Chipotle Mexican Grill, Inc. — Q2 2010 Form 10-Q
Reporting period: Three and six months ended June 30, 2010. Chipotle operated 1,001 restaurants at quarter-end and reported one operating segment.
Financial results
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Revenue | $466.8 million | $388.8 million | $876.5 million | $743.3 million |
| Operating income | $75.0 million | $57.3 million | $136.3 million | $98.5 million |
| Operating margin | 16.1% | 14.7% | 15.5% | 13.2% |
| Net income | $46.5 million | $35.4 million | $84.3 million | $60.8 million |
| Diluted EPS | $1.46 | $1.10 | $2.65 | $1.88 |
| Comparable restaurant sales growth | 8.7% | 1.7% | 6.6% | 1.9% |
Q2 net margin was 10.0%, versus 9.1% a year earlier; first-half net margin was 9.6%, versus 8.2%. First-half cash from operations was $129.0 million, compared with $114.7 million. Capital expenditures were $41.7 million, versus $51.8 million. Cash and cash equivalents were $202.0 million at June 30, 2010; available-for-sale securities were $105.0 million.
Food, beverage and packaging costs were 30.4% of Q2 revenue, down from 30.9%; labor was 24.6%, up from 24.5%; occupancy was 6.8%, down from 7.2%. The effective tax rate was 38.3% for Q2 and 38.4% for the first half.
Liquidity, debt and capital allocation
Total current assets were $339.3 million and current liabilities were $100.6 million. The company reported no loans outstanding under its revolving credit facility; available borrowings were $19.7 million. The balance sheet included $3.8 million of deemed landlord financing, current and long-term. Management said cash, short-term investments and operating cash flow should cover capital needs for at least 24 months.
First-half financing cash use was $49.8 million, including $58.6 million to acquire treasury stock. The company repurchased $56.4 million under its existing program during the first half. On July 22, 2010, the board authorized up to an additional $100 million of repurchases.
Changes, outlook and commentary
- Revenue increased 20.1% in Q2 and 17.9% in the first half, reflecting restaurant growth and higher comparable sales. Comparable-sales growth was primarily driven by increased customer visits.
- Operating income grew faster than revenue, with operating margin improving 1.4 percentage points in Q2 and 2.3 points in the first half.
- Chipotle opened 25 restaurants in Q2 and 45 in the first half. It expected to open 120–130 in 2010, with up to 25% using its lower-investment “A Model” format.
- Management expected full-year 2010 comparable-sales growth in the mid- to high-single digits. It also expected full-year G&A as a percentage of revenue to be consistent with 2009, while marketing and promotional spending as a share of revenue was expected to rise versus 2009.
- Supply constraints reduced the naturally raised share of chicken by about 20% in Q2; management expected about 80% of chicken to meet its naturally raised protocols until supply improved. The company reported naturally raised barbacoa beef in all restaurants, with naturally raised beef at about 85%.
Risks, contingencies and unusual items
Management cited commodity-price and supply risks, including potential food-cost effects if menu pricing does not keep pace. A California employment lawsuit alleges violations involving record-keeping, breaks and overtime. Class certification was denied, but the plaintiff appealed; the company said potential liability could not be reasonably estimated. Management did not believe ordinary-course legal matters would be material, while noting adverse outcomes could affect results or cash flows. The filing reported no material change in risk factors since the 2009 Form 10-K.
The company adopted new fair-value disclosure requirements effective January 1, 2010, with no significant financial-statement impact. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during Q2.
Important facts for investors to verify
- Whether restaurant openings and comparable-sales growth sustain the stated 2010 outlook, and how results vary with seasonal patterns.
- Whether naturally raised chicken and other ingredient supply constraints ease, and how food costs respond.
- Whether planned marketing increases, the August manager conference, wage and insurance costs affect expense rates in the second half.
- Developments in the employment lawsuit and the pace and price of share repurchases, including the additional authorization.
- The composition and yield of cash and short-term investments: the filing reports $105.0 million of available-for-sale securities and describes other interest-bearing balances, but does not provide a single clearly reconciled total across those disclosures.