Chipotle Mexican Grill Inc: Form 10-Q for the period ended Sep 30, 2023

Cautionary Note Regarding Forward-Looking Statements

Certain statements in this report are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995, including statements about the number of new restaurants we expect to open and the number with Chipotlanes, our expectation to generate positive cash flow for the foreseeable future, our ability to manage risks in our supply chain, our plans for continuing stock buybacks and the period of time during which our cash and short-term investment will fund our operations. We use words such as “anticipate”, “believe”, “could”, “should”, “may”, “approximately”, “estimate”, “expect”, “intend”, “project”, “target”, and similar terms and phrases, including references to assumptions, to identify forward-looking statements. The forward-looking statements in this report are based on currently available operating, financial and competitive information available to us as of the date of this filing 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, including but not limited to: increasing wage inflation and the competitive labor market, including as a result of regulations such as California AB 1228, which impacts our ability to attract and retain qualified employees and has resulted in occasional staffing shortages; the impact of any union organizing efforts and our responses to such efforts; increasing supply costs (including beef, tortillas, queso, salsa, beans and rice); risks of food safety incidents and food-borne illnesses; risks associated with our reliance on certain information technology systems and potential material failures or interruptions; privacy and cyber security risks, including risk of breaches, unauthorized access, theft, modification or destruction of guest or employee personal or confidential information stored on our network or the network of third party providers; the impact of competition, including from sources outside the restaurant industry; the financial impact of increasing our average hourly wages; the impact of federal, state or local government regulations relating to our employees, employment practices, restaurant design and construction, and the sale of food or alcoholic beverages; our ability to achieve our planned growth, such as the costs and availability of suitable new restaurant sites, construction materials and contractors and the expected costs to accelerate our international expansion through franchise restaurants in the Middle East; increases in ingredient and other operating costs due to inflation, global conflicts, climate change, our Food with Integrity philosophy, tariffs or trade restrictions and supply shortages; the uncertainty of our ability to achieve expected levels of comparable restaurant sales due to factors such as changes in consumers' perceptions of our brand, including as a result of actual or rumored food safety concerns or other negative publicity, decreased consumer spending (including as a result of higher inflation, mass layoffs, fear of possible recession and higher energy prices), or the inability to increase menu prices or realize the benefits of menu price increases; risks associated with our digital business, including risks arising from our reliance on third party delivery services; risks relating to litigation, including possible governmental actions and potential class action litigation related to food safety incidents, cybersecurity incidents, employment or privacy laws, advertising claims or other matters; and other risk factors described from time to time in our SEC reports, including our Annual Report on Form 10-K for the year ended December 31, 2022, and in other reports filed with the SEC, all of which are available on the investor relations page of our website at ir.Chipotle.com.

As of September 30, 2023, we operated 3,260 Chipotle restaurants throughout the United States and 61 international Chipotle restaurants. We manage our U.S. operations based on eight regions and have aggregated our operations to one reportable segment.

Throughout “Management’s Discussion and Analysis of Financial Condition and Results of Operations” we commonly discuss the following key operating metrics which we believe will drive our financial results and long-term growth model. We believe these metrics are useful to investors because management uses these metrics to assess the growth of our business and the effectiveness of our marketing and operational strategies:

Comparable restaurant sales

Restaurant operating costs as a percentage of total revenue

New restaurant openings

Third Quarter 2023 Financial Highlights, year-over-year:

Total revenue increased 11.3% to $2.5 billion

Comparable restaurant sales increased 5.0%

Diluted earnings per share was $11.32, a 23.0% increase from $9.20, which includes a $0.04 after-tax impact from expenses related to corporate restructuring.

Sales Trends. Comparable restaurant sales increased 5.0% for the three months ended September 30, 2023. The increase is primarily attributable to higher transactions and, to a lesser extent, an increase in average check. Comparable restaurant sales represent the change in period-over-period total revenue for restaurants in operation for at least 13 full calendar months. Digital sales represented 36.6% of total food and beverage revenue.

Restaurant Operating Costs. During the three months ended September 30, 2023, our restaurant operating costs (food, beverage and packaging; labor; occupancy; and other operating costs) were 73.7% of total revenue, a decrease from 74.7% during the three months ended September 30, 2022. The decrease was driven primarily by sales leverage, partially offset by inflation across several food costs and, to a lesser extent, wage inflation.

Restaurant Development. During the three months ended September 30, 2023, we opened 62 new restaurants, which included 54 restaurants with a Chipotlane. We remain on track to open approximately 255-285 new restaurants in 2023 (including 10 to 15 relocations) and expect to open approximately 285 to 315 new restaurants in 2024, which assumes utility, construction, permit and inspection delays do not worsen. We expect that at least 80% of our new restaurants will include a Chipotlane.

Cultivate Next Fund. Our Cultivate Next Fund is a venture formed to make early-stage investments into strategically aligned companies that further our mission to Cultivate a Better World. The Fund has an initial size of $50.0 million and will be financed almost entirely by Chipotle. During the three months ended September 30, 2023 we made a $2.0 million investment in a convertible note receivable issued by a developer of agriculture related robotic technologies. As of September 30, 2023, we have made $20.5 million in investments through this Fund.

Restaurant Activity

The following table details restaurant unit data for the periods indicated.

Results of Operations

Our results of operations as a percentage of total revenue and period-over-period change are discussed in the following section.

Revenue

(dollars in millions)

(dollars in millions)

The significant factors contributing to the total revenue increase for the three months ended September 30, 2023 compared to the three months ended September 30, 2022, were new restaurant openings and comparable restaurant sales increases. Total revenue increased due to restaurants not yet in the comparable base of $150.3 million, of which $73.4 million was due to restaurants opened in 2023 and comparable restaurant sales increases of $101.5 million. Comparable restaurant sales increased 5.0% as a result of an increase in transactions of 4.1% and an increase in average check of 0.9%. The increase in average check was driven by a 2.8% benefit from menu price increases, which was partially offset by a decrease in check mix.

The significant factors contributing to the total revenue increase for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022, were comparable restaurant sales increases and new restaurant openings. Total revenue increased due to comparable restaurant sales increases of $462.8 million and restaurants not yet in the comparable base of $438.6 million, of which $124.0 million was due to restaurants opened in 2023. Comparable restaurant sales increased 7.7% as a result of an increase in transactions of 4.3% and an increase in average check of 3.4%. The increase in average check was driven by a 6.0% benefit from menu price increases, which was partially offset by a decrease in check mix.

Food, Beverage and Packaging Costs

(dollars in millions)

(dollars in millions)

Food, beverage and packaging costs decreased 0.1% as a percentage of total revenue for the three months ended September 30, 2023 compared to the three months ended September 30, 2022, including 0.8% benefit from menu price increases, partially offset by 0.7% from inflation on beef and queso.

Food, beverage and packaging costs decreased 1.0% as a percentage of total revenue for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022, including 1.9% from menu price increases and 0.8% from lower avocado costs, partially offset by 1.7% due to inflation across several food costs, primarily beef and tortillas.

Labor Costs

(dollars in millions)

(dollars in millions)

Labor costs decreased 0.2% as a percentage of total revenue for the three months ended September 30, 2023 compared to the three months ended September 30, 2022, including 0.8% from sales leverage, partially offset by 0.6% due to restaurant wage inflation.

Labor costs decreased 0.8% as a percentage of total revenue for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022, including 1.5% from sales leverage, partially offset by 0.9% due to restaurant wage inflation.

Occupancy Costs

(dollars in millions)

(dollars in millions)

Occupancy costs decreased 0.1% and 0.2% as a percentage of total revenue for the three and nine months ended September 30, 2023 compared to the three and nine months ended September 30, 2022, respectively, primarily due to sales leverage, partially offset by increased rent expense associated with new restaurants.

Other Operating Costs

(dollars in millions)

(dollars in millions)

Other operating costs include, among other items, marketing and promotional costs, delivery expense, bank and credit card processing fees, restaurant utilities, technology costs, and maintenance costs.

Other operating costs decreased 0.5% as a percentage of total revenue for the three months ended September 30, 2023 compared to the three months ended September 30, 2022, including 0.4% of sales leverage and 0.1% of lower marketing and promotional expenses, partially offset by 0.1% of higher maintenance costs.

Other operating costs decreased 0.6% as a percentage of total revenue for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022, including 0.6% of sales leverage and 0.3% of lower delivery expenses, partially offset by 0.1% of higher maintenance costs.

General and Administrative Expenses

(dollars in millions)

(dollars in millions)

General and administrative expenses increased in dollar terms for the three months ended September 30, 2023 compared to the three months ended September 30, 2022, due to a $10.2 million increase in stock-based compensation performance awards, a $5.1 million increase in performance bonuses, a $3.5 million increase in conference expense, primarily associated with our upcoming biennial All Managers’ Conference which is scheduled for March 2024, and a $2.9 million increase in outside services expense related to corporate initiatives.

General and administrative expenses increased in dollar terms for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022, primarily due to a $13.5 million increase in performance bonuses, an $11.5 million increase in outside services expense related to corporate initiatives, a $9.5 million increase in employee wages primarily due to headcount growth, an $8.0 million increase in stock-based compensation performance awards, and a $6.5 million increase in restructuring costs. These increases were slightly offset by a $10.8 million decrease in conference expense, primarily associated with our biennial All Managers’ Conference held in the 2022 comparable period, and a $3.2 million decrease in recruitment expense.

Depreciation and Amortization

(dollars in millions)

(dollars in millions)

Depreciation and amortization remained flat as a percentage of total revenue for the three months ended September 30, 2023 compared to the three months ended September 30, 2022, primarily due to sales leverage offset by increased depreciation expense associated with new restaurants.

Depreciation and amortization decreased 0.1% as a percentage of total revenue for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022, primarily due to sales leverage, partially offset by increased depreciation expense associated with new restaurants.

Impairment, Closure Costs, and Asset Disposals

(dollars in millions)

(dollars in millions)

Impairment, closure costs, and asset disposals increased in dollar terms for the three months ended September 30, 2023 compared to the three months ended September 30, 2022, primarily due to higher charges related to the replacement of certain leasehold improvements and, to a lesser extent, the replacement of certain kitchen equipment.

Impairment, closure costs, and asset disposals increased in dollar terms for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022, primarily due to elevated impairment of operating lease assets and leasehold improvements and higher charges related to the replacement of certain leasehold improvements and, to a lesser extent, the replacement of certain kitchen equipment. These elevated impairments include the impact of Pizzeria Locale closing.

Interest and Other Income, net

(dollars in millions)

(dollars in millions)

Interest and other income, net increased in dollar terms for the three months ended September 30, 2023 compared to the three months ended September 30, 2022, primarily due to increased interest income on our investments in U.S. Treasury securities, money market funds and time deposits due to increased interest rates and a higher average investment balance.

Interest and other income, net increased in dollar terms for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022, primarily due to increased interest income on our investments in U.S. Treasury securities, money market funds and time deposits due to increased interest rates and a higher average investment balance, partially offset by a gain on our investments in Tractor Beverages, Inc. in the prior year.

Provision for Income Taxes

(dollars in millions)

(dollars in millions)

The effective income tax rate decreased 0.2% for the three months ended September 30, 2023 compared to the three months ended September 30, 2022, including 0.5% from a decrease in uncertain tax position reserves, 0.4% from higher income tax credits, mostly offset by a 0.8% from a decrease in tax benefits from option exercises and equity vesting.

The effective income tax rate increased 0.4% for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022, including 0.9% from a decrease in tax benefits from option exercises and equity vesting, partially offset by 0.4% from higher income tax credits.

Seasonality

Seasonal factors cause our profitability to fluctuate from quarter to quarter. Historically, our average daily restaurant sales and net income are lower in the first and fourth quarters due, in part, to the holiday season and because fewer people eat out during periods of inclement weather (the winter months) than during periods of mild or warm weather (the spring, summer and fall months). Other factors also have a seasonal effect on our results. For example, restaurants located near colleges and universities generally do more business during the academic year. Seasonal factors, however, might be moderated or outweighed by other factors that may influence our quarterly results, such as unexpected publicity impacting our business in a positive or negative way, worldwide health pandemics, impact of inflation on consumer spending, fluctuations in food or packaging costs, or the timing of menu price increases or promotional activities and other marketing initiatives. The number of trading days in a quarter can also affect our results, although, on an overall annual basis, changes in trading days do not have a significant impact.

Our quarterly results are also affected by other factors such as the amount and timing of non-cash stock-based compensation expense and related tax rate impacts, litigation, settlement costs and related legal expenses, impairment charges and non-operating costs, timing of marketing or promotional expenses, the number and timing of new restaurants opened in a quarter, and closure of restaurants. New restaurants typically have higher operating costs following opening because of the expenses associated with their opening and operating inefficiencies in the months immediately following opening. Accordingly, results for a particular quarter are not necessarily indicative of results to be expected for any other quarter or for any year.

Liquidity and Capital Resources

As of September 30, 2023, we had a cash and marketable investments balance of $1.9 billion, excluding non-marketable investments of $64.4 million and restricted cash of $25.3 million. After funding the current operations in our restaurants and support centers, the first planned use of our cash flow from operations is to provide capital for the continued investment in new restaurant construction. In addition to continuing to invest in our restaurant expansion, we expect to utilize cash flow from operations to: repurchase additional shares of our common stock subject to market conditions; invest in, maintain, and refurbish our existing restaurants; and for general corporate purposes. As of September 30, 2023, $368.4 million remained available for repurchases of shares of our common stock. Under the remaining repurchase authorizations, shares may be purchased from time to time in open market transactions, subject to market conditions. Additionally, as of September 30, 2023, we had $500.0 million of undrawn borrowing capacity under a line of credit facility.

We believe that cash from operations, together with our cash and investment balances, will be sufficient to meet ongoing capital expenditures, working capital requirements and other cash needs for the foreseeable future. Assuming no significant declines in comparable restaurant sales, we expect we will generate positive cash flow for the foreseeable future. Should our business deteriorate due to changing conditions, there are actions we can take to further conserve liquidity.

We have not required significant working capital because customers generally pay using cash or credit and debit cards and because our operations do not require significant receivables, nor do they require significant inventories due, in part, to our use of various fresh ingredients. In addition, we generally have the right to pay for the purchase of food, beverages and supplies sometime after the receipt of those items, within ten days, thereby reducing the need for incremental working capital to support our growth.

Cash Flows

Cash provided by operating activities was $1.5 billion for the nine months ended September 30, 2023, compared to $921.6 million for the nine months ended September 30, 2022. The increase was primarily due to higher net earnings, timing of tax-related payments and receipts and, to a lesser extent, net cash changes in non-tax operating assets and liabilities.

Cash used in investing activities was $794.0 million for the nine months ended September 30, 2023, compared to $646.3 million for the nine months ended September 30, 2022. The change was primarily associated with a $94.4 million increase in investment purchases net of investment maturities and increased capital expenditures of $53.3 million primarily related to costs associated with new restaurant development.

Cash used in financing activities was $505.4 million for the nine months ended September 30, 2023, compared to $722.7 million for the nine months ended September 30, 2022. The change was primarily due to decreased treasury stock repurchases of $192.5 million and, to a lesser extent, $23.8 million of lower payments of tax withholdings related to stock-based compensation.

Critical Accounting Estimates

Critical accounting estimates are those that we believe are both significant and that require us to make difficult, subjective or complex judgments, often because we need to estimate the effect of inherently uncertain matters. We base our estimates and judgments on historical experiences and various other factors that we believe to be appropriate under the circumstances. Actual results may differ from these estimates, and we might obtain different estimates if we used different assumptions or factors. We had no significant changes to our critical accounting estimates as described in our annual report on Form 10-K for the year ended December 31, 2022.

Commodity Price Risks

We are exposed to commodity price risks. Many of the ingredients we use to prepare our food, as well as our packaging materials and utilities to run our restaurants, are ingredients or commodities that are affected by the price of other commodities, exchange rates, foreign demand, weather, seasonality, production, availability and other factors outside our control. We work closely with our suppliers and use a mix of forward pricing protocols under which we agree with our supplier on fixed prices for deliveries at some time in the future, fixed pricing protocols under which we agree on a fixed price with our supplier for the duration of that protocol, formula pricing protocols under which the prices we pay are based on a specified formula related to the prices of the goods, such as spot prices or based on changes in industry indices, and range forward protocols under which we agree on a price range for the duration of that protocol. Generally, our pricing protocols with suppliers can remain in effect for periods ranging from one to 24 months, depending on the outlook for prices of the particular ingredient. In some cases, we have minimum purchase obligations. We have tried to increase, where practical, the number of suppliers for our ingredients, which we believe can help mitigate pricing volatility, and we follow industry news, trade issues, exchange rates, foreign demand, weather, crises and other world events that may affect our ingredient prices. Increases in ingredient prices could adversely affect our results if we choose for competitive or other reasons not to increase menu prices at the same rate at which ingredient costs increase, or if menu price increases result in customer resistance. We also could experience shortages of key ingredients for many unforeseen reasons, such as crop damage due to inclement weather, if our suppliers need to close or restrict operations, or due to industry-wide shipping and freight delays.

Changing Interest Rates

We are exposed to interest rate risk through fluctuations of interest rates on our investments. As of September 30, 2023, we had $2.0 billion in cash and cash equivalents, current and long-term investments, and restricted cash, nearly all of which are interest bearing. Changes in interest rates affect the interest income we earn, and therefore impact our cash flows and results of operations.

Foreign Currency Exchange Risk

A portion of our operations consist of activities outside of the U.S. and we have currency risk on the transactions in other currencies and translation adjustments resulting from the conversion of our international financial results into the U.S. dollar. However, a substantial majority of our operations and investment activities are transacted in the U.S., and therefore our foreign currency risk is not material at this date.

We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to ensure that information required to be disclosed in Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial and Administrative Officer, as appropriate, to allow timely decisions regarding required disclosure.

Evaluation of Disclosure Controls and Procedures

As of September 30, 2023, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial and Administrative Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our Chief Executive Officer and Chief Financial and Administrative Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

Changes in Internal Control over Financial Reporting

There were no changes during the fiscal quarter ended September 30, 2023, in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

There have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022.