Chipotle Mexican Grill, Inc. — Q1 2011 Form 10-Q
Business context and period: The filing covers the three months ended March 31, 2011. Chipotle operated 1,095 fast-casual Mexican restaurants, including three outside the United States, and reported one operating segment. Results are unaudited; interim performance is not necessarily indicative of full-year results.
Financial performance
Amounts below are in millions, except per-share data and percentages.
| Metric | Q1 2011 | Q1 2010 | Change or context |
|---|---|---|---|
| Revenue | $509.4 | $409.7 | Up 24.3%; comparable sales increased 12.4% versus 4.3% |
| Income from operations | $74.8 | $61.3 | Operating margin approximately 14.7% versus 15.0% |
| Net income | $46.4 | $37.8 | Up approximately 22.5% |
| Diluted EPS | $1.46 | $1.19 | Basic EPS was $1.49 versus $1.20 |
| Operating cash flow | $68.3 | $59.9 | Cash flow from operations increased |
| Capital expenditures | $26.4 | $19.7 | Purchases of property and equipment |
Cost and margin trends: Food, beverage and packaging costs rose to 32.0% of revenue from 30.2%, reflecting inflation and weather-related produce pressures. Labor improved to 24.6% from 25.4%; occupancy to 6.9% from 7.6%. Other operating costs increased to 11.3% from 10.7%, mainly due to marketing and promotions. General and administrative expense was 6.3% of revenue versus 6.4%.
Liquidity and obligations: At March 31, cash and cash equivalents were $282.9 million and investments were $104.5 million, for a combined $387.4 million. Current liabilities were $99.3 million. Total liabilities were $295.3 million, including $3.8 million of deemed landlord financing; the filing reports no off-balance-sheet arrangements. Management expected cash, investments and operating cash flow to cover needs for at least 24 months. The company repurchased 57,712 shares for $13.5 million during the quarter, with about $56.5 million remaining under the authorization.
Changes versus the prior-year quarter
- Revenue growth reflected $49.1 million from comparable restaurant sales and $50.4 million from restaurants outside the comparable base. Higher customer visits primarily drove comparable-sales growth.
- There were 12 restaurant openings, compared with 20 in Q1 2010; the restaurant count increased to 1,095 from 976 year over year.
- Net income and diluted EPS rose, while food costs as a share of revenue increased and operating margin edged lower.
- Operating cash flow increased, and the quarter ended with $282.9 million of cash, compared with $193.0 million at the end of Q1 2010.
Outlook, commentary and risks
- Management expected to open 135–145 restaurants in 2011, including the company’s first restaurant in France; approximately 30% of planned openings were expected to be “A Model” restaurants.
- Management projected mid-single-digit comparable-sales growth for full-year 2011, citing difficult comparisons and continued economic uncertainty. Q1 comparable-sales growth was 12.4%.
- Food-cost inflation, including pressure on avocados, dairy and meats, was expected to continue through 2011. The company expected food costs to increase in Q2 and planned menu price increases across the country during Q3.
- Management expected marketing and promotional spending as a percentage of revenue to increase for full-year 2011, particularly in Q2. The estimated 2011 effective tax rate was 38.3%, versus 38.1% for 2010.
- Supply challenges for naturally raised meats continued: the company served naturally raised pork across all restaurants, but the percentage of naturally raised chicken and beef declined in the quarter.
- Legal matters included ADA serving-line cases, an employee wage-and-hour case, and an ongoing DHS/ICE work-authorization investigation. In April 2011, the company received notice of a U.S. Attorney’s Office criminal-division investigation related to work authorization. Potential fines or other liability could not be estimated. The company said employee terminations had temporarily raised training costs.
- Commodity prices, weather, supplier availability, foreign currency and litigation were identified as risks. Management reported no material change in risk factors from the 2010 Form 10-K and stated disclosure controls were effective.
Important facts for investors to verify
- Whether food-cost inflation and planned Q3 menu pricing affect restaurant margins, customer visits and comparable-sales growth.
- Progress toward the 135–145 restaurant-opening target and the projected mid-single-digit full-year comparable-sales increase.
- Developments, potential costs and operating effects from the DHS/ICE investigation and the ADA and employment-related litigation.
- Whether naturally raised meat supply constraints continue to affect sourcing and the company’s Food With Integrity commitments.
- Use of cash and investments for restaurant expansion, maintenance and share repurchases, and the pace of authorized repurchases.