Chipotle Results

Chipotle Announces Third Quarter 2018 Results

EPS Nearly Doubles, As Sales Comp Accelerates, And Restaurant Margins Expand To 18.7% Versus Q3-2017

Chipotle

Chipotle Mexican Grill, Inc. (NYSE: CMG) yesterday reported financial results for its third quarter ended September 30, 2018.

Overview for the three months ended September 30, 2018 as compared to the three months ended September 30, 2017:

  • Revenue increased 8.6% to $1.2 billion
  • Comparable restaurant sales increased 4.4%
  • Digital sales grew 48.3% in the quarter and accounted for 11.2% of sales
  • Restaurant level operating margin was 18.7%, an increase from 16.1%
  • Net income was $38.2 million, including the after-tax impact of $22.4 million in expenses related to restaurant asset impairment, corporate restructuring, and certain other costs, a 94.8% increase from $19.6 million; excluding those items, adjusted net income was $60.7 million, a 60.3% increase from $37.8 million.1
  • Diluted earnings per share was $1.36, net of a $0.80 after-tax impact from expenses related to restaurant asset impairment, corporate restructuring, and certain other costs, a 97.1% increase from $0.69. Adjusted diluted earnings per share excluding these charges was $2.16, a 62.4% increase from $1.33.1
  • Opened 28 new restaurants and closed or relocated 32

Overview for the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017:

  • Revenue increased 8.1% to $3.6 billion
  • Comparable restaurant sales increased 3.3%, which includes 20 basis points of deferred revenue.
  • Digital sales grew 34.4% and accounted for 10.2% of sales
  • Restaurant level operating margin was 19.3%, an increase from 17.6%
  • Net income was $144.5 million, including the after-tax impact of $60.8 million in expenses related to restaurant asset impairment, corporate restructuring, and certain other costs, a 9.1% increase from net income of $132.5 million; excluding those items, adjusted net income was $205.4 million, a 36.3% increase from $150.7 million.1
  • Diluted earnings per share was $5.17, net of a $2.17 after-tax impact from expenses related to restaurant asset impairment, corporate restructuring, and certain other costs, a 11.9% increase from $4.62. Adjusted diluted earnings per share excluding these charges was $7.34, a 39.8% increase from $5.25. 1
  • Opened 97 new restaurants and closed or relocated 42

"Chipotle's strategy to win today and cultivate a better future is taking hold and I'm pleased to report our third quarter results with strong sales growth and restaurant margin expansion over last year," said Brian Niccol, chief executive officer. "We made important progress during the quarter with the introduction of our 'For Real' marketing strategy and I'm encouraged by the progress we are making in building a pipeline of customer focused innovation, driving digital sales, elevating our restaurant operations and effectively executing our reorganization."

Results for the three months ended September 30, 2018

Revenue for the quarter was $1.2 billion, an increase of 8.6% from the third quarter of 2017. The increase in revenue was driven by new restaurant openings and a 4.4% increase in comparable restaurant sales. Comparable restaurant sales improved primarily as a result of an increase in average check, including a 3.8% effective menu price increase, partially offset by 1.1% fewer comparable restaurant transactions.

We opened 28 new restaurants during the quarter and closed or relocated 32, bringing the total restaurant count to 2,463.

Food, beverage and packaging costs were 33.4% of revenue, a decrease of 160 basis points compared to the third quarter of 2017. The decrease was primarily due to the benefit of menu price increases taken in almost all restaurants within the last 12 months and relief in avocado prices, partially offset by elevated prices of beef, paper and packaging items.

Restaurant level operating margin was 18.7% in the quarter, an improvement from 16.1% in the third quarter of 2017.  The improvement was driven primarily by comparable restaurant sales increases and lower marketing and promotional cost, partially offset by increased repairs and maintenance.

General and administrative expenses were 8.9% of revenue for the third quarter of 2018, an increase of 10 basis points over the third quarter of 2017. In dollar terms, general and administrative expenses increased compared to the third quarter of 2017 due to $15.8 million in expense related to corporate restructuring, including stock compensation modification expense, severance, relocation, and outside services helping us through the transition, $10.6 million in expense associated with the biennial All Managers' Conference that was held in September 2018, $7.2 million related to increased headcount and higher bonus expense, and $4.4 million in outside service expense related to company initiatives to support restaurant growth, including digitizing our restaurant experience and operational leadership changes. These increases were partially offset by the benefit of comparing against a nonrecurring charge of $30.0 million recorded in the third quarter of 2017 related to the data security incident that occurred in the first six months of 2017.  

The effective tax rate was 36.8% in the third quarter of 2018, compared to 39% in the third quarter of 2017.  The decrease was primarily due to the impact of the 2017 Tax Cuts and Jobs Act (the "TCJA"), which lowered the U.S. corporate income tax rate from 35% to 21% for tax years beginning after December 31, 2017.  This was partially offset by an increase in the effective state tax rate resulting from state tax deductions at the lower federal tax rate and certain non-deductible items that were added or expanded by the TCJA, including impacts of executive stock-based compensation and non-deductible meals.  The tax rate was further impacted during the three months ended September 30, 2018 due to a one-time tax expense on expired vested options, offset by favorable federal tax credits.

Net income for the third quarter of 2018 was $38.2 million, or $1.36 per diluted share, compared to net income of $19.6 million, or $0.69 per diluted share, in the third quarter of 2017. Excluding the impact of restaurant asset impairment, corporate restructuring, and certain other costs, adjusted net income was $60.7 million and adjusted diluted earnings per share was $2.16.

Results for the nine months ended September 30, 2018

Revenue for the first nine months of 2018 was $3.6 billion, up 8.1% from the first nine months of 2017. The increase in revenue was driven by new restaurant openings and a 3.3% increase in comparable restaurant sales, which includes 20 basis points of deferred revenue. Comparable restaurant sales improved primarily as a result of an increase in average check, including a 4.3% benefit from menu price increases that have been implemented in all our restaurants, partially offset by 2.1% fewer comparable restaurant transactions.

We opened 97 new restaurants during the year and closed or relocated 42 (including the closure of five Pizzeria Locale restaurants), bringing the total restaurant count to 2,463.

Food beverage and packaging costs were 32.8% of revenue, a decrease of 150 basis points compared to the first nine months of 2017. The decrease was driven by the benefit of the menu price increases and relief in avocado prices, partially offset by elevated beef prices during the first nine months of 2018 compared to the first nine months of 2017.

Restaurant level operating margin was 19.3% for the nine months ended September 30, 2018, an improvement from 17.6% in the first nine months of 2017. The improvement was driven by comparable restaurant sales increases, combined with lower marketing and promotional expenses, partially offset by wage inflation at the crew level.

General and administrative expenses were 7.5% of revenue for the first nine months of 2018, an increase of 40 basis points over the first nine months of 2017. In dollar terms, general and administrative expenses increased compared to the first nine months of 2017 due to $21.8 million related to increased headcount and higher bonus expense combined with $13.3 million in expense related to corporate restructuring, $12.0 million in expense associated with the biennial All Managers' Conference that was held in September 2018, $9.3 million in outside service expense related to company initiatives to support restaurant growth, including digitizing our restaurant experience and operational leadership changes, and increased litigation expense of $4.6 million. These increases were partially offset by the benefit of comparing against the non-recurring charge of $30.0 million recorded in the third quarter of 2017 related to the data security incident.

Impairment, closure costs, and asset disposals increased $46.6 million compared to the first nine months of 2017 primarily due to the planned closures of underperforming restaurants and the write down of a large portion of the associated long-lived asset values, as well as lease termination costs and impairment related to office closures.

The effective tax rate was 35.8% in the third quarter of 2018, compared to 38.2% in the third quarter of 2017.  The decrease was primarily due to the impact of the TCJA, which lowered the U.S. corporate income tax rate from 35% to 21% for tax years beginning after December 31, 2017.  This was partially offset by an increase in the effective state tax rate resulting from state tax deductions at the lower federal tax rate and certain non-deductible items that were added or expanded by the TCJA, including impacts of executive stock-based compensation and non-deductible meals.  The tax rate was further impacted during the nine months ended September 30, 2018 due to a one-time tax expense on expired vested options, offset by favorable federal tax credits.

Net income for the first nine months of 2018 was $144.5 million, or $5.17 per diluted share, compared to net income of $132.5 million, or $4.62 per diluted share, for the nine months ended September 30, 2017. Excluding the impact of restaurant asset impairment, corporate restructuring, and certain other costs, adjusted net income was $205.4 million and adjusted diluted earnings per share was $7.34.

Outlook

For 2018, management is anticipating the following:

  • Comparable restaurant sales increases for the full year in the low to mid-single digits
  • New restaurant openings at the lower end of the previously announced range of 130 to 150 for the full year

For 2019, management is anticipating the following:

  • 140 to 155 new restaurant openings

About Chipotle

Chipotle Mexican Grill, Inc. (NYSE: CMG) is cultivating a better world by serving responsibly sourced, classically-cooked, real food with wholesome ingredients without added colors, flavors or other additives. Chipotle had more than 2,450 restaurants as of September 30, 2018 in the United States, Canada, the United Kingdom, France and Germany and is the only restaurant company of its size that owns and operates all its restaurants. With more than 70,000 employees passionate about providing a great guest experience, Chipotle is a longtime leader and innovator in the food industry. Chipotle is committed to making its food more accessible to everyone while continuing to be a brand with a demonstrated purpose as it leads the way in digital, technology and sustainable business practices. Steve Ells, founder and executive chairman, first opened Chipotle starting with a single restaurant in Denver, Colorado in 1993.

Chipotle Mexican Grill, Inc.

Condensed Consolidated Statement of Income

(unaudited)

(in thousands, except per share data)

Three months ended September 30,

2018

2017

Revenue

$

1,225,007

100.0

%

$

1,128,074

100.0

%

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

Food, beverage and packaging

409,213

33.4

394,567

35.0

Labor

332,865

27.2

306,862

27.2

Occupancy

86,691

7.1

83,199

7.4

Other operating costs

167,488

13.7

162,312

14.4

General and administrative expenses

109,524

8.9

99,182

8.8

Depreciation and amortization

52,654

4.3

41,546

3.7

Pre-opening costs

2,127

0.2

2,792

0.2

Impairment, closure costs, and asset disposals

6,454

0.5

6,747

0.6

Total operating expenses

1,167,016

95.3

1,097,207

97.3

Income from operations

57,991

4.7

30,867

2.7

Interest and other income, net

2,493

0.2

1,275

0.1

Income before income taxes

60,484

4.9

32,142

2.8

Provision for income taxes

(22,280)

(1.8)

(12,532)

(1.1)

Net income

$

38,204

3.1

%

$

19,610

1.7

%

Earnings per share:

Basic

$

1.37

$

0.69

Diluted

$

1.36

$

0.69

Weighted-average common shares outstanding:

Basic

27,802

28,415

Diluted

28,017

28,439

Chipotle Mexican Grill, Inc.

Condensed Consolidated Statement of Income

(unaudited)

(in thousands, except per share data)

Nine months ended September 30,

2018

2017

Revenue

$

3,639,924

100.0

%

$

3,366,312

100.0

%

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

Food, beverage and packaging

1,194,224

32.8

1,155,514

34.3

Labor

993,570

27.3

900,564

26.8

Occupancy

258,719

7.1

242,482

7.2

Other operating costs

490,728

13.5

476,606

14.2

General and administrative expenses

271,740

7.5

238,698

7.1

Depreciation and amortization

148,762

4.1

121,906

3.6

Pre-opening costs

6,790

0.2

9,764

0.3

Impairment, closure costs, and asset disposals

56,635

1.6

10,013

0.3

Total operating expenses

3,421,168

94.0

3,155,547

93.7

Income from operations

218,756

6.0

210,765

6.3

Interest and other income, net

6,210

0.2

3,512

0.1

Income before income taxes

224,966

6.2

214,277

6.4

Provision for income taxes

(80,432)

(2.2)

(81,817)

(2.4)

Net income

$

144,534

4.0

%

$

132,460

3.9

%

Earnings per share:

Basic

$

5.19

$

4.63

Diluted

$

5.17

$

4.62

Weighted-average common shares outstanding:

Basic

27,844

28,604

Diluted

27,967

28,696

Chipotle Mexican Grill, Inc.

Condensed Consolidated Balance Sheet

(in thousands, except per share data)

September 30,

December 31,

2018

2017

(unaudited)

Assets

Current assets:

Cash and cash equivalents

$

343,028

$

184,569

Accounts receivable, net

26,868

40,453

Inventory

18,285

19,860

Prepaid expenses and other current assets

55,406

50,918

Income tax receivable

21,697

9,353

Investments

327,787

324,382

Total current assets

793,071

629,535

Leasehold improvements, property and equipment, net

1,361,440

1,338,366

Restricted cash

29,580

29,601

Other assets

24,842

26,251

Goodwill

21,939

21,939

Total assets

$

2,230,872

$

2,045,692

Liabilities and shareholders' equity

Current liabilities:

Accounts payable

$

103,486

$

82,028

Accrued payroll and benefits

127,302

82,541

Accrued liabilities

171,998

159,324

Total current liabilities

402,786

323,893

Deferred rent

327,804

316,498

Deferred income tax liability

27,322

814

Other liabilities

37,123

40,042

Total liabilities

795,035

681,247

Shareholders' equity:

Preferred stock, $0.01 par value, 600,000 shares authorized, no shares issued as of September 30, 2018 and December 31, 2017, respectively

-

-

Common stock $0.01 par value, 230,000 shares authorized, 35,966 and 35,852 shares issued as of September 30, 2018 and December 31, 2017, respectively

360

359

Additional paid-in capital

1,353,071

1,305,090

Treasury stock, at cost, 8,174 and 7,826 common shares at September 30, 2018 and December 31, 2017, respectively

(2,454,337)

(2,334,409)

Accumulated other comprehensive income (loss)

(4,855)

(3,659)

Retained earnings

2,541,598

2,397,064

Total shareholders' equity

1,435,837

1,364,445

Total liabilities and shareholders' equity

$

2,230,872

$

2,045,692

Chipotle Mexican Grill, Inc.

Condensed Consolidated Statement of Cash Flows

(unaudited)

(in thousands)

Nine months ended

September 30,

2018

2017

(as adjusted)(1)

Operating activities

Net income

$

144,534

$

132,460

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

Depreciation and amortization

148,762

121,906

Deferred income tax (benefit) provision

26,424

(11,323)

Impairment, closure costs, and asset disposals

56,635

10,013

Bad debt allowance

116

181

Stock-based compensation expense

48,219

54,596

Other

(1,933)

(126)

Changes in operating assets and liabilities:

Accounts receivable

13,442

16,477

Inventory

1,562

(7,023)

Prepaid expenses and other current assets

(5,041)

(4,890)

Other assets

1,500

(909)

Accounts payable

18,183

14,771

Accrued liabilities and accrued payroll and benefits

38,092

35,514

Income tax payable/receivable

(12,366)

(7,810)

Deferred rent

17,096

22,410

Other long-term liabilities

(2,728)

3,060

Net cash provided by operating activities

492,497

379,307

Investing activities

Purchases of leasehold improvements, property and equipment

(209,999)

(165,506)

Purchases of investments

(297,217)

(120,084)

Maturities of investments

295,000

140,000

Net cash used in investing activities

(212,216)

(145,590)

Financing activities

Acquisition of treasury stock

(116,401)

(208,959)

Tax withholding on share-based compensation awards

(4,627)

(626)

Stock plan transactions and other financing activities

(150)

10

Net cash used in financing activities

(121,178)

(209,575)

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

(665)

1,931

Net change in cash, cash equivalents, and restricted cash

158,438

26,073

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

214,170

116,370

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

$

372,608

$

142,443

(1) Balances were adjusted due to the adoption of Financial Accounting Standards Board Accounting Standards Update No. 2016-18, "Statement of Cash Flows (Topic 230): Restricted Cash" as discussed in further detail in Item 1. "Financial Statements," in our Form 10-Q.

Chipotle Mexican Grill, Inc.

Supplemental Financial and Other Data

(dollars in thousands)

For the three months ended

Sep. 30,

Jun. 30,

Mar. 31,

Dec. 31,

Sep. 30

2018

2018

2018

2017

2017

Number of restaurants opened

28

34

35

38

38

Restaurant relocations/closures

(32)

(8)

(2)

(4)

(3)

Number of restaurants at end of period

2,463

2,467

2,441

2,408

2,374

Average restaurant sales

$

1,980

$

1,950

$

1,941

$

1,940

$

1,948

Comparable restaurant sales increase

4.4%

3.3%

2.2%

0.9%

1.0%

Chipotle Mexican Grill, Inc.

Reconciliation of Non-GAAP Financial Measures

(in thousands, except per share amounts)

The following provides a reconciliation of non-GAAP financial measures presented in the text above to the most directly comparable financial measures calculated and presented in accordance with GAAP.

Adjusted net income is net income excluding restaurant asset impairment, corporate restructuring, and certain other costs. Adjusted diluted earnings per share is adjusted net income divided by diluted weighted-average common shares outstanding. We believe that these measures enhance investors' ability to compare the past financial performance of our underlying business with our current business performance and reflect the performance of our underlying restaurants separate from asset impairment, corporate restructuring and certain other costs at the corporate level. Management uses these non-GAAP measures for similar purposes. Our adjusted net income and adjusted diluted earnings per share measure may not be comparable to other companies' adjusted income measures.

Three months ended

Nine months ended

September 30,

September 30,

2018

2017

2018

2017

Net income

$

38,204

$

19,610

$

144,534

$

132,460

Percentage increase/(decrease) from prior year period

94.8%

-

9.1%

-

Non-GAAP adjustments:

Restaurant closure costs(1)

10,198

-

35,364

-

Corporate Restructuring:

Lease termination and other office closure costs(2)

314

-

16,613

-

Employee related restructuring costs(3)

8,795

-

12,695

-

Stock-based compensation(4)

6,087

-

(339)

-

Other adjustments(5)

644

30,000

3,644

30,000

Total non-GAAP adjustments

$

26,038

$

30,000

$

67,977

$

30,000

Tax effect of non-GAAP adjustments(6)

(3,590)

(11,766)

(7,158)

(11,766)

After tax impact of non-GAAP adjustments

$

22,448

$

18,234

$

60,819

$

18,234

Adjusted net income

$

60,652

$

37,844

$

205,353

$

150,694

Percentage increase from prior period

60.3%

-

36.3%

-

Diluted weighted-average number of common shares outstanding

28,017

28,439

27,967

28,696

Diluted earnings per share

$

1.36

$

0.69

$

5.17

$

4.62

Percentage increase/(decrease) from prior period

97.1%

-

11.9%

-

Adjusted diluted earnings per share

$

2.16

$

1.33

$

7.34

$

5.25

Percentage increase from prior year period

62.4%

-

39.8%

-

(1) Restaurant asset impairment costs and accelerated depreciation for planned restaurant closures announced in June 2018 due to underperformance. During the three months ended September 30, 2018, we closed 32 Chipotle restaurants in connection with this initiative. During the nine months ended September 30, 2018, we closed 33 Chipotle restaurants and five Pizzeria Locale restaurants in connection with this initiative.

(2) Costs for office lease termination, accelerated depreciation, impairment charges for office-related assets, duplicate rent expense and other office closure expenses.

(3) Costs for employee severance and other transition expenses, recruitment and relocation costs, and third party and other employee-related costs.

(4) Costs for modification of stock awards to extend or accelerate vesting for employees severing from the company, offset by a reduction of expense due to forfeiture of original awards for these employees.

(5) For the three months ended September 30, 2018, consists of costs for professional services for an initiative undertaken as part of our ongoing business transformation. For the nine months ended September 30, 2018, also includes the uninsured portion of a judgment in a single legal proceeding, in an amount exceeding the range typically seen in the ordinary-course, single-plaintiff litigation matters.  For the three and nine months ended September 30, 2017, consists of a nonrecurring charge we recorded related to the data security incident that occurred in the first six months of 2017.

(6) For the three and nine months ended September 30, 2018, we have included a write-off of deferred tax assets related to expired stock awards of $4,487 and $9,919, respectively.

SOURCE Chipotle Mexican Grill



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