Chipotle Mexican Grill, Inc. — FY2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013; audited annual results, with quarterly data including the quarter ended December 31, 2013. Chipotle operated 1,595 restaurants across its Chipotle, ShopHouse and Pizzeria Locale concepts. The company reports one operating segment; substantially all revenue and assets are in the U.S.
Financial performance and liquidity
| Metric | FY2013 | FY2012 | Change |
|---|---|---|---|
| Revenue | $3.215 billion | $2.731 billion | +17.7% |
| Operating income | $532.7 million | $455.9 million | +16.9% |
| Operating margin | 16.6% | 16.7% | Down about 0.1 percentage point |
| Net income | $327.4 million | $278.0 million | +17.8% |
| Diluted EPS | $10.47 | $8.75 | +19.7% |
| Comparable restaurant sales | +5.6% | +7.1% | Growth moderated |
| Operating cash flow | $528.8 million | $420.0 million | +25.9% |
| Capital expenditures | $199.9 million | $197.0 million | +1.5% |
Food, beverage and packaging costs increased to 33.4% of revenue from 32.6%, reflecting inflation in ingredients including salsa inputs, dairy, cooking oils and chicken. Labor costs improved to 23.0% of revenue from 23.5%; occupancy costs were 6.2%, versus 6.3%. Net margin was approximately 10.2% in both years.
In Q4 2013, revenue was $844.1 million, operating income $129.1 million and net income $79.6 million, compared with $699.2 million, $102.2 million and $61.4 million, respectively, in Q4 2012. Quarterly comparable sales growth accelerated to 9.3% from 3.8%.
At year-end, cash and cash equivalents were $323.2 million; current and long-term investments totaled $568.8 million. Management separately cited $578.2 million of cash and short-term investments and $313.9 million of long-term investments. Current assets were $666.3 million and current liabilities $199.2 million. Total liabilities were $471.0 million and equity $1.538 billion; the filing reports no off-balance-sheet arrangements and no borrowings in the presented balance sheet. Operating lease commitments totaled $2.857 billion, including $185.9 million due within one year. Operating cash flow less capital expenditures was approximately $328.9 million.
Changes, outlook and material matters
- Revenue growth remained strong, driven by new restaurants and comparable sales, but annual comparable-sales growth eased from 7.1% to 5.6%. The company opened 185 restaurants in 2013.
- Food costs rose as a share of sales, partly offset by labor and occupancy leverage. Marketing expense increased, and management expected marketing spend as a percentage of revenue to rise in 2014.
- Management expected 180–195 restaurant openings in 2014 and comparable-sales growth in the low- to mid-single digits, excluding menu price increases. It anticipated likely menu price increases, most likely in the second half of 2014.
- Management forecast approximately $235 million of 2014 capital expenditures, including about $175 million for new restaurant construction before landlord reimbursements; average development costs were expected to rise about 5%. The estimated 2014 effective tax rate was 39.2%.
- Management expected continued food-cost inflation in 2014, particularly for avocados, beef, dairy and chicken. Some restaurants temporarily served conventionally raised beef or chicken because of supply constraints for meats meeting the company’s sourcing standards.
- Federal criminal and civil investigations concerning employee work-authorization compliance and related disclosures were ongoing, involving the U.S. Attorney for the District of Columbia and the SEC. The company said potential fines or liabilities could not be estimated. A consolidated shareholder derivative action had a proposed settlement subject to court approval.
- Other key risks include food-safety incidents and reputational harm, ingredient supply and cost volatility, labor costs and staffing, execution of rapid expansion, lease and development costs, and competition. Management and the auditor reported effective internal controls; the auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Whether comparable-sales momentum and customer traffic sustain the 2014 outlook, especially after the year’s quarterly acceleration.
- Actual food-cost inflation, availability of qualifying ingredients, and the effect of any menu price increases on traffic and margins.
- Restaurant opening pace, development costs, and returns from new locations and the smaller ShopHouse and Pizzeria Locale concepts.
- Developments and potential financial or reputational consequences of the work-authorization investigations and related litigation.
- Cash deployment among expansion, share repurchases and other needs, alongside substantial long-term lease commitments.