CHIPOTLE MEXICAN GRILL INC - Quarter Report: 2019 September (Form 10-Q)

cmg-20190930x10q

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

______________________________

FORM 10-Q

______________________________

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2019

¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 1-32731

______________________________

CHIPOTLE MEXICAN GRILL, INC.

(Exact name of registrant as specified in its charter)

______________________________


Delaware	84-1219301
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

610 Newport Center Drive, Suite 1300 Newport Beach, CA	92660
(Address of Principal Executive Offices)	(Zip Code)

Registrant’s telephone number, including area code: (949) 524-4000

______________________________

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common stock, par value $0.01 per share	CMG	New York Stock Exchange

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes  No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). x Yes ¨ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer	x	Accelerated filer	¨
Non-accelerated filer	¨	Smaller reporting company	¨
		Emerging growth company	¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes x No

As of October 18, 2019, there were 27,795,204 shares of the registrant’s common stock, par value of $0.01 per share outstanding.

Table of Contents

TABLE OF CONTENTS



	PART I
Item 1.	Financial Statements	1
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	19
Item 4.	Controls and Procedures	20
	PART II
Item 1.	Legal Proceedings	20
Item 1A.	Risk Factors	20
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	21
Item 6.	Exhibits	22
	Signatures	23

Table of Contents

PART I

ITEM 1. FINANCIAL STATEMENTS

Chipotle Mexican Grill, Inc.

Condensed Consolidated Balance Sheet

(in thousands, except per share data)



	September 30,		December 31,
	2019		2018
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	386,565	$	249,953
Accounts receivable, net of allowance for doubtful accounts of $81 and $0 as of September 30, 2019 and December 31, 2018, respectively		49,489		62,312
Inventory		23,871		21,555
Prepaid expenses and other current assets		62,211		54,129
Income tax receivable		3,824		-
Investments		428,796		426,845
Total current assets		954,756		814,794
Leasehold improvements, property and equipment, net		1,425,446		1,379,254
Restricted cash		28,697		30,199
Operating lease assets		2,479,464		-
Deferred income tax assets		9,634		-
Other assets		18,001		19,332
Goodwill		21,939		21,939
Total assets	$	4,937,937	$	2,265,518
Liabilities and shareholders' equity
Current liabilities:
Accounts payable	$	118,483	$	113,071
Accrued payroll and benefits		145,766		113,467
Accrued liabilities		141,159		147,849
Unearned revenue		61,809		70,474
Current operating lease liabilities		166,802		-
Income tax payable		-		5,129
Total current liabilities		634,019		449,990
Commitments and contingencies (Note 11)
Deferred rent		-		330,985
Long-term operating lease liabilities		2,642,737		-
Deferred income tax liabilities		-		11,566
Other liabilities		38,734		31,638
Total liabilities		3,315,490		824,179
Shareholders' equity:
Preferred stock, $0.01 par value, 600,000 shares authorized, no shares issued as of September 30, 2019 and December 31, 2018, respectively		-		-
Common stock, $0.01 par value, 230,000 shares authorized, 36,320 and 35,973 shares issued as of September 30, 2019 and December 31, 2018, respectively		363		360
Additional paid-in capital		1,439,811		1,374,154
Treasury stock, at cost, 8,519 and 8,276 common shares at September 30, 2019 and December 31, 2018, respectively		(2,660,872)		(2,500,556)
Accumulated other comprehensive loss		(5,887)		(6,236)
Retained earnings		2,849,032		2,573,617
Total shareholders' equity		1,622,447		1,441,339
Total liabilities and shareholders' equity	$	4,937,937	$	2,265,518

See accompanying notes to condensed consolidated financial statements.

Table of Contents

Chipotle Mexican Grill, Inc.

Condensed Consolidated Statement of Income

(unaudited)

(in thousands, except per share data)



	Three months ended				Nine months ended
	September 30,				September 30,
	2019		2018		2019		2018
Revenue	$	1,403,697	$	1,225,007	$	4,146,145	$	3,639,924
Restaurant operating costs (exclusive of depreciation and amortization shown separately below):
Food, beverage and packaging		466,496		409,213		1,371,147		1,194,224
Labor		373,645		332,865		1,090,540		993,570
Occupancy		91,409		86,691		270,102		258,719
Other operating costs		180,259		167,488		548,311		490,728
General and administrative expenses		115,070		109,524		339,136		271,740
Depreciation and amortization		52,206		52,654		157,629		148,762
Pre-opening costs		3,064		2,127		6,122		6,790
Impairment, closure costs, and asset disposals		5,927		6,454		17,356		56,635
Total operating expenses		1,288,076		1,167,016		3,800,343		3,421,168
Income from operations		115,621		57,991		345,802		218,756
Interest and other income, net		4,411		2,493		11,487		6,210
Income before income taxes		120,032		60,484		357,289		224,966
Provision for income taxes		(21,450)		(22,280)		(79,547)		(80,432)
Net income	$	98,582	$	38,204	$	277,742	$	144,534
Earnings per share:
Basic	$	3.55	$	1.37	$	10.02	$	5.19
Diluted	$	3.47	$	1.36	$	9.83	$	5.17
Weighted-average common shares outstanding:
Basic		27,775		27,802		27,730		27,844
Diluted		28,388		28,017		28,268		27,967

Condensed Consolidated Statement of Comprehensive Income

(unaudited)

(in thousands)



	Three months ended				Nine months ended
	September 30,				September 30,
	2019		2018		2019		2018
Net income	$	98,582	$	38,204	$	277,742	$	144,534
Other comprehensive income (loss), net of income taxes:
Foreign currency translation adjustments		(631)		249		202		(1,199)
Unrealized gain (loss) on available-for-sale securities, net of tax		5		22		147		3
Other comprehensive income (loss), net of income taxes		(626)		271		349		(1,196)
Comprehensive income	$	97,956	$	38,475	$	278,091	$	143,338

See accompanying notes to condensed consolidated financial statements.

Table of Contents

Chipotle Mexican Grill, Inc.

Condensed Consolidated Statement of Shareholders’ Equity

(unaudited)

(in thousands)


	Common Stock					Treasury Stock					Accumulated Other Comprehensive Income (Loss)
	Shares	Amount		Additional ‎Paid-In ‎Capital		Shares	Amount		Retained ‎Earnings		Available-for-Sale Securities			Foreign Currency Translation	Total
Balance, December 31, 2017	35,852	$	359	$	1,305,090	7,826	$	(2,334,409)	$	2,397,064	$	(306)	$	(3,353)	$	1,364,445
Stock-based compensation	-		-		12,376	-		-		-		-		-		12,376
Stock plan transactions and other	31		-		(228)	-		-		-		-		-		(228)
Acquisition of treasury stock	-		-		-	231		(72,025)		-		-		-		(72,025)
Net income	-		-		-	-		-		59,446		-		-		59,446
Other comprehensive income (loss), net of income tax	-		-		-	-		-		-		(101)		132		31
Balance, March 31, 2018	35,883	$	359	$	1,317,238	8,057	$	(2,406,434)	$	2,456,510	$	(407)	$	(3,221)	$	1,364,045
Stock-based compensation	-		-		11,660	-		-		-		-		-		11,660
Stock plan transactions and other	62		-		(409)	-		-		-		-		-		(409)
Acquisition of treasury stock	-		-		-	76		(28,675)		-		-		-		(28,675)
Net income	-		-		-	-		-		46,884		-		-		46,884
Other comprehensive income (loss), net of income tax	-		-		-	-		-		-		82		(1,580)		(1,498)
Balance, June 30, 2018	35,945	$	359	$	1,328,489	8,133	$	(2,435,109)	$	2,503,394	$	(325)	$	(4,801)	$	1,392,007
Stock-based compensation	-		-		24,760	-		-		-		-		-		24,760
Stock plan transactions and other	21		1		(178)	-		-		-		-		-		(177)
Acquisition of treasury stock	-		-		-	41		(19,228)		-		-		-		(19,228)
Net income	-		-		-	-		-		38,204		-		-		38,204
Other comprehensive income (loss), net of income tax	-		-		-	-		-		-		22		249		271
Balance, September 30, 2018	35,966	$	360	$	1,353,071	8,174	$	(2,454,337)	$	2,541,598	$	(303)	$	(4,552)	$	1,435,837

Balance, December 31, 2018	35,973	$	360	$	1,374,154	8,276	$	(2,500,556)	$	2,573,617	$	(147)	$	(6,089)	$	1,441,339
Adoption of ASU No. 2016-02, Leases (Topic 842)	-		-		-	-		-		(2,327)		-		-		(2,327)
Stock-based compensation	-		-		19,342	-		-		-		-		-		19,342
Stock plan transactions and other	135		1		(212)	-		-		-		-		-		(211)
Acquisition of treasury stock	-		-		-	110		(62,854)		-		-		-		(62,854)
Net income	-		-		-	-		-		88,132		-		-		88,132
Other comprehensive income (loss), net of income tax	-		-		-	-		-		-		100		278		378
Balance, March 31, 2019	36,108	$	361	$	1,393,284	8,386	$	(2,563,410)	$	2,659,422	$	(47)	$	(5,811)	$	1,483,799
Stock-based compensation	-		-		21,322	-		-		-		-		-		21,322
Stock plan transactions and other	85		1		(186)	-		-		-		-		-		(185)
Acquisition of treasury stock	-		-		-	83		(58,512)		-		-		-		(58,512)
Net income	-		-		-	-		-		91,028		-		-		91,028
Other comprehensive income (loss), net of income tax	-		-		-	-		-		-		42		555		597
Balance, June 30, 2019	36,193	$	362	$	1,414,420	8,469	$	(2,621,922)	$	2,750,450	$	(5)	$	(5,256)	$	1,538,049
Stock-based compensation	-		-		25,506	-		-		-		-		-		25,506
Stock plan transactions and other	127		1		(115)	-		-		-		-		-		(114)
Acquisition of treasury stock	-		-		-	50		(38,950)		-		-		-		(38,950)
Net income	-		-		-	-		-		98,582		-		-		98,582
Other comprehensive income (loss), net of income tax	-		-		-	-		-		-		5		(631)		(626)
Balance, September 30, 2019	36,320	$	363	$	1,439,811	8,519	$	(2,660,872)	$	2,849,032	$	-	$	(5,887)	$	1,622,447

See accompanying notes to condensed consolidated financial statements.

Table of Contents

Chipotle Mexican Grill, Inc.

Condensed Consolidated Statement of Cash Flows

(unaudited)

(in thousands)



	Nine months ended
	September 30,
	2019		2018
Operating activities
Net income	$	277,742	$	144,534
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		157,629		148,762
Amortization of operating lease assets		117,622		-
Deferred income tax (benefit) provision		(15,146)		26,424
Impairment, closure costs, and asset disposals		10,216		56,635
Bad debt allowance		85		116
Stock-based compensation expense		65,657		48,219
Other		(3,044)		(1,933)
Changes in operating assets and liabilities:
Accounts receivable		19,039		13,442
Inventory		(2,312)		1,562
Prepaid expenses and other current assets		(17,514)		(5,041)
Other assets		2,864		1,500
Accounts payable		(4,162)		18,183
Accrued payroll and benefits		30,471		45,146
Accrued liabilities		25,552		13,463
Unearned revenue		(8,665)		(20,517)
Income tax payable/receivable		(8,985)		(12,366)
Deferred rent		-		17,096
Operating lease liabilities		(112,478)		-
Other long-term liabilities		472		(2,728)
Net cash provided by operating activities		535,043		492,497
Investing activities
Purchases of leasehold improvements, property and equipment		(237,965)		(209,999)
Purchases of investments		(328,107)		(297,217)
Maturities of investments		328,448		295,000
Net cash used in investing activities		(237,624)		(212,216)
Financing activities
Acquisition of treasury stock		(151,621)		(116,401)
Tax withholding on share-based compensation awards		(10,420)		(4,627)
Stock plan transactions and other financing activities		(665)		(150)
Net cash used in financing activities		(162,706)		(121,178)
Effect of exchange rate changes on cash, cash equivalents and restricted cash		397		(665)
Net change in cash, cash equivalents, and restricted cash		135,110		158,438
Cash, cash equivalents, and restricted cash at beginning of period		280,152		214,170
Cash, cash equivalents, and restricted cash at end of period	$	415,262	$	372,608
Supplemental disclosures of cash flow information
Income taxes paid	$	103,439	$	66,091
Purchases of leasehold improvements, property, and equipment accrued in accounts payable and accrued liabilities	$	40,250	$	31,063
Acquisition of treasury stock accrued in accounts payable and accrued liabilities	$	748	$	600

See accompanying notes to condensed consolidated financial statements.

‎

Table of Contents

Chipotle Mexican Grill, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

(dollar and share amounts in thousands, unless otherwise specified)

1. Basis of Presentation

In this quarterly report on Form 10-Q, Chipotle Mexican Grill, Inc., a Delaware corporation, together with its subsidiaries, is collectively referred to as “Chipotle,” “we,” “us,” or “our.”

We develop and operate restaurants that serve a focused menu of burritos, burrito bowls, tacos and salads, made using fresh, high-quality ingredients. As of September 30, 2019, we operated 2,505 Chipotle restaurants throughout the United States as well as 39 international Chipotle restaurants. We are also an investor in a consolidated entity that owns and operates two Pizzeria Locale restaurants, a fast-casual pizza concept. We manage our operations based on eight regions and have aggregated our operations to one reportable segment.

Certain prior year amounts have been reclassified for consistency with the current year presentation.

We have prepared the accompanying unaudited condensed consolidated financial statements in accordance with U.S. generally accepted accounting principles for interim financial statements and pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments consisting of normal recurring adjustments necessary for a fair presentation of our financial position and results of operations. Interim results of operations are not necessarily indicative of the results that may be achieved for the full year. The financial statements and related notes do not include all information and footnotes required by U.S. generally accepted accounting principles for annual reports. This quarterly report should be read in conjunction with the consolidated financial statements included in our annual report on Form 10-K for the year ended December 31, 2018.

2. Recent Accounting Standards

Recently Issued Accounting Standards

In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2018-15, “Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract”, which clarifies the accounting for implementation costs in cloud computing arrangements. ASU 2018-15 is effective for us in the first quarter of fiscal 2020. We do not expect a material impact on our consolidated statement of income and are still assessing the impact on our consolidated balance sheet.

We reviewed all other recently issued accounting pronouncements and concluded that they were either not applicable or not expected to have a significant impact on the condensed consolidated financial statements.

Recently Adopted Accounting Standards

On January 1, 2019, we adopted ASU 2016-02, “Leases (Topic 842),” along with related clarifications and improvements. This pronouncement requires lessees to recognize a liability for lease obligations, which represents the discounted obligation to make future lease payments, and a corresponding right-of-use asset on the balance sheet. The guidance requires disclosure of key information about leasing arrangements that is intended to give financial statement users the ability to assess the amount, timing, and potential uncertainty of cash flows related to leases. We elected the optional transition method to apply the standard as of the effective date and therefore, we have not applied the standard to the comparative periods presented on our condensed consolidated financial statements.

Our practical expedients were as follows:



		Implications as of January 1, 2019
Practical expedient package		We have not reassessed whether any expired or existing contracts are, or contain, leases.
		We have not reassessed the lease classification for any expired or existing leases.
		We have not reassessed initial direct costs for any expired or existing leases.
Hindsight practical expedient		We have not elected the hindsight practical expedient, which permits the use of hindsight when determining lease term and impairment of operating lease assets.

Table of Contents

The impact on the consolidated balance sheet is as follows:



	December 31, 2018		Adjustments Due to the Adoption of Topic 842		January 1, 2019
Assets
Current assets:
Cash and cash equivalents	$	249,953	$	-	$	249,953
Accounts receivable		62,312		-		62,312
Inventory		21,555		-		21,555
Prepaid expenses and other current assets		54,129		(23,653)		30,476
Investments		426,845		-		426,845
Total current assets		814,794		(23,653)		791,141
Leasehold improvements, property and equipment, net		1,379,254		(15,167)		1,364,087
Restricted cash		30,199		-		30,199
Operating lease assets		-		2,363,020		2,363,020
Other assets		19,332		-		19,332
Goodwill		21,939		-		21,939
Total assets	$	2,265,518	$	2,324,200	$	4,589,718
Liabilities and shareholders' equity
Current liabilities:
Accounts payable	$	113,071	$	-	$	113,071
Accrued payroll and benefits		113,467		-		113,467
Accrued liabilities		147,849		(23,860)		123,989
Unearned revenue		70,474		-		70,474
Income tax payable		5,129		-		5,129
Total current liabilities		449,990		(23,860)		426,130
Commitments and contingencies
Deferred rent		330,985		(330,985)		-
Current and long-term operating lease liabilities		-		2,682,203		2,682,203
Deferred income tax liabilities		11,566		(831)		10,735
Other liabilities		31,638		-		31,638
Total liabilities		824,179		2,326,527		3,150,706
Shareholders' equity:
Preferred stock, $0.01 par value, 600,000 shares authorized, no shares issued as of December 31, 2018 and 2017, respectively		-		-		-
Common stock, $0.01 par value, 230,000 shares authorized, 35,973 and 35,852 shares issued as of December 31, 2018 and 2017, respectively		360		-		360
Additional paid-in capital		1,374,154		-		1,374,154
Treasury stock, at cost, 8,276 and 7,826 common shares at December 31, 2018 and 2017, respectively		(2,500,556)		-		(2,500,556)
Accumulated other comprehensive loss		(6,236)		-		(6,236)
Retained earnings		2,573,617		(2,327)		2,571,290
Total shareholders' equity		1,441,339		(2,327)		1,439,012
Total liabilities and shareholders' equity	$	2,265,518	$	2,324,200	$	4,589,718

Table of Contents

3. Revenue Recognition

We generally recognize revenue, net of discounts and incentives, when payment is tendered at the point of sale. We report revenue net of sales-related taxes collected from customers and remitted to government taxing authorities.

Gift Cards

We sell gift cards which do not have expiration dates and we do not deduct non-usage fees from outstanding gift card balances. We recognize revenue from gift cards when: (i) the gift card is redeemed by the customer; or (ii) we determine the likelihood of the gift card being redeemed by the customer is remote (gift card breakage) and there is not a legal obligation to remit the unredeemed gift cards to the relevant jurisdiction. Gift card breakage is recognized in revenue as the gift cards are used on a pro rata basis over an eight-month period beginning at the date of the gift card sale and is included in revenue on the condensed consolidated statement of income. We have determined that 4% of gift card sales will not be redeemed and will be retained by us.

Gift card liability balances are typically highest at the end of each calendar year following increased gift card sales during the holiday season; accordingly, revenue recognized from gift card liability balances is highest in the first quarter of each calendar year. The gift card liability included in unearned revenue on the condensed consolidated balance sheet is $52,008 and $70,474 as of September 30, 2019 and December 31, 2018, respectively.

Revenue from the redemption of gift cards that was included in unearned revenue at the beginning of the year is as follows:



	Three months ended				Nine months ended
	September 30,				September 30,
	2019		2018		2019		2018
Revenue recognized from gift card liability balance at the beginning of the year	$	3,556	$	3,306	$	34,874	$	33,835

Chipotle Rewards

During the first quarter of 2019, we launched a national loyalty program called Chipotle Rewards. Eligible customers who enroll in the program generally earn points for every dollar spent. After accumulating a certain number of points, the customer earns a reward that can be redeemed for a free entrée. We may also periodically offer promotions, which provide the customer with the opportunity to earn bonus points or free food vouchers (“Bonus Vouchers”). Earned rewards generally expire one to two months after they are issued, and points generally expire if an account is inactive for a period of six months.

We defer revenue associated with the estimated selling price of points or Bonus Vouchers earned by customers as each point or Bonus Voucher is earned, net of points we do not expect to be redeemed. The estimated selling price of each point or Bonus Voucher earned is based on the estimated value of product for which the reward is expected to be redeemed. Our estimate of points and Bonus Vouchers we expect to be redeemed is based on historical company specific data. The cost associated with rewards and Bonus Vouchers redeemed are included in food, beverage, and packaging expense on our condensed consolidated statement of income.

We recognize loyalty revenue on the condensed consolidated statement of income when a customer redeems an earned reward. Deferred revenue associated with Chipotle Rewards is included in unearned revenue on our condensed consolidated balance sheet.

Changes in our Chipotle Rewards liability balance were as follows:



	Three months ended				Nine months ended
	September 30,				September 30,
	2019		2018		2019		2018
Chipotle Rewards liability, beginning balance	$	8,577	$	-	$	-	$	-
Revenue deferred		12,354		-		32,081		-
Revenue recognized		(11,130)		-		(22,280)		-
Chipotle Rewards liability, ending balance	$	9,801	$	-	$	9,801	$	-

4. Fair Value of Financial Instruments

The carrying value of our cash and cash equivalents, accounts receivable and accounts payable approximate fair value because of their short-term nature.

Table of Contents

Our investments consist of U.S. treasury notes with maturities of up to one year. Fair value of investments is measured using Level 1 inputs (quoted prices for identical assets in active markets). We designate the appropriate classification of our investments at the time of purchase based upon the intended holding period.

Investments, all of which are classified as held-to-maturity, are carried at amortized cost and approximated fair value as of September 30, 2019. We recognize impairment charges when management believes the decline in the fair value of the investment below the carrying value is other-than-temporary. No impairment charges were recognized on our investments for the three and nine months ended September 30, 2019 and 2018.

As of September 30, 2018, we transferred the classification of our investments from available-for-sale to held-to-maturity. As of September 30, 2019, the unrealized holding loss and offsetting discount, created as a result of this reclassification, was fully amortized to interest and other income on the condensed consolidated statement of income.

We also maintain a rabbi trust to fund obligations under a deferred compensation plan. Amounts in the rabbi trust are invested in mutual funds, which are designated as trading securities carried at fair value and are included in other assets on the condensed consolidated balance sheet. Fair value of mutual funds is measured using Level 1 inputs. The fair value of the investments in the rabbi trust was $12,452 and $10,872 as of September 30, 2019, and December 31, 2018, respectively. We record trading gains and losses in general and administrative expenses on the condensed consolidated statement of income, along with the offsetting amount related to the increase or decrease in deferred compensation to reflect our exposure to liabilities for payment under the deferred plan.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

Assets recognized or disclosed at fair value on the condensed consolidated financial statements on a nonrecurring basis include items such as leasehold improvements, property and equipment, operating lease assets, goodwill, and other intangible assets. These assets are measured at fair value if determined to be impaired.

Other than as disclosed in Note 5. “Corporate Restructuring Costs” and Note 9. “Leases” as of September 30, 2019 and December 31, 2018, we had no material non-financial assets or liabilities that were measured using Level 3 inputs.

5. Corporate Restructuring Costs

In May 2018, we announced that we would open a headquarters office in Newport Beach, California, consolidate certain corporate administrative functions into our existing office in Columbus, Ohio, and close our existing headquarters offices in Denver, Colorado, as well as additional corporate offices in New York, New York. All affected employees were either offered an opportunity to continue in the new organization or were offered a severance package. We record severance as a one-time termination benefit and recognize the expense ratably over the employees’ required future service period. We evaluate our operating lease assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the operating lease asset (or asset group that includes the operating lease asset, referred to interchangeably throughout as an “operating lease asset”) may not be recoverable. We first compare the carrying value of the operating lease asset to the operating lease asset’s estimated future undiscounted cash flows. If the estimated undiscounted future cash flows are less than the carrying value of the operating lease asset, we determine if we have an impairment loss by comparing the carrying value of the operating lease asset to the operating lease asset's estimated fair value. The estimated fair value of the operating lease asset is generally determined using a discounted cash flow projection model, using Level 3 inputs. The impairment charges represent the excess of each operating lease asset’s carrying amount over its estimated fair value. All other costs, including other employee transition costs, recruitment and relocation costs, other office closure costs, and third-party costs are recognized in the period incurred.

Table of Contents

Corporate restructuring costs consist of the following:


	Three months ended				Nine months ended
	September 30,				September 30,
	2019		2018		2019		2018
Employee severance and other employee transition costs⁽¹⁾	$	142	$	4,100	$	1,648	$	4,593
Recruitment and relocation costs⁽¹⁾		1,136		3,188		5,336		3,395
Operating lease asset impairment and other office closure costs⁽²⁾		-		(1,076)		1,719		15,223
Third-party and other costs⁽¹⁾		1,180		2,460		3,218		5,660
Stock-based compensation⁽¹⁾		-		6,087		134		(339)
Total corporate restructuring costs	$	2,458	$	14,759	$	12,055	$	28,532

(1) Recorded in general and administrative expenses on the condensed consolidated statement of income.

(2) Recorded in impairment, closure costs, and asset disposals on the condensed consolidated statement of income.

Changes in our corporate restructuring liabilities which are included in accrued liabilities on the condensed consolidated balance sheet were as follows:



	December 31, 2018		Charges		Payments		September 30, 2019
Employee severance and other employee transition costs	$	2,722	$	1,648	$	(4,370)	$	-
Recruitment and relocation costs		224		5,336		(5,490)		70
Third-party and other costs		554		3,218		(3,698)		74
Total restructuring liability	$	3,500	$	10,202	$	(13,558)	$	144

6. Shareholders’ Equity

Through September 30, 2019, we had announced authorizations by our Board of Directors of repurchases of shares of common stock, which in the aggregate, authorized expenditures of up to $2,700,000. As of September 30, 2019, $107,662 was available to repurchase shares under the previously announced repurchase authorizations. Shares repurchased are being held in treasury stock until they are reissued or retired at the discretion of the Board of Directors.

During the nine months ended September 30, 2019, 17 shares of common stock at a total cost of $10,420 were netted and surrendered as payment for minimum statutory withholding obligations in connection with the vesting of outstanding stock awards. Shares surrendered by the participants in accordance with the applicable award agreements and plan are deemed repurchased by us but are not part of publicly announced share repurchase programs.

7. Stock-Based Compensation

During the nine months ended September 30, 2019, we granted stock only stock appreciation rights (“SOSARs”) on 199 shares of our common stock to eligible employees. The weighted-average grant date fair value of the SOSARs was $176.08 per share with a weighted-average exercise price of $598.60 per share. The SOSARs vest in two equal installments on the second and third anniversary of the grant date. During the nine months ended September 30, 2019, 1,124 SOSARs were exercised, 27 SOSARs were forfeited, and 50 SOSARs expired.

During the nine months ended September 30, 2019, we granted restricted stock units (“RSUs”) on 25 shares of our common stock to eligible employees. The weighted-average grant date fair value of the RSUs was $610.96 per share. The RSUs generally vest in two equal installments on the second and third anniversary of the grant date. During the nine months ended September 30, 2019, 45 RSUs vested and 14 RSUs were forfeited.

During the nine months ended September 30, 2019, we awarded a total of 46 performance shares (“PSUs”) that are subject to service and performance vesting conditions. The weighted-average grant date fair value of the PSUs was $583.13 per share, and the quantity of shares that will vest range from 0% to 300% of the targeted number of shares. If the defined minimum targets are not met, then no shares will vest. During the nine months ended September 30, 2019, there were two different PSU awards granted with different terms.

The first award, consisting of 33 PSUs, will vest based on our growth in comparable restaurant sales and average restaurant margin over defined periods. These PSU awards will vest fully on the third anniversary of the grant date.

Table of Contents

The second award, consisting of 13 PSUs, will vest based on achievement of certain targets related to digital sales, general and administrative expenses as a percentage of revenue, and successful completion of a defined number of strategic initiatives. These PSU awards will vest 40% on the third anniversary of the grant date and 60% on the fourth anniversary of the grant date.

During the nine months ended September 30, 2019, 12 PSUs that were subject to service and market conditions were forfeited for failure to meet the specified performance levels or service requirements.

The following table sets forth total stock-based compensation expense:



	Three months ended				Nine months ended
	September 30,				September 30,
	2019		2018		2019		2018
Stock-based compensation expense	$	25,506	$	24,760	$	66,170	$	48,796
Stock-based compensation expense, net of tax	$	18,951	$	18,161	$	49,042	$	35,792
Total capitalized stock-based compensation included in net leasehold improvements, property and equipment on the condensed consolidated balance sheet	$	170	$	186	$	513	$	577
Excess tax benefit (deficit) on stock-based compensation recognized in provision for income taxes	$	8,820	$	(181)	$	19,518	$	(6,155)

8. Income Taxes

The effective income tax rate for the three months ended September 30, 2019, was 17.9%, a decrease from 36.8% for the three months ended September 30, 2018, primarily due to excess tax benefits for stock-based compensation, a reduction in non-deductible employee meals, changes in tax position due to legislative guidance, and a non-recurring prior year tax expense attributable to tax reform in the comparable period.

The effective income tax rate for the nine months ended September 30, 2019, was 22.3%, a decrease from 35.8% for the nine months ended September 30, 2018, primarily due to net excess tax benefits for stock-based compensation, a reduction in non-deductible employee meals, changes in tax position due to legislative guidance, and a non-recurring prior year tax expense attributable to tax reform in the comparable period, offset by non-deductible current year reserves related to legal proceedings.

9. Leases

We determine if a contract contains a lease at inception. Our material operating leases consist of restaurant locations and office space. Our leases generally have remaining terms of 1-20 years and most include options to extend the leases for additional 5-year periods. Generally, the lease term is the minimum of the noncancelable period of the lease or the lease term inclusive of reasonably certain renewal periods up to a term of 20 years.

Operating lease assets and liabilities are recognized at the lease commencement date. Operating lease liabilities represent the present value of lease payments not yet paid. Operating lease assets represent our right to use an underlying asset and are based upon the operating lease liabilities adjusted for prepayments or accrued lease payments, initial direct costs, lease incentives, and impairment of operating lease assets. To determine the present value of lease payments not yet paid, we estimate incremental secured borrowing rates corresponding to the maturities of the leases. As we have no outstanding debt nor committed credit facilities, secured or otherwise, we estimate this rate based on prevailing financial market conditions, comparable company and credit analysis, and management judgment.

Our leases typically contain rent escalations over the lease term. We recognize expense for these leases on a straight-line basis over the lease term. Additionally, tenant incentives used to fund leasehold improvements are recognized when earned and reduce our right-of-use asset related to the lease. These are amortized through the right-of-use asset as reductions of expense over the lease term.

Some of our leases include rent escalations based on inflation indexes and fair market value adjustments. Certain leases contain contingent rental provisions that include a fixed base rent plus an additional percentage of the restaurant’s sales, generally in excess of a stipulated amount. Operating lease liabilities are calculated using the prevailing index or rate at lease commencement. Subsequent escalations in the index or rate and contingent rental payments are recognized as variable lease expenses. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.

Table of Contents

Related to the adoption of Topic 842, our policy elections were as follows:


Separation of lease and non-lease components		We elected this expedient to account for lease and non-lease components as a single component for our entire population of operating lease assets.
Short-term policy		We have elected the short-term lease recognition exemption for all applicable classes of underlying assets. Short-term disclosures include only those leases with a term greater than one month and 12 months or less, and expense is recognized on a straight-line basis over the lease term. Leases with an initial term of 12 months or less, that do not include an option to purchase the underlying asset that we are reasonably certain to exercise, are not recorded on the balance sheet.

Supplemental balance sheet information related to leases was as follows:



		September 30,
Operating Leases	Classification	2019
Right-of-use assets	Operating lease assets	$	2,479,464

Current lease liabilities	Current operating lease liabilities		166,802
Non-current lease liabilities	Long-term operating lease liabilities		2,642,737
Total lease liabilities		$	2,809,539



	September 30,
	2019
Weighted average remaining lease term (years)		13.5
Weighted average discount rate		5.24%

The components of lease cost were as follows:



		Three months ended		Nine months ended
		September 30,		September 30,
	Classification	2019		2019
Operating lease cost	Occupancy, General and administrative expenses and Pre-opening costs	$	77,483	$	228,989
Short-term lease cost	Other operating costs		737		2,211
Variable lease cost	Occupancy		9,429		27,809
Sublease income	General and administrative expenses		(886)		(2,561)
Total lease cost		$	86,763	$	256,448

Table of Contents

Supplemental disclosures of cash flow information related to leases were as follows:



	Three months ended		Nine months ended
	September 30,		September 30,
	2019		2019
Cash paid for operating lease liabilities	$	74,520	$	219,924
Operating lease assets obtained in exchange for operating lease liabilities⁽¹⁾	$	153,653	$	2,619,699
Derecognition of operating lease assets due to terminations or impairment	$	832	$	13,985

(1) Amounts for the nine months ended September 30, 2019 include the transition adjustment for the adoption of Topic 842 discussed in Note 2. “Recent Accounting Standards”.

Maturities of lease liabilities were as follows as of September 30, 2019:



	Operating Leases
Remainder of 2019	$	49,415
2020		308,232
2021		307,929
2022		307,757
2023		303,227
Thereafter		2,694,165
Total lease payments		3,970,725
Less: imputed interest		1,161,186
Present value of lease liabilities	$	2,809,539

As of September 30, 2019, the total lease payments includes $2,130,516 related to options to extend lease terms that are reasonably certain of being exercised, and exclude approximately $90,000 of legally binding minimum lease payments for leases signed but not yet commenced and $9,558 of future sublease income.

As previously disclosed in our 2018 Annual Report on Form 10-K and under the previous lease accounting, maturities of lease liabilities were as follows as of December 31, 2018:



	Operating Leases
2019	$	294,191
2020		296,579
2021		294,941
2022		295,290
2023		290,980
Thereafter		2,478,397
Total minimum lease payments	$	3,950,378

As of December 31, 2018, maturities of lease liabilities have not been reduced by minimum sublease income of $11,790 due in the future under our subleases. As of December 31, 2018, we had $90,484 of legally binding minimum lease payments related to restaurant leases that have not yet commenced.

We have six sale and leaseback transactions, which do not qualify for sale leaseback accounting due to fixed price renewal options prohibiting sale accounting. These transactions are accounted for under the financing method. Under the financing method, the assets remain on the condensed consolidated balance sheet and the proceeds from the transactions are recorded as a financing liability. A portion of lease payments are applied as payments of deemed principal and imputed interest. The deemed landlord financing liability was $2,198 and $2,390 as of September 30, 2019 and December 31, 2018, respectively, with the current portion of the liability included in accrued liabilities, and the remaining portion included in other liabilities on the condensed consolidated balance sheet.

Table of Contents

10. Earnings Per Share

The following table sets forth the computations of basic and diluted earnings per share:



	Three months ended				Nine months ended
	September 30,				September 30,
	2019		2018		2019		2018
Net income	$	98,582	$	38,204	$	277,742	$	144,534
Shares:
Weighted-average number of common shares outstanding		27,775		27,802		27,730		27,844
Dilutive stock awards		613		215		538		123
Diluted weighted-average number of common shares outstanding		28,388		28,017		28,268		27,967
Basic earnings per share	$	3.55	$	1.37	$	10.02	$	5.19
Diluted earnings per share	$	3.47	$	1.36	$	9.83	$	5.17

The following stock awards were excluded from the calculation of diluted earnings per share:



	Three months ended				Nine months ended
	September 30,				September 30,
	2019		2018		2019		2018
Stock awards subject to performance conditions		84		108		83		103
Stock awards that were antidilutive		17		1,164		178		1,817
Total stock awards excluded from diluted earnings per share		101		1,272		261		1,920

11. Commitments and Contingencies

Purchase Obligations

We enter into various purchase obligations in the ordinary course of business, generally of a short-term nature. Those that are binding primarily relate to commitments for food purchases and supplies, amounts owed under contractor and subcontractor agreements, orders submitted for equipment for restaurants under construction, and marketing initiatives and corporate sponsorships.

Data Security Litigation

In April 2017, our information security team detected unauthorized activity on the network that supports payment processing for our restaurants, and immediately began an investigation with the help of leading computer security firms. We also self-reported the issue to payment card processors and law enforcement. Our investigation detected malware designed to access payment card data from cards used at point-of-sale devices at most Chipotle restaurants, primarily in the period from March 24, 2017 through April 18, 2017. The malware searched for track data, which may include cardholder name, card number, expiration date, and internal verification codes; however, no other customer information was affected. We removed the malware from our systems and continue to work to enhance our security measures. Substantially all of our investigation costs have been covered by insurance; however, we may incur legal and other expenses in excess of our insurance coverage limits associated with the data security incident in future periods. We will recognize these expenses as services are received.

As a result of this incident, several lawsuits were filed alleging, among other things, that we negligently failed to provide adequate security to protect the payment card information of the plaintiff and other similarly situated customers. These lawsuits were consolidated into one action captioned Todd Gordon, et. al. v. Chipotle Mexican Grill, Inc., which was pending in the United States District Court for the District of Colorado. In March 2019, we reached an agreement to settle the consolidated Gordon action, and the court has granted preliminary approval of the settlement and the claims notification and administration process has commenced. We do not expect that the settlement will exceed applicable insurance coverages or will have a material financial impact on us, although the total liabilities arising from the settlement will be dependent in part on the number of claims filed, and may exceed our expectations and applicable insurance coverage.

As of September 30, 2019, we had a balance of $21,365 for loss contingencies related to the data security incident on the condensed consolidated balance sheet, which is included in the accrued liabilities line item. We ultimately may be subject to liabilities greater or less than the amount accrued.

Table of Contents

Other Legal Proceedings

Receipt of Grand Jury Subpoenas

On January 28, 2016, we were served with a Federal Grand Jury Subpoena from the U.S. District Court for the Central District of California in connection with an official criminal investigation being conducted by the U.S. Attorney’s Office for the Central District of California, in conjunction with the U.S. Food and Drug Administration’s Office of Criminal Investigations. The subpoena required the production of documents and information related to company-wide food safety matters dating back to January 1, 2013. Since then we have received additional subpoenas requesting information related to illness incidents associated with several of our restaurants, and we may receive additional subpoenas in the future related to illness incidents at these or other restaurants. We have cooperated and intend to continue to cooperate in the investigation.

Shareholder Class Actions

On January 8, 2016, Susie Ong filed a complaint in the U.S. District Court for the Southern District of New York on behalf of a purported class of purchasers of shares of our common stock between February 4, 2015 and January 5, 2016. The complaint purports to state claims against us, each of the co-Chief Executive Officers serving during the claimed class period and the Chief Financial Officer under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and related rules, based on our alleged failure during the claimed class period to disclose material information about our quality controls and safeguards in relation to consumer and employee health. The complaint asserts that those failures and related public statements were false and misleading and that, as a result, the market price of our stock was artificially inflated during the claimed class period. The complaint seeks damages on behalf of the purported class in an unspecified amount, interest, and an award of reasonable attorneys’ fees, expert fees and other costs. On March 8, 2017, the court granted our motion to dismiss the complaint, with leave to amend. The plaintiff filed an amended complaint on April 7, 2017. On March 22, 2018, the court granted our motion to dismiss, with prejudice. On April 20, 2018, the plaintiffs filed a motion for relief from the judgment and seeking leave to file a third amended complaint, and on November 20, 2018, the court denied the motion. On December 20, 2018, the plaintiff initiated an appeal to the U.S. Court of Appeals for the Second Circuit.

We intend to continue vigorously defending the Ong case through any further appeals made by the plaintiff, but it is not possible at this time to reasonably estimate the outcome of or any potential liability from either of this case.

Miscellaneous

We are involved in various other claims and legal actions that arise in the ordinary course of business. We do not believe that the ultimate resolution of these actions will have a material adverse effect on our financial position, results of operations, liquidity or capital resources. However, a significant increase in the number of these claims, or one or more successful claims under which we incur greater liabilities than we currently anticipate, could materially and adversely affect our business, financial condition, results of operations and cash flows.

Accrual for Estimated Liability

Excluding the accrual for the Data Security Incident described above, we had a balance of $37,293 on the condensed consolidated balance sheet as of September 30, 2019, which is included in the accrued liabilities line item. We ultimately may be subject to liabilities greater or less than the amount accrued.

Table of Contents

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Cautionary Note Regarding Forward-Looking Statements

Certain statements in this report, including projections of our expected comparable restaurant sales increases for 2019, estimates of restructuring-related costs, projected restaurant closures and the resulting financial impacts, and projected new restaurant openings for 2019, are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. We use words such as “anticipate,” “believe,” “could,” “should,” “estimate,” “expect,” “intend,” “may,” “predict,” “project,” “target,” and similar terms and phrases, including references to assumptions, to identify forward-looking statements. These forward-looking statements are based on information available to us as of the date any such statements are made, and we assume no obligation to update these forward-looking statements. These statements are subject to risks and uncertainties that could cause actual results to differ materially from those described in the statements. These risks and uncertainties include, but are not limited to, the risk factors described in our annual report on Form 10-K for the year ended December 31, 2018, as updated in other reports filed subsequently with the SEC.

Overview

As of September 30, 2019, we operated 2,505 Chipotle restaurants throughout the United States as well as 39 international Chipotle restaurants. We are also an investor in a consolidated entity that owns and operates two Pizzeria Locale restaurants, a fast-casual pizza concept. We are committed to making our food more accessible to everyone while continuing to be a brand with a demonstrated purpose. Steve Ells, our founder and executive chairman, first opened Chipotle with a single restaurant in Denver, Colorado in 1993.

2019 Highlights

Sales Trends. Average restaurant sales were $2.2 million as of September 30, 2019, an increase from $2.0 million as of September 30, 2018. We define average restaurant sales as the average trailing 12-month sales for restaurants in operation for at least 12 full calendar months.

Comparable restaurant sales increased 10.3% for the nine months ended September 30, 2019, including the adverse impact of 0.2% from deferred revenue associated with the new Chipotle Rewards loyalty program. We expect full year 2019 comparable restaurant sales increases to be in the high single digits, including the impact of revenue deferral associated with Chipotle Rewards. Comparable restaurant sales represent the change in period-over-period sales for restaurants in operation for at least 13 full calendar months.

We continue to invest in improving our digital platforms and equipping select restaurants with an upgraded digital make line dedicated to fulfilling out-of-restaurant orders. Sales from out-of-restaurant orders increased 730 basis points to 17.5% of revenue during the nine months ended September 30, 2019, an increase from 10.2% of revenue during the nine months ended September 30, 2018.

Restaurant Operating Costs. Our restaurant operating costs (food, beverage and packaging; labor; occupancy; and other operating costs) as a percentage of revenue decreased 160 basis points to 79.1% in the nine months ended September 30, 2019, as compared to 80.7% in the nine months ended September 30, 2018. The decrease was primarily due to sales leverage from comparable restaurant sales increases.

Corporate Restructuring. During 2018, we opened a new headquarters office in Newport Beach, California, consolidated certain corporate administrative functions into our existing office in Columbus, Ohio, closed a corporate office in New York, New York, and commenced the closure of our previous headquarters office in Denver, Colorado. All affected employees were either offered an opportunity to continue in the new organization or were offered a severance package. We expect to incur total corporate restructuring costs, including costs already incurred, aggregating approximately $55 million to $60 million including (i) employee severance and other employee transition costs of approximately $10 million to $11 million; (ii) recruitment and relocation costs of approximately $15 million to $16 million; (iii) operating lease impairment and other office closure costs of approximately $18 million to $20 million; and (iv) third-party and other costs of approximately $12 million to $13 million. We recognized a total of $12.1 million during the nine months ended September 30, 2019, and $54.7 million in total since the restructuring activities commenced in 2018. For additional information, please see Note 5. “Corporate Restructuring Costs” in the notes to the condensed consolidated financial statements included in Item 1. “Financial Statements.”

Planned Restaurant Closures. In June 2018, we announced planned restaurant closures of approximately 55 to 65 restaurants beginning in the second quarter of 2018 and continuing over the next several quarters. As a result, we expect to incur total restaurant exits costs aggregating approximately $37.0 million to $43.0 million, of which $36.5 million has been incurred to date. We have closed 48 Chipotle restaurants and five Pizzeria Locale restaurants in connection with this initiative since the initiative commenced in 2018.

Restaurant Development. We opened 25 new restaurants, closed one, and relocated one restaurant during the three months ended September 30, 2019, and opened 60 new restaurants, closed four restaurants, and relocated one restaurant during the nine months ended September 30, 2019. Based on the early success of Chipotlanes, we shifted our real estate strategy to seek more sites that can accommodate a Chipotlane. Given the longer construction timeline associated with Chipotlanes, a portion of the restaurants originally scheduled to open during

Table of Contents

the three months ended December 31, 2019 will likely shift to opening during the three months ended March 31, 2020. Due to this shift, we expect to fall at, or slightly below the low end of our 2019 new restaurant opening range of 140 to 155 openings.

Restaurant Activity

The following table details restaurant unit data for the periods indicated:



	Three months ended		Nine months ended
	September 30,		September 30,
	2019	2018	2019	2018
Beginning of period	2,523	2,467	2,491	2,408
Openings	25	28	60	97
Chipotle closures	(1)	(32)	(4)	(36)
Chipotle relocations	(1)	-	(1)	(1)
Pizzeria Locale closures	-	-	-	(5)
Total restaurants at end of period	2,546	2,463	2,546	2,463

Results of Operations

Our results of operations as a percentage of revenue and period-over-period changes are discussed in the following section.

Revenue



	Three months ended					Nine months ended
	September 30,				Percentage	September 30,				Percentage
	2019		2018		change	2019		2018		change
	(dollars in millions)					(dollars in millions)
Revenue	$	1,403.7	$	1,225.0	14.6%	$	4,146.1	$	3,639.9	13.9%
Average restaurant sales	$	2.2	$	2.0	8.8%	$	2.2	$	2.0	8.8%
Comparable restaurant sales increases		11.0%					10.3%

Restaurant sales increased for the three and nine months ended September 30, 2019, primarily due to comparable restaurant sales increases of $127.3 million and $344.4 million, respectively, and revenue from restaurants not yet in the comparable base of $51.4 million and $161.8 million, respectively.

For the three months ended September 30, 2019, comparable restaurant sales increased 11.0% as a result of a 7.4% increase in comparable restaurant transactions and a 3.5% increase in the average check, which includes a benefit from menu price increases that were implemented during 2018.

For the nine months ended September 30, 2019, comparable restaurant sales increased 10.3% as a result of a 6.7% increase in comparable restaurant transactions and a 3.8% increase in the average check, which includes a benefit from menu price increases that were implemented during 2018.

Food, Beverage and Packaging Costs



	Three months ended					Nine months ended
	September 30,				Percentage	September 30,				Percentage
	2019		2018		change	2019		2018		change
	(dollars in millions)					(dollars in millions)
Food, beverage and packaging	$	466.5	$	409.2	14.0%	$	1,371.1	$	1,194.2	14.8%
As a percentage of revenue		33.2%		33.4%	(0.2%)		33.1%		32.8%	0.3%

Food, beverage and packaging costs decreased as a percentage of revenue for the three months ended September 30, 2019, primarily due to the benefit of menu price increases during 2018, partially offset by increased cost of several ingredients.

Food, beverage and packaging costs increased as a percentage of revenue for the nine months ended September 30, 2019, primarily due to increased cost of several ingredients. The increase was partially offset by the benefit of menu price increases nationwide at the end of 2018 and lower freight expense.

Table of Contents

Labor Costs



	Three months ended					Nine months ended
	September 30,				Percentage	September 30,				Percentage
	2019		2018		change	2019		2018		change
	(dollars in millions)					(dollars in millions)
Labor costs	$	373.6	$	332.9	12.3%	$	1,090.5	$	993.6	9.8%
As a percentage of revenue		26.6%		27.2%	(0.6%)		26.3%		27.3%	(1.0%)

Labor costs decreased as a percentage of revenue for the three and nine months ended September 30, 2019, primarily due to sales leverage, partially offset by wage inflation.

Occupancy Costs



	Three months ended					Nine months ended
	September 30,				Percentage	September 30,				Percentage
	2019		2018		change	2019		2018		change
	(dollars in millions)					(dollars in millions)
Occupancy costs	$	91.4	$	86.7	5.4%	$	270.1	$	258.7	4.4%
As a percentage of revenue		6.5%		7.1%	(0.6%)		6.5%		7.1%	(0.6%)

Occupancy costs decreased as a percentage of revenue for the three and nine months ended September 30, 2019, primarily due to sales leverage on a partially fixed-cost base.

Other Operating Costs



	Three months ended					Nine months ended
	September 30,				Percentage	September 30,				Percentage
	2019		2018		change	2019		2018		change
	(dollars in millions)					(dollars in millions)
Other operating costs	$	180.3	$	167.5	7.6%	$	548.3	$	490.7	11.7%
As a percentage of revenue		12.8%		13.7%	(0.9%)		13.2%		13.5%	(0.3%)

Other operating costs include, among other items, marketing and promotional costs, delivery expense, bank and credit card fees, restaurant utilities and maintenance costs. Other operating costs decreased as a percentage of revenue for the three months ended September 30, 2019, primarily due to sales leverage and reduction in repairs, maintenance and marketing expense, partially offset by increased delivery expense associated with increased delivery sales.

Other operating costs decreased as a percentage of revenue for the nine months ended September 30, 2019, primarily due to sales leverage and reduction in repairs and maintenance expense, partially offset by increased delivery expense associated with increased delivery sales and marketing expense.

General and Administrative Expenses



	Three months ended					Nine months ended
	September 30,				Percentage	September 30,				Percentage
	2019		2018		change	2019		2018		change
	(dollars in millions)					(dollars in millions)
General and administrative expense	$	115.1	$	109.5	5.1%	$	339.1	$	271.7	24.8%
As a percentage of revenue		8.2%		8.9%	(0.7%)		8.2%		7.5%	0.7%

General and administrative expenses increased in dollar terms for the three months ended September 30, 2019, primarily due to the following: a $9.0 million increase in estimated loss contingencies due to agreements to settle a number of legal matters; a $10.8 million increase in wage and payroll tax expense, which includes increased expense for performance bonuses and increased payroll tax expense from stock-based compensation; and a $2.2 million increase in outside service expense related to company initiatives to support restaurant growth, including digitizing our restaurant experience; partially offset by a decrease of $10.3 million in conference expense, primarily related to our biennial All Managers’ Conference held in the 2018 comparable period; and a $7.3 million decrease in expense associated with the corporate restructuring in the prior year.

Table of Contents

General and administrative expenses increased in dollar terms for the nine months ended September 30, 2019, primarily due to the following: a $30.8 million increase in estimated loss contingencies for legal proceedings, most of which relates to older cases, including an estimate for the previously disclosed government investigation that has been on-going for nearly four years; a $23.2 million increase in wage and payroll tax expense, which includes increased expense for performance bonuses and increased payroll tax expense from stock-based compensation; a $19.8 million increase in stock-based compensation expense, which includes increased expense associated with performance shares in the current year; and a $10.5 million increase in outside service expense related to company initiatives to support restaurant growth, including digitizing our restaurant experience; partially offset by a $10.0 million decrease in conference expense, primarily associated with our biennial All Managers’ Conference held in the 2018 comparable period; and a $3.5 million decrease in expense associated with the corporate restructuring in the prior year.

Depreciation and Amortization



	Three months ended					Nine months ended
	September 30,				Percentage	September 30,				Percentage
	2019		2018		change	2019		2018		change
	(dollars in millions)					(dollars in millions)
Depreciation and amortization	$	52.2	$	52.7	(0.9%)	$	157.6	$	148.8	6.0%
As a percentage of revenue		3.7%		4.3%	(0.6%)		3.8%		4.1%	(0.3%)

Depreciation and amortization decreased as a percent of revenue for the three and nine months ended September 30, 2019, primarily due to sales leverage.

Impairment, Closure Costs, and Asset Disposals



	Three months ended					Nine months ended
	September 30,				Percentage	September 30,				Percentage
	2019		2018		change	2019		2018		change
	(dollars in millions)					(dollars in millions)
Impairment, closure costs, and asset disposals	$	5.9	$	6.5	(8.2%)	$	17.4	$	56.6	(69.4%)
As a percentage of revenue		0.4%		0.5%	(0.1%)		0.4%		1.6%	(1.1%)

Impairment, closure costs and asset disposals decreased in dollar terms in during the three months ended September 30, 2019, primarily due to higher lease termination costs associated with the planned closures of underperforming restaurants in the comparable period 2018, partially offset by an asset impairment in the three months ended September 30, 2019.

Impairment, closure costs and asset disposals decreased in dollar terms in during the nine months ended September 30, 2019, primarily as a result of higher impairment in the comparable period 2018 due to impairment related to office closures, the planned closures of underperforming restaurants, as well as lease termination costs.

Provision for Income Taxes



	Three months ended					Nine months ended
	September 30,				Percentage	September 30,				Percentage
	2019		2018		change	2019		2018		change
	(dollars in millions)					(dollars in millions)
Provision for income taxes	$	21.5	$	22.3	(3.7%)	$	79.5	$	80.4	(1.1%)
Effective tax rate		17.9%		36.8%	(19.0%)		22.3%		35.8%	(13.5%)

Table of Contents

Seasonality

Seasonal factors cause our profitability to fluctuate from quarter to quarter. Historically, our average daily restaurant sales and net income are lower in the first and fourth quarters due, in part, to the holiday season and because fewer people eat out during periods of inclement weather (the winter months) than during periods of mild or warm weather (the spring, summer and fall months). Other factors also have a seasonal effect on our results. For example, restaurants located near colleges and universities generally do more business during the academic year. Seasonal factors, however, might be moderated or outweighed by other factors that may influence our quarterly results, such as unexpected publicity impacting our business in a positive or negative way, fluctuations in food or packaging costs, or the timing of menu price increases. The number of trading days in a quarter can also affect our results, although, on an overall annual basis, changes in trading days do not have a significant impact.

Our quarterly results are also affected by other factors such as the amount and timing of non-cash stock-based compensation expense and related tax rate impacts, the number and timing of new restaurants opened in a quarter, closure of restaurants, and anticipated and unanticipated events. New restaurants typically have lower margins following opening as a result of the expenses associated with their opening and operating inefficiencies in the months immediately following opening. Accordingly, results for a particular quarter are not necessarily indicative of results to be expected for any other quarter or for any year.

Liquidity and Capital Resources

Our primary liquidity and capital requirements are for new restaurant construction, initiatives to improve the guest experience in our restaurants, working capital and general corporate needs. As of September 30, 2019, we had a cash and short-term investment balance of $815.4 million that we expect to utilize, along with cash flow from operations to provide capital in support of the growth of our business and to invest in, maintain, and refurbish our existing restaurants, to repurchase additional shares of our common stock subject to market conditions, and for general corporate purposes. As of September 30, 2019, $107.7 million remained available for repurchases of shares of our common stock under previously announced repurchase authorizations. Under the remaining repurchase authorizations, shares may be purchased from time to time in open market transactions, subject to market conditions. We believe that cash from operations, together with our cash and investment balances, will be enough to meet ongoing capital expenditures, working capital requirements and other cash needs for the foreseeable future.

We have not required significant working capital because customers generally pay using cash or credit and debit cards and because our operations do not require significant receivables, nor do they require significant inventories due, in part, to our use of various fresh ingredients. In addition, we generally have the right to pay for the purchase of food, beverage and supplies sometime after the receipt of those items, generally within ten days, thereby reducing the need for incremental working capital to support our growth.

Off-Balance Sheet Arrangements

As of September 30, 2019, we had no off-balance sheet arrangements or obligations.

Critical Accounting Estimates

Critical accounting estimates are those that we believe are both significant and that require us to make difficult, subjective or complex judgments, often because we need to estimate the effect of inherently uncertain matters. We base our estimates and judgments on historical experiences and various other factors that we believe to be appropriate under the circumstances. Actual results may differ from these estimates, and we might obtain different estimates if we used different assumptions or factors.

Except as disclosed in Note 2. “Recent Accounting Standards” and Note 9. “Leases”, pertaining to the adoption of Topic 842, there have been no significant changes to our critical accounting estimates as described in our annual report on Form 10-K for the year ended December 31, 2018.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Commodity Price Risks

We are exposed to commodity price risks. Many of the ingredients we use to prepare our food, as well as our packaging materials and utilities to run our restaurants, are ingredients or commodities that are affected by the price of other commodities, exchange rates, foreign demand, weather, seasonality, production, availability and other factors outside our control. We work closely with our suppliers and use a mix of forward pricing protocols under which we agree with our supplier on fixed prices for deliveries at some time in the future, fixed pricing protocols under which we agree on a fixed price with our supplier for the duration of that protocol, formula pricing protocols under which the prices we pay are based on a specified formula related to the prices of the goods, such as spot prices, and range forward protocols under which we agree on a price range for the duration of that protocol. Generally, our pricing protocols with suppliers can remain in effect for periods ranging from one to 36 months, depending on the outlook for prices of the particular ingredient. In several cases, we have minimum purchase obligations. We have tried to increase, where practical, the number of suppliers for our ingredients, which we believe can help mitigate pricing volatility, and we follow industry news, trade issues, exchange rates, foreign demand, weather, crises and other world events that may affect our ingredient prices.

Table of Contents

Increases in ingredient prices could adversely affect our results if we choose for competitive or other reasons not to increase menu prices at the same rate at which ingredient costs increase, or if menu price increases are met with customer resistance.

Changing Interest Rates

We are also exposed to interest rate risk through fluctuations of interest rates on our investments. Changes in interest rates affect the interest income we earn, and therefore impact our cash flows and results of operations. As of September 30, 2019, we had $798.9 million in investments and interest-bearing cash accounts, including insurance-related restricted trust accounts classified in restricted cash, and $16.4 million in accounts with an earnings credit we classify as interest and other income, which combined earned a weighted-average interest rate of 2.16%.

Foreign Currency Exchange Risk

A portion of our operations consist of activities outside of the U.S. and we have currency risk on the transactions in other currencies and translation adjustments resulting from the conversion of our international financial results into the U.S. dollar. However, a substantial majority of our operations and investment activities are transacted in the U.S. and therefore our foreign currency risk is not material at this date.

ITEM 4. CONTROLS AND PROCEDURES

We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to ensure that information required to be disclosed in Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.

As of September 30, 2019, we carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

There were no changes during the three months ended September 30, 2019, in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

PART II

ITEM 1. LEGAL PROCEEDINGS

For information regarding legal proceedings, see Note 11. “Commitments and Contingencies” in the notes to the condensed consolidated financial statements included in Item 1. “Financial Statements.”

ITEM 1A. RISK FACTORS

There have been no material changes in our risk factors since our annual report on Form 10-K for the year ended December 31, 2018.

Table of Contents

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Purchases of Equity Securities by the Issuer

The table below reflects shares of common stock we repurchased during the third quarter of 2019.


		Total Number of Shares Purchased	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs⁽¹⁾	Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs⁽²⁾
July		25,574	$	754.43	25,574	$	127,295,006
	Purchased 7/1 through 7/31
August		13,305	$	809.27	13,305	$	116,527,637
	Purchased 8/1 through 8/31
September		10,861	$	816.28	10,861	$	107,661,994
	Purchased 9/1 through 9/30
Total		49,740	$	782.61	49,740	$	107,661,994

(1)Shares were repurchased pursuant to repurchase programs announced on February 6, 2019.

(2)This column includes an additional $100 million in authorized repurchases announced on July 23, 2019. There is no expiration date for this program, and the authorization to repurchase shares will end when we have repurchased the maximum amount of shares authorized, or our Board of Directors have determined to discontinue such repurchases.

‎

Table of Contents

ITEM 6. EXHIBITS

EXHIBIT INDEX



		Description of Exhibit Incorporated Herein by Reference
Exhibit Number	Exhibit Description	Form	File No.	Filing Date	Exhibit Number	Filed Herewith
31.1	Certification of Chief Executive Office of Chipotle Mexican Grill, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	-	-	-	-	X
31.2	Certificate of Chief Financial Officer of Chipotle Mexican Grill, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	-	-	-	-	X
32.1	Certification of Chief Executive Officer and Chief Financial Officer of Chipotle Mexican Grill, Inc. pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	-	-	-	-	X
101.INS	Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document)	-	-	-	-	X
101.SCH	Inline XBRL Taxonomy Extension Schema Document	-	-	-	-	X
101.CAL	Inline XBRL Taxonomy Extension Calculation Linkbase Document	-	-	-	-	X
101.DEF	Inline XBRL Taxonomy Extension Definition Linkbase Document	-	-	-	-	X
101.LAB	Inline XBRL Taxonomy Extension Label Linkbase Document	-	-	-	-	X
101.PRE	Inline XBRL Taxonomy Extension Presentation Linkbase Document	-	-	-	-	X
104	Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)	-	-	-	-	X

Test

Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



CHIPOTLE MEXICAN GRILL, INC.
By:	/S/ JOHN R. HARTUNG
Name:	John R. Hartung
Title:	Chief Financial Officer (principal financial officer and duly authorized signatory for the registrant)

Date: October 22, 2019