Chipotle Mexican Grill, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Chipotle operated 2,339 restaurants at quarter-end and reported as one segment.
Financial performance and liquidity
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $1,169.4 million | $998.4 million | $2,238.2 million | $1,832.8 million |
| Operating income (loss) | $106.7 million | $40.9 million | $179.9 million | $(5.7) million |
| Net income (loss) | $66.7 million | $25.6 million | $112.9 million | $(0.8) million |
| Diluted EPS | $2.32 | $0.87 | $3.92 | $(0.03) |
| Operating margin | 9.1% | 4.1% | 8.0% | (0.3)% |
- Q2 revenue increased 17.1%; first-half revenue increased 22.1%. Comparable restaurant sales rose 8.1% in Q2 and 12.5% in the first half, against weak year-ago comparisons.
- Restaurant operating costs as a share of revenue improved year over year: food, beverage and packaging was 34.1% in Q2 and 34.0% for the half; labor was 26.2% and 26.5%; occupancy was 6.9% and 7.1%; other operating costs were 14.0% for both periods.
- Six-month operating cash flow was $243.6 million, versus $179.7 million. Capital expenditures were $113.7 million, versus $126.7 million; operating cash flow less capital expenditures was approximately $129.9 million.
- Cash and cash equivalents were $175.1 million and short-term investments $394.5 million at June 30, for combined cash and short-term investments of $569.6 million. Current assets were $664.0 million and current liabilities $267.8 million.
- Total liabilities were $618.4 million. The balance sheet does not show a separate borrowing or debt balance, so the filing text does not provide a clear debt amount. The company reported no off-balance-sheet arrangements.
Changes, outlook and management commentary
- Profitability recovered substantially from the first half of 2016, when Chipotle reported an operating loss and a small net loss. Management attributed improved restaurant cost ratios primarily to sales leverage, labor efficiencies, lower marketing and promotional spending, and lower food costs.
- Average restaurant sales were $1.957 million, down 5.3% from $2.067 million a year earlier, but up from $1.868 million at year-end 2016. First-half comparable sales included a 0.2% benefit from previously deferred revenue recognized in Q1.
- Management expected full-year 2017 comparable restaurant sales growth in the high single digits, assuming some easing of the sales impact from the Sterling, Virginia incident and potential contributions from a queso rollout and a likely Q4 menu-price increase. It forecast 195–210 new restaurant openings for 2017; 107 had opened in the first half.
- Management expected full-year food, beverage and packaging costs as a percentage of revenue to be below the first-half level if avocado prices continued to decline. Estimated 2017 effective tax rate was approximately 38.4%, versus 40.8% for 2016.
- The company repurchased 244,000 shares for $104.6 million during the first half and had $197.9 million remaining under authorized repurchase programs. It said cash, investments and operating cash flow should meet foreseeable capital and operating needs.
Risks, contingencies and unusual items
- A payment-card data incident was detected in April. Malware at point-of-sale systems at most Chipotle restaurants sought payment-card track data, potentially including cardholder name, number, expiration date and verification codes. The malware was removed; the company said no other customer information was affected. The number of cards affected and potential assessments, fines or other liabilities could not be reasonably estimated. Investigation costs were expected to be substantially covered by insurance, but coverage for assessments and penalties is limited.
- Related payment-card and customer class actions had been filed, alongside existing shareholder derivative and securities class actions. The company intended to defend the cases but could not estimate outcomes or potential liabilities; litigation exposure may exceed applicable insurance coverage.
- A federal grand jury investigation into company-wide food-safety matters continued. A July 19, 2017 subpoena sought information about illness incidents at a Sterling, Virginia restaurant. Management said the late-July news about a norovirus incident there had adversely affected sales trends in the second half of July.
- The company closed all 15 ShopHouse restaurants during the first half. A Q2 gain on disposal and impairment reflected assignment and termination of ShopHouse leases and sale of related assets, partly offset by restaurant-closure costs and fire damage.
- Commodity prices—particularly food inputs—remain a risk; most purchases are effectively at spot prices. Management also noted seasonal variation in sales and profitability. Adoption of the new lease standard was expected to materially increase reported assets and liabilities; its income-statement impact was still under assessment.
Important facts for investors to verify
- Whether the high-single-digit comparable-sales outlook remained achievable after the Sterling incident and its effect on customer traffic.
- The eventual financial, legal and reputational impact of the payment-card incident and food-safety investigations, including insurance limits and any assessments or penalties.
- Whether restaurant-level cost improvements and lower avocado prices persisted, and whether planned menu pricing and queso affected sales and margins.
- Actual new restaurant openings, capital spending and share repurchases versus management’s plans.
- The company’s debt and lease-obligation profile: this filing excerpt does not give a clear debt balance, and management expected lease accounting changes to materially affect the balance sheet.