CHIPOTLE MEXICAN GRILL INC - Quarter Report: 2019 June (Form 10-Q)
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 June 30, 2019
or
¨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)
______________________________
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Delaware | 84-1219301 |
(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) |
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610 Newport Center Drive, Suite 1300 Newport Beach, CA | 92660 |
(Address of Principal Executive Offices) | (Zip Code) |
Registrant’s telephone number, including area code: (303) 595-4000
______________________________
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. 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 and post such files). 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 July 19, 2019, there were 27,722,812 shares of the registrant’s common stock, par value of $0.01 per share outstanding.
TABLE OF CONTENTS
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| PART I |
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Item 1. | 1 | |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 15 |
Item 3. | 19 | |
Item 4. | 20 | |
| PART II |
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Item 1. | 20 | |
Item 1A. | 20 | |
Item 2. | 20 | |
Item 3. | 20 | |
Item 4. | 20 | |
Item 5. | 21 | |
Item 6. | 22 | |
| 23 |
PART I
ITEM 1. FINANCIAL STATEMENTS
Chipotle Mexican Grill, Inc.
Condensed Consolidated Balance Sheet
(in thousands, except per share data)
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| June 30, |
| December 31, | ||
| 2019 |
| 2018 | ||
| (unaudited) |
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Assets |
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Current assets: |
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Cash and cash equivalents | $ | 299,913 |
| $ | 249,953 |
Accounts receivable, net of allowance for doubtful accounts of $81 and $0 as of June 30, 2019 and December 31, 2018, respectively |
| 49,362 |
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| 62,312 |
Inventory |
| 21,144 |
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| 21,555 |
Prepaid expenses and other current assets |
| 44,116 |
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| 54,129 |
Investments |
| 417,867 |
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| 426,845 |
Total current assets |
| 832,402 |
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| 814,794 |
Leasehold improvements, property and equipment, net |
| 1,387,896 |
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| 1,379,254 |
Restricted cash |
| 28,543 |
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| 30,199 |
Operating lease assets |
| 2,370,710 |
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| - |
Other assets |
| 17,817 |
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| 19,332 |
Goodwill |
| 21,939 |
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| 21,939 |
Total assets | $ | 4,659,307 |
| $ | 2,265,518 |
Liabilities and shareholders' equity |
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Current liabilities: |
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Accounts payable | $ | 99,007 |
| $ | 113,071 |
Accrued payroll and benefits |
| 98,800 |
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| 113,467 |
Accrued liabilities |
| 126,879 |
|
| 147,849 |
Unearned revenue |
| 61,794 |
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| 70,474 |
Current operating lease liabilities |
| 161,253 |
|
| - |
Income tax payable |
| 535 |
|
| 5,129 |
Total current liabilities |
| 548,268 |
|
| 449,990 |
Commitments and contingencies (Note 11) |
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Deferred rent |
| - |
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| 330,985 |
Long-term operating lease liabilities |
| 2,534,769 |
|
| - |
Deferred income tax liabilities |
| 4,407 |
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| 11,566 |
Other liabilities |
| 33,814 |
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| 31,638 |
Total liabilities |
| 3,121,258 |
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| 824,179 |
Shareholders' equity: |
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Preferred stock, $0.01 par value, 600,000 shares authorized, no shares issued as of June 30, 2019 and December 31, 2018, respectively |
| - |
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| - |
Common stock, $0.01 par value, 230,000 shares authorized, 36,193 and 35,973 shares issued as of June 30, 2019 and December 31, 2018, respectively |
| 362 |
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| 360 |
Additional paid-in capital |
| 1,414,420 |
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| 1,374,154 |
Treasury stock, at cost, 8,469 and 8,276 common shares at June 30, 2019 and December 31, 2018, respectively |
| (2,621,922) |
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| (2,500,556) |
Accumulated other comprehensive loss |
| (5,261) |
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| (6,236) |
Retained earnings |
| 2,750,450 |
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| 2,573,617 |
Total shareholders' equity |
| 1,538,049 |
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| 1,441,339 |
Total liabilities and shareholders' equity | $ | 4,659,307 |
| $ | 2,265,518 |
See accompanying notes to condensed consolidated financial statements.
Chipotle Mexican Grill, Inc.
Condensed Consolidated Statement of Income
(unaudited)
(in thousands, except per share data)
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| Three months ended |
| Six months ended | ||||||||
| June 30, |
| June 30, | ||||||||
| 2019 |
| 2018 |
| 2019 |
| 2018 | ||||
Revenue | $ | 1,434,231 |
| $ | 1,266,520 |
| $ | 2,742,448 |
| $ | 2,414,917 |
Restaurant operating costs (exclusive of depreciation and amortization shown separately below): |
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Food, beverage and packaging |
| 483,284 |
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| 413,096 |
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| 904,651 |
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| 785,011 |
Labor |
| 368,053 |
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| 341,842 |
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| 716,895 |
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| 660,705 |
Occupancy |
| 89,923 |
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| 86,772 |
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| 178,693 |
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| 172,028 |
Other operating costs |
| 193,309 |
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| 175,171 |
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| 368,052 |
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| 323,240 |
General and administrative expenses |
| 121,395 |
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| 85,153 |
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| 224,066 |
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| 162,216 |
Depreciation and amortization |
| 51,642 |
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| 49,193 |
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| 105,423 |
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| 96,108 |
Pre-opening costs |
| 2,118 |
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| 2,014 |
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| 3,058 |
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| 4,663 |
Impairment, closure costs, and asset disposals |
| 4,487 |
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| 45,322 |
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| 11,429 |
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| 50,181 |
Total operating expenses |
| 1,314,211 |
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| 1,198,563 |
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| 2,512,267 |
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| 2,254,152 |
Income from operations |
| 120,020 |
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| 67,957 |
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| 230,181 |
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| 160,765 |
Interest and other income, net |
| 3,947 |
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| 2,323 |
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| 7,076 |
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| 3,717 |
Income before income taxes |
| 123,967 |
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| 70,280 |
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| 237,257 |
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| 164,482 |
Provision for income taxes |
| (32,939) |
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| (23,396) |
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| (58,097) |
|
| (58,152) |
Net income | $ | 91,028 |
| $ | 46,884 |
| $ | 179,160 |
| $ | 106,330 |
Earnings per share: |
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Basic | $ | 3.28 |
| $ | 1.69 |
| $ | 6.47 |
| $ | 3.82 |
Diluted | $ | 3.22 |
| $ | 1.68 |
| $ | 6.35 |
| $ | 3.81 |
Weighted-average common shares outstanding: |
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Basic |
| 27,720 |
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| 27,819 |
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| 27,708 |
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| 27,865 |
Diluted |
| 28,300 |
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| 27,935 |
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| 28,209 |
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| 27,942 |
Condensed Consolidated Statement of Comprehensive Income
(unaudited)
(in thousands)
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| Three months ended |
| Six months ended | ||||||||
| June 30, |
| June 30, | ||||||||
| 2019 |
| 2018 |
| 2019 |
| 2018 | ||||
Net income | $ | 91,028 |
| $ | 46,884 |
| $ | 179,160 |
| $ | 106,330 |
Other comprehensive income (loss), net of income taxes: |
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Foreign currency translation adjustments |
| 555 |
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| (1,580) |
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| 833 |
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| (1,448) |
Unrealized gain (loss) on available-for-sale securities, net of tax |
| 42 |
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| 82 |
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| 142 |
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| (19) |
Other comprehensive income (loss), net of income taxes |
| 597 |
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| (1,498) |
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| 975 |
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| (1,467) |
Comprehensive income | $ | 91,625 |
| $ | 45,386 |
| $ | 180,135 |
| $ | 104,863 |
See accompanying notes to condensed consolidated financial statements.
Chipotle Mexican Grill, Inc.
Condensed Consolidated Statement of Shareholders’ Equity
(unaudited)
(in thousands)
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| Common Stock |
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| Treasury Stock |
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| Accumulated Other Comprehensive Income (Loss) |
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| Shares |
| Amount |
| Additional |
| Shares |
| Amount |
| Retained |
| Available-for-Sale Securities |
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| 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 | - |
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| - |
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| 12,376 |
| - |
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| - |
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| - |
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| - |
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| - |
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| 12,376 |
Stock plan transactions and other | 31 |
|
| - |
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| (228) |
| - |
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| - |
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| - |
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| - |
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| - |
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| (228) |
Acquisition of treasury stock | - |
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| - |
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| - |
| 231 |
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| (72,025) |
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| - |
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| - |
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| - |
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| (72,025) |
Net income | - |
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| - |
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| - |
| - |
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| - |
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| 59,446 |
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| - |
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| - |
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| 59,446 |
Other comprehensive income (loss), net of income tax | - |
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| - |
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| - |
| - |
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| - |
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| - |
|
| (101) |
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| 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 | - |
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| - |
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| 11,660 |
| - |
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| - |
|
| - |
|
| - |
|
| - |
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| 11,660 |
Stock plan transactions and other | 62 |
|
| - |
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| (409) |
| - |
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| - |
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| - |
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| - |
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| - |
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| (409) |
Acquisition of treasury stock | - |
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| - |
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| - |
| 76 |
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| (28,675) |
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| - |
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| - |
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| - |
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| (28,675) |
Net income | - |
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| - |
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| - |
| - |
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| - |
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| 46,884 |
|
| - |
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| - |
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| 46,884 |
Other comprehensive income (loss), net of income tax | - |
|
| - |
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| - |
| - |
|
| - |
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| - |
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| 82 |
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| (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 |
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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) | - |
|
| - |
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| - |
| - |
|
| - |
|
| (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, 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 |
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| (58,512) |
|
| - |
|
| - |
|
| - |
|
| (58,512) |
Net income | - |
|
| - |
|
| - |
| - |
|
| - |
|
| 91,028 |
|
| - |
|
| - |
|
| 91,028 |
Other comprehensive income, 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 |
See accompanying notes to condensed consolidated financial statements.
Chipotle Mexican Grill, Inc.
Condensed Consolidated Statement of Cash Flows
(unaudited)
(in thousands)
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| Six months ended | ||||
| June 30, | ||||
| 2019 |
| 2018 | ||
Operating activities |
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Net income | $ | 179,160 |
| $ | 106,330 |
Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation and amortization |
| 105,423 |
|
| 96,108 |
Amortization of operating lease assets |
| 77,438 |
|
| - |
Deferred income tax (benefit) provision |
| (6,349) |
|
| 16,948 |
Impairment, closure costs, and asset disposals |
| 4,944 |
|
| 50,181 |
Bad debt allowance |
| 85 |
|
| 106 |
Stock-based compensation expense |
| 40,321 |
|
| 23,645 |
Other |
| (2,588) |
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| (1,228) |
Changes in operating assets and liabilities: |
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Accounts receivable |
| 18,275 |
|
| 16,621 |
Inventory |
| 421 |
|
| (1,007) |
Prepaid expenses and other current assets |
| (13,617) |
|
| (19,490) |
Other assets |
| 2,907 |
|
| 3,776 |
Accounts payable |
| (10,319) |
|
| 14,451 |
Accrued payroll and benefits |
| (16,526) |
|
| 15,400 |
Accrued liabilities |
| 7,659 |
|
| 7,100 |
Unearned revenue |
| (8,681) |
|
| (18,516) |
Income tax payable/receivable |
| (4,593) |
|
| (23,003) |
Deferred rent |
| - |
|
| 11,455 |
Operating lease liabilities |
| (74,346) |
|
| - |
Other long-term liabilities |
| 901 |
|
| (3,459) |
Net cash provided by operating activities |
| 300,515 |
|
| 295,418 |
Investing activities |
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Purchases of leasehold improvements, property and equipment |
| (142,002) |
|
| (128,505) |
Purchases of investments |
| (208,253) |
|
| (208,294) |
Maturities of investments |
| 220,000 |
|
| 185,000 |
Net cash used in investing activities |
| (130,255) |
|
| (151,799) |
Financing activities |
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Acquisition of treasury stock |
| (111,542) |
|
| (97,528) |
Tax withholding on share-based compensation awards |
| (10,398) |
|
| (4,273) |
Stock plan transactions and other financing activities |
| (510) |
|
| (55) |
Net cash used in financing activities |
| (122,450) |
|
| (101,856) |
Effect of exchange rate changes on cash, cash equivalents and restricted cash |
| 494 |
|
| (715) |
Net change in cash, cash equivalents, and restricted cash |
| 48,304 |
|
| 41,048 |
Cash, cash equivalents, and restricted cash at beginning of period |
| 280,152 |
|
| 214,170 |
Cash, cash equivalents, and restricted cash at end of period | $ | 328,456 |
| $ | 255,218 |
Supplemental disclosures of cash flow information |
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Income taxes paid | $ | 69,075 |
| $ | 64,184 |
Purchases of leasehold improvements, property, and equipment accrued in accounts payable and accrued liabilities | $ | 27,119 |
| $ | 26,154 |
Acquisition of treasury stock accrued in accounts payable and accrued liabilities | $ | 1,900 |
| $ | 635 |
See accompanying notes to condensed consolidated financial statements.
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 June 30, 2019, we operated 2,482 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, and early adoption is permitted. We are currently evaluating the impact this guidance will have on our consolidated financial statements.
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:
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| Implications as of January 1, 2019 |
Practical expedient package |
| We have not reassessed whether any expired or existing contracts are, or contain, leases. |
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| We have not reassessed the lease classification for any expired or existing leases. |
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| 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. |
The impact on the consolidated balance sheet is as follows:
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| December 31, 2018 |
| Adjustments Due to the Adoption of Topic 842 |
| January 1, 2019 | |||
Assets |
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Current assets: |
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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 |
|
| - |
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| 30,199 |
Operating lease assets |
| - |
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| 2,363,020 |
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| 2,363,020 |
Other assets |
| 19,332 |
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| - |
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| 19,332 |
Goodwill |
| 21,939 |
|
| - |
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| 21,939 |
Total assets | $ | 2,265,518 |
| $ | 2,324,200 |
| $ | 4,589,718 |
Liabilities and shareholders' equity |
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Current liabilities: |
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Accounts payable | $ | 113,071 |
| $ | - |
| $ | 113,071 |
Accrued payroll and benefits |
| 113,467 |
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| - |
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| 113,467 |
Accrued liabilities |
| 147,849 |
|
| (23,860) |
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| 123,989 |
Unearned revenue |
| 70,474 |
|
| - |
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| 70,474 |
Income tax payable |
| 5,129 |
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| - |
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| 5,129 |
Total current liabilities |
| 449,990 |
|
| (23,860) |
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| 426,130 |
Commitments and contingencies |
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Deferred rent |
| 330,985 |
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| (330,985) |
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| - |
Current and long-term operating lease liabilities |
| - |
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| 2,682,203 |
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| 2,682,203 |
Deferred income tax liabilities |
| 11,566 |
|
| (831) |
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| 10,735 |
Other liabilities |
| 31,638 |
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| - |
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| 31,638 |
Total liabilities |
| 824,179 |
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| 2,326,527 |
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| 3,150,706 |
Shareholders' equity: |
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Preferred stock, $0.01 par value, 600,000 shares authorized, no shares issued as of December 31, 2018 and 2017, respectively |
| - |
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| - |
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| - |
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 |
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| - |
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| 360 |
Additional paid-in capital |
| 1,374,154 |
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| - |
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| 1,374,154 |
Treasury stock, at cost, 8,276 and 7,826 common shares at December 31, 2018 and 2017, respectively |
| (2,500,556) |
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| - |
|
| (2,500,556) |
Accumulated other comprehensive loss |
| (6,236) |
|
| - |
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| (6,236) |
Retained earnings |
| 2,573,617 |
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| (2,327) |
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| 2,571,290 |
Total shareholders' equity |
| 1,441,339 |
|
| (2,327) |
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| 1,439,012 |
Total liabilities and shareholders' equity | $ | 2,265,518 |
| $ | 2,324,200 |
| $ | 4,589,718 |
3. Revenue Recognition
We 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.
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 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 $53,217 and $70,474 as of June 30, 2019 and December 31, 2018, respectively. Revenue recognized on the condensed consolidated statement of income for the redemption of gift cards that were included in accrued liabilities at the beginning of the year is as follows:
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| Three months ended |
| Six months ended | ||||||||
| June 30, |
| June 30, | ||||||||
| 2019 |
| 2018 |
| 2019 |
| 2018 | ||||
Revenue recognized from gift card liability balance at the beginning of the year | $ | 6,615 |
| $ | 6,289 |
| $ | 31,318 |
| $ | 30,529 |
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 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 program members 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.
We recognize loyalty revenue when a customer redeems an earned reward. Deferred revenue associated with Chipotle Rewards is included in unearned revenue on our condensed consolidated balance sheet. The Chipotle Rewards loyalty liability included in unearned revenue on the condensed consolidated balance sheet is $8,577 and $0 as of June 30, 2019 and December 31, 2018, respectively.
Revenue recognized on the condensed consolidated statement of income for the three and six months ended June 30, 2019, was $8,873 and $11,150, respectively. No revenue was recognized for the three and six months ended June 30, 2018 related to the Chipotle Rewards program because the program launched in 2019.
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.
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 June 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 six months ended June 30, 2019 and 2018.
As of September 30, 2018, we transferred the classification of our investments from available-for-sale to held-to-maturity. The unrealized holding loss and offsetting discount, created as a result of this reclassification, will be amortized to interest and other income on the condensed consolidated statement of income over the remaining life of the securities and will be fully amortized by September 30, 2019.
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 $12,283 and $10,872 as of June 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 June 30, 2019 and December 31, 2018, we had no 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 assets, 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 assets 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.
Corporate restructuring costs consist of the following:
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| Six months ended | ||||||||
| June 30, |
| June 30, | ||||||||
| 2019 |
| 2018 |
| 2019 |
| 2018 | ||||
Employee severance and other employee transition costs(1) | $ | 460 |
| $ | 493 |
| $ | 1,506 |
| $ | 493 |
Recruitment and relocation costs(1) |
| 2,107 |
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| 207 |
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| 4,200 |
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| 207 |
Operating lease impairment and other office closure costs(2) |
| 324 |
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| 16,299 |
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| 1,719 |
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| 16,299 |
Third-party and other costs(1) |
| 1,031 |
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| 3,200 |
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| 2,038 |
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| 3,200 |
Stock-based compensation(1) |
| - |
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| (6,426) |
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| 134 |
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| (6,426) |
Total restructuring costs | $ | 3,922 |
| $ | 13,773 |
| $ | 9,597 |
| $ | 13,773 |
(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 liability which are included in accrued liabilities on the condensed consolidated balance sheet were as follows:
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| December 31, 2018 |
| Charges |
| Payments |
| June 30, 2019 | ||||
Employee severance and other employee transition costs | $ | 2,722 |
| $ | 1,506 |
| $ | (4,206) |
| $ | 22 |
Recruitment and relocation costs |
| 224 |
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| 4,200 |
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| (4,374) |
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| 50 |
Third-party and other costs |
| 554 |
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| 2,038 |
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| (2,592) |
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| - |
Total restructuring liability | $ | 3,500 |
| $ | 7,744 |
| $ | (11,172) |
| $ | 72 |
6. Shareholders’ Equity
Through June 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 $2.6 billion. As of June 30, 2019, $46,589 was available to repurchase shares under the previously announced repurchase authorizations. On July 23, 2019, we announced that our Board of Directors authorized the expenditure of an additional $100,000 to repurchase shares of our common stock. Shares repurchased are being held in treasury stock until they are reissued or retired at the discretion of the Board of Directors.
During the six months ended June 30, 2019, 17 shares of common stock at a total cost of $10,398 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 six months ended June 30, 2019, we granted stock only stock appreciation rights (“SOSARs”) on 190 shares of our common stock to eligible employees. The weighted-average grant date fair value of the SOSARs was $173.96 per share with a weighted-average exercise price of $590.60 per share. The SOSARs vest in two equal installments on the and anniversary of the grant date. During the six months ended June 30, 2019, 736 SOSARs were exercised, 23 SOSARs were forfeited, and 50 SOSARs expired.
During the six months ended June 30, 2019, we granted restricted stock units (“RSUs”) on 23 shares of our common stock to eligible employees. The weighted-average grant date fair value of the RSUs was $599.06 per share. The RSUs generally vest in two equal installments on the and anniversary of the grant date. During the six months ended June 30, 2019, 45 RSUs vested and 11 RSUs were forfeited.
During the six months ended June 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 six months ended June 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 anniversary of the grant date.
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 six months ended June 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:
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| Three months ended |
| Six months ended | ||||||||
| June 30, |
| June 30, | ||||||||
| 2019 |
| 2018 |
| 2019 |
| 2018 | ||||
Stock-based compensation expense | $ | 21,322 |
| $ | 11,660 |
| $ | 40,664 |
| $ | 24,036 |
Stock-based compensation expense, net of tax | $ | 15,689 |
| $ | 8,575 |
| $ | 30,091 |
| $ | 17,676 |
Total capitalized stock-based compensation included in net property, plant and equipment on the condensed consolidated balance sheet | $ | 155 |
| $ | 112 |
| $ | 343 |
| $ | 391 |
Excess tax benefit (deficit) on stock-based compensation recognized in provision for income taxes | $ | 5,264 |
| $ | (431) |
| $ | 10,698 |
| $ |