10-QPeriod: Q2 FY2018

CHIPOTLE MEXICAN GRILL INC Quarterly Report for Q2 Ended Jun 30, 2018

Filed July 27, 2018For Securities:CMG

Summary

Chipotle Mexican Grill Inc. (CMG) reported its second-quarter 2018 financial results, showing modest revenue growth driven by comparable restaurant sales increases and new restaurant openings. However, the company experienced a notable decline in net income and earnings per share compared to the same period in the prior year, largely impacted by significant corporate restructuring costs, impairment charges related to restaurant closures, and increased operating expenses. Financially, the company saw an increase in cash and cash equivalents and a slight increase in total assets. Despite the revenue growth, the profitability was pressured by substantial one-time charges related to announced corporate restructuring and the closure of underperforming restaurants. Management is focused on improving digital platforms and expanding out-of-restaurant order capabilities, which showed positive trends. Investors should monitor the execution of the corporate restructuring plan and its impact on future expenses and operational efficiency, as well as the ongoing efforts to drive comparable restaurant sales growth amidst transaction declines.

Financial Highlights

46 data points
Beta

Revenue

$1.27B

Net Income

$46.88M

3.7% Net Margin

EPS (Diluted)

$0.03

Total Assets

$2.13B

Cash & Equivalents

$225.66M

Free Cash Flow

$23.32M

Financial Statements
Beta
Revenue$1.27B
Operating Expenses$1.20B
Operating Income$67.96M
Net Income$46.88M
EPS (Basic)$0.03
EPS (Diluted)$0.03
Shares Outstanding (Basic)1.39B
Shares Outstanding (Diluted)1.40B

Key Highlights

  • 1Revenue increased by 8.3% to $1.2665 billion for the three months ended June 30, 2018, compared to $1.1694 billion in the prior year period.
  • 2Comparable restaurant sales increased by 3.3% for the three months ended June 30, 2018, driven by an increase in average check, partially offset by fewer transactions.
  • 3Net income decreased significantly to $46.88 million ($1.68 per diluted share) for the three months ended June 30, 2018, compared to $66.73 million ($2.32 per diluted share) in the prior year period.
  • 4The company incurred substantial restructuring costs, impairment charges, and closure costs totaling $45.3 million in the quarter, impacting profitability.
  • 5Sales from out-of-restaurant orders increased, representing 9.7% of revenue for the first six months of 2018, up from 8.3% in the prior year period.
  • 6Chipotle is undergoing a significant corporate restructuring, including opening a new headquarters in Newport Beach, California, and closing existing offices, with estimated costs of $70 million to $80 million.
  • 7The company repurchased $28.377 million worth of common stock during the quarter, under its authorized repurchase programs.

Frequently Asked Questions

The decline in net income was primarily due to significant one-time charges. These included $45.3 million in impairment, closure costs, and asset disposals, largely related to planned restaurant closures and office consolidations. Additionally, the company is incurring substantial corporate restructuring costs, estimated between $70 million to $80 million, which began impacting expenses in this quarter.

While comparable restaurant sales increased due to higher average checks (partially from menu price increases), transactions declined. Chipotle is investing in improving its digital platforms and equipping select restaurants with upgraded 'second make lines' to better fulfill out-of-restaurant orders, which has shown positive growth. The company expects comparable restaurant sales increases to be in the low to mid-single digits for the full year.

The corporate restructuring involves consolidating offices and relocating headquarters, with estimated costs of $70 million to $80 million. A significant portion of these costs ($57 million to $66 million) are expected to be recognized in 2019. This restructuring is expected to increase expenses in the near term, and management anticipates potential impacts on employee hiring and retention. The company expects these costs to adversely affect its results of operations.

Chipotle is facing several class-action lawsuits stemming from a 2017 data security incident. The company has accrued $30,000 as of June 30, 2018, for estimated potential liabilities from claims and assessments by payment card networks. While substantially all investigation costs are expected to be covered by insurance, legal expenses may exceed coverage limits. The company also continues to cooperate with a federal grand jury subpoena related to food safety matters. Management believes the ultimate resolution of these matters will not have a material adverse effect, but acknowledges potential for greater liabilities.