Chipotle Mexican Grill, Inc. Announces Third Quarter 2016 Results

DENVER–(hospitalitybusinessnews.com)–Chipotle Mexican Grill, Inc. 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

 

Chipotle Mexican Grill, Inc.
Condensed Consolidated Statement of Income and Comprehensive Income
(in thousands, except per share data)
(unaudited)

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.
Condensed Consolidated Statement of Income and Comprehensive Income
(in thousands, except per share data)
(unaudited)

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.
Condensed Consolidated Balance Sheet
(in thousands, except per share data)

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.
Condensed Consolidated Statement of Cash Flows
(unaudited)
(in thousands)

Nine months ended September
30,

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.
Supplemental Financial and Other Data
(dollars in thousands)

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 %
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