Business context and reporting period
Chipotle Mexican Grill, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2023. It operates one reportable segment. At quarter-end, it had 3,268 restaurants: 3,205 U.S. Chipotle restaurants, 57 international Chipotle restaurants, and six non-Chipotle restaurants. In July, it closed all five Pizzeria Locale restaurants.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $2,514.8m (+13.6%) | $2,213.3m | $4,883.4m (+15.3%) | $4,233.9m |
| Operating income | $431.8m | $337.6m | $799.4m | $527.8m |
| Net income | $341.8m | $259.9m | $633.4m | $418.2m |
| Diluted EPS | $12.32 (+33.2%) | $9.25 | $22.81 | $14.83 |
| Operating margin | 17.2% | 15.3% | 16.4% | 12.5% |
| Operating cash flow | Not separately stated | Not separately stated | $1,037.5m | $569.7m |
Q2 comparable restaurant sales increased 7.4%, primarily from menu price increases and, to a lesser extent, higher transactions. Digital sales were 38.0% of food and beverage revenue, versus 39.0% a year earlier. Restaurant operating costs were 72.5% of revenue, down from 74.8%; management cited sales leverage and lower avocado prices, partly offset by food and wage inflation. Q2 diluted EPS included an estimated $0.33 after-tax impact from expenses primarily related to impairment, closure costs, and corporate restructuring.
Liquidity, capital resources, and debt
At June 30, 2023, cash and cash equivalents were $504.9m and current and long-term investments were $1,281.9m; management reported $1.7bn of cash and marketable investments, excluding restricted cash and non-marketable investments. Operating cash flow for the first half rose to $1.04bn, while investing cash use was $627.7m, including $257.6m of capital expenditures. Financing cash use was $289.1m, including $221.8m of treasury-stock purchases. Cash, cash equivalents, and restricted cash ended the period at $530.0m.
The company had no borrowings under its $500m revolving credit facility and was in compliance with its covenants. It reported $294.7m of remaining share-repurchase authorization. Operating lease liabilities totaled $3.89bn, including current and long-term amounts.
Material changes and management outlook
- Q2 revenue growth reflected $152.3m from comparable restaurant sales and $149.2m from restaurants not yet in the comparable base. The company opened 47 restaurants in the quarter, 40 with Chipotlanes.
- Management remained on track to open approximately 255–285 restaurants in 2023, including 10–15 relocations, with at least 80% of new restaurants expected to include a Chipotlane. This outlook assumes utility, construction, permitting, and material-supply delays do not worsen.
- Management expects positive cash flow for the foreseeable future, assuming no significant decline in comparable restaurant sales, and believes cash, investments, and operating cash flow can fund ongoing needs.
- Planned cash uses include new restaurant construction, restaurant investment and refurbishment, potential share repurchases subject to market conditions, and general corporate purposes. The company made $18.5m of investments through its Cultivate Next Fund by quarter-end, including a $7.5m investment in Vebu during Q2.
Risks, contingencies, and unusual items
Key risks identified include wage and ingredient-cost inflation, labor availability and union activity, food-safety events, supply interruptions, competition and consumer spending, execution of restaurant growth, third-party delivery reliance, cybersecurity and privacy incidents, and litigation. Commodity prices are exposed to factors including weather, supply, and global events; pricing agreements with suppliers generally span one to 24 months. The company also faces interest-rate exposure on its largely interest-bearing cash and investments.
Impairment, closure costs, and asset disposals were $16.2m in Q2, versus $4.7m a year earlier; the increase included elevated restaurant and office impairments, replacement costs for certain equipment and improvements, and the Pizzeria Locale closure decision. The company reported ordinary-course legal claims and a $6.6m accrued legal liability at quarter-end; management did not expect pending or threatened matters to materially adversely affect the business, while noting outcomes are uncertain. Management reported no material change in previously disclosed risk factors and concluded disclosure controls were effective.
Important facts for investors to verify
- Whether comparable-sales growth, including the contribution from menu pricing, is sustained and supported by transaction trends.
- Whether food, labor, and other cost inflation affects restaurant margins as sales leverage changes.
- Progress against the 2023 opening target and the assumed construction, permitting, and supply conditions.
- Cash-flow quality: first-half operating cash flow benefited in part from the timing of tax-related payments and receipts.
- Potential effects of lease obligations, share repurchases, legal matters, and food-safety, supply-chain, labor, or cybersecurity risks.