Chipotle Mexican Grill, Inc. — Q3 2010 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2010; comparisons are with the same 2009 periods. Dollar figures below are in millions unless noted. Chipotle operated 1,023 restaurants, including three outside the United States, and reported one operating segment.
Financial performance
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Revenue | $476.9 | $387.6 | $1,353.4 | $1,130.9 |
| Income from operations | $77.6 | $54.8 | $213.8 | $153.3 |
| Net income | $48.2 | $34.5 | $132.5 | $95.2 |
| Diluted EPS | $1.52 | $1.08 | $4.18 | $2.96 |
| Operating margin | 16.3% | 14.1% | 15.8% | 13.6% |
Q3 revenue increased 23.0% and nine-month revenue increased 19.7%. Comparable restaurant sales rose 11.4% in Q3 and 8.3% year to date, primarily on higher customer visits. Revenue growth also reflected restaurant openings: 22 in Q3 and 67 year to date. Average restaurant sales were $1.806 million, up 4.0%.
For the nine months, operating cash flow was $196.2 million, versus $179.1 million in 2009. Capital expenditures were $71.2 million, compared with $80.3 million. Cash and cash equivalents were $211.0 million at September 30; available-for-sale securities were $90.0 million. Management cited $301.0 million in cash and short-term investments. The company had no revolver borrowings and $19.7 million available under its credit facility. Total liabilities were $271.3 million; the filing reported no off-balance-sheet arrangements.
Material changes and capital allocation
- Food, beverage and packaging costs declined as a share of revenue to 30.6% in Q3 and 30.4% year to date, from 30.8% and 30.9%, respectively. Labor, occupancy and other operating costs also declined as a share of revenue. General and administrative expense rose to 7.0% of Q3 revenue from 6.3%, partly due to a biennial manager conference, higher stock compensation and staffing growth.
- The company repurchased $109.3 million of stock during the first nine months of 2010. At September 30, approximately $76.6 million remained under the then-current authorization. Repurchases may be changed or stopped.
- Retained earnings increased to $410.1 million from $277.5 million at year-end 2009; treasury stock increased to $225.8 million from $114.3 million.
Outlook, risks and contingencies
- Management expected 120–130 restaurant openings in 2010 and 135–145 in 2011, with up to 25% of 2010 openings in lower-investment “A Model” locations. The 2011 plan included a first restaurant in Paris.
- Management forecast high-single-digit comparable sales growth for full-year 2010 and low-single-digit growth for 2011. It expected food-cost pressure in Q4 2010, continuing and potentially increasing in 2011, including from inflation and greater use of naturally raised ingredients. Naturally raised chicken supply constraints were expected to persist through at least Q1 2011.
- Estimated effective tax rates were 38.3% for 2010 and 38.4% for 2011. These are estimates, not guarantees.
- Risks highlighted include new-site availability and opening delays, weaker comparable sales, food and commodity inflation, supply constraints, food safety and consistency, labor and regulatory costs, and environmental liabilities. The company noted that new restaurants may initially have lower margins and that results are seasonal.
- ADA serving-line lawsuits remained unresolved after a July 2010 appeals ruling against the company in an individual case; potential liability could not be reasonably estimated. A California employment-lawsuit class was not certified, but the plaintiff’s appeal remained pending; potential liability was also not estimable. Management did not expect ordinary-course claims to have a material adverse effect, while acknowledging adverse outcomes could be harmful.
- The company adopted new fair-value disclosure requirements in 2010 without significant financial-statement impact. Disclosure controls were judged effective at quarter-end, with no material change to internal control over financial reporting reported.
Important facts for investors to verify
- Whether comparable-sales momentum and the 2011 low-single-digit outlook were sustained, and how much growth came from existing restaurants versus new units.
- Whether food inflation and naturally raised meat supply constraints affected costs, margins, menu availability or customer traffic as management expected.
- Progress toward restaurant-opening targets, including the economics and performance of A Model locations and the planned Paris opening.
- Updates on the ADA and employment litigation, including any change in class certification, appeals or estimable exposure.
- Subsequent share repurchases, remaining authorization and liquidity needs relative to expansion and capital expenditures.