Chipotle Mexican Grill, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; unaudited. Comparisons are with the three months ended March 31, 2022, unless stated otherwise. Chipotle operated 3,224 restaurants at quarter-end and reported one operating segment.
Financial performance
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Total revenue | $2,368.6 million | $2,020.5 million | +17.2% |
| Comparable restaurant sales | +10.9% | +9.0% | +1.9 percentage points |
| Income from operations | $367.6 million | $190.2 million | +93.3% |
| Net income | $291.6 million | $158.3 million | +84.3% |
| Diluted earnings per share | $10.50 | $5.59 | +87.8% |
| Cash provided by operating activities | $455.0 million | $282.9 million | +$172.1 million |
Food and beverage revenue rose 17.6% to $2,351.0 million; delivery service revenue fell 18.6% to $17.6 million. Management attributed revenue growth primarily to higher comparable sales and new restaurants. Comparable sales gains reflected menu price increases and, to a lesser extent, higher transactions. Digital sales were 39.3% of food and beverage revenue, down from 41.9%, as sales shifted toward in-restaurant dining.
Restaurant operating costs were 74.4% of revenue, compared with 79.3%. Food, beverage and packaging costs were 29.2% of revenue (31.0%); labor 24.6% (26.3%); occupancy 5.1% (5.5%); and other operating costs 15.3% (16.4%). The improvements mainly reflected sales leverage; lower avocado prices and delivery expense also helped. Food-cost inflation, wage inflation, utilities and maintenance costs partly offset the improvement. Income from operations was approximately 15.5% of revenue, versus 9.4%; net income was approximately 12.3%, versus 7.8%.
General and administrative expense was $148.3 million, up 0.6%, but declined to 6.3% of revenue from 7.3%. Depreciation and amortization was $76.6 million, up 6.9%. Impairment, closure costs and asset disposals increased to $8.4 million from $4.3 million, primarily due to replacement of certain leasehold improvements and kitchen equipment. Net interest and other income was $8.9 million, compared with a $0.2 million expense, mainly reflecting higher interest income on investments. The effective tax rate rose to 22.5% from 16.7%, primarily due to fewer tax benefits from option exercises and equity vesting.
Cash, liquidity and capital
- Cash and cash equivalents were $409.7 million at March 31, 2023. Management reported $1.4 billion of cash and marketable investments, excluding $25.1 million of restricted cash and $55.4 million of non-marketable investments.
- Operating cash flow was $455.0 million. Investing activities used $235.5 million, including $120.4 million of property and equipment purchases; financing activities used $193.9 million, including treasury stock purchases and tax withholding on stock awards.
- The company had no borrowings on its $500 million revolving credit facility and was in compliance with its covenants. The facility includes a leverage limit below 3.0x and a fixed-charge coverage requirement above 1.5x.
- Quarter-end current assets were $1.26 billion and current liabilities $894.1 million. Total liabilities were $4.57 billion, including $3.77 billion of operating lease liabilities. The filing reports no outstanding credit-facility debt.
- Chipotle repurchased 84,765 shares for approximately $131.6 million in Q1, including shares accrued but not yet paid; $282.3 million remained authorized for repurchases at quarter-end.
Material changes and business developments
- Revenue increased 17.2%, supported by 10.9% comparable sales growth and contributions from restaurants outside the comparable-sales base. Average restaurant sales increased 7.7% to $2.9 million.
- Chipotle opened 40 restaurants and one non-Chipotle restaurant during the quarter; 34 of the Chipotle openings included a Chipotlane. Four Chipotle restaurants were relocated.
- Q1 operating cash flow improved year over year, primarily from higher earnings and the timing of tax amounts owed. Capital expenditures increased, primarily for restaurant development. Financing cash use declined, mainly because share repurchases were lower than in Q1 2022.
- As of March 31, 2023, Chipotle had 3,164 U.S. Chipotle restaurants, 54 international Chipotle restaurants and six non-Chipotle restaurants.
Outlook, risks and contingencies
- Management remained on track to open approximately 255–285 restaurants in 2023, including 10–15 relocations, and expected at least 80% of new restaurants to include a Chipotlane. This outlook assumes utility, construction, permitting and material-supply delays do not worsen.
- Management expected positive cash flow for the foreseeable future, assuming no significant declines in comparable restaurant sales, and believed available cash, investments and operating cash flow would fund foreseeable needs. It also identified continued restaurant investment, refurbishments, share repurchases and general corporate purposes as expected uses of cash.
- No specific full-year revenue, earnings or comparable-sales guidance is provided in the filing text.
- Key risks include food and packaging cost inflation, wage pressure and labor availability, supply-chain disruption, food-safety incidents, cybersecurity and privacy events, competition, consumer spending weakness, the ability to pass through price increases, restaurant-development delays, delivery-platform reliance and litigation. The filing says there were no material changes to previously disclosed risk factors.
- The company was involved in ordinary-course legal matters, including employment, personal injury, consumer, privacy and commercial claims. It stated that their ultimate resolution was not expected to materially affect its financial position or results, while noting that increased claims or higher-than-expected liabilities could have an adverse effect. Accrued legal liabilities were $16.0 million at quarter-end.
- Management noted seasonal variability in restaurant sales and profitability. It reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether comparable-sales growth and restaurant-level cost improvements persist as menu pricing, traffic and input-cost trends evolve.
- Whether the 2023 opening plan is achieved, including the expected Chipotlane mix, given the stated construction, permitting and supply assumptions.
- How cash deployment among restaurant investment, repurchases and other uses affects liquidity and share count.
- Developments in food safety, labor, supply-chain, cybersecurity and litigation risks, including any material change in legal exposure.
- The sustainability of investment income and the tax rate, which affected Q1 results and may vary in subsequent periods.