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CHIPOTLE MEXICAN GRILL INC - Quarter Report: 2021 June (Form 10-Q)

cmg-20210630x10q

 

 

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: (949524-4000

______________________________

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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common stock, par value $0.01 per share

CMG

New York Stock Exchange

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See 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.

Financial Statements (Unaudited)

1

Condensed Consolidated Balance Sheets

1

Condensed Consolidated Statements of Income and Comprehensive Income

2

Condensed Consolidated Statements of Shareholders’ Equity

3

Condensed Consolidated Statements of Cash Flows

4

Notes to Condensed Consolidated Financial Statements

5

Note 1 - Basis of Presentation and Update to Accounting Policy

5

Note 2 - Recently Issued Accounting Standards

5

Note 3 - Revenue Recognition

5

Note 4 - Fair Value of Financial Instruments

6

Note 5 - Shareholders' Equity

8

Note 6 - Stock-Based Compensation

8

Note 7 - Income Taxes

9

Note 8 - Leases

9

Note 9 - Earnings Per Share

9

Note 10 - Commitments and Contingencies

10

Note 11 - Debt

10

Note 12 - Related Party Transactions

11

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

12

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

17

Item 4.

Controls and Procedures

18

PART II

Item 1.

Legal Proceedings

18

Item 1A.

Risk Factors

19

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

19

Item 6.

Exhibits

20

 

Signatures

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.

1


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.

 

2


CHIPOTLE MEXICAN GRILL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(in thousands)

(unaudited)

Common Stock

Treasury Stock

Shares

Amount

Additional
Paid-In
Capital

Shares

Amount

Retained
Earnings

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.

3


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.


4


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.

5


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 one 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.

6


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: