CHIPOTLE MEXICAN GRILL INC - Quarter Report: 2020 March (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 March 31, 2020
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: (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. 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). 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 the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act (check one):
Large accelerated filer | 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 April 24, 2020, there were 27,890,741 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 | |
| 5 | |
| Note 1 - Basis of Presentation and Update to Accounting Policy | 5 |
| 5 | |
| 6 | |
| 7 | |
| 7 | |
| 7 | |
| 8 | |
| 8 | |
| 9 | |
| 9 | |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 11 |
Item 3. | 16 | |
Item 4. | 16 | |
| PART II |
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Item 1. | 17 | |
Item 1A. | 17 | |
Item 2. | 18 | |
Item 6. | 19 | |
| 20 |
PART I
ITEM 1. FINANCIAL STATEMENTS
CHIPOTLE MEXICAN GRILL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
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| March 31, |
| December 31, | ||
| 2020 |
| 2019 | ||
| (unaudited) |
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Assets |
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Current assets: |
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Cash and cash equivalents | $ | 500,315 |
| $ | 480,626 |
Accounts receivable, net |
| 63,461 |
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| 80,545 |
Inventory |
| 23,335 |
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| 26,096 |
Prepaid expenses and other current assets |
| 50,781 |
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| 57,076 |
Income tax receivable |
| 56,631 |
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| 27,705 |
Investments |
| 380,978 |
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| 400,156 |
Total current assets |
| 1,075,501 |
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| 1,072,204 |
Leasehold improvements, property and equipment, net |
| 1,465,666 |
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| 1,458,690 |
Restricted cash |
| 27,956 |
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| 27,855 |
Operating lease assets |
| 2,591,416 |
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| 2,505,466 |
Other assets |
| 24,010 |
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| 18,450 |
Goodwill |
| 21,939 |
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| 21,939 |
Total assets | $ | 5,206,488 |
| $ | 5,104,604 |
Liabilities and shareholders' equity |
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Current liabilities: |
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Accounts payable | $ | 130,423 |
| $ | 115,816 |
Accrued payroll and benefits |
| 132,273 |
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| 126,600 |
Accrued liabilities |
| 147,242 |
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| 155,843 |
Unearned revenue |
| 77,499 |
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| 95,195 |
Current operating lease liabilities |
| 178,358 |
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| 173,139 |
Total current liabilities |
| 665,795 |
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| 666,593 |
Commitments and contingencies (Note 10) |
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Long-term operating lease liabilities |
| 2,764,778 |
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| 2,678,374 |
Deferred income tax liabilities |
| 64,851 |
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| 37,814 |
Other liabilities |
| 39,044 |
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| 38,797 |
Total liabilities |
| 3,534,468 |
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| 3,421,578 |
Shareholders' equity: |
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Preferred stock, $0.01 par value, 600,000 shares authorized, no shares issued as of March 31, 2020 and December 31, 2019, respectively |
| - |
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| - |
Common stock, $0.01 par value, 230,000 shares authorized, 36,517 and 36,323 shares issued as of March 31, 2020 and December 31, 2019, respectively |
| 365 |
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| 363 |
Additional paid-in capital |
| 1,483,224 |
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| 1,465,697 |
Treasury stock, at cost, 8,702 and 8,568 common shares as of March 31, 2020 and December 31, 2019, respectively |
| (2,801,150) |
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| (2,699,119) |
Accumulated other comprehensive loss |
| (7,204) |
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| (5,363) |
Retained earnings |
| 2,996,785 |
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| 2,921,448 |
Total shareholders' equity |
| 1,672,020 |
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| 1,683,026 |
Total liabilities and shareholders' equity | $ | 5,206,488 |
| $ | 5,104,604 |
See accompanying notes to condensed consolidated financial statements.
CHIPOTLE MEXICAN GRILL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(unaudited)
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| Three months ended | ||||
| March 31, | ||||
| 2020 |
| 2019 | ||
Revenue | $ | 1,410,772 |
| $ | 1,308,217 |
Restaurant operating costs (exclusive of depreciation and amortization shown separately below): |
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Food, beverage and packaging |
| 462,299 |
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| 421,367 |
Labor |
| 393,565 |
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| 348,842 |
Occupancy |
| 95,279 |
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| 88,770 |
Other operating costs |
| 210,762 |
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| 174,743 |
General and administrative expenses |
| 106,470 |
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| 102,671 |
Depreciation and amortization |
| 58,374 |
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| 53,781 |
Pre-opening costs |
| 3,566 |
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| 940 |
Impairment, closure costs, and asset disposals |
| 9,336 |
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| 6,942 |
Total operating expenses |
| 1,339,651 |
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| 1,198,056 |
Income from operations |
| 71,121 |
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| 110,161 |
Interest and other income, net |
| 2,743 |
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| 3,129 |
Income before income taxes |
| 73,864 |
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| 113,290 |
Benefit (provision) for income taxes |
| 2,524 |
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| (25,158) |
Net income | $ | 76,388 |
| $ | 88,132 |
Earnings per share: |
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Basic | $ | 2.75 |
| $ | 3.18 |
Diluted | $ | 2.70 |
| $ | 3.13 |
Weighted-average common shares outstanding: |
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Basic |
| 27,792 |
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| 27,696 |
Diluted |
| 28,323 |
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| 28,118 |
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(unaudited)
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| Three months ended | ||||
| March 31, | ||||
| 2020 |
| 2019 | ||
Net income | $ | 76,388 |
| $ | 88,132 |
Other comprehensive income (loss), net of income taxes: |
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Foreign currency translation adjustments |
| (1,841) |
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| 278 |
Unrealized gain on available-for-sale securities, net of income taxes |
| - |
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| 100 |
Other comprehensive income (loss), net of income taxes |
| (1,841) |
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| 378 |
Comprehensive income | $ | 74,547 |
| $ | 88,510 |
See accompanying notes to condensed consolidated financial statements.
CHIPOTLE MEXICAN GRILL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(in thousands)
(unaudited)
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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, 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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| - |
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| - |
| - |
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| - |
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| (2,327) |
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| - |
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| - |
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| (2,327) |
Stock-based compensation | - |
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| - |
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| 19,342 |
| - |
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| - |
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| - |
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| - |
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| - |
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| 19,342 |
Stock plan transactions and other | 135 |
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| 1 |
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| (212) |
| - |
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| - |
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| - |
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| - |
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| - |
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| (211) |
Acquisition of treasury stock | - |
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| - |
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| - |
| 110 |
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| (62,854) |
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| - |
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| - |
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| - |
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| (62,854) |
Net income | - |
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| - |
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| - |
| - |
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| - |
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| 88,132 |
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| - |
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| - |
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| 88,132 |
Other comprehensive income (loss), net of income tax | - |
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| - |
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| - |
| - |
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| - |
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| - |
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| 100 |
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| 278 |
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| 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 |
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Balance, December 31, 2019 | 36,323 |
| $ | 363 |
| $ | 1,465,697 |
| 8,568 |
| $ | (2,699,119) |
| $ | 2,921,448 |
| $ | - |
| $ | (5,363) |
| $ | 1,683,026 |
Adoption of ASU No. 2016-13, Financial Instrument-Credit Losses (Topic 326) | - |
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| - |
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| - |
| - |
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| - |
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| (1,051) |
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| - |
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| - |
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| (1,051) |
Stock-based compensation | - |
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| - |
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| 17,708 |
| - |
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| - |
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| - |
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| - |
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| - |
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| 17,708 |
Stock plan transactions and other | 194 |
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| 2 |
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| (181) |
| - |
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| - |
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| - |
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| - |
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| - |
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| (179) |
Acquisition of treasury stock | - |
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| - |
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| - |
| 134 |
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| (102,031) |
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| - |
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| - |
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| - |
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| (102,031) |
Net income | - |
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| - |
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| - |
| - |
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| - |
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| 76,388 |
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| - |
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| - |
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| 76,388 |
Other comprehensive income (loss), net of income tax | - |
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| - |
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| - |
| - |
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| - |
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| - |
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| - |
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| (1,841) |
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| (1,841) |
Balance, March 31, 2020 | 36,517 |
| $ | 365 |
| $ | 1,483,224 |
| 8,702 |
| $ | (2,801,150) |
| $ | 2,996,785 |
| $ | - |
| $ | (7,204) |
| $ | 1,672,020 |
See accompanying notes to condensed consolidated financial statements.
CHIPOTLE MEXICAN GRILL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
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| Three months ended March 31, | ||||
| 2020 |
| 2019 | ||
Operating activities |
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Net income | $ | 76,388 |
| $ | 88,132 |
Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation and amortization |
| 58,374 |
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| 53,781 |
Amortization of operating lease assets |
| 42,961 |
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| 38,105 |
Deferred income tax provision |
| 27,343 |
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| 1,772 |
Impairment, closure costs, and asset disposals |
| 8,805 |
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| 4,085 |
Provision for credit losses |
| (90) |
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| 206 |
Stock-based compensation expense |
| 17,395 |
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| 19,154 |
Other |
| 707 |
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| (1,269) |
Changes in operating assets and liabilities: |
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Accounts receivable |
| 25,967 |
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| 15,946 |
Inventory |
| 2,734 |
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| 2,781 |
Prepaid expenses and other current assets |
| (4,158) |
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| (3,712) |
Other assets |
| (5,133) |
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| 242 |
Accounts payable |
| 20,245 |
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| (4,256) |
Accrued payroll and benefits |
| 5,839 |
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| 5,853 |
Accrued liabilities |
| (9,389) |
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| (4,773) |
Unearned revenue |
| (15,924) |
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| (13,386) |
Income tax payable/receivable |
| (29,179) |
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| 16,054 |
Operating lease liabilities |
| (40,918) |
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| (36,492) |
Other long-term liabilities |
| 104 |
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| 358 |
Net cash provided by operating activities |
| 182,071 |
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| 182,581 |
Investing activities |
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Purchases of leasehold improvements, property and equipment |
| (77,653) |
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| (64,226) |
Purchases of investments |
| (80,746) |
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| (89,111) |
Maturities of investments |
| 99,037 |
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| 60,000 |
Net cash used in investing activities |
| (59,362) |
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| (93,337) |
Financing activities |
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Acquisition of treasury stock |
| (54,401) |
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| (52,886) |
Tax withholding on stock-based compensation awards |
| (47,630) |
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| (10,368) |
Stock plan transactions and other financing activities |
| (69) |
|
| (277) |
Net cash used in financing activities |
| (102,100) |
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| (63,531) |
Effect of exchange rate changes on cash, cash equivalents and restricted cash |
| (819) |
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| 178 |
Net change in cash, cash equivalents, and restricted cash |
| 19,790 |
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| 25,891 |
Cash, cash equivalents, and restricted cash at beginning of period |
| 508,481 |
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| 280,152 |
Cash, cash equivalents, and restricted cash at end of period | $ | 528,271 |
| $ | 306,043 |
Supplemental disclosures of cash flow information |
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Income taxes paid (refunded) | $ | (14) |
| $ | 7,361 |
Purchases of leasehold improvements, property, and equipment accrued in accounts payable and accrued liabilities | $ | 33,757 |
| $ | 22,386 |
Acquisition of treasury stock accrued in accounts payable and accrued liabilities | $ | - |
| $ | 1,600 |
See accompanying notes to condensed consolidated financial statements.
CHIPOTLE MEXICAN GRILL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollar and share amounts in thousands, unless otherwise specified)
(unaudited)
1. Basis of Presentation and Update to Accounting Policy
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 relevant menu of burritos, burrito bowls, tacos and salads, made using fresh, high-quality ingredients. As of March 31, 2020, we operated 2,595 Chipotle restaurants throughout the United States as well as 40 international Chipotle restaurants. We are also an investor in a consolidated entity that owns and operates three 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.
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, 2019.
Updates to Significant Accounting Policies
On January 1, 2020 we adopted Accounting Standards Update (“ASU”) 2016-13, “Financial Instruments – Credit Losses (Topic 326)”, along with related clarifications and improvements. As a result, we updated our significant accounting policies for the measurement of credit losses below. Refer to Note 2. “Recent Accounting Standards” for information related to the impact of the adoption of Topic 326 on our condensed consolidated financial statements.
Allowance for Credit Losses
We closely monitor accounts receivable and held to maturity investment balances and estimate the allowance for credit losses. Our estimate is based on historical collection experience, external market data and other factors, including those related to current market conditions and events. Our credit losses associated with accounts receivable and held to maturity investments have not historically been material.
2. Recent Accounting Standards
Recently Issued Accounting Standards
In December 2019, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2019-12, “Simplifying the Accounting for Income Taxes (Topic 740)”, which simplifies the accounting for income taxes. ASU 2019-12 is effective for reporting periods beginning after December 15, 2020, and early adoption is permitted. We are currently evaluating the impact this guidance will have on our consolidated financial statements, but do not expect the adoption of ASU 2019-12 will result in a material change to 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 to the condensed consolidated financial statements.
Recently Adopted Accounting Standards
On January 1, 2020 we adopted ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326)”, along with related clarifications and improvements. This pronouncement requires companies to measure credit losses utilizing a methodology that reflects expected credit losses and requires a consideration of a broader range of reasonable and supportable information to inform credit loss estimates. We adopted the standard using the modified-retrospective approach as of the effective date and therefore, we have not applied the standard to the comparative periods presented in our condensed consolidated financial statements. The modified-retrospective approach requires an entity to recognize a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which this guidance is effective. As of January 1, 2020, the adoption of this standard resulted in a net increase to the allowance for credit losses of $1,414, a decrease to our deferred income tax liability of $363, and a decrease to retained earnings of $1,051.
On January 1, 2020 we adopted ASU 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 (“ASU 2018-15”), which clarifies the accounting for implementation costs in cloud computing arrangements. We adopted the standard prospectively on January 1, 2020. Prior to the adoption of ASU 2018-15, we capitalized implementation costs incurred during the application development phase of cloud computing arrangements to leasehold improvements, property and equipment, net on our consolidated balance sheets and have recognized expense over the useful life of the related asset within depreciation and amortization on our condensed consolidated statements of income. Subsequent to the adoption of ASU 2018-15, we capitalize such costs within prepaid expenses and other current assets or other assets on our condensed consolidated balance sheets and recognize expense over the expected contract term within general and administrative expenses or other operating costs on our condensed consolidated statements of income, consistent with where the expense associated with the hosting element of the arrangement are presented. The adoption of ASU 2018-15 did not result in a material change to our condensed consolidated financial statements.
3. Revenue Recognition
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. Gift card balances are initially recorded as unearned revenue. We recognize revenue from gift cards when the gift card is redeemed by the customer. Historically, the majority of gift cards are redeemed within one year. In addition, based on historical redemption rates, a portion of gift cards are not expected to be redeemed and will be recognized as breakage over time in proportion to gift card redemptions. The breakage rates are based on company and program specific information, including historical redemption patterns, and expected remittance to government agencies under unclaimed property laws, if applicable. We evaluate our breakage rate estimate annually and apply that rate to gift card redemptions. 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 sheets was as follows:
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| March 31, |
| December 31, | ||
| 2020 |
| 2019 | ||
Gift card liability | $ | 64,015 |
| $ | 84,611 |
Revenue recognized from the redemption of gift cards that was included in unearned revenue at the beginning of the year was as follows:
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| Three months ended | ||||
| March 31, | ||||
| 2020 |
| 2019 | ||
Revenue recognized from gift card liability balance at the beginning of the year | $ | 28,070 |
| $ | 24,703 |
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 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 statements 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 sheets.
Changes in our Chipotle Rewards liability included in unearned revenue on the condensed consolidated balance sheets were as follows:
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| Three months ended | ||||
| March 31, | ||||
| 2020 |
| 2019 | ||
Chipotle Rewards liability, beginning balance | $ | 10,584 |
| $ | - |
Revenue deferred |
| 15,217 |
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| 5,743 |
Revenue recognized |
| (12,317) |
|
| (2,277) |
Chipotle Rewards liability, ending balance | $ | 13,484 |
| $ | 3,466 |
4. Fair Value of Financial Instruments
Assets and Liabilities Measured at Fair Value on a Recurring Basis
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 less than 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. The fair value of these investments exceeded the amortized cost by $2,857 as of March 31, 2020. We recognize a reserve for expected credit losses when lifetime credit losses are expected by management. As of March 31, 2020, our investment portfolio consisted entirely of US Treasury securities for which management has concluded that there is no risk of non-payment. No impairment charges were recognized on our investments for the three months ended March 31, 2020 and 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 sheets. Fair value of mutual funds is measured using Level 1 inputs. The fair value of the investments in the rabbi trust was $13,279 and $12,811 as of March 31, 2020, and December 31, 2019, respectively. We record trading gains and losses in general and administrative expenses on the condensed consolidated statements 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.
5. Shareholders’ Equity
Through March 31, 2020, 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 $2,800,000. As of March 31, 2020, $115,018 was available to be repurchased under 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.
For the three months ended March 31, 2020, 58 shares of common stock at a total cost of $47,630 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.
6. Stock-Based Compensation
For the three months ended March 31, 2020, we granted stock only stock appreciation rights (“SOSARs”) on 106 shares of our common stock to eligible employees. The weighted-average grant date fair value of the SOSARs was $224.58 per share with a weighted-average exercise price of $857.00 per share. The SOSARs vest in two equal installments on the and anniversary of the grant date. For the three months ended March 31, 2020, 149 SOSARs were exercised, and 12 SOSARs were forfeited.
For the three months ended March 31, 2020, we granted restricted stock units (“RSUs”) on 32 shares of our common stock to eligible employees. The weighted-average grant date fair value of the RSUs was $857.50 per share. The RSUs vest in two equal installments on the and anniversary of the grant date. For the three months ended March 31, 2020, 54 RSUs vested and 4 RSUs were forfeited.
For the three months ended March 31, 2020, we awarded a total of 27 performance shares (“PSUs”) that are subject to service, market and performance vesting conditions. The weighted-average grant date fair value of the PSUs was $857.00 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. Further, in no event may more than 100% of the target number of PSUs vest if our 3 year total shareholder return is below the 25th percentile of the constituent companies comprising the S&P 500 on the day of grant. For the three months ended March 31, 2020, 71 PSUs vested and 2 PSUs were forfeited.
The following table sets forth total stock-based compensation expense:
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| March 31, | ||||
| 2020 |
| 2019 | ||
Stock-based compensation | $ | 17,708 |
| $ | 19,342 |
Stock-based compensation, net of income taxes | $ | 14,505 |
| $ | 14,402 |
Total capitalized stock-based compensation included in net leasehold improvements, property and equipment on the condensed consolidated balance sheets | $ | 313 |
| $ | 188 |
Excess tax benefit on stock-based compensation recognized in provision for income taxes | $ | 23,631 |
| $ | 5,434 |
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7. Income Taxes
The effective tax rate for the three months ended March 31, 2020, was -3.4%, a decrease from 22.2% for the three months ended March 31, 2019, primarily due to excess tax benefits recognized in connection with stock-based compensation.
On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”). Intended to provide economic relief to those impacted by the coronavirus (COVID-19) pandemic, the CARES Act includes provisions, among others, addressing the carryback of net operating losses for specific periods, refunds of alternative minimum tax credits, temporary modifications to the limitations placed on the tax deductibility of net interest expenses, and technical amendments for qualified improvement property (“QIP”). Additionally, the CARES Act, in efforts to enhance business’ liquidity, provides for refundable employee retention tax credits and the deferral of the employer-paid portion of social security taxes.
As of March 31, 2020, we have elected to defer the employer-paid portion of social security taxes. Additionally, as a result of the technical amendments made by the CARES Act to QIP, we are presently estimating the acceleration of depreciation expenses. These accelerated tax depreciation expenses of $32,256, in addition to the deferral of employer-paid social security taxes of $830, represent temporary book-to-tax timing differences (i.e., no effective tax rate impact) for income tax purposes and are recorded as components within our deferred income tax liabilities and income tax receivable on the condensed consolidated balance sheets.
We intend to claim the refundable employee retention tax credits provided under the CARES Act, which can be used to offset payroll tax liabilities. We are still estimating the potential benefits that the employee retention tax credits can provide, however we do not expect that they will have a material impact on our financial statements. Further, we are continuing to examine additional impacts that the CARES Act may have on our U.S. business, and we are currently evaluating the potential tax-related incentives offered in Canada, France, Germany and the United Kingdom, where our operations have also been impacted by COVID-19.
8. 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.
The components of lease cost were as follows:
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| Three months ended |
| Three months ended | ||
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| March 31, |
| March 31, | ||
| Classification | 2020 |
| 2019 | ||
Operating lease cost | Occupancy, Other operating costs, General and administrative expenses and Pre-opening costs | $ | 81,096 |
| $ | 76,805 |
Short-term lease cost | Other operating costs |
| 36 |
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| 737 |
Variable lease cost | Occupancy |
| 9,156 |
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| 9,104 |
Sublease income | General and administrative expenses |
| (837) |
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| (766) |
Total lease cost |
| $ | 89,451 |
| $ | 85,880 |
Supplemental disclosures of cash flow information related to leases were as follows:
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| Three months ended |
| Three months ended | ||
| March 31, |
| March 31, | ||
| 2020 |
| 2019 | ||
Cash paid for operating lease liabilities | $ | 77,889 |
| $ | 71,832 |
Operating lease assets obtained in exchange for operating lease liabilities(1) | $ | 136,966 |
| $ | 2,401,239 |
Derecognition of operating lease assets due to terminations or impairment | $ | 2,007 |
| $ | 10,050 |
(1) Amounts for the three months ended March 31, 2019 include the transition adjustment for the adoption of Topic 842 discussed in our annual report on Form 10-K for the year ended December 31, 2019.
9. Earnings Per Share
The following table sets forth the computations of basic and diluted earnings per share:
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| March 31, | ||||
| 2020 |
| 2019 | ||
Net income | $ | 76,388 |
| $ | 88,132 |
Shares: |
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Weighted-average number of common shares outstanding (for basic calculation) |
| 27,792 |
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| 27,696 |
Dilutive stock awards |
| 531 |
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| 422 |
Weighted-average number of common shares outstanding (for diluted calculation) |
| 28,323 |
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| 28,118 |
Basic earnings per share | $ | 2.75 |
| $ | 3.18 |
Diluted earnings per share | $ | 2.70 |
| $ | 3.13 |
The following stock awards were excluded from the calculation of diluted earnings per share:
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| Three months ended | ||||
| March 31, | ||||
| 2020 |
| 2019 | ||
Stock awards subject to performance conditions |
| 90 |
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| 81 |
Stock awards that were antidilutive |
| 103 |
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| 343 |
Total stock awards excluded from diluted earnings per share |
| 193 |
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| 424 |
10. 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.
Litigation
Settlement of DOJ Investigation
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 relating to 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 (collectively, the “DOJ”). The subpoena required the production of documents and information related to company-wide food safety matters dating back to January 1, 2013. On April 21, 2020, we announced that we have signed a Deferred Prosecution Agreement to resolve this investigation. Pursuant to the Agreement, the DOJ has agreed to take no legal action relating to these past incidents for three years provided that Chipotle complies with its obligations under the Agreement, which include paying a $25,000 fine (consisting of a $10,000 payment by June 1, 2020, followed by three separate payments of $5,000 each to be paid every 30 days after the first payment) and enhancing and maintaining our existing comprehensive compliance program, which is designed to ensure that it complies with all applicable federal and state food safety laws.
Shareholder Class Action
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 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 case, but it is not possible at this time to reasonably estimate the outcome of or any potential liability from the 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
We had a balance of $45,552 on the condensed consolidated balance sheets as of March 31, 2020, which is included in the accrued liabilities line item. We ultimately may be subject to liabilities greater or less than the amount accrued.
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 the potential future impact of COVID-19 on our results of operations or liquidity, the potential impact of actions we have taken to mitigate the impact of COVID-19, the expected benefit of the CARES Act on our liquidity and the period of time during which our cash and short-term investment will fund our operations 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, 2019, as updated in this Form 10-Q and other reports filed subsequently with the SEC.
Overview
As of March 31, 2020, we operated 2,595 Chipotle restaurants throughout the United States as well as 40 international Chipotle restaurants and three non-Chipotle restaurants. We are committed to making real food more accessible to everyone while continuing to be a brand with a demonstrated purpose.
First Quarter 2020 Financial Highlights
Revenue increased 7.8% to $1.4 billion
Comparable restaurant sales increased 3.3% with a 1.4% decrease in transactions including a 1.3% leap day benefit
Diluted earnings per share was $2.70, which included restaurant asset impairment, corporate restructuring, and certain other costs of $12.8 million, a 13.7% decrease from $3.13.
Overview of the Impact of COVID-19
The COVID-19 pandemic has adversely affected, and will continue to adversely affect, our operations and financial results for the foreseeable future. In response to COVID-19, we have temporarily closed some restaurants and closed the dining rooms in all our restaurants. All our restaurants that remain open provide only take out, digital order ahead and delivery services. We have been in regular contact with our major suppliers and while to date we have not experienced significant disruptions in our supply chain, we could see future disruptions should the impacts of COVID-19 extend for a considerable amount of time. To support our employees, we have eliminated non-essential travel, implemented work from home for our support centers, significantly expanded employee benefits, increased sanitization of high touch, high traffic areas in our restaurants, provided personal protective equipment for our restaurant employees and increased the frequency of personal hygiene practices. In March 2020 we suspended our stock buyback program and implemented a short-term cash preservation strategy, which is discussed in further detail in the “Liquidity and Capital Resource” section below.
Given the level of volatility and uncertainty surrounding the future impact of COVID-19 on the broader US economy and any specific impact to our business, we have withdrawn our previously issued fiscal 2020 guidance related to comparable restaurant sales growth and new restaurant openings. The analysis that follows provides more specific details about how the COVID-19 outbreak has impacted specific financial statement items.
Sales Trends. Comparable restaurant sales increased 3.3% with a 1.4% decrease in transactions including a 1.3% leap day benefit. Through the end of February 2020, before we experienced the impact of COVID-19, comparable restaurant sales increased 14.4% with 10.7% transactions growth including a 2.1% leap day benefit. Comparable restaurant sales for the month of March 2020 were negatively impacted by COVID-19, resulting in comparable restaurant sales of -16.0%, and decreased to -35.0% for the week ended March 29, 2020.
Digital sales grew 80.8% to $371.8 million for the three months ended March 31, 2020 as compared to the three months ended March 31, 2019 and represented 26.3% of sales. After our dining rooms closed, we reprioritized our marketing efforts by offering free delivery from March 15, 2020 through at least early May 2020, shifting media spend from live sports to more online and streaming platforms, and announcing a national delivery partnership with Uber Eats. As a result, digital sales for the month of March grew 102.6% year over year and represented 37.6% of sales.
Restaurant Operating Costs. Our restaurant operating costs (food, beverage and packaging; labor; occupancy; and other operating costs) as a percentage of revenue increased 340 basis points to 82.4% for the three months ended March 31, 2020, as compared to 79.0% for the three months ended March 30, 2019. The sudden change to our business due to COVID-19 in March resulted in a short term, outsized impact to labor and food costs. Labor costs were elevated as we accommodated crew needs, shifted hours to support our growing digital business, and made additional employee investments in the form of extra assistance pay and elevated quarterly bonuses. Similarly, our food costs were elevated as we worked to right size food purchases to align with the new sales level. We also stocked our restaurant with additional cleaning and sanitation supplies, gloves, hand sanitizers, masks, and a tamper evident packaging seal for contactless mobile pickup and delivery orders. Prior to these COVID-19 impacts, our restaurant operating costs were 78.2% of revenue through the end of February 2020.
Restaurant Development. We opened 19 new restaurants, closed two restaurants, and relocated one restaurant for the three months ended March 31, 2020. We have nine restaurants set to open and another 49 under construction; however, we have begun to see construction delays and have preemptively delayed groundbreaking on the majority of projects in April 2020. As of March 31, 2020, about 100 restaurants were temporarily closed as a result of COVID-19, mainly inside malls and shopping centers, which includes 21 international restaurants.
Restaurant Activity
The following table details restaurant unit data for the periods indicated:
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| Three months ended | ||
| March 31, | ||
| 2020 |
| 2019 |
Beginning of period | 2,622 |
| 2,491 |
Chipotle openings | 19 |
| 15 |
Chipotle permanent closures | (2) |
| (2) |
Chipotle relocations | (1) |
| - |
Total restaurants at end of period | 2,638 |
| 2,504 |
Results of Operations
Our results of operations as a percentage of revenue and period-over-period change are discussed in the following section.
Revenue
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| 2020 |
| 2019 |
| change | ||
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Revenue | $ | 1,410.8 |
| $ | 1,308.2 |
| 7.8% |
Average restaurant sales | $ | 2.2 |
| $ | 2.0 |
| 9.3% |