Chipotle Mexican Grill, Inc. — 2012 Q2 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012. Financial figures below are in millions of dollars except per-share amounts and where noted. The filing is unaudited. Chipotle operated 1,316 restaurants, including one ShopHouse, and reports one operating segment.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $690.9 | $571.6 | $1,331.5 | $1,080.9 |
| Operating income | $133.8 | $83.9 | $236.0 | $158.7 |
| Net income | $81.7 | $50.7 | $144.3 | $97.0 |
| Diluted EPS | $2.56 | $1.59 | $4.53 | $3.06 |
| Operating margin | 19.4% | 14.7% | 17.7% | 14.7% |
| Net margin | 11.8% | 8.9% | 10.8% | 9.0% |
- Q2 revenue rose 20.9%, operating income 59.5%, net income 61.2%, and diluted EPS 61.0% year over year. First-half revenue increased 23.2% and net income 48.8%.
- Q2 comparable restaurant sales increased 8.0% (10.0% in Q2 2011); first-half comparable sales rose 10.2% (11.1% in 2011). Average restaurant sales were $2.106 million, up 9.3%.
- Q2 food, beverage and packaging costs were 32.1% of revenue versus 32.9% a year earlier; labor was 23.1% versus 24.1%; occupancy was 6.0% versus 6.3%. Lower food-cost ratios reflected menu pricing and avocado and tomato cost relief, partly offset by ingredient inflation. Higher sales supported labor and occupancy leverage.
Cash flow, balance sheet and liquidity
- First-half operating cash flow was $170.9, compared with $174.7 in 2011. Capital spending was $90.3 versus $57.7; operating cash flow less capital spending was approximately $80.5 versus $117.0.
- Investing activities used $201.2, including $110.9 of investment purchases and $90.3 of property and equipment spending. Financing activities provided $34.2, including a $73.7 excess tax benefit from stock-based compensation and $39.6 of treasury-stock purchases.
- Cash and cash equivalents were $404.8 at June 30, up from $401.2 at year-end. Cash plus investments totaled $698.7; investments were $293.9. Current assets were $620.4 and current liabilities $150.1 (approximately 4.1x current ratio).
- Total liabilities were $387.2. The filing reports no off-balance-sheet arrangements and no material conventional borrowing; deemed landlord financing totaled approximately $3.6. Management said available cash and operating cash flow should meet foreseeable operating and capital needs.
Changes, outlook and material matters
- Growth reflected restaurant openings and comparable-sales gains: 87 restaurants opened in the first half, versus 51 in the prior-year period. Management expected 155–165 openings in 2012, including one additional ShopHouse.
- Management expected full-year 2012 comparable-sales growth in the mid-single digits, with menu-price contribution declining to about 1.3% in Q3 and 1.0% in Q4; no further 2012 price increases were expected. The estimated 2012 effective tax rate was 39.0%, versus 38.5% for 2011; renewal of certain federal tax credits could reduce it by up to 0.4 percentage points.
- Management expected food-cost inflation to persist and full-year food costs as a share of revenue to exceed Q2 levels. Marketing and promotional spending was expected to increase significantly in the second half. Q3 G&A was expected to include approximately $5.0 of costs for the September managers’ conference.
- Stock-based compensation expense was $38.8 for the first half, versus $22.8 in 2011. A revised estimate for performance-based awards added $5.6 of expense, or $0.11 to basic and diluted EPS, in Q1.
- Government investigations concerning employee work-authorization compliance continued; in May 2012 the SEC began a civil investigation, and the U.S. Attorney’s investigation broadened to include federal securities-law matters. The company said it would cooperate; potential fines or liabilities could not be estimated. A shareholder derivative action was filed in July 2012.
- Other contingencies include ADA-related class actions and an employment-practices lawsuit. The company said outcomes and potential liabilities could not be reasonably estimated. It lowered serving-line walls in California and in a significant majority of restaurants elsewhere.
- Food supply constraints may periodically lead some restaurants to serve conventionally raised meat. Risks also include commodity-price volatility, possible labor disruption associated with work-authorization investigations, litigation, and seasonal variability. Management reported no material change in risk factors from its 2011 Form 10-K.
Important facts for investors to verify
- Whether comparable-sales growth and customer-visit trends support management’s mid-single-digit full-year outlook as pricing benefits fade.
- How food inflation, naturally raised meat availability, and higher second-half marketing costs affect restaurant margins.
- Developments, costs, disclosures, or penalties arising from the work-authorization and securities-law investigations and related shareholder litigation.
- The sustainability of cash generation and capital returns, including planned restaurant investment and remaining share-repurchase authorization of $77.7.
- The filing’s reported operating cash flow includes a $73.7 excess stock-compensation tax benefit classified in financing cash flows; assess cash-flow comparisons with this classification in mind.