Chipotle Mexican Grill, Inc. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. Dollar amounts below are in millions unless noted. Chipotle operated 1,931 restaurants at quarter-end, including its U.S. and international Chipotle restaurants, 11 ShopHouse locations, and three Pizzeria Locale locations through a consolidated entity. The company reports one operating segment.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $1,216.9 | $1,084.2 | $3,503.7 | $3,038.5 |
| Operating income | $234.8 | $207.4 | $660.0 | $522.9 |
| Net income | $144.9 | $130.8 | $407.7 | $324.1 |
| Diluted EPS | $4.59 | $4.15 | $12.92 | $10.29 |
| Operating margin | 19.3% | 19.1% | 18.8% | 17.2% |
| Net margin | 11.9% | 12.1% | 11.6% | 10.7% |
Revenue increased 12.2% in Q3 and 15.3% year to date. Comparable restaurant sales rose 2.6% in Q3 versus 19.8% a year earlier, and 5.5% for the first nine months versus 17.0%. Growth reflected new restaurant openings and higher comparable sales; the company attributed comparable-sales gains to customer visits and, for the nine-month period, higher average check including menu price increases. Average restaurant sales were $2.532 million, up 5.4% year over year.
For the first nine months, food, beverage and packaging costs were 33.3% of revenue (down from 34.5%); labor was 22.4% (up from 22.0%); occupancy was 5.5% (down from 5.6%); and other operating costs were 10.8% (up from 10.6%). Q3 labor rose to 22.2% of revenue from 21.2%, largely due to wage inflation. The nine-month effective tax rate was 38.6%, versus 38.3%.
Cash flow, balance sheet and capital allocation
- Nine-month operating cash flow was $588.6 million, compared with $549.8 million. Investing cash use was $328.2 million, including $181.8 million in capital expenditures; financing cash use was $72.5 million.
- Cash and cash equivalents were $604.2 million at September 30, 2015, up from $419.5 million at year-end 2014. Short-term investments were $355.6 million and long-term investments $625.1 million. Management reported cash and short-term investments of $959.7 million and said available cash and operating cash flow should meet foreseeable needs.
- Total liabilities were $546.4 million and shareholders’ equity $2,401.5 million. The balance sheet reports no borrowings or debt balance.
- The company repurchased $147.1 million of stock during the first nine months; $155.1 million remained authorized at quarter-end. Treasury stock acquisitions used $147.1 million of cash in the period.
Outlook, developments and risks
- Management expected 215–225 restaurant openings in 2015, raised from prior guidance, and 220–235 in 2016. Full-year 2015 comparable-sales growth was expected in the low- to mid-single digits; 2016 growth was expected in the low single digits.
- Management expected food costs as a percentage of revenue in 2016 to be consistent with or slightly below 2015 levels. It estimated a 38.7% effective tax rate for full-year 2015 and 2016, and expected 2015 G&A dollars to be generally consistent with 2014; 2016 G&A was expected to rise.
- A pork supplier was suspended in January after failing to meet company standards. Carnitas was unavailable in many U.S. restaurants during the first nine months; the company expected the new U.K. supply to restore availability across all restaurants by year-end 2015. Management estimated the shortage reduced nine-month comparable-sales growth by about one percentage point. Supply constraints could also lead some locations to serve conventionally raised beef or chicken, with in-store disclosure.
- Commodity prices, wage inflation, staffing and scheduling inefficiencies, and seasonal sales patterns could affect results. A majority of ingredient purchases were effectively at spot prices; supplier pricing arrangements ranged from one to 18 months, and some included minimum purchase obligations.
- The company continued to cooperate with DHS, SEC, and U.S. Attorney investigations concerning employee work-authorization compliance and related disclosures. It could not determine whether fines or other liabilities would result or estimate their amount. Other ordinary-course legal claims were not expected to have a material adverse effect, though the filing notes that outcomes could differ.
- A $2.8 million first-quarter write-off of internally developed software that the company chose not to implement contributed to higher year-to-date asset-disposal losses. Disclosure controls were concluded to be effective; integration of a new HR and payroll system remained ongoing.
Most important facts for investors to verify
- Whether comparable-sales trends and restaurant-opening plans subsequently matched management’s 2015–2016 outlook.
- Whether pork supply normalized and whether food-sourcing standards affected menu availability or sales.
- How labor inflation, staffing efficiency, and commodity costs affected restaurant margins.
- Any developments, penalties, or liabilities from the ongoing work-authorization and related government investigations.
- Cash generation, investment liquidity, and the pace and remaining authorization of share repurchases.