Chipotle Mexican Grill, Inc. — FY2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. Chipotle operated 2,408 restaurants at year-end, including 2,363 U.S. and 37 international Chipotle restaurants and eight non-Chipotle restaurants. Its operations are reported as one segment.
Financial performance and liquidity
| Metric | FY2017 | FY2016 | Change |
|---|---|---|---|
| Revenue | $4.476 billion | $3.904 billion | +14.7% |
| Operating income | $270.8 million | $34.6 million | Improved |
| Operating margin | 6.1% | 0.9% | +5.2 percentage points |
| Net income | $176.3 million | $22.9 million | Improved |
| Net margin | 3.9% | 0.6% | +3.3 percentage points |
| Diluted EPS | $6.17 | $0.77 | Improved |
| Cash from operations | $467.1 million | $349.2 million | +$117.9 million |
| Capital expenditures | $216.8 million | $258.8 million | −$42.1 million |
Operating cash flow less capital expenditures was approximately $250.3 million. At year-end, current assets were $629.5 million and current liabilities $323.9 million; cash and cash equivalents were $184.6 million, with current investments of $324.4 million. Management reported cash and short-term investments totaling $509.0 million and said available liquidity and operating cash flow should meet foreseeable needs.
No conventional borrowing or debt balance is reported in the supplied financial statements. Lease commitments are substantial: future minimum operating lease payments totaled $3.906 billion. Total liabilities were $681.2 million and shareholders’ equity was $1.364 billion.
Material changes versus prior period
- Comparable restaurant sales rose 6.4% in 2017, following a 20.4% decline in 2016. FY2017 revenue growth also reflected new restaurants; average restaurant sales increased from $1.868 million to $1.940 million.
- Comparable sales momentum slowed during 2017: quarterly increases were 17.8%, 8.1%, 1.0%, and 0.9% from first to fourth quarter.
- Restaurant operating costs as a percentage of revenue declined 4.1 percentage points year over year, aided by sales leverage, menu price increases, lower promotional spending, and labor efficiencies. Food costs were 34.3% of revenue versus 35.0%; labor was 26.9% versus 28.3%.
- FY2016 results had been sharply affected by food-safety incidents and related sales declines. The 2017 recovery did not restore prior peak performance: 2015 revenue was $4.501 billion and net income $475.6 million.
- Chipotle opened 183 restaurants in 2017, versus 243 in 2016, and closed 15 ShopHouse locations. It recorded a $30 million charge for estimated payment-card incident liabilities. FY2016 included a $14.5 million non-cash ShopHouse impairment.
Outlook, commentary, and risks
- Management expected low-single-digit comparable sales growth for 2018, including the benefit of extending menu price increases to nearly 950 additional restaurants in January. It planned 130–150 new restaurants, fewer than in prior years.
- 2018 capital expenditures were forecast at approximately $300 million, largely for existing-restaurant upgrades and improvements; about $120 million was expected for new-restaurant construction before landlord reimbursements.
- Management expected a 2018 effective tax rate of 30%–31%. The Tax Cuts and Jobs Act produced a provisional $6.0 million FY2017 tax benefit from remeasuring deferred taxes.
- Management expected higher 2018 labor costs from wage inflation and enhanced employee benefits; it also expected food costs as a percentage of revenue to be lower than 2017, assuming stable commodity prices. These are forecasts, not assurances.
- Key risks include renewed food-borne illness or reputational damage, ongoing government food-safety investigations and litigation, rising food and labor costs, supply constraints for responsibly sourced ingredients, intense competition, and execution risks in digital ordering, delivery, and restaurant operations.
- A 2017 malware incident affected payment-card data at most restaurants, primarily from March 24 through April 18. The company recorded a $30 million liability; additional claims, assessments, fines, or legal costs could exceed the accrual or insurance coverage. CEO Steve Ells planned to become Executive Chairman after a successor is appointed.
Most important facts for investors to verify
- Whether comparable-sales growth continues after quarterly growth slowed to 0.9% in Q4 2017, and whether the recovery supports improved restaurant-level economics.
- Actual 2018 openings, capital spending, and returns on restaurant and second-make-line investments.
- Final payment-card incident liabilities and outcomes of food-safety investigations, customer claims, and shareholder litigation.
- Whether food, labor, and enhanced food-safety costs remain controlled without compromising guest experience or brand recovery.
- Updated lease obligations, liquidity, and the impact of adopting the new lease accounting standard, which the company expected to materially increase reported balance-sheet assets and liabilities.