Chipotle Mexican Grill, Inc. — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016; comparisons are primarily with FY 2015. Chipotle operated 2,250 restaurants at year-end: 2,227 Chipotle locations and 23 restaurants under other concepts. Unless stated otherwise, financial figures below are in U.S. dollars.
Business context and financial results
Chipotle operates fast-casual restaurants focused on burritos, tacos, bowls and salads. Results were heavily affected by food-borne illness incidents associated with restaurants beginning in late 2015, which damaged customer perceptions and reduced sales throughout 2016.
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Revenue | $3.904 billion | $4.501 billion |
| Comparable restaurant sales | -20.4% | +0.2% |
| Operating income | $34.6 million | $763.6 million |
| Operating margin | 0.9% | 17.0% |
| Net income | $22.9 million | $475.6 million |
| Diluted EPS | $0.77 | $15.10 |
| Cash from operating activities | $349.2 million | $683.3 million |
| Capital expenditures | $258.8 million | $257.4 million |
Net margin fell to 0.6% from 10.6%. Operating cash flow less capital expenditures was approximately $90.4 million, versus $425.9 million in 2015. The filing reports no conventional borrowings on the balance sheet; total liabilities were $623.6 million. The company had $87.9 million in cash, $329.8 million in current investments and $125.1 million in long-term investments. Management reported $417.7 million of cash and short-term investments and said available cash, investments and operating cash flow should meet foreseeable needs. Undiscounted operating lease commitments totaled $3.683 billion.
Material changes and unusual items
- Revenue declined 13.3% year over year; comparable sales fell 20.4%, driven mainly by a 14.4% decline in transactions and, to a lesser extent, lower average checks. New restaurants partly offset the decline.
- Average restaurant sales fell to $1.868 million from $2.424 million. Quarterly comparable sales improved sequentially, from -29.7% in Q1 to -4.8% in Q4; the fourth-quarter comparison benefited from weak sales in late 2015.
- Restaurant operating costs rose 13.3 percentage points as a share of revenue. Food, beverage and packaging costs were 35.0% of revenue, labor 28.3%, occupancy 7.5%, and other operating costs 16.4%.
- Marketing and promotional expense was 5.1% of revenue, versus a three-year historical average of 2.1%. Enhanced food-safety procedures also increased food costs; management estimated their ongoing impact at about 1% of revenue relative to pre-crisis levels.
- The company recorded a $14.5 million non-cash impairment charge against substantially all ShopHouse long-lived assets and began exploring strategic alternatives for the concept.
- Chipotle repurchased $813.9 million of common stock during 2016. No cash dividends were paid or anticipated in the foreseeable future.
Outlook, risks and contingencies
- 2017 outlook: Management targeted full-year comparable sales growth in the high single digits and planned to open 195–210 restaurants. It expected restaurant-level operating costs as a percentage of revenue to decline, partly from sales leverage, lower avocado costs and more efficient food management.
- Management expected 2017 capital expenditures of about $224 million, including approximately $170 million for new restaurant construction before landlord reimbursements, and an effective tax rate of 39.0%–39.5%.
- Management’s recovery plan emphasized customer experience, marketing, digital ordering, catering and delivery. Results depend on restoring customer traffic and trust; the company cautioned that sales may not recover fully and that enhanced food-safety measures may continue to constrain margins.
- Key risks include further food-safety incidents or negative publicity; ingredient supply and price volatility; labor costs and staffing; intense competition; execution and profitability of new restaurants; and the cost and effectiveness of marketing and technology initiatives.
- The company disclosed ongoing government investigations into food-safety incidents, customer claims and litigation, a shareholder class action, and shareholder derivative actions. It could not reasonably estimate potential liability for several matters. It also reported that it had reached an agreement in Q4 2016 with the U.S. Attorney’s Office for the District of Columbia to resolve DHS and ICE work-authorization investigations.
- Management and the independent auditor reported effective internal control over financial reporting; the financial statement audit opinion was unqualified. The filing states that adoption of the new lease accounting standard is expected to materially increase reported assets and liabilities.
Important facts for investors to verify
- Whether comparable sales and customer transactions recovered as management’s 2017 outlook anticipated.
- Whether enhanced food-safety procedures reduced incident risk and whether their stated cost impact and margin effects were sustained.
- Actual restaurant-level margins, cash generation and capital spending compared with management’s expectations.
- Developments, outcomes and financial exposure from food-safety investigations, customer claims and shareholder litigation.
- Whether the large repurchase program, lease commitments and planned restaurant openings remain consistent with liquidity and recovery needs.