and any liability beyond insurance coverage could not be reasonably estimated. Shareholder derivative suits were resolved during Q2; other shareholder class-action matters remained pending.
Important facts for investors to verify
- Whether comparable-sales growth can be sustained given declining comparable transactions and reliance on higher average checks and menu pricing.
- The final cash and non-cash costs, timing, and operational effects of the corporate restructuring and planned restaurant closures.
- Whether labor, repair and maintenance, and other operating costs constrain margins despite improved food-cost ratios.
- The ultimate exposure from food-safety investigations, data-security claims, and related litigation, including the limits of insurance coverage.
- The effect of adopting the new lease standard on reported assets, liabilities, and future expense presentation.