Chipotle Mexican Grill, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Chipotle operated 2,482 U.S. and 39 international restaurants, plus two Pizzeria Locale restaurants. The company reports one operating segment.
Financial performance
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue | $1.434 billion, up 13.2% | $2.742 billion, up 13.6% |
| Operating income | $120.0 million, versus $68.0 million | $230.2 million, versus $160.8 million |
| Net income | $91.0 million, versus $46.9 million | $179.2 million, versus $106.3 million |
| Diluted EPS | $3.22, versus $1.68 | $6.35, versus $3.81 |
| Comparable restaurant sales | Up 10.0% | Up 10.0%, including a 0.3% adverse impact from deferred loyalty-program revenue |
Q2 comparable sales reflected transaction growth of 6.5% and average-check growth of 3.5%; for the first half, the respective increases were 6.1% and 3.9%. Average restaurant sales were $2.1 million, up 7.6% year over year. Out-of-restaurant orders represented 17.1% of revenue in the first half, versus 9.7% a year earlier.
For the first half, restaurant operating costs were 79.1% of revenue, down from 80.4%. Food, beverage and packaging costs rose to 33.0% of revenue from 32.5%, primarily due to higher avocado costs. Labor costs fell to 26.1% from 27.4%, mainly from sales leverage; occupancy fell to 6.5% from 7.1%. General and administrative costs increased to 8.2% of revenue from 6.7%, including higher legal contingencies and stock-based compensation. Impairment, closure costs and asset disposals declined to $11.4 million from $50.2 million, largely reflecting elevated prior-year charges.
First-half operating cash flow was $300.5 million, compared with $295.4 million. Investing cash outflow was $130.3 million, including $142.0 million of property and equipment purchases; financing cash outflow was $122.5 million, including $111.5 million for treasury-stock purchases. Cash, cash equivalents and restricted cash totaled $328.5 million at June 30.
Liquidity, balance sheet and capital
Cash and short-term investments totaled $717.8 million at June 30 ($299.9 million cash and $417.9 million investments). The company said cash, investments and operating cash flow should meet foreseeable needs. It reported no outstanding debt or committed credit facilities and no off-balance-sheet arrangements. Operating lease liabilities were $2.696 billion, including $161.3 million current; lease assets were $2.371 billion. Adoption of the lease accounting standard in 2019 added substantial lease assets and liabilities, so balance-sheet comparisons with 2018 are not directly comparable.
Share repurchases totaled $111.5 million in the first half; $46.6 million remained under existing authorizations at June 30. On July 23, the board authorized an additional $100 million in repurchases.
Outlook, commentary and notable items
- Management expected full-year 2019 comparable restaurant sales growth in the high single digits and approximately 140–155 new restaurant openings. The company opened 35 and closed three Chipotle restaurants in the first half.
- Management expected $1–$6 million of additional restructuring charges in the remainder of 2019. Total restructuring costs were estimated at $53–$58 million; $52 million had been recognized since the initiative began. The separate restaurant-closure initiative had incurred $36.3 million of expected $37–$43 million total exit costs.
- Q2 general and administrative expense included a $16.5 million increase in estimated legal loss contingencies versus the prior-year quarter. First-half legal proceedings included a $19.9 million accrual during Q2. The filing also reported a $21.4 million data-security settlement contingency balance and $29.3 million of other loss-contingency balances; ultimate liabilities could differ from recorded estimates.
- The 2017 payment-card malware incident settlement had preliminary court approval; the company did not expect it to exceed insurance coverage or have a material financial impact, but claims and liabilities could exceed expectations or coverage. A federal grand jury investigation into food-safety matters remained ongoing, and a shareholder class-action dismissal was on appeal.
- Commodity prices, particularly food inputs, may pressure margins; management noted higher avocado costs. The filing reported no material change in risk factors and concluded disclosure controls were effective as of June 30.
Most important facts for investors to verify
- Whether comparable-sales growth and digital/out-of-restaurant sales momentum continued after the first half.
- Whether food-cost inflation, especially avocado prices, offsets sales leverage and menu pricing.
- How legal and government-investigation contingencies develop, including insurance coverage and final settlement costs.
- Whether restaurant-opening, closure and restructuring plans meet management’s stated ranges and affect margins or cash needs.
- How lease obligations and ongoing share repurchases affect future liquidity and capital allocation.