Chipotle Results

Chipotle Announces Improved Fourth Quarter 2018 Results

Chipotle

Chipotle Mexican Grill, Inc. (NYSE: CMG) today reported financial results for its fourth quarter and year ended December 31, 2018.

Fourth quarter highlights, year over year:

  • Revenue increased 10.4% to $1.2 billion
  • Comparable restaurant sales increased 6.1%, which included 2.0% of comparable restaurant transactions growth
  • Digital sales grew 65.6% and accounted for 12.9% of sales
  • Restaurant level operating margin was 17.0%, an increase from 14.9%
  • Diluted earnings per share was $1.15, a 25.8% decrease from $1.55. Adjusted diluted earnings per share was $1.72, excluding the impact of restaurant closure costs, corporate restructuring, and certain other costs, a 11.0% increase from $1.55.1
  • Opened 40 new restaurants and closed or relocated 12

Full year 2018 highlights, year over year:

  • Revenue increased 8.7% to $4.9 billion
  • Comparable restaurant sales increased 4.0%, net of a 0.8% decline in comparable restaurant transactions
  • Digital sales grew 42.4% and accounted for 10.9% of sales
  • Restaurant level operating margin was 18.7%, an increase from 16.9%
  • Diluted earnings per share was $6.31, a 2.3% increase from $6.17. Adjusted diluted earnings per share was $9.06, excluding the impact of restaurant closure costs, corporate restructuring, and certain other costs, a 33.0% increase from $6.81. 1
  • Opened 137 new restaurants and closed or relocated 54

1 Adjusted net income and adjusted diluted earnings per share are non-GAAP financial measures. Reconciliations to GAAP measures and further information are set forth in the table at the end of this press release.

"I'm very pleased to report strong fourth quarter results with 6.1% comparable restaurant sales growth that included 2% transaction growth. For the full year, Chipotle's average unit volumes exceeded $2 million with digital sales surpassing half a billion dollars," said Brian Niccol, Chief Executive Officer, Chipotle. "The growth acceleration this quarter gives us confidence that our strategy is working. When we connect with guests through great operations, relevant marketing focused on Chipotle's great taste and real ingredients, and provide more convenient access, they respond enthusiastically."

Fourth quarter 2018 results:

Revenue for the quarter was $1.2 billion, an increase of 10.4% from the fourth quarter of 2017. The increase in revenue was driven by a 6.1% increase in comparable restaurant sales and new restaurant openings. Comparable restaurant sales improved primarily as a result of an increase in average check which includes a 3.3% benefit from menu price increases. Comparable restaurant sales also improved due to a 2% increase in comparable restaurant transactions.

We opened 40 new restaurants during the quarter and closed or relocated 12, bringing the total restaurant count to 2,491.

Food, beverage and packaging costs were 33.2% of revenue, a decrease of 100 basis points compared to the fourth quarter of 2017. The decrease was primarily due to the benefit of menu price increases taken in late 2017 and early 2018 and to a lesser extent favorable avocado pricing, partially offset by increased freight expenses and higher paper and packaging costs.

Restaurant level operating margin was 17.0% in the quarter, an improvement from 14.9% in the fourth quarter of 2017.  The improvement was driven primarily by leverage from the comparable restaurant sales increase. This was partially offset by increased marketing and promotional costs and wage inflation at the crew level.

General and administrative expenses were 8.5% of revenue for the fourth quarter of 2018, an increase of 330 basis points, over the fourth quarter of 2017. The increase was primarily due to $15.1 million related to the corporate restructuring and other unusual charges, $10.8 million related to higher costs associated with our annual incentive cash bonus program (AIP), and $9.2 million in higher stock compensation due to a reversal of expense taken in the fourth quarter of 2017 for performance-based stock awards.

Impairment, closure costs, and asset disposals increased $6.7 million in the quarter compared to the fourth quarter 2017 primarily due to the planned closures of underperforming restaurants, offices affected by corporate restructuring, and the write down of the associated long-lived asset values.

The effective tax rate was 26.3% in the fourth quarter of 2018, compared to 28.8% in the fourth quarter of 2017.  The decrease was primarily due to the impact of the 2017 Tax Cuts and Jobs Act, or TCJA, and federal tax credits offset by unfavorable tax impacts of expirations and cancellations of various equity awards.

Net income for the fourth quarter of 2018 was $32.0 million, or $1.15 per diluted share, compared to net income of $43.8 million, or $1.55 per diluted share, in the fourth quarter of 2017. Excluding the impact of restaurant closure costs, corporate restructuring, and certain other costs, adjusted net income was $48.1 million and adjusted diluted earnings per share was $1.72

Our Board of Directors has also approved the investment of up to an additional $100 million, exclusive of commissions, to repurchase shares of our common stock, subject to market conditions. This repurchase authorization, in addition to up to approximately $57.6 million available as of December 31, 2018, for repurchases under a previously announced repurchase authorization, may be modified, suspended, or discontinued at any time.

Full year 2018 results:

Revenue for 2018 was $4.9 billion, an increase of 8.7% from 2017. The increase in revenue was driven by new restaurant openings and a 4.0% increase in comparable restaurant sales. Comparable restaurant sales improved primarily as a result of an increase in average check, including a 4.0% benefit from menu price increases in late 2017 and early 2018, partially offset by 0.8% fewer comparable restaurant transactions.

We opened 137 new restaurants during the year and closed or relocated 54, in-line with previous guidance, bringing the total restaurant count to 2,491.

Food, beverage and packaging costs were 32.9% of revenue, a decrease of 140 basis points compared to 2017. The decrease was driven by the benefit of the menu price increases and relief in avocado prices. These decreases were partially offset by increased freight costs, and to a lesser extent increased costs associated with tortillas and rice.

Restaurant level operating margin was 18.7% for 2018, an improvement from 16.9% in 2017. The improvement was driven primarily by leverage from the comparable restaurant sales increase, combined with lower marketing and promotional expenses, partially offset by wage inflation at the crew level.

General and administrative expenses were 7.7% of revenue for 2018, an increase of 110 basis points, over 2017. The increase was due to $32.1 million related to the corporate restructuring and other unusual charges, $21.4 million related to higher costs associated with our annual incentive cash bonus program (AIP) and retention bonuses, $10.9 million associated with the biennial All Managers' Conference that was held in September 2018, and the remaining increase primarily relates to general and administrative growth to support our restaurant growth and digitizing our restaurant experience. 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 a data security incident in the second quarter of 2017.

Impairment, closure costs, and asset disposals increased $53.3 million compared to 2017 primarily due to the planned closures of underperforming restaurants that began in the second quarter of 2018, as well as the closure of offices affected by corporate restructuring, and the write down of a large portion of the associated long-lived asset values.

The effective tax rate was 34.2% in 2018, compared to 36.1% in 2017.  The decrease was primarily due to the favorable impacts of the TCJA and federal tax credits offset by unfavorable tax impacts of expirations and cancellations of various equity awards.

Net income for 2018 was $176.6 million, or $6.31 per diluted share, compared to net income of $176.3 million, or $6.17 per diluted share, for 2017. Excluding the impact of restaurant asset impairment, corporate restructuring, and certain other costs, adjusted net income was $253.4 million and adjusted diluted earnings per share was $9.06.

Full Year 2019 Outlook

For 2019, management is anticipating the following:

  • Mid-single digit range comparable restaurant sales growth
  • 140 to 155 new restaurant openings
  • An estimated effective full year tax rate between 27.0% and 30.0%

Chipotle Mexican Grill, Inc.

Consolidated Statement of Income

(unaudited)

(in thousands, except per share data)

Three months ended December 31,

2018

2017

Revenue

$

1,225,061

100.0

%

$

1,110,100

100.0

%

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

Food, beverage and packaging

406,536

33.2

379,914

34.2

Labor

332,509

27.1

305,428

27.5

Occupancy

88,404

7.2

84,650

7.6

Other operating costs

189,303

15.5

175,038

15.8

General and administrative expenses

103,720

8.5

57,690

5.2

Depreciation and amortization

53,217

4.3

41,442

3.7

Pre-opening costs

1,756

0.1

2,577

0.2

Impairment, closure costs, and asset disposals

10,004

0.8

3,332

0.3

Total operating expenses

1,185,449

96.8

1,050,071

94.6

Income from operations

39,612

3.2

60,029

5.4

Interest and other income, net

3,858

0.3

1,437

0.1

Income before income taxes

43,470

3.5

61,466

5.5

Provision for income taxes

(11,451)

(0.9)

(17,673)

(1.6)

Net income

$

32,019

2.6

%

$

43,793

3.9

%

Earnings per share:

Basic

$

1.15

$

1.56

Diluted

$

1.15

$

1.55

Weighted-average common shares outstanding:

Basic

27,763

28,158

Diluted

27,946

28,164

Chipotle Mexican Grill, Inc.

Consolidated Statement of Income

(in thousands, except per share data)

Year ended December 31,

2018

2017

(unaudited)

Revenue

$

4,864,985

100.0

%

$

4,476,412

100.0

%

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

Food, beverage and packaging

1,600,760

32.9

1,535,428

34.3

Labor

1,326,079

27.3

1,205,992

26.9

Occupancy

347,123

7.1

327,132

7.3

Other operating costs

680,031

14.0

651,644

14.6

General and administrative expenses

375,460

7.7

296,388

6.6

Depreciation and amortization

201,979

4.2

163,348

3.6

Pre-opening costs

8,546

0.2

12,341

0.3

Impairment, closure costs, and asset disposals

66,639

1.4

13,345

0.3

Total operating expenses

4,606,617

94.7

4,205,618

94.0

Income from operations

258,368

5.3

270,794

6.0

Interest and other income, net

10,068

0.2

4,949

0.1

Income before income taxes

268,436

5.5

275,743

6.2

Provision for income taxes

(91,883)

(1.9)

(99,490)

(2.2)

Net income

$

176,553

3.6

%

$

176,253

3.9

%

Earnings per share:

Basic

$

6.35

$

6.19

Diluted

$

6.31

$

6.17

Weighted-average common shares outstanding:

Basic

27,823

28,491

Diluted

27,962

28,561

Chipotle Mexican Grill, Inc.

Consolidated Balance Sheet

(in thousands, except per share data)

December 31,

2018

2017

(unaudited)

Assets

Current assets:

Cash and cash equivalents

$

249,953

$

184,569

Accounts receivable

62,312

40,453

Inventory

21,555

19,860

Prepaid expenses and other current assets

54,129

50,918

Income tax receivable

-

9,353

Investments

426,845

324,382

Total current assets

814,794

629,535

Leasehold improvements, property and equipment, net

1,379,254

1,338,366

Restricted cash

30,199

29,601

Other assets

19,332

26,251

Goodwill

21,939

21,939

Total assets

$

2,265,518

$

2,045,692

Liabilities and shareholders' equity

Current liabilities:

Accounts payable

$

113,071

$

82,028

Accrued payroll and benefits

113,467

82,541

Accrued liabilities

147,849

95,679

Unearned revenue

70,474

63,645

Income tax payable

5,129

-

Total current liabilities

449,990

323,893

Deferred rent

330,985

316,498

Deferred income tax liability

11,566

814

Other liabilities

31,638

40,042

Total liabilities

824,179

681,247

Shareholders' equity:

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

-

-

Common stock, $0.01 par value, 230,000 shares authorized, 35,973 and 35,852 shares issued as of December 31, 2018 and 2017, respectively

360

359

Additional paid-in capital

1,374,154

1,305,090

Treasury stock, at cost, 8,276 and 7,826 common shares at December 31, 2018 and 2017, respectively

(2,500,556)

(2,334,409)

Accumulated other comprehensive income (loss)

(6,236)

(3,659)

Retained earnings

2,573,617

2,397,064

Total shareholders' equity

1,441,339

1,364,445

Total liabilities and shareholders' equity

$

2,265,518

$

2,045,692

Chipotle Mexican Grill, Inc.

Consolidated Statement of Cash Flows

(in thousands)

Year ended December 31,

2018

2017

(unaudited)

(as adjusted)(1)

Operating activities

Net income

$

176,553

$

176,253

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

Depreciation and amortization

201,979

163,348

Deferred income tax (benefit) provision

10,585

(18,026)

Impairment, closure costs, and asset disposals

61,987

13,345

Bad debt allowance

125

214

Stock-based compensation expense

69,164

65,255

Other

(2,918)

(218)

Changes in operating assets and liabilities:

Accounts receivable

(8,298)

(140)

Inventory

(1,722)

(5,250)

Prepaid expenses and other current assets

(3,811)

(6,710)

Other assets

(2,005)

(1,476)

Accounts payable

32,080

10,908

Accrued payroll and benefits

29,568

6,188

Accrued liabilities

14,831

28,179

Unearned revenue

6,829

4,207

Income tax payable/receivable

14,439

(4,173)

Deferred rent

21,297

29,996

Other long-term liabilities

869

6,316

Net cash provided by operating activities

621,552

468,216

Investing activities

Purchases of leasehold improvements, property and equipment

(287,390)

(216,777)

Purchases of investments

(485,188)

(199,801)

Maturities of investments

385,000

330,000

Net cash used in investing activities

(387,578)

(86,578)

Financing activities

Acquisition of treasury stock

(160,937)

(285,218)

Tax withholding on share-based compensation awards

(5,411)

(702)

Stock plan transactions and other financing activities

(187)

26

Net cash used in financing activities

(166,535)

(285,894)

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

(1,457)

2,056

Net change in cash, cash equivalents, and restricted cash

65,982

97,800

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

214,170

116,370

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

$

280,152

$

214,170

(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

Dec. 31,

Sep. 30,

Jun. 30,

Mar. 31,

Dec. 31,

2018

2018

2018

2018

2017

Number of restaurants opened

40

28

34

35

38

Restaurant relocations/closures

(12)

(32)

(8)

(2)

(4)

Number of restaurants at end of period

2,491

2,463

2,467

2,441

2,408

Average restaurant sales

$

2,004

$

1,980

$

1,950

$

1,941

$

1,940

Comparable restaurant sales increase

6.1%

4.4%

3.3%

2.2%

0.9%

Chipotle Mexican Grill, Inc.

Reconciliation of Non-GAAP Financial Measures

(in thousands, except per share amounts)

(unaudited)

The following table 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 measures may not be comparable to other companies' adjusted income measures.

Adjusted Net Income and Adjusted Diluted Earnings Per Share

Three months ended

Year ended

December 31,

December 31,

2018

2017

2018

2017

Net income

$

32,019

$

43,793

$

176,553

$

176,253

Non-GAAP adjustments:

Restaurant closure costs:

Lease termination and other restaurant closure costs(1)

5,931

-

35,752

-

Accelerated depreciation(2)

1,027

-

6,570

-

Corporate Restructuring:

Lease termination and other office closure costs(3)

348

-

15,571

-

Accelerated depreciation(2)

283

-

720

-

Duplicate rent expense(4)

1,565

-

2,518

-

Employee related restructuring costs(5)

12,178

-

24,534

-

Other adjustments(6)

1,396

-

5,040

30,000

Total non-GAAP adjustments

$

22,728

$

-

$

90,705

$

30,000

Tax effect of non-GAAP adjustments(7)

(6,694)

-

(13,852)

(11,766)

After tax impact of non-GAAP adjustments

$

16,034

$

-

$

76,853

$

18,234

Adjusted net income

$

48,053

$

43,793

$

253,406

$

194,487

Diluted weighted-average number of common shares outstanding

27,946

28,164

27,962

28,561

Diluted earnings per share

$

1.15

$

1.55

$

6.31

$

6.17

Adjusted diluted earnings per share

$

1.72

$

1.55

$

9.06

$

6.81

(1) Costs for restaurant lease terminations, asset impairment charges, and other closure expenses for restaurant closures announced in June 2018 due to underperformance.

(2) Accelerated depreciation for restaurant and office closures announced in June 2018 due to underperformance and the corporate restructuring.

(3) Costs for office lease terminations, asset impairment and other closure expenses for the corporate headquarter relocation and office consolidation announced in May 2018.

(4) Duplicate rent expense for the corporate headquarter relocation and office consolidation announced in May 2018.

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

(6) For the three months ended December 31, 2018, consists of costs for professional services for an initiative undertaken as part of our ongoing business transformation. For the twelve months ended December 31, 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 twelve months ended December 31, 2017, consists of a nonrecurring charge we recorded related to the data security incident that occurred in the first six months of 2017.

(7) For the three months ended December 31, 2018, includes a one-time benefit for restaurant employee meals due to TCJA of $3,274 and a write-off of deferred tax assets related to expired stock awards of $530. For the twelve months ended December 31, 2018, includes a one-time benefit for restaurant employee meals due to TCJA of $3,274 and a write-off of deferred tax assets related to expired stock awards of $10,776.

SOURCE Chipotle Mexican Grill



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