Chipotle Mexican Grill, Inc. — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011. Unaudited results; dollar amounts below are in millions unless noted. Chipotle operated 1,131 restaurants at quarter-end and reported one operating segment.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $571.6 (+22.4%) | $466.8 | $1,080.9 (+23.3%) | $876.5 |
| Operating income | $83.9 | $75.0 | $158.7 | $136.3 |
| Net income | $50.7 (+9.0%) | $46.5 | $97.0 (+15.1%) | $84.3 |
| Diluted EPS | $1.59 | $1.46 | $3.06 | $2.65 |
| Operating margin | 14.7% | 16.1% | 14.7% | 15.6% |
Q2 comparable restaurant sales rose 10.0% (8.7% prior year); first-half comparable sales rose 11.1% (6.6% prior year). Average restaurant sales were $1.927 million, up 9.3%. Management attributed comparable-sales gains primarily to increased customer visits; new restaurants also contributed materially to revenue growth.
Food, beverage and packaging costs rose to 32.9% of revenue in Q2 from 30.4%, and to 32.5% for the first half from 30.3%, reflecting inflation in items including avocados, beef, dairy and chicken. Labor costs improved as a share of revenue (Q2 24.1% versus 24.6%; first half 24.3% versus 25.0%). Occupancy costs also declined as a share of revenue. General and administrative expense increased to 7.3% of Q2 revenue from 6.5%, primarily due to higher stock-based compensation, legal and investigation costs, and staffing.
Cash flow and liquidity: First-half operating cash flow was $174.7, versus $129.0 in 2010. Capital expenditures were $57.7; net investing cash outflow was $58.0. Cash and cash equivalents ended at $349.8, up from $224.8 at year-end 2010. Cash and investments totaled approximately $474.3. Total liabilities were $324.5, including $3.7 of deemed landlord financing; the filing reports no off-balance-sheet arrangements. Management said available cash and operating cash flow should cover anticipated needs for at least 24 months.
Changes, outlook and notable items
- Revenue growth reflected both restaurant expansion and comparable-sales gains. Chipotle opened 51 restaurants in the first half, compared with 45 a year earlier.
- Management expected to open 135–145 restaurants in 2011, including its first restaurant in France, and forecast full-year comparable-sales growth in the high single digits to low double digits. It cautioned that customer resistance to price increases or a weaker economy could impair that outlook.
- Menu price increases began in the Pacific region in Q1 and were being rolled out elsewhere through August. Management expected food inflation to continue, particularly in dairy and meat, but expected food costs as a percentage of revenue to decline in the second half as price increases took effect.
- The estimated 2011 effective tax rate was 38.2%. Management noted seasonality: sales and net income have historically been lower in the first and fourth quarters.
- Chipotle recognized a $2.486 million first-half loss on its ANGR Holdings equity-method investment, representing the entire investment, after the associated restaurants closed. First-half stock-based compensation expense was $22.8 million before tax.
- During the first half, the company repurchased 90,000 shares for $22.5 million; $47.6 million remained under the current authorization at June 30.
Risks and contingencies
- ICE and the U.S. Attorney’s Office were investigating employee work-authorization matters. The company said the investigation remained ongoing and that fines, penalties or other liabilities could not be estimated; employee terminations and retraining could disrupt operations and raise labor costs.
- ADA-related litigation remained unresolved, including potential damages and fees in an individual case and pending class-action matters. The company said additional exposure could not be reasonably estimated.
- A California employment-practices case could proceed as a single-plaintiff action; an appeal remained pending. The filing also describes other ordinary-course claims.
- Commodity costs, supplier pricing, weather and other factors may pressure margins. The filing says some purchases are effectively at spot prices and some supply arrangements carry minimum purchase obligations.
- Management identified no material changes to the risk factors in its 2010 Form 10-K. It reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- Whether comparable-sales momentum and planned menu price increases support the 2011 high-single- to low-double-digit sales outlook.
- How food inflation, pricing and customer response affect restaurant margins in the second half.
- Progress toward 135–145 planned openings and the sales and costs associated with new and “A Model” restaurants.
- Developments and potential costs from the work-authorization investigation and pending litigation; outcomes and liabilities are not quantified in the filing.
- Cash generation, capital spending and planned share repurchases, including remaining authorization of approximately $47.6 million.