Chipotle Mexican Grill, Inc. Announces Third Quarter 2016 Results
Revenue decreased 14.8% to $1.0 billion - Comparable restaurant transactions decreased 15.2%
Chipotle Mexican Grill, Inc. (NYSE: CMG) today reported financial results for its third quarter ended September 30, 2016.
Overview for the three months ended September 30, 2016 as compared to the three months ended September 30, 2015:
- Revenue decreased 14.8% to $1.0 billion
- Comparable restaurant transactions decreased 15.2%
- Comparable restaurant sales decreased 21.9%, which includes a 0.8% decrease from a revenue deferral related to unredeemed Chiptopia awards
- Restaurant level operating margin was 14.1%, a decrease from 28.3%. The Chiptopia revenue deferral negatively impacted restaurant level operating margins by 0.9%
- Net income was $7.8 million, a decrease from $144.9 million. Net income includes a $14.5 million non-cash, pretax impairment charge related to ShopHouse and was reduced by an $11.5 million pretax revenue deferral related to Chiptopia
- Diluted earnings per share was $0.27, a decrease from $4.59, including $0.29 related to the ShopHouse impairment charge and $0.23 due to the deferral of revenue from Chiptopia
- Opened 54 new restaurants, net of one closure
Overview for the nine months ended September 30, 2016 as compared to the nine months ended September 30, 2015:
- Revenue decreased 18.1% to $2.9 billion
- Comparable restaurant transactions decreased 17.9%
- Comparable restaurant sales decreased 24.9% which includes a 0.3% decrease from the revenue deferral related to unredeemed Chiptopia awards
- Restaurant level operating margin was 12.5%, a decrease from 27.9%
- Net income was $7.0 million, a decrease from net income of $407.7 million
- Diluted earnings per share was $0.23, a decrease from $12.92
- Opened 168 new restaurants, net of 3 relocations or closures
“We continued to make steady progress in our sales recovery during the third quarter. We are earning back our customers’ trust, and our research demonstrates that people are feeling better about our brand, and the quality of our food. While this year has been a year of reinvestment, we are now focused on continuing to further recover sales and improve our economic model to create long-term shareholder value. Today we will share our financial and operational goals for 2017, and our plan to achieve them,” said Steve Ells, founder, chairman and co-CEO of Chipotle.
Comparable Restaurant Sales and Transaction Trends
Monthly comparable restaurant sales declines improved 16.3% from a low of 36.4% in January 2016 to 20.1% (net of 0.7% due to the revenue deferral from Chiptopia) in September 2016. Monthly comparable restaurant transaction declines improved 20.3% from a low of 33.7% in January 2016 to 13.4% in September 2016.
“Our restaurant teams are very excited to see more customers return to their restaurants, and are working hard to reward them with an excellent guest experience. After successfully implementing an industry leading food safety program, and as our marketing efforts are driving more people to our restaurants, it is critical that we are prepared to delight customers on every visit. We are confident that we have the leadership and teams in place to do just that,” said Monty Moran, co-CEO.
Third quarter 2016 results
Revenue for the quarter was $1.0 billion, down 14.8% from the third quarter of 2015. The decrease in revenue was driven by a 21.9% decrease in comparable restaurant sales, including a reduction of 0.8% on comparable restaurant sales resulting from deferring $11.5 million of revenue related to unredeemed awards from the Chiptopia Summer Rewards program that ran during the third quarter of 2016, partially offset by sales from new restaurant openings. Comparable restaurant sales declined primarily as a result of a decrease in the number of transactions in our restaurants, and to a lesser extent from a decline in average check.
We opened 54 new restaurants during the quarter, net of one closure, bringing the total restaurant count to 2,178.
Food costs were 35.1% of revenue, an increase of 210 basis points as compared to the third quarter of 2015. The increase was driven by increased waste costs and higher avocado prices, partially offset by relief in beef prices.
Restaurant level operating margin was 14.1% in the quarter, a decrease from 28.3% in the third quarter of 2015. The decrease was driven primarily by sales deleveraging (including 0.9% from the Chipotle revenue deferral) and an increase in marketing and promotional spend which totaled 4.8% of revenue for the third quarter of 2016 compared to 2.4% of revenue in the third quarter of 2015.
General and administrative expenses were 7.6% of revenue for the third quarter of 2016, an increase of 180 basis points over the third quarter of 2015 primarily as a result of sales deleverage. In dollar terms, general and administrative expenses increased compared to the third quarter of 2015 due to expenses associated with our biennial All Managers’ Conference in September 2016 and higher legal expense, partially offset by lower non-cash stock based compensation expense.
We recorded a non-cash asset impairment charge of $14.5 million related to our ShopHouse Southeast Asian Kitchen restaurants.
Net income for the third quarter of 2016 was $7.8 million, or $0.27 per diluted share, compared to net income of $144.9 million, or $4.59 per diluted share, in the third quarter of 2015.
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. This repurchase authorization, in addition to up to approximately $69.2 million available as of September 30, 2016 for repurchases under a previously announced repurchase authorization, may be modified, suspended, or discontinued at any time
Results for the nine months ended September 30, 2016
Revenue for the first nine months of 2016 was $2.9 billion, down 18.1% from the first nine months of 2015. The decrease in revenue was driven by a 24.9% decrease in comparable restaurant sales, including a reduction of 0.3% resulting from deferring $11.5 million of revenue related to accounting for Chiptopia, partially offset by sales from new restaurant openings. Comparable restaurant sales declined primarily as a result of a decrease in the number of transactions in our restaurants, and to a lesser extent from a decline in average check.
We opened 168 new restaurants during the first nine months of 2016, net of 3 relocations or closures, bringing the total restaurant count to 2,178.
Food costs were 34.8% of revenue, an increase of 150 basis points as compared to the first nine months of 2015. The increase was driven by increased waste costs and costs related to new food safety procedures, partially offset by the benefit of menu price increases implemented in select restaurants in the second half of 2015.
Restaurant level operating margin was 12.5% for the nine months ended September 30, 2016, a decrease from 27.9% in the first nine months of 2015. The decrease was driven by sales deleveraging and an increase in marketing and promotional spend which totaled 5.2% of revenue in the nine months ended September 30, 2016, compared with 2.1% of revenue for the nine months ended September 30, 2015.
General and administrative expenses were 7.4% of revenue for the first nine months of 2016, an increase of 160 basis points over the first nine months of 2015 primarily as a result of sales deleverage. In dollar terms, general and administrative costs increased compared to the first nine months of 2015 due to expenses associated with our biennial All Managers’ Conference in September 2016 and higher legal expense, partially offset by lower non-cash stock based compensation expense.
Net income for the first nine months of 2016 was $7.0 million, or $0.23 per diluted share, compared to net income of $407.7 million, or $12.92 per diluted share, for the nine months ended September 30, 2015.
Outlook
For 2016, management expects the following:
- New restaurant openings for the full year at or above the high end of the previously-disclosed range of 220 to 235
- Comparable restaurant sales declines in the low single-digits for the fourth quarter
- An effective full year tax rate of approximately 38.2%, which benefited from the recognition of tax credits earned in prior years
For 2017, management is targeting the following:
- 195 - 210 new restaurant openings
- Comparable restaurant sales increases in the high single-digits
- Restaurant level operating margins of 20%
- An estimated effective full year tax rate of approximately 39.5%, which will be impacted by volatility due to a recently issued accounting standard that changes how the company accounts for taxes associated with stock-based compensation awards.
- $10.00 earnings per diluted share
Definitions
The following definitions apply to these terms as used throughout this release:
Comparable restaurant sales, or sales comps, represent the change in period-over-period sales for restaurants in operation for at least 13 full calendar months.
Comparable restaurant transactions represent the change in period-over-period transactions, including transactions with no sales dollars due to promotional discounts, for restaurants in operation for at least 13 full calendar months.
Restaurant level operating margin represents total revenue less restaurant operating costs, expressed as a percent of total revenue.
About Chipotle
Steve Ells, founder, chairman and co-CEO, started Chipotle with the idea that food served fast did not have to be a typical fast food experience. Today, Chipotle continues to offer a focused menu of burritos, tacos, burrito bowls (a burrito without the tortilla) and salads made from fresh, high-quality ingredients, prepared using classic cooking methods and served in a distinctive atmosphere. Through our vision of Food With Integrity, Chipotle is seeking better food from using ingredients that are not only fresh, but that—where possible—are sustainably grown and raised responsibly with respect for the animals, the land, and the farmers who produce the food. In order to achieve this vision, we focus on building a special people culture that is centered on creating teams of top performers empowered to achieve high standards. This people culture not only leads to a better dining experience for our customers, it also allows us to develop future leaders from within. Chipotle opened with a single restaurant in 1993 and operates more than 2,100 restaurants, including 27 Chipotle restaurants outside the U.S. and 15 ShopHouse Southeast Asian Kitchen restaurants, and is an investor in an entity that owns and operates seven Pizzeria Locale restaurants.
Chipotle Mexican Grill, Inc. |
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Three months ended September 30, | ||||||||||||||
2016 | 2015 | |||||||||||||
Revenue | $ | 1,036,982 | 100.0 | % | $ | 1,216,890 | 100.0 | % | ||||||
Restaurant operating costs (exclusive of depreciation and amortization shown separately below): | ||||||||||||||
Food, beverage and packaging | 363,900 | 35.1 | 401,051 | 33.0 | ||||||||||
Labor | 286,144 | 27.6 | 270,076 | 22.2 | ||||||||||
Occupancy | 74,201 | 7.2 | 66,391 | 5.5 | ||||||||||
Other operating costs | 166,045 | 16.0 | 134,879 | 11.1 | ||||||||||
General and administrative expenses | 78,405 | 7.6 | 70,066 | 5.8 | ||||||||||
Depreciation and amortization | 37,434 | 3.6 | 33,145 | 2.7 | ||||||||||
Pre-opening costs | 4,490 | 0.4 | 4,367 | 0.4 | ||||||||||
Loss on disposal and impairment of assets | 16,637 | 1.6 | 2,156 | 0.2 | ||||||||||
Total operating expenses | 1,027,256 | 99.1 | 982,131 | 80.7 | ||||||||||
Income from operations | 9,726 | 0.9 | 234,759 | 19.3 | ||||||||||
Interest and other income, net | 672 | 0.1 | 1,518 | 0.1 | ||||||||||
Income before income taxes | 10,398 | 1.0 | 236,277 | 19.4 | ||||||||||
Provision for income taxes | (2,599 | ) | (0.3 | ) | (91,394 | ) | (7.5 | ) | ||||||
Net income | $ | 7,799 | 0.8 | % | $ | 144,883 | 11.9 | % | ||||||
Other comprehensive income, net of income taxes: | ||||||||||||||
Foreign currency translation adjustments | (203 | ) | (1,718 | ) | ||||||||||
Unrealized gain (loss) on investments, net of income taxes of $(346) and $0 | (536 | ) | - | |||||||||||
Other comprehensive income (loss), net of income taxes | (739 | ) | (1,718 | ) | ||||||||||
Comprehensive income | $ | 7,060 | $ | 143,165 | ||||||||||
Earnings per share: | ||||||||||||||
Basic | $ | 0.27 | $ | 4.65 | ||||||||||
Diluted | $ | 0.27 | $ | 4.59 | ||||||||||
Weighted average common shares outstanding: | ||||||||||||||
Basic | 29,063 | 31,187 | ||||||||||||
Diluted | 29,171 | 31,548 | ||||||||||||
Chipotle Mexican Grill, Inc. |
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Nine months ended September 30, | ||||||||||||||
2016 | 2015 | |||||||||||||
Revenue | $ | 2,869,824 | 100.0 | % | $ | 3,503,716 | 100.0 | % | ||||||
Restaurant operating costs (exclusive of depreciation and amortization shown separately below): | ||||||||||||||
Food, beverage and packaging | 999,968 | 34.8 | 1,166,770 | 33.3 | ||||||||||
Labor | 820,751 | 28.6 | 785,141 | 22.4 | ||||||||||
Occupancy | 217,147 | 7.6 | 194,269 | 5.5 | ||||||||||
Other operating costs | 473,390 | 16.5 | 378,779 | 10.8 | ||||||||||
General and administrative expenses | 211,171 | 7.4 | 203,339 | 5.8 | ||||||||||
Depreciation and amortization | 108,296 | 3.8 | 96,228 | 2.7 | ||||||||||
Pre-opening costs | 13,044 | 0.5 | 11,470 | 0.3 | ||||||||||
Loss on disposal and impairment of assets | 22,040 | 0.8 | 7,744 | 0.2 | ||||||||||
Total operating expenses | 2,865,807 | 99.9 | 2,843,740 | 81.2 | ||||||||||
Income from operations | 4,017 | 0.1 | 659,976 | 18.8 | ||||||||||
Interest and other income, net | 3,584 | 0.1 | 4,483 | 0.1 | ||||||||||
Income before income taxes | 7,601 | 0.3 | 664,459 | 19.0 | ||||||||||
Provision for income taxes | (638 | ) | (0.0 | ) | (256,731 | ) | (7.3 | ) | ||||||
Net income | $ | 6,963 | 0.2 | % | $ | 407,728 | 11.6 | % | ||||||
Other comprehensive income, net of income taxes: | ||||||||||||||
Foreign currency translation adjustments | 961 | (4,699 | ) | |||||||||||
Unrealized gain (loss) on investments, net of income taxes of $1,185 and $0 | 1,866 | - | ||||||||||||
Other comprehensive income (loss), net of income taxes | 2,827 | (4,699 | ) | |||||||||||
Comprehensive income | $ | 9,790 | $ | 403,029 | ||||||||||
Earnings per share: | ||||||||||||||
Basic | $ | 0.24 | $ | 13.10 | ||||||||||
Diluted | $ | 0.23 | $ | 12.92 | ||||||||||
Weighted average common shares outstanding: | ||||||||||||||
Basic | 29,387 | 31,115 | ||||||||||||
Diluted | 29,792 | 31,556 | ||||||||||||
Chipotle Mexican Grill, Inc. |
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September 30, | December 31, | |||||
2016 | 2015 | |||||
(unaudited) | ||||||
Assets | ||||||
Current assets: | ||||||
Cash and cash equivalents | $ | 154,128 | $ | 248,005 | ||
Accounts receivable, net of allowance for doubtful accounts of $1,275 and $1,176 as of September 30, 2016 and December 31, 2015, respectively | 22,103 | 38,283 | ||||
Inventory | 18,382 | 15,043 | ||||
Prepaid expenses and other current assets | 45,250 | 39,965 | ||||
Income tax receivable | 24,013 | 58,152 | ||||
Investments | 205,021 | 415,199 | ||||
Total current assets | 468,897 | 814,647 | ||||
Leasehold improvements, property and equipment, net | 1,278,672 | 1,217,220 | ||||
Long term investments | 250,659 | 622,939 | ||||
Other assets | 46,866 | 48,321 | ||||
Goodwill | 21,939 | 21,939 | ||||
Total assets | $ | 2,067,033 | $ | 2,725,066 | ||
Liabilities and shareholders' equity | ||||||
Current liabilities: | ||||||
Accounts payable | $ | 74,682 | $ | 85,709 | ||
Accrued payroll and benefits | 97,009 | 64,958 | ||||
Accrued liabilities | 107,808 | 129,275 | ||||
Total current liabilities | 279,499 | 279,942 | ||||
Deferred rent | 279,359 | 251,962 | ||||
Deferred income tax liability | 33,862 | 32,305 | ||||
Other liabilities | 33,293 | 32,883 | ||||
Total liabilities | 626,013 | 597,092 | ||||
Shareholders' equity: | ||||||
Preferred stock, $0.01 par value, 600,000 shares authorized, no shares issued as of September 30, 2016 and December 31, 2015, respectively | - | - | ||||
Common stock $0.01 par value, 230,000 shares authorized, and 35,830 and 35,790 shares issued as of September 30, 2016 and December 31, 2015, respectively | 358 | 358 | ||||
Additional paid-in capital | 1,223,760 | 1,172,628 | ||||
Treasury stock, at cost, 6,848 and 5,206 common shares at September 30, 2016 and December 31, 2015, respectively | (1,982,488) | (1,234,612) | ||||
Accumulated other comprehensive income (loss) | (5,446) | (8,273) | ||||
Retained earnings | 2,204,836 | 2,197,873 | ||||
Total shareholders' equity | 1,441,020 | 2,127,974 | ||||
Total liabilities and shareholders' equity | $ | 2,067,033 | $ | 2,725,066 | ||
Chipotle Mexican Grill, Inc. |
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Nine months ended September |
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2016 | 2015 | |||||||
Operating activities | ||||||||
Net income | $ | 6,963 | $ | 407,728 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 108,296 | 96,228 | ||||||
Deferred income tax (benefit) provision | 380 | (12,542 | ) | |||||
Loss on disposal and impairment of assets | 22,040 | 7,744 | ||||||
Bad debt allowance | 99 | (27 | ) | |||||
Stock-based compensation expense | 48,389 | 59,725 | ||||||
Excess tax benefit on stock-based compensation | (1,888 | ) | (74,861 | ) | ||||
Other | (224 | ) | 273 | |||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | 16,084 | 10,637 | ||||||
Inventory | (3,442 | ) | (2,212 | ) | ||||
Prepaid expenses and other current assets | (5,362 | ) | (3,028 | ) | ||||
Other assets | 1,509 | (3,967 | ) | |||||
Accounts payable | (11,938 | ) | 7,101 | |||||
Accrued liabilities | 36,245 | (7,434 | ) | |||||
Income tax payable/receivable | 36,026 | 77,858 | ||||||
Deferred rent | 27,319 | 21,532 | ||||||
Other long-term liabilities | 576 | 3,808 | ||||||
Net cash provided by operating activities | 281,072 | 588,563 | ||||||
Investing activities | ||||||||
Purchases of leasehold improvements, property and equipment | (192,252 | ) | (181,840 | ) | ||||
Purchases of investments | - | (433,829 | ) | |||||
Maturities of investments | 45,000 | 287,450 | ||||||
Proceeds from sale of investments | 540,648 | - | ||||||
Net cash provided by (used in) investing activities | 393,396 | (328,219 | ) | |||||
Financing activities | ||||||||
Acquisition of treasury stock | (771,354 | ) | (147,122 | ) | ||||
Excess tax benefit on stock-based compensation | 1,888 | 74,862 | ||||||
Stock plan transactions and other financing activities | 23 | (225 | ) | |||||
Net cash used in financing activities | (769,443 | ) | (72,485 | ) | ||||
Effect of exchange rate changes on cash and cash equivalents | 1,098 | (3,162 | ) | |||||
Net change in cash and cash equivalents | (93,877 | ) | 184,697 | |||||
Cash and cash equivalents at beginning of period | 248,005 | 419,465 | ||||||
Cash and cash equivalents at end of period | $ | 154,128 | $ | 604,162 | ||||
Chipotle Mexican Grill, Inc. |
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For the three months ended | ||||||||||||||||||||
Sep. 30, | Jun. 30, | Mar. 31, | Dec. 31, | Sep. 30, | ||||||||||||||||
2016 | 2016 | 2016 | 2015 | 2015 | ||||||||||||||||
Number of restaurants opened | 55 | 58 | 58 | 79 | 53 | |||||||||||||||
Restaurant relocations/closures | (1 | ) | - | (2 | ) | - | - | |||||||||||||
Number of restaurants at end of period | 2,178 | 2,124 | 2,066 | 2,010 | 1,931 | |||||||||||||||
Average restaurant sales | $ | 1,914 | $ | 2,067 | $ | 2,230 | $ | 2,424 | $ | 2,532 | ||||||||||
Comparable restaurant sales increase (decrease) | (21.9 | %) | (23.6 | %) | (29.7 | %) | (14.6 | %) | 2.6 | % | ||||||||||