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CHIPOTLE MEXICAN GRILL INC - Quarter Report: 2022 June (Form 10-Q)

cmg-20220630x10q

 

 

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, 2022

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 1100 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 25, 2022, there were 27,764,647 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 Policies

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

9

Note 7 - Income Taxes

9

Note 8 - Leases

10

Note 9 - Earnings Per Share

10

Note 10 - Commitments and Contingencies

10

Note 11 - Debt

11

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

18

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 3

Defaults upon Senior Securities

19

Item 4

Mine Safety Disclosures

19

Item 5

Other Information

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,

2022

2021

(unaudited)

Assets

Current assets:

Cash and cash equivalents

$

520,933

$

815,374

Accounts receivable, net

83,636

99,599

Inventory

29,456

32,826

Prepaid expenses and other current assets

73,716

78,756

Income tax receivable

97,874

94,064

Investments

240,684

260,945

Total current assets

1,046,299

1,381,564

Leasehold improvements, property and equipment, net

1,813,348

1,769,278

Long-term investments

359,911

274,311

Restricted cash

30,895

30,856

Operating lease assets

3,209,934

3,118,294

Other assets

63,010

56,716

Goodwill

21,939

21,939

Total assets

$

6,545,336

$

6,652,958

Liabilities and shareholders' equity

Current liabilities:

Accounts payable

$

158,581

$

163,161

Accrued payroll and benefits

161,052

162,405

Accrued liabilities

148,614

173,052

Unearned revenue

132,446

156,351

Current operating lease liabilities

230,930

218,713

Total current liabilities

831,623

873,682

Commitments and contingencies (Note 10)

 

 

Long-term operating lease liabilities

3,393,423

3,301,601

Deferred income tax liabilities

126,239

141,765

Other liabilities

39,852

38,536

Total liabilities

4,391,137

4,355,584

Shareholders' equity:

Preferred stock, $0.01 par value, 600,000 shares authorized, no shares issued as of June 30, 2022 and December 31, 2021, respectively

-

-

Common stock, $0.01 par value, 230,000 shares authorized, 37,284 and 37,132 shares issued as of June 30, 2022 and December 31, 2021, respectively

373

371

Additional paid-in capital

1,782,303

1,729,312

Treasury stock, at cost, 9,480 and 9,052 common shares as of June 30, 2022 and December 31, 2021, respectively

(3,969,221)

(3,356,102)

Accumulated other comprehensive loss

(6,639)

(5,354)

Retained earnings

4,347,383

3,929,147

Total shareholders' equity

2,154,199

2,297,374

Total liabilities and shareholders' equity

$

6,545,336

$

6,652,958

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,

2022

2021

2022

2021

Food and beverage revenue

$

2,192,802

$

1,869,365

$

4,191,758

$

3,585,355

Delivery service revenue

20,537

23,173

42,120

48,758

Total revenue

2,213,339

1,892,538

4,233,878

3,634,113

Restaurant operating costs (exclusive of depreciation and amortization shown separately below):

Food, beverage and packaging

673,928

574,478

1,300,854

1,097,149

Labor

549,926

464,506

1,081,866

898,175

Occupancy

113,919

103,430

225,951

205,199

Other operating costs

317,481

287,242

648,176

581,952

General and administrative expenses

140,820

146,044

288,222

301,147

Depreciation and amortization

69,733

62,082

141,398

125,204

Pre-opening costs

5,253

4,965

10,601

8,386

Impairment, closure costs, and asset disposals

4,681

4,266

8,991

9,934

Total operating expenses

1,875,741

1,647,013

3,706,059

3,227,146

Income from operations

337,598

245,525

527,819

406,967

Interest and other income (expense), net

10,572

851

10,359

(1,317)

Income before income taxes

348,170

246,376

538,178

405,650

Provision for income taxes

(88,228)

(58,402)

(119,942)

(90,575)

Net income

$

259,942

$

187,974

$

418,236

$

315,075

Earnings per share:

Basic

$

9.32

$

6.68

$

14.95

$

11.20

Diluted

$

9.25

$

6.60

$

14.83

$

11.04

Weighted-average common shares outstanding:

Basic

27,905

28,134

27,974

28,130

Diluted

28,092

28,501

28,196

28,542

Other comprehensive income (loss), net of income taxes:

Foreign currency translation adjustments

$

(1,480)

$

305

$

(1,285)

$

42

Comprehensive income

$

258,462

$

188,279

$

416,951

$

315,117

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, 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 

Balance, December 31, 2021

37,132 

$

371 

$

1,729,312 

9,052 

$

(3,356,102)

$

3,929,147 

$

(5,354)

$

2,297,374 

Stock-based compensation

-

-

24,077 

-

-

-

-

24,077 

Stock plan transactions and other

134 

2 

(61)

-

-

-

-

(59)

Acquisition of treasury stock

-

-

-

230 

(345,921)

-

-

(345,921)

Net income

-

-

-

-

-

158,294 

-

158,294 

Other comprehensive income (loss), net of income tax

-

-

-

-

-

-

195 

195 

Balance, March 31, 2022

37,266 

$

373 

$

1,753,328 

9,282 

$

(3,702,023)

$

4,087,441 

$

(5,159)

$

2,133,960 

Stock-based compensation

-

-

29,142 

-

-

-

-

29,142 

Stock plan transactions and other

18 

-

(167)

-

-

-

-

(167)

Acquisition of treasury stock

-

-

-

198 

(267,198)

-

-

(267,198)

Net income

-

-

-

-

-

259,942 

-

259,942 

Other comprehensive income (loss), net of income tax

-

-

-

-

-

-

(1,480)

(1,480)

Balance, June 30, 2022

37,284 

$

373 

$

1,782,303 

9,480 

$

(3,969,221)

$

4,347,383 

$

(6,639)

$

2,154,199 

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,

2022

2021

Operating activities

Net income

$

418,236

$

315,075

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization

141,398

125,204

Deferred income tax provision

(15,537)

(15,884)

Impairment, closure costs, and asset disposals

8,851

8,235

Provision for credit losses

(876)

(220)

Stock-based compensation expense

52,221

102,680

Other

(11,909)

2,467

Changes in operating assets and liabilities:

Accounts receivable

12,353

37,286

Inventory

3,320

1,309

Prepaid expenses and other current assets

948

(18,186)

Operating lease assets

112,505

105,485

Other assets

(3,014)

117

Accounts payable

(2,972)

12,525

Accrued payroll and benefits

(583)

21,068

Accrued liabilities

(22,293)

(20,102)

Unearned revenue

(20,062)

(11,487)

Income tax payable/receivable

(3,832)

(1,851)

Operating lease liabilities

(100,024)

(101,818)

Other long-term liabilities

958

955

Net cash provided by operating activities

569,688

562,858

Investing activities

Purchases of leasehold improvements, property and equipment

(196,495)

(212,123)

Purchases of investments

(195,242)

(190,920)

Maturities of investments

142,540

162,045

Proceeds from sale of equipment

-

2,885

Net cash used in investing activities

(249,197)

(238,113)

Financing activities

Acquisition of treasury stock

(521,910)

(203,151)

Tax withholding on stock-based compensation awards

(91,905)

(58,860)

Other financing activities

(588)

(2,208)

Net cash used in financing activities

(614,403)

(264,219)

Effect of exchange rate changes on cash, cash equivalents and restricted cash

(490)

(216)

Net change in cash, cash equivalents, and restricted cash

(294,402)

60,310

Cash, cash equivalents, and restricted cash at beginning of period

846,230

635,836

Cash, cash equivalents, and restricted cash at end of period

$

551,828

$

696,146

Supplemental disclosures of cash flow information

Income taxes paid

$

139,177

$

108,247

Purchases of leasehold improvements, property, and equipment accrued in accounts payable and accrued liabilities

$

61,072

$

50,403

Acquisition of treasury stock accrued in accounts payable and accrued liabilities

$

6,999

$

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, 2022, we operated 3,052 restaurants including 2,999 Chipotle restaurants within the United States, 49 international Chipotle restaurants, and four Pizzeria Locale restaurants. Pizzeria Locale is a fast casual pizza concept that is owned and operated by a consolidated entity that we are an investor in. We manage our U.S. 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, 2021.

2. Recently Issued Accounting Standards

In March 2020, 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 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.

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,

2022

2021

Gift card liability

$

103,065

$

130,779

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,

2022

2021

2022

2021

Revenue recognized from gift card liability balance at the beginning of the year

$

10,939

$

8,628

$

48,374

$

39,494

Chipotle Rewards

We have a loyalty program called Chipotle Rewards. Eligible customers who enroll in the program generally earn points for every dollar spent. 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 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 month 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 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 reward is expected to be redeemed. Our estimate of points and rewards we expect to be redeemed is based on historical and other company specific data. The costs associated with rewards redeemed are primarily included in food, beverage, and packaging on our condensed consolidated statements of income and comprehensive income. We evaluate Chipotle Rewards point breakage annually, or more frequently as circumstances warrant.

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,

2022

2021

2022

2021

Chipotle Rewards liability, beginning balance

$

28,019

$

23,925

$

25,572

$

22,337

Revenue deferred

30,186

26,509

59,874

52,370

Revenue recognized

(28,824)

(25,382)

(56,065)

(49,655)

Chipotle Rewards liability, ending balance

$

29,381

$

25,052

$

29,381

$

25,052

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.

6


Our investments are comprised of U.S. Treasury securities, a corporate debt security, non-marketable equity securities, and an equity method investment. We also maintain a deferred compensation plan with related assets held in a rabbi trust. We designate the appropriate classification of our investments at the time of purchase based upon the intended holding period.

Held-to-Maturity Investments

U.S. Treasury Securities

As of June 30, 2022, we held $555,880 of U.S. Treasury securities with maturities of up to 28 months, of which $240,684 mature within one year. As of December 31, 2021, we held $501,288 of U.S. Treasury securities with maturities of up to 24 months, of which $260,945 matured within one year. Our investments in U.S. Treasury securities are held at amortized cost. The fair value of our held-to-maturity U.S. Treasury security investments is measured using Level 1 inputs (quoted prices for identical assets in active markets). As of June 30, 2022 and December 31, 2021, the fair value of our securities were $546,525 and $500,172, respectively. We recognize a reserve for expected credit losses when lifetime credit losses are expected by management. As of June 30, 2022, management has concluded there is no risk of non-payment with respect to our U.S. Treasury security investments.

Corporate Debt Security

On September 30, 2021, we acquired a promissory note issued by a supplier in exchange for $18,000. The promissory note has a principal balance of $18,000 and bears interest at a rate equal to the 3-month U.S. dollar LIBOR plus a fixed interest spread. Accrued interest is paid quarterly in arrears and principal is payable in accordance with an amortization schedule beginning on December 31, 2022. The promissory note matures on September 30, 2028. Our investment in the corporate debt security is held at amortized cost. We maintained a reserve for expected credit losses associated with the investment of $216 and $423 as of June 30, 2022 and December 31, 2021, respectively. We determined the fair value of the investment to be $17,000 and $18,000 as of June 30, 2022 and December 31, 2021, respectively. The fair value of the Corporate Debt Security is measured using Level 3 (unobservable) inputs. We determined the fair value using an internally-developed valuation model and unobservable inputs include credit and liquidity spreads and effective maturity.

Rabbi Trust

We maintain a rabbi trust to fund obligations under a deferred compensation plan. The rabbi trust is subject to creditor claims in the event of insolvency, but the assets held in the rabbi trust are not available for general corporate purposes. Amounts in the rabbi trust are invested in mutual funds, consistent with the investment choices selected by participants in their Deferred Plan accounts, 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 $19,876 and $19,330 as of June 30, 2022 and December 31, 2021, respectively. We record trading gains and losses, 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 in general and administrative expenses on the condensed consolidated statements of income and comprehensive income.

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, certain long-term investments, operating lease assets, 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 or if there has been an observable price change of a non-marketable equity security.

7


The following table summarizes our restaurant and office assets measured at fair value by hierarchy level on a nonrecurring basis: