Chipotle Mexican Grill, Inc. — Q1 2017 Form 10-Q
Business context and period: Quarter ended March 31, 2017. Chipotle operated 2,291 restaurants at quarter-end: 2,249 U.S. Chipotle restaurants, 34 international Chipotle restaurants and 8 non-Chipotle restaurants. The company reported one operating segment and closed all 15 ShopHouse restaurants during the quarter. Amounts below are in millions unless otherwise noted.
Financial performance and liquidity
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Revenue | $1,068.8 | $834.5 |
| Operating income (loss) | $73.2 | $(46.6) |
| Net income (loss) | $46.1 | $(26.4) |
| Diluted EPS | $1.60 | $(0.88) |
| Cash from operations | $150.6 | $61.7 |
| Capital expenditures | $57.1 | $62.9 |
- Revenue increased 28.1%. Comparable restaurant sales rose 17.8%, including a 0.6% benefit from recognizing previously deferred revenue. Q1 2016 comparable sales had fallen 29.7%.
- Operating margin was approximately 6.8%, versus a loss margin of approximately 5.6% a year earlier; net margin was approximately 4.3%, versus approximately negative 3.2% (calculated from reported figures).
- Food, beverage and packaging costs were 33.8% of revenue (35.3%); labor 26.9% (30.9%); occupancy 7.4% (8.5%); and other operating costs 14.1% (18.6%). Together, these restaurant costs were approximately 82.2% of revenue versus 93.3%.
- Cash and cash equivalents were $122.4 at March 31, 2017, and investments were $454.6, for total cash and short-term investments of approximately $577.0. Current assets were $664.0 and current liabilities $306.3.
- The balance sheet reports no borrowings or debt. Total liabilities were $654.5, including deferred rent of $297.8. The company said cash, investments and operating cash flow should meet foreseeable needs.
- Repurchases used $59.1 of cash during the quarter; $144.6 remained authorized. The company repurchased 140,780 shares at an average $411.67 per share.
Changes, outlook and notable matters
- Management attributed the sales recovery and improved restaurant cost ratios primarily to higher transactions, reduced promotions, higher average check, sales leverage and labor efficiencies. Average restaurant sales were $1.931 million, down 13.4% from $2.230 million a year earlier.
- Management expected full-year comparable sales growth in the high single digits and 195–210 new restaurant openings. The company opened 57 restaurants in Q1.
- Full-year food costs as a percentage of revenue were expected to remain relatively consistent with Q1. Marketing and promotional expense was forecast at about 3.3% of revenue for 2017, with Q2 expected to have the largest expense due to a new advertising campaign. The estimated full-year effective tax rate was approximately 39%.
- In April 2017, the company detected unauthorized activity on its payment-processing network. The investigation covered restaurant card transactions from March 24 through April 18; management said investigation costs were expected to be substantially covered by insurance, but potential assessments, fines, penalties or other liabilities could not be estimated.
- A federal criminal investigation into food-safety matters dating to 2013 remained unresolved, and the company said potential fines or penalties could not be estimated. A shareholder securities class action was amended after dismissal with leave to amend; related derivative actions also remained pending. The SEC notified the company it did not intend to recommend enforcement action concerning its work-authorization investigation.
- Two Chipotle restaurant closures and a restaurant fire in April were expected to create Q2 expense; an estimated lease liability was also expected from the closures. Q1 included approximately $1.1 million of impairment related to anticipated closures.
- The company said adoption of the new lease standard, effective for it after December 15, 2018, would materially increase recognized balance-sheet assets and obligations. It did not expect the revenue-recognition standard to materially affect financial position or results.
Important facts for investors to verify
- Whether the 17.8% comparable-sales increase is sustainable, given the unusually weak prior-year comparison and the deferred-revenue contribution.
- Developments and potential financial, legal or reputational consequences of the payment-card security investigation and food-safety proceedings.
- Whether restaurant cost improvements persist amid wage inflation, ingredient-price volatility and planned advertising spending.
- Actual restaurant openings, closures and Q2 costs, including the effects of the April fire and lease liabilities.
- Cash deployment, including share repurchases, and the future balance-sheet impact of lease-standard adoption.