Chipotle Mexican Grill, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Chipotle operated 2,669 restaurants at quarter-end, including 40 international locations; it reports one operating segment. Results were significantly affected by COVID-19.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $1.365 billion | $1.434 billion | $2.776 billion | $2.742 billion |
| Operating income (loss) | $(4.9) million | $120.0 million | $66.2 million | $230.2 million |
| Net income | $8.2 million | $91.0 million | $84.6 million | $179.2 million |
| Diluted EPS | $0.29 | $3.22 | $2.99 | $6.35 |
| Operating cash flow | Not separately provided for the quarter | $304.9 million | $300.5 million |
- Q2 comparable restaurant sales fell 9.8%; comparable entrées declined 13.7%, partly offset by a 3.9% increase in average check. Sales trends improved from a 24.4% year-over-year decline in April to a 7.0% decline in May and 2.0% growth in June.
- Digital sales rose 216.3% to $829.3 million and represented 60.7% of Q2 sales.
- Q2 restaurant operating costs were 87.8% of revenue, up 8.7 percentage points year over year. Labor was 28.2% of revenue and other operating costs 19.2%; higher delivery costs, promotions, sales deleverage, and temporary employee support contributed.
- Q2 operating margin was approximately -0.4%, versus approximately 8.4% a year earlier. A $12.5 million income tax benefit—primarily reflecting excess tax benefits on equity awards—helped produce positive net income despite a pre-tax loss.
- Six-month investing cash outflow was $75.5 million, including $165.5 million of property and equipment purchases, partly offset by investment maturities. Financing cash outflow was $104.2 million, including share-related payments and repurchases. Cash, cash equivalents, and restricted cash totaled $633.6 million at period-end.
Balance sheet, liquidity, and debt
- At June 30, cash and cash equivalents were $605.6 million and short-term investments were $301.0 million; together, $906.6 million. Restricted cash was $28.0 million.
- Total liabilities were $3.666 billion, including $3.006 billion of operating lease liabilities. No borrowings were outstanding under the $600 million revolving credit facility, which expires May 7, 2021.
- Management expected approximately $100 million of liquidity benefit primarily from deferred Social Security tax payments and accelerated tax depreciation under the CARES Act. The company said cash, investments, and operating cash flow should meet foreseeable needs.
Changes and notable items
- Q2 revenue declined 4.8% year over year, while six-month revenue increased 1.2%; six-month net income fell 52.8%. COVID-19 restrictions and changed customer behavior drove the quarterly sales decline.
- Q2 included $5.4 million of impairment, closure, and asset-disposal costs. Diluted EPS included an estimated $0.11 after-tax impact from restaurant impairment and closure costs and corporate restructuring charges.
- Chipotle opened 37 restaurants and permanently closed three during Q2; 21 openings included a Chipotlane. The company said it expected to accelerate openings in 2021.
- The company suspended stock repurchases in March and reported no buybacks during Q2. It had $115.0 million remaining under authorized repurchase programs.
- In April, Chipotle agreed to a Deferred Prosecution Agreement to resolve the DOJ food-safety investigation, including a $25 million fine; $10 million was paid in June, with three further $5 million payments due. The agreement also requires maintaining an enhanced compliance program.
Outlook, risks, and contingencies
- Chipotle withheld 2020 guidance for comparable sales growth, restaurant openings, and the full-year effective tax rate because of uncertainty around COVID-19. Management said continued comparable-sales improvement could permit positive cash flow for the rest of the year, while noting further liquidity actions could be taken if recovery took longer than anticipated.
- Risks include renewed or prolonged pandemic impacts, potential supply interruptions, delivery and promotional costs, commodity-price volatility, and the effect of sales recovery on restaurant profitability. About 30 restaurants remained temporarily closed at quarter-end, mainly in malls and shopping centers.
- A shareholder class action remained on appeal; the company said potential liability could not be reasonably estimated. An accrued liability of $31.4 million was included in accrued liabilities, though the filing does not clearly allocate that balance among matters.
- The company reported no material changes to previously disclosed risk factors and no material off-balance-sheet arrangements.
Investor facts to verify
- Whether sales recovery continued after June and whether the improvement translated into sustainable restaurant margins.
- Whether digital growth can offset delivery expense and promotional costs as customer ordering patterns evolve.
- Actual timing and amount of CARES Act-related liquidity benefits and capital spending.
- Payments and compliance obligations under the DOJ agreement, and any developments in the shareholder litigation or other contingencies.
- Use of the revolving credit facility and compliance with its leverage and fixed-charge covenants.