Chipotle Mexican Grill, Inc. — Q2 2014 Form 10-Q
Business context and reporting period. The filing covers the quarter and six months ended June 30, 2014. Chipotle operated 1,681 restaurants at quarter-end: 1,656 Chipotle restaurants, seven ShopHouse locations, and one Pizzeria Locale, plus international Chipotle locations included in the Chipotle count. The company reports one operating segment.
Financial performance
| Metric | Q2 2014 | Q2 2013 | First half 2014 | First half 2013 |
|---|---|---|---|---|
| Revenue | $1,050.1 million | $816.8 million | $1,954.2 million | $1,543.5 million |
| Operating income | $179.8 million | $146.4 million | $315.5 million | $266.5 million |
| Net income | $110.3 million | $87.9 million | $193.3 million | $164.4 million |
| Diluted EPS | $3.50 | $2.82 | $6.14 | $5.27 |
| Comparable sales growth | 17.3% | 5.5% | 15.5% | 3.4% |
| Operating margin | 17.1% | 17.9% | 16.2% | 17.3% |
For Q2, revenue increased 28.6% and net income increased 25.5% year over year. In the first half, revenue rose 26.6% and net income rose 17.6%. Revenue growth reflected stronger comparable sales and restaurant openings; 89 restaurants opened in the first half. Average restaurant sales were $2.307 million, up 8.9%.
- Costs and margins: Food, beverage and packaging costs were 34.6% of Q2 revenue versus 33.1% a year earlier, and 34.5% for the first half versus 33.0%. Management cited inflation in beef, avocados and dairy, partly offset by menu pricing and lower tomatillo costs. Labor and occupancy improved as a share of sales; other operating costs and G&A increased as a share of sales.
- Cash flow: First-half operating cash flow was $360.4 million, compared with $267.8 million. Capital expenditures were $102.8 million; net cash used in investing activities was $172.9 million and net cash used in financing activities was $40.8 million. Cash increased $146.8 million to $470.1 million.
- Liquidity and debt: Cash plus current and long-term investments totaled approximately $1.109 billion at June 30, 2014. Current assets were $892.1 million and current liabilities $241.5 million. The balance sheet presents no borrowings or debt balance; total liabilities were $524.5 million.
- Capital returns: The company repurchased $50.3 million of shares in the first half and had $139.9 million remaining under its repurchase authorizations at June 30.
Material changes and management outlook
- Q2 comparable sales growth accelerated to 17.3% from 5.5% a year earlier, driven mainly by higher customer visits and, to a lesser extent, higher average checks. U.S. menu price increases averaged about 6.25%–6.5%; they contributed 2.5 percentage points to Q2 comparable-sales growth and 1.3 points for the first half.
- Management expected 180–195 new restaurants in 2014, including a small number of ShopHouse and/or Pizzeria Locale locations, and full-year comparable-sales growth in the mid-teens. Catering contributed slightly more than 1% of first-half sales.
- Management expected food costs as a percentage of revenue to ease from first-half levels in the second half due to pricing, but to increase slightly for full-year 2014 versus 2013 because of continuing inflation. Marketing and promotion was expected to rise slightly as a share of revenue. Full-year G&A as a share of revenue was expected to increase year over year, but be below the first-half rate; stock-based compensation was expected to be lower in the second half.
- The estimated 2014 effective tax rate was 39.1%, versus 38.7% for 2013, primarily reflecting expiration of certain federal tax credits, partly offset by a lower estimated state tax rate.
Risks, contingencies, and notable items
- Supply constraints meant some restaurants served conventionally raised beef or chicken during the first half; management said this could recur and that it discloses affected locations to customers. Commodity inflation and possible customer resistance to menu prices could pressure results.
- The company disclosed ongoing DHS/ICE, SEC, and U.S. Attorney investigations concerning employee work-authorization compliance and related disclosures. It could not estimate whether fines, penalties, or other liabilities would result.
- Three shareholder derivative actions related to work authorization matters and other allegations were consolidated. The company agreed to a proposed settlement, subject to court approval, involving attorneys’ fees already accrued and additional compliance oversight. If not approved, the company said the outcome and potential liability could not be estimated.
- Stock-based compensation was a significant expense: approximately $62.0 million for the first half, including a $1.6 million cumulative adjustment from revised vesting estimates. Ordinary-course claims were not expected to have a material adverse effect, though the filing cautioned that adverse or increased claims could do so.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting. No material risk-factor changes from the 2013 Form 10-K were reported.
Investor facts to verify
- Whether strong comparable-sales growth and customer traffic continued after Q2, and how much subsequent growth reflects pricing versus transactions.
- Whether food-cost inflation, especially for beef, avocados, and dairy, matched management’s full-year expectations and whether supply constraints affected responsible sourcing.
- Actual 2014 restaurant openings, margins, and G&A and stock-compensation trends versus management’s outlook.
- Developments, potential costs, and any settlement approval relating to the government investigations and derivative litigation.
- Cash and investment balances, capital spending, and remaining share-repurchase authorization.