CHIPOTLE MEXICAN GRILL INC - Quarter Report: 2021 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, 2021
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)
______________________________
|
|
|
|
Delaware | 84-1219301 |
(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) |
|
|
610 Newport Center Drive, Suite 1400 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 July 20, 2021, there were 28,094,868 shares of the registrant’s common stock, par value of $0.01 per share outstanding.
TABLE OF CONTENTS
|
|
|
|
|
|
| PART I |
|
Item 1. | 1 | |
| 1 | |
| Condensed Consolidated Statements of Income and Comprehensive Income | 2 |
| 3 | |
| 4 | |
| 5 | |
| Note 1 - Basis of Presentation and Update to Accounting Policy | 5 |
| 5 | |
| 5 | |
| 6 | |
| 8 | |
| 8 | |
| 9 | |
| 9 | |
| 9 | |
| 10 | |
| 10 | |
| 11 | |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 12 |
Item 3. | 17 | |
Item 4. | 18 | |
| PART II |
|
Item 1. | 18 | |
Item 1A. | 19 | |
Item 2. | 19 | |
Item 6. | 20 | |
| 21 |
PART I
ITEM 1. FINANCIAL STATEMENTS
CHIPOTLE MEXICAN GRILL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
| June 30, |
| December 31, | ||
| 2021 |
| 2020 | ||
| (unaudited) |
|
| ||
Assets |
|
|
|
|
|
Current assets: |
|
|
|
|
|
Cash and cash equivalents | $ | 668,269 |
| $ | 607,987 |
Accounts receivable, net |
| 75,697 |
|
| 104,500 |
Inventory |
| 25,159 |
|
| 26,445 |
Prepaid expenses and other current assets |
| 71,613 |
|
| 54,906 |
Income tax receivable |
| 284,612 |
|
| 282,783 |
Investments |
| 322,460 |
|
| 343,616 |
Total current assets |
| 1,447,810 |
|
| 1,420,237 |
Leasehold improvements, property and equipment, net |
| 1,666,184 |
|
| 1,584,311 |
Long-term investments |
| 150,814 |
|
| 102,328 |
Restricted cash |
| 27,877 |
|
| 27,849 |
Operating lease assets |
| 2,945,912 |
|
| 2,767,185 |
Other assets |
| 59,918 |
|
| 59,047 |
Goodwill |
| 21,939 |
|
| 21,939 |
Total assets | $ | 6,320,454 |
| $ | 5,982,896 |
Liabilities and shareholders' equity |
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
Accounts payable | $ | 140,251 |
| $ | 121,990 |
Accrued payroll and benefits |
| 225,104 |
|
| 203,054 |
Accrued liabilities |
| 143,469 |
|
| 164,649 |
Unearned revenue |
| 113,016 |
|
| 127,750 |
Current operating lease liabilities |
| 213,646 |
|
| 204,756 |
Total current liabilities |
| 835,486 |
|
| 822,199 |
Commitments and contingencies (Note 10) |
|
|
| ||
Long-term operating lease liabilities |
| 3,134,555 |
|
| 2,952,296 |
Deferred income tax liabilities |
| 133,510 |
|
| 149,422 |
Other liabilities |
| 42,745 |
|
| 38,844 |
Total liabilities |
| 4,146,296 |
|
| 3,962,761 |
Shareholders' equity: |
|
|
|
|
|
Preferred stock, $0.01 par value, 600,000 shares authorized, no shares issued as of June 30, 2021 and December 31, 2020, respectively |
| - |
|
| - |
Common stock, $0.01 par value, 230,000 shares authorized, 36,988 and 36,704 shares issued as of June 30, 2021 and December 31, 2020, respectively |
| 370 |
|
| 367 |
Additional paid-in capital |
| 1,654,195 |
|
| 1,549,909 |
Treasury stock, at cost, 8,890 and 8,703 common shares as of June 30, 2021 and December 31, 2020, respectively |
| (3,067,458) |
|
| (2,802,075) |
Accumulated other comprehensive loss |
| (4,187) |
|
| (4,229) |
Retained earnings |
| 3,591,238 |
|
| 3,276,163 |
Total shareholders' equity |
| 2,174,158 |
|
| 2,020,135 |
Total liabilities and shareholders' equity | $ | 6,320,454 |
| $ | 5,982,896 |
See accompanying notes to condensed consolidated financial statements.
CHIPOTLE MEXICAN GRILL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(in thousands, except per share data)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three months ended |
| Six months ended | ||||||||
| June 30, |
| June 30, | ||||||||
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||
Food and beverage revenue | $ | 1,869,365 |
| $ | 1,350,188 |
| $ | 3,585,355 |
| $ | 2,752,305 |
Delivery service revenue |
| 23,173 |
|
| 14,550 |
|
| 48,758 |
|
| 23,205 |
Total revenue |
| 1,892,538 |
|
| 1,364,738 |
|
| 3,634,113 |
|
| 2,775,510 |
Restaurant operating costs (exclusive of depreciation and amortization shown separately below): |
|
|
|
|
|
|
|
|
|
|
|
Food, beverage and packaging |
| 574,478 |
|
| 454,756 |
|
| 1,097,149 |
|
| 917,055 |
Labor |
| 464,506 |
|
| 385,266 |
|
| 898,175 |
|
| 778,831 |
Occupancy |
| 103,430 |
|
| 95,576 |
|
| 205,199 |
|
| 190,855 |
Other operating costs |
| 287,242 |
|
| 262,378 |
|
| 581,952 |
|
| 473,140 |
General and administrative expenses |
| 146,044 |
|
| 102,647 |
|
| 301,147 |
|
| 209,117 |
Depreciation and amortization |
| 62,082 |
|
| 60,024 |
|
| 125,204 |
|
| 118,398 |
Pre-opening costs |
| 4,965 |
|
| 3,644 |
|
| 8,386 |
|
| 7,210 |
Impairment, closure costs, and asset disposals |
| 4,266 |
|
| 5,386 |
|
| 9,934 |
|
| 14,722 |
Total operating expenses |
| 1,647,013 |
|
| 1,369,677 |
|
| 3,227,146 |
|
| 2,709,328 |
Income (loss) from operations |
| 245,525 |
|
| (4,939) |
|
| 406,967 |
|
| 66,182 |
Interest and other income (expense), net |
| 851 |
|
| 623 |
|
| (1,317) |
|
| 3,366 |
Income (loss) before income taxes |
| 246,376 |
|
| (4,316) |
|
| 405,650 |
|
| 69,548 |
Benefit/(provision) for income taxes |
| (58,402) |
|
| 12,491 |
|
| (90,575) |
|
| 15,015 |
Net income | $ | 187,974 |
| $ | 8,175 |
| $ | 315,075 |
| $ | 84,563 |
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
Basic | $ | 6.68 |
| $ | 0.29 |
| $ | 11.20 |
| $ | 3.04 |
Diluted | $ | 6.60 |
| $ | 0.29 |
| $ | 11.04 |
| $ | 2.99 |
Weighted-average common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
Basic |
| 28,134 |
|
| 27,911 |
|
| 28,130 |
|
| 27,851 |
Diluted |
| 28,501 |
|
| 28,333 |
|
| 28,542 |
|
| 28,328 |
Other comprehensive income (loss), net of income taxes: |
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments | $ | 305 |
| $ | 1,055 |
| $ | 42 |
| $ | (786) |
Comprehensive income | $ | 188,279 |
| $ | 9,230 |
| $ | 315,117 |
| $ | 83,777 |
See accompanying notes to condensed consolidated financial statements.
CHIPOTLE MEXICAN GRILL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(in thousands)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Common Stock |
|
|
| Treasury Stock |
|
|
|
|
|
|
|
| ||||||||
| Shares |
| Amount |
| Additional |
| Shares |
| Amount |
| Retained |
| Accumulated Other Comprehensive Income (Loss) |
| Total | ||||||
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) | - |
|
| - |
|
| - |
| - |
|
| - |
|
| (1,051) |
|
| - |
|
| (1,051) |
Stock-based compensation | - |
|
| - |
|
| 17,708 |
| - |
|
| - |
|
| - |
|
| - |
|
| 17,708 |
Stock plan transactions and other | 194 |
|
| 2 |
|
| (181) |
| - |
|
| - |
|
| - |
|
| - |
|
| (179) |
Acquisition of treasury stock | - |
|
| - |
|
| - |
| 134 |
|
| (102,031) |
|
| - |
|
| - |
|
| (102,031) |
Net income | - |
|
| - |
|
| - |
| - |
|
| - |
|
| 76,388 |
|
| - |
|
| 76,388 |
Other comprehensive income (loss), net of income tax | - |
|
| - |
|
| - |
| - |
|
| - |
|
| - |
|
| (1,841) |
|
| (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 |
Stock-based compensation | - |
|
| - |
|
| 23,676 |
| - |
|
| - |
|
| - |
|
| - |
|
| 23,676 |
Stock plan transactions and other | 150 |
|
| 2 |
|
| (115) |
| - |
|
| - |
|
| - |
|
| - |
|
| (113) |
Acquisition of treasury stock | - |
|
| - |
|
| - |
| 1 |
|
| (317) |
|
| - |
|
| - |
|
| (317) |
Net income | - |
|
| - |
|
| - |
| - |
|
| - |
|
| 8,175 |
|
| - |
|
| 8,175 |
Other comprehensive income (loss), net of income tax | - |
|
| - |
|
| - |
| - |
|
| - |
|
| - |
|
| 1,055 |
|
| 1,055 |
Balance, June 30, 2020 | 36,667 |
| $ | 367 |
| $ | 1,506,785 |
| 8,703 |
| $ | (2,801,467) |
| $ | 3,004,960 |
| $ | (6,149) |
| $ | 1,704,496 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2020 | 36,704 |
| $ | 367 |
| $ | 1,549,909 |
| 8,703 |
| $ | (2,802,075) |
| $ | 3,276,163 |
| $ | (4,229) |
| $ | 2,020,135 |
Stock-based compensation | - |
|
| - |
|
| 55,960 |
| - |
|
| - |
|
| - |
|
| - |
|
| 55,960 |
Stock plan transactions and other | 232 |
|
| 2 |
|
| 632 |
| - |
|
| - |
|
| - |
|
| - |
|
| 634 |
Acquisition of treasury stock | - |
|
| - |
|
| - |
| 74 |
|
| (106,036) |
|
| - |
|
| - |
|
| (106,036) |
Net income | - |
|
| - |
|
| - |
| - |
|
| - |
|
| 127,101 |
|
| - |
|
| 127,101 |
Other comprehensive income (loss), net of income tax | - |
|
| - |
|
| - |
| - |
|
| - |
|
| - |
|
| (263) |
|
| (263) |
Balance, March 31, 2021 | 36,936 |
| $ | 369 |
| $ | 1,606,501 |
| 8,777 |
| $ | (2,908,111) |
| $ | 3,403,264 |
| $ | (4,492) |
| $ | 2,097,531 |
Stock-based compensation | - |
|
| - |
|
| 47,670 |
| - |
|
| - |
|
| - |
|
| - |
|
| 47,670 |
Stock plan transactions and other | 52 |
|
| 1 |
|
| 24 |
| - |
|
| - |
|
| - |
|
| - |
|
| 25 |
Acquisition of treasury stock | - |
|
| - |
|
| - |
| 113 |
|
| (159,347) |
|
| - |
|
| - |
|
| (159,347) |
Net income | - |
|
| - |
|
| - |
| - |
|
| - |
|
| 187,974 |
|
| - |
|
| 187,974 |
Other comprehensive income (loss), net of income tax | - |
|
| - |
|
| - |
| - |
|
| - |
|
| - |
|
| 305 |
|
| 305 |
Balance, June 30, 2021 | 36,988 |
| $ | 370 |
| $ | 1,654,195 |
| 8,890 |
| $ | (3,067,458) |
| $ | 3,591,238 |
| $ | (4,187) |
| $ | 2,174,158 |
See accompanying notes to condensed consolidated financial statements.
CHIPOTLE MEXICAN GRILL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
| Six months ended | ||||
| June 30, | ||||
| 2021 |
| 2020 | ||
Operating activities |
|
|
|
|
|
Net income | $ | 315,075 |
| $ | 84,563 |
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
Depreciation and amortization |
| 125,204 |
|
| 118,398 |
Amortization of operating lease assets |
| 105,485 |
|
| 88,139 |
Deferred income tax provision |
| (15,884) |
|
| 55,122 |
Impairment, closure costs, and asset disposals |
| 8,235 |
|
| 13,747 |
Provision for credit losses |
| (220) |
|
| 82 |
Stock-based compensation expense |
| 102,680 |
|
| 40,762 |
Other |
| 2,467 |
|
| 1,670 |
Changes in operating assets and liabilities: |
|
|
|
|
|
Accounts receivable |
| 37,286 |
|
| 22,598 |
Inventory |
| 1,309 |
|
| 2,029 |
Prepaid expenses and other current assets |
| (18,186) |
|
| (6,250) |
Other assets |
| 117 |
|
| (8,574) |
Accounts payable |
| 12,525 |
|
| 40,530 |
Accrued payroll and benefits |
| 21,068 |
|
| 3,264 |
Accrued liabilities |
| (20,102) |
|
| (8,120) |
Unearned revenue |
| (11,487) |
|
| (4,027) |
Income tax payable/receivable |
| (1,851) |
|
| (70,119) |
Operating lease liabilities |
| (101,818) |
|
| (69,468) |
Other long-term liabilities |
| 955 |
|
| 587 |
Net cash provided by operating activities |
| 562,858 |
|
| 304,933 |
Investing activities |
|
|
|
|
|
Purchases of leasehold improvements, property and equipment |
| (212,123) |
|
| (165,455) |
Purchases of investments |
| (190,920) |
|
| (101,104) |
Maturities of investments |
| 162,045 |
|
| 198,578 |
Proceeds from sale of equipment |
| 2,885 |
|
| - |
Acquisitions of equity method investments |
| - |
|
| (7,525) |
Net cash used in investing activities |
| (238,113) |
|
| (75,506) |
Financing activities |
|
|
|
|
|
Acquisition of treasury stock |
| (203,151) |
|
| (54,401) |
Tax withholding on stock-based compensation awards |
| (58,860) |
|
| (47,947) |
Other financing activities |
| (2,208) |
|
| (1,855) |
Net cash used in financing activities |
| (264,219) |
|
| (104,203) |
Effect of exchange rate changes on cash, cash equivalents and restricted cash |
| (216) |
|
| (104) |
Net change in cash, cash equivalents, and restricted cash |
| 60,310 |
|
| 125,120 |
Cash, cash equivalents, and restricted cash at beginning of period |
| 635,836 |
|
| 508,481 |
Cash, cash equivalents, and restricted cash at end of period | $ | 696,146 |
| $ | 633,601 |
Supplemental disclosures of cash flow information |
|
|
|
|
|
Income taxes paid | $ | 108,247 |
| $ | 657 |
Purchases of leasehold improvements, property, and equipment accrued in accounts payable and accrued liabilities | $ | 50,403 |
| $ | 41,504 |
Acquisition of treasury stock accrued in accounts payable and accrued liabilities | $ | 3,372 |
| $ | - |
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 Policies
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, quesadillas, tacos, and salads, made using fresh, high-quality ingredients. As of June 30, 2021, we operated 2,808 Chipotle restaurants throughout the United States as well as 41 international Chipotle restaurants. We are also an investor in a consolidated entity that owns and operates four 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 to conform to 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, 2020.
2. Recently Issued Accounting Standards
Recently Issued Accounting Standards
In March 2020, the Financial Accounting Standards Board (the “FASB”) issued ASU No. 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” The pronouncement provides temporary optional expedients and exceptions to the current guidance on contract modifications and hedge accounting to ease the financial reporting burden related to the expected market transition from the London Interbank Offered Rate ("LIBOR") and other interbank offered rates to alternative reference rates. The guidance was effective upon issuance and generally can be applied to applicable contract modifications through December 31, 2022. We are currently evaluating the impact of the transition from LIBOR to alternative reference rates but do not expect a significant impact 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, 2021, we adopted ASU 2019-12, “Simplifying the Accounting for Income Taxes (Topic 740)”, which modified certain technical guidelines for accounting for income taxes. The adoption of ASU 2019-12 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, 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 (“gift card breakage rate”). The gift card breakage rate is 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 gift card breakage rate estimate annually, or more frequently as circumstances warrant, 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:
|
|
|
|
|
|
|
|
|
|
|
|
| June 30, |
| December 31, | ||
| 2021 |
| 2020 | ||
Gift card liability | $ | 87,964 |
| $ | 105,413 |
Revenue recognized from the redemption of gift cards that was included in unearned revenue at the beginning of the year was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three months ended |
| Six months ended | ||||||||
| June 30, |
| June 30, | ||||||||
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||
Revenue recognized from gift card liability balance at the beginning of the year | $ | 8,628 |
| $ | 4,064 |
| $ | 39,494 |
| $ | 32,134 |
Chipotle Rewards
We have a national loyalty program called Chipotle Rewards. Eligible customers who enroll in the program generally earn points for every dollar spent. After accumulating the required number of points, the customer may select a reward. We may also periodically offer promotions, which typically provide the customer with the opportunity to earn bonus points or other rewards. 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. In June 2021, we enhanced Chipotle Rewards and introduced a new redemption feature we call the “Rewards Exchange” that provides loyalty members multiple redemption options. Previously, Chipotle Rewards points were automatically redeemed for a free entrée when the customer obtained the required number of points. The change in the Chipotle Rewards program did not have a material impact on our condensed consolidated financial statements.
We defer revenue associated with the estimated selling price of points or rewards earned by customers as each point or reward is earned, net of points or rewards we do not expect to be redeemed. The estimated selling price of each point or reward earned is based on the estimated value of the product for which the point or reward is expected to be redeemed. Our estimate of points and rewards we expect to be redeemed (“rewards breakage rate”) is based on historical and other company specific data. The change in the Chipotle Rewards program in June 2021 did not materially impact our estimate of the stand-alone selling price or breakage rate of each point. The costs associated with rewards redeemed are primarily included in food, beverage, and packaging expense on our condensed consolidated statements of income and comprehensive income.
We recognize loyalty revenue within food and beverage revenue on the condensed consolidated statements of income and comprehensive 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:
|
|
|
|
|
|
|
|
|
|
|
|
| Three months ended |
| Six months ended | ||||||||
| June 30, |
| June 30, | ||||||||
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||
Chipotle Rewards liability, beginning balance | $ | 23,925 |
| $ | 13,484 |
| $ | 22,337 |
| $ | 10,584 |
Revenue deferred |
| 26,509 |
|
| 25,226 |
|
| 52,370 |
|
| 40,443 |
Revenue recognized |
| (25,382) |
|
| (18,698) |
|
| (49,655) |
|
| (31,015) |
Chipotle Rewards liability, ending balance | $ | 25,052 |
| $ | 20,012 |
| $ | 25,052 |
| $ | 20,012 |
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, restricted cash, accounts receivable and accounts payable approximate fair value because of their short-term nature.
Our investments are comprised of held-to-maturity U.S. Treasury securities, non-marketable equity securities and an equity method investment. We also maintain a deferred compensation plan with related assets held in a rabbi trust.
Held-to-Maturity Investments
We invest in U.S. Treasury securities with maturities of up to 19 months, with $322,460 maturing within one year from June 30, 2021. The fair value of our held-to-maturity 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.
All held-to-maturity investments are carried at amortized cost. The amortized costs of these investments exceeded the fair value by $140 and $117 as of June 30, 2021 and December 31, 2020, respectively. We recognize a reserve for the expected credit losses when lifetime credit losses are expected by management. As of June 30, 2021, management has concluded there is no risk of non-payment.
Rabbi Trust
We 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 rabbi trust investments in mutual funds is measured using Level 1 inputs. The fair value of the investments in the rabbi trust was $18,418 and $15,296 as of June 30, 2021 and December 31, 2020, respectively. We record trading gains and losses in general and administrative expenses on the condensed consolidated statements of income and comprehensive 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, investments in non-marketable equity securities, other assets, and goodwill. These assets are measured at fair value whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
The following table summarizes our assets measured at fair value by hierarchy level on a nonrecurring basis:
|
|
|
|
|
|
|
|
|