Chipotle Mexican Grill, Inc. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. Dollar amounts below are in millions unless otherwise noted. The company operated 1,502 restaurants at quarter-end, including two ShopHouse locations, and reported one operating segment.
Financial performance
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Revenue | $816.8 | $690.9 | $1,543.5 | $1,331.5 |
| Operating income | $146.4 | $133.8 | $266.5 | $236.0 |
| Net income | $87.9 | $81.7 | $164.4 | $144.3 |
| Diluted EPS | $2.82 | $2.56 | $5.27 | $4.53 |
| Operating margin | 17.9% | 19.4% | 17.3% | 17.7% |
| Net margin | 10.8% | 11.8% | 10.7% | 10.8% |
- Q2 revenue increased 18.2%, while operating income rose 9.4% and net income rose 7.6%. First-half revenue increased 15.9%, operating income 12.9%, and net income 13.9% year over year.
- Comparable restaurant sales grew 5.5% in Q2 versus 8.0% a year earlier, and 3.4% in the first half versus 10.2%. Average restaurant sales were $2.119 million, up 0.6%.
- Q2 food, beverage and packaging costs were 33.1% of revenue versus 32.1%; labor costs were 22.7% versus 23.1%; occupancy costs were 5.9% versus 6.0%; and other operating costs were 10.6% versus 9.6%. Higher food inflation and marketing and promotional spending pressured margins; improved staffing and higher sales helped labor costs as a share of revenue.
- First-half cash from operations was $267.8, compared with $170.9 in 2012. Investing cash outflow was $231.8, including $80.1 of property and equipment purchases and net investment purchases; financing cash outflow was $76.6, including $81.1 of treasury stock purchases. Cash and equivalents declined $40.9 to $281.6.
- Cash and investments totaled approximately $774.1 at June 30. Total liabilities were $441.5, with current liabilities of $182.7; the filing reports no debt balance. Management said available cash and operating cash flow should meet foreseeable needs.
Changes, outlook and risks
- The company opened 92 restaurants in the first half, compared with 87 in the same period of 2012. Management expected 165–180 openings in 2013, including up to four ShopHouse restaurants, and expected full-year comparable sales growth in the low- to mid-single digits.
- Management expected food-cost inflation to continue and food costs as a percentage of revenue to increase modestly. Cost pressures included salsa ingredients, dairy and chicken; relief in avocado prices and increased purchases of conventionally raised beef partly offset these pressures. The estimated 2013 effective tax rate was 38.9%.
- Catering launched in select markets in the first half; management expected to offer it at all U.S. Chipotle restaurants by year-end. The company noted that supply constraints led some restaurants to serve conventionally raised meats temporarily and could do so again.
- Cash and investments were exposed to interest-rate movements; food and packaging costs were exposed to commodity prices and supply conditions. Management cited seasonality and the ramp-up costs and inefficiencies of new restaurants as factors affecting quarterly results.
- Federal authorities were investigating employee work-authorization compliance and related disclosures, including a parallel criminal and civil investigation. The company said potential fines or liabilities could not be estimated. A consolidated shareholder derivative action remained pending; the company had moved to dismiss it. A separate shareholder class action was dismissed July 3, 2013 without findings of liability.
- The company repurchased $80.6 of shares in the first half and had $119.6 of authorization remaining at June 30. Management stated repurchases could be modified, suspended or discontinued.
Important facts for investors to verify
- Whether comparable-sales momentum and the 2013 low- to mid-single-digit outlook were sustained after the quarter.
- Actual food-cost inflation, sourcing constraints, and any effect on margins or the company’s ingredient standards.
- Developments and potential financial or operating consequences of the government investigations and pending derivative litigation.
- Restaurant opening pace, new-unit economics, and the funding and timing of share repurchases.
- Cash-flow comparability: first-half 2012 included a substantially larger excess tax benefit from stock-based compensation than 2013.