UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM
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(Exact name of registrant as specified in its charter)
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Securities registered pursuant to Section 12(b) of the Act:
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Securities registered pursuant to Section 12(g) of the Act: None
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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No .
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act (check one):
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No
As of June 30, 2020, the aggregate market value of the registrant’s outstanding common equity held by non-affiliates was $
As of February 5, 2021, there were
Part III incorporates certain information by reference from the registrant’s definitive proxy statement for the 2021 annual meeting of shareholders, which will be filed no later than 120 days after the close of the registrant’s fiscal year ended December 31, 2020.
TABLE OF CONTENTS
PART I | ||
Item 1. | 3 | |
Item 1A. | 8 | |
Item 1B. | 17 | |
Item 2. | 17 | |
Item 3. | 17 | |
PART II | ||
Item 5. | 18 | |
Item 6. | 20 | |
Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 21 |
Item 7A. | 29 | |
Item 8. | 30 | |
| 30 | |
| 31 | |
Item 9. | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure | 56 |
Item 9A. | 56 | |
Item 9B. | 58 | |
PART III | ||
Item 10. | 58 | |
Item 11. | 58 | |
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 58 |
Item 13. | Certain Relationships and Related Transactions, and Director Independence | 58 |
Item 14. | 58 | |
PART IV | ||
Item 15. | 59 | |
Item 16. | 61 | |
| 62 |
PART I
Cautionary Note Regarding Forward-Looking Statements
This report includes “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995. We use words such as “may,” “will,” “should,” “expect,” “intend,” “plan,” “anticipate,” “believe,” “think,” “estimate,” “seek,” “expect,” “predict,” “could,” “project,” “potential” and other similar terms and phrases, including references to assumptions, to identify forward-looking statements. These forward-looking statements are based on currently available operating, financial and competitive information and are subject to various risks and uncertainties. Our actual future results and trends may differ materially depending on a variety of factors, including, but not limited to, the risks and uncertainties described in this report under the heading “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” so you should not place undue reliance on forward-looking statements. These statements are subject to risks and uncertainties that could cause actual results to differ materially from those described in the statements, including: the potential future impact of COVID-19 on our results of operations, supply chain or liquidity; risks of food safety and food-borne illnesses and other health concerns about our food; risks associated with our reliance on certain information technology systems and potential failures or interruptions; privacy and cyber security risks related to our acceptance of electronic payments or electronic processing of confidential customer or employee information; the impact of competition, including from sources outside the restaurant industry; the increasingly competitive labor market and our ability to attract and retain qualified employees; the impact of federal, state or local government regulations relating to our employees, restaurant design and construction, or the sale of food or alcoholic beverages; our ability to achieve our planned growth, such as the availability of suitable new restaurant sites; and increases in ingredient and other operating costs due to our Food With Integrity philosophy, tariffs or trade restrictions and supply shortages. We are including this Cautionary Note to make applicable and take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 for forward-looking statements. We expressly disclaim any obligation to update or revise any forward-looking statements after the date of this report as a result of new information, future events or other developments, except as required by applicable laws and regulations.
ITEM 1. BUSINESS
General
Chipotle Mexican Grill, Inc., a Delaware corporation, together with its subsidiaries (“Chipotle,” “we,” “us,” or “our”) owns and operates Chipotle Mexican Grill restaurants, which feature a relevant menu of burritos, burrito bowls (a burrito without the tortilla), tacos, and salads. We strive to cultivate a better world by serving responsibly sourced, classically cooked, real food with wholesome ingredients and without artificial colors, flavors or preservatives. We are passionate about providing a great guest experience and making our food more accessible to everyone while continuing to be a brand with a demonstrated purpose. Steve Ells, founder and former executive chairman, first opened Chipotle with a single restaurant in Denver, Colorado in 1993. Over 25 years later, our devotion to seeking out the very best ingredients, raised with respect for animals, farmers, and the environment, remains at the core of our commitment to Food With Integrity.
As of December 31, 2020, we owned and operated 2,724 Chipotle restaurants throughout the United States, 40 international Chipotle restaurants, and four non-Chipotle restaurants. We manage our operations based on eight regions and have aggregated our operations to one reportable segment. Our revenue is derived from sales by company-owned restaurants.
Business Strategy
We are a brand with a demonstrated purpose of cultivating a better world. Our mission is to win today while creating a bright future by focusing on five key fundamental strategies:
Making the brand more visible and loved;
Utilizing a disciplined approach to creativity and innovation;
Leveraging digital capabilities to drive productivity and expand access, convenience and engagement;
Engaging with customers through our loyalty program; and
Running successful restaurants with a strong culture that provides great food with integrity while delivering exceptional in-restaurant and digital experiences.
Food with Integrity
Serving high quality food while still charging reasonable prices is critical to ensuring guests enjoy wholesome food at a great value. In all of our Chipotle restaurants, we endeavor to serve only meats that are raised in accordance with criteria we have established in an effort to improve sustainability and promote animal welfare, and without the use of non-therapeutic antibiotics or added hormones. We brand these meats as “Responsibly Raised®.” One of our primary goals is for all of Chipotle restaurants to serve meats raised to our standards, but we have and expect to continue to face challenges in doing so. For example, some of our restaurants periodically serve conventionally raised chicken or beef due to supply constraints for our Responsibly Raised brand meats or stop
serving one or more menu items due to additional supply constraints. When we become aware of such an issue, we clearly and specifically disclose this temporary change on signage in each affected restaurant so that guests can adjust their orders if they choose to do so. We also seek to use responsibly grown produce, by which we mean produce grown by suppliers whose practices conform to our priorities with respect to environmental considerations and employee welfare. Some of the beans we serve are organically grown or grown using conservation tillage methods that improve soil conditions, reduce erosion, and help preserve the environment in which the beans are grown. We call these beans “transitional.” Some of the other produce items we serve are organically grown as well as we continue our commitment to find high quality ingredients.
Purchasing
Maintaining the high levels of quality and safety we demand in our restaurants depends in part on our ability to acquire high-quality, fresh ingredients and other necessary supplies that meet our specifications from reliable suppliers. Our 24 independently owned and operated regional distribution centers purchase from various suppliers we carefully select based on quality, price, availability, and the suppliers’ understanding and adherence of our mission. We’ve also sought to increase, where practical, the number of suppliers for our ingredients to help mitigate pricing volatility and reduce our reliance on one or several suppliers, which could create supply shortages. In addition, we closely monitor industry news, trade tariffs, weather, exchange rates, foreign demand, crises and other world events that may affect our ingredient prices. Certain key ingredients (certain cuts of beef, tomatoes, tortillas and adobo) are purchased from a small number of suppliers.
Quality Assurance and Food Safety
We are committed to serving only safe, high quality food. Our food safety and quality assurance teams work to ensure compliance with our food safety programs and practices, components of which include:
supplier interventions (steps to mitigate food safety risks before ingredients reach Chipotle);
advanced technologies (tools that reduce or eliminate pathogens while maintaining food quality);
small grower support and training;
enhanced restaurant procedures (protocols for handling ingredients and sanitizing surfaces in our restaurants);
food safety certifications;
internal and third-party restaurant inspections; and
ingredient traceability.
These and other food safety practices underscore our commitment to be a leader in food safety while continuing to serve high quality food that our guests love. Our food safety and quality assurance teams establish and monitor our quality and food safety programs and work closely with suppliers to ensure our high standards are met throughout the supply chain. We maintain a limited list of approved suppliers, many of whom are among the top suppliers in the industry. In addition, we have a team approach where our training, operations, culinary, legal and safety, security and risk management departments develop and implement operating standards for food quality, food preparation, restaurant cleanliness, employee health protocols, and safety in the restaurants. Our food safety programs are also intended to ensure that we not only continue to comply with applicable federal, state and local food safety regulations, but also establish Chipotle as an industry leader in food safety. To help achieve this goal, we have a Food Safety Advisory Council comprised of some of the nation’s foremost food safety authorities. The Food Safety Advisory Council is charged with evaluating our programs, both in practice and implementation, and advising us on ways to elevate our already high standards for food safety. Our food safety and quality assurance team members hold board seats and participate in technical working groups with several associations. This gives us the opportunity to learn and share our knowledge and expertise with other food safety professionals and regulatory agencies.
Digital Business
Our digital platform continues to be a strategic driver of our growth. In the past year, we significantly upgraded our capabilities by digitizing almost all of our restaurant digital-make lines, expanding our partnerships with third-party delivery services and building more Chipotlanes, which is our drive through format for customer pick-up of digital orders. Digital sales, which includes delivery and customer pick-up, accounted for 46.2% of our total sales in 2020, compared to 10.9% of total sales in 2019. Our strong digital platform gave us a competitive advantage during the COVID-19 pandemic, as more guests prefer to eat their meals at home and in-restaurant dining was prohibited or restricted. We have made digital ordering convenient with enhancements to the Chipotle App and website, such as unlimited customization, contactless delivery, and group ordering.
Human Capital
As of December 31, 2020, Chipotle employed nearly 88,000 people worldwide. In the United States, we employed 85,314 people in our restaurants and approximately 1,367 people in our Restaurant Support Centers (RSCs) and field support organizations; approximately 87,000 individuals are employed in the U.S. and approximately 1,000 are employed in Canada, France, Germany and
the United Kingdom. We do not currently have any employees represented by unions. We believe our efforts to manage our workforce have been effective, as evidenced by a strong culture and our employees’ demonstrated commitment to living our purpose and values.
Culture, Values & Diversity, Equity & Inclusion
As a people-first company rooted in values, our purpose of Cultivating a Better World extends beyond serving nutritious food using real ingredients. It means hiring world-class individuals dedicated to investing in their future and partnering together to positively impact the communities they serve. Most notably, it means fostering a culture that champions diversity, ensures equity, and celebrates inclusion.
As of December 31, 2020, more than 50% of our U.S.-based employee population is female and approximately 66% of our U.S based employee population is comprised of racial and ethnic minorities. U.S. diversity statistics were as follows:
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Gender |
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Female | 54% | Hispanic or Latino | 38% |
Male | 45% | White | 31% |
Not Indicated | 1% | Black or African American | 18% |
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| Asian | 5% |
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| Two or More Races | 4% |
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| Not Indicated/Specified | 3% |
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| American Indian/Alaskan Native | 1% |
We provide opportunities for our employees to drive our Diversity, Equity & Inclusion (DE&I) strategy by creating programs that raise awareness, allowing courageous conversations and a more inclusive culture. These programs empower our employee-driven Employee Resource Groups (ERGs) to challenge the organization to consider additional opportunities to Cultivate A Better World in the DE&I space. Our current ERGs are as follows:
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Employee Resource Groups | Year Established |
HUSTLE: Humans Uniting to Support the Ladies’ Experience Supporting our Female Community | 2019 |
PRIDE: People Respecting Inclusivity, Diversity and Education Supporting our LGBTQ Community | 2019 |
SERVES: Community Outreach Supporting the Communities we Serve | 2019 |
WELLNESS: Employee Wellbeing Supporting our employee’s mental, physical and financial wellbeing | 2019 |
UNIFIED: United Network or Influencers Furthering Inclusion and Ethnic Diversity Supporting our Communities of Color | 2020 |
Total Rewards
The financial, physical and mental wellness of our employees remains our top priority. We conducted an independent pay equity analysis of our U.S. workforce to identify risks and pay gaps in our organization by gender and race/ethnicity. The results did not identify preferential treatment to any class of employee, which supports our commitment to ensuring we pay our employees equally across gender and race/ethnicity. This commitment is evidenced by our investment in our compensation packages and robust suite of benefit offerings such as:
Eligible Crew members who work at locations that meet team sales and output goals may qualify for a quarterly Crew Bonus (equivalent to one week’s worth of pay on average). In addition to quarterly performance bonuses, full-time crew members with at least one continuous year of service may be eligible for an annual bonus. In 2020, we paid out approximately $4 million across these bonus programs.
Debt-Free Degrees are offered to those eligible Chipotle employees who work toward Associate's and Bachelor's Business and Technology degrees through six specified colleges. The program covers 100% of tuition costs upfront.
Personalized mental health assistance is available to all Chipotle employees and their family members through a partnership with Health Advocate. Support is available 24/7 via in-person, phone or virtual visits with a licensed counselor.
Following ten years of uninterrupted service, our restaurant General Managers and Support Staff employees are eligible for a paid eight-week sabbatical.
Our Response to COVID-19
The health and well-being of our employees and guests has always been and continues to be our top priority. To ensure the health and well-being of all of our employees during the COVID-19 pandemic, we also provided the following incremental COVID-19 benefits:
Expanded our paid emergency leave benefits to accommodate employees directly affected by COVID-19
Provided 30-day personal leave with automatic approval for any COVID-19 related reason.
Extended access to telemedicine coverage to employees and their families.
Expanded Employee Assistance Program coverage and Concierge Service with a focus on mental health support for employees and their families.
Removed the minimum hours worked requirement for access to our Tuition Assistance & Debt-free-degree programs.
Provided hourly assistance pay: 10% increase to all hourly base wages.
Discretionary Bonus: Provided a minimum bonus for our salaried restaurant managers during each quarter.
Assistance Pay Bonus: Provided an additional bonus to our salaried restaurant managers.
Implemented work from home for our support centers.
Government Regulation and Environmental Matters
We are subject to various federal, state and local laws and regulations that govern aspects of our business operations, including those governing:
the preparation, sale and labeling of food, including regulations of the Food and Drug Administration, which oversees the safety of the entire food system, including inspections and mandatory food recalls, menu labeling and nutritional content;
employment practices and working conditions, such as minimum wage rates, wage and hour practices, requirements to provide meal and rest periods, Fair Workweek legislation, employment of minors, anti-discrimination, anti-harassment, classification of employees, paid and family leave, workplace safety accommodations to certain employees, immigration and overtime pay, among others;
privacy and data security, laws governing the collection, maintenance and use of information regarding employees and guests and consumer credit protection and fraud;
compliance with the Americans with Disabilities Act and similar laws that give civil rights protections to individuals with disabilities in the context of employment, public accommodations and other areas;
environmental practices, such as the discharge, storage, handling, release and disposal of hazardous or toxic substances, and regulations restricting the use of straws, utensils and the types of packaging we can use in our restaurants;
building and zoning requirements, including state and local licensing and regulation governing the design and operation of facilities and land use; and
licensing and regulation by health, alcoholic beverage, sanitation, food and other agencies.
Compliance with these laws and regulation has not had, and is not expected to have, a material effect on our capital expenditures, results of operations or competitive position. See “Risk Factors” in Item 1A for a discussion of risks relating to federal, state, local and international laws and regulations applicable to our business and our Deferred Prosecution Agreement with the U.S. Attorney’s Office for the Central District of California and the United States Department of Justice’s Consumer Protection Branch.
Seasonality
Seasonal factors influencing our business are described under the heading “Quarterly Financial Data/Seasonality” in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Competition
The fast-casual, quick-service, and casual dining segments of the restaurant industry are highly competitive with respect to, among other things, taste, price, food quality and presentation, service, location, convenience, brand reputation, cleanliness, and ambience of each restaurant. Our competition includes a variety of restaurants in each of these segments, including locally-owned restaurants, as well as national and regional chains. Competition from food delivery services, which offer meals from a wide variety of restaurants, also has increased in recent years, particularly during COVID-19, and is expected to continue to increase. Many of our competitors also offer dine-in, carry-out, online, catering, and delivery services. Among our main competitors are restaurant formats that claim to serve higher quality ingredients without artificial flavors, colors and preservatives, and that serve food quickly and at a reasonable price.
Our Intellectual Property and Trademarks
“Chipotle,” “Chipotle Mexican Grill,” “Food With Integrity,” “Responsibly Raised,” “Chipotle Rewards,” and a number of other marks and related designs and logos are U.S. registered trademarks of Chipotle. We have filed trademark applications for a number of additional marks in the U.S. as well. In addition to our U.S. registrations, we have registered trademarks for “Chipotle” and a number of other marks in Canada, the European Union and various other countries, and have filed trademark applications for “Chipotle Mexican Grill,” “Chipotle” and a number of other marks in additional countries. We also believe that the design of our restaurants is our proprietary trade dress and have registered elements of our restaurant design for trade dress protection in the U.S. as well.
From time to time, we have taken action against other restaurants that we believe are misappropriating our trademarks, restaurant designs or advertising. Although our policy is to protect and defend vigorously our rights to our intellectual property, we may not be able to adequately protect our intellectual property, which could harm the value of our brand and adversely affect our business.
Available Information
We maintain a website at www.chipotle.com, including an investor relations section at ir.chipotle.com, on which we routinely post important information, such as webcasts of quarterly earnings calls and other investor events in which we participate or host, and any related materials. Our Code of Ethics and our Code of Conduct for Suppliers also are available in this section of our website. You may access our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports, as well as other reports relating to us that are filed with or furnished to the SEC, free of charge in the investor relations section of our website as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. The SEC also maintains a website that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at www.sec.gov.
The contents of the websites mentioned above are not incorporated into and should not be considered a part of this report. The references to the URLs for these websites are intended to be inactive textual references only.
ITEM 1A. RISK FACTORS
You should carefully consider the risks described below in addition to the other information set forth in this Annual Report on Form 10-K, including the Management’s Discussion and Analysis of Financial Conditions and Results of Operations section and the consolidated financial statements and related notes. If any of the risks and uncertainties described below actually occur or continue to occur, our business, financial condition and results of operations, and the trading price of our common stock could be materially and adversely affected. The risks and uncertainties described below are those that we have identified as material but are not the only risks and uncertainties we face. Our business is also subject to general risks and uncertainties that affect many other companies, including, but not limited to, overall economic and industry conditions and additional risks not currently known to us or that we presently deem immaterial may arise or become material and may negatively impact our business, reputation, financial condition, results of operations or the trading price of our common stock.
Risks Related to the Nature of our Restaurant Business and Operating in the Restaurant Industry
Food safety and food-borne illness concerns may have an adverse effect on our business by decreasing sales and increasing costs.
Food safety is our top priority, and we dedicate appropriate resources to ensuring that our guests enjoy safe, high-quality food products. Even with strong preventative controls and interventions, food-borne illnesses continue to occur in the restaurant industry because food safety risks cannot be completely eliminated in any restaurant. Incidents may result from the failure of restaurant crew members or suppliers to follow our food safety policies and procedures, or from employees or guests entering our restaurant while ill and contaminating food ingredients or surfaces. Although we monitor and audit all of our programs, we cannot guarantee that each and every individual food item is safely and properly maintained during distribution throughout the supply chain. Regardless of the source or cause, any report of food-borne illness such as E. coli, hepatitis A, norovirus or salmonella, and other food safety issues, including food tampering or contamination, at one of our restaurants could adversely affect our reputation and have a negative impact on our sales. In addition, instances of food-borne illness, food tampering or food contamination that occur solely at competitors’ restaurants could result in negative publicity about the restaurant industry and adversely impact our sales. Social media has dramatically increased the rate at which negative publicity, including actual or perceived food safety incidents, can be disseminated before there is any meaningful opportunity to investigate, respond and address an issue. The occurrence of food-borne illnesses or food safety issues could also adversely affect the price and availability of affected ingredients, resulting in higher costs and lower margins.
We may be more susceptible than our competitors to significant adverse consequences arising from food safety incidents due to several highly publicized food safety events in our restaurants and failure to adhere to our food safety standards. From 2015 to 2017, illnesses caused by E. coli bacteria and norovirus were connected to a number of our restaurants and, in 2018, illnesses believed to be caused by C. perfringens bacteria were connected to the food in one of our restaurants. As a result of these incidents and the related negative publicity, our sales and profitability were severely impacted throughout 2016 and from time to time through 2018. Because of consumer perceptions in the wake of these food safety incidents, any future food safety incidents associated with our restaurants—even incidents that would be considered minor at other restaurants—may have a more significant negative impact on our sales and our ability to regain guests. In addition, we may be at a higher risk for food safety incidents than some competitors due to our greater use of fresh, unprocessed produce, handling of raw chicken, our reliance on employees cooking with traditional methods rather than automation, and our avoidance of frozen ingredients. The risk of illnesses associated with our food also may increase due to the growth of our delivery or catering businesses, in which our food is transported and/or served in transportation conditions that are not under our control. All of these factors could have an adverse impact on our ability to attract and retain guests, which could in turn have a material adverse effect on our growth and profitability.
The restaurant industry is highly competitive. If we are not able to compete successfully, our business, financial condition and results of operations would be adversely affected.
The restaurant industry is highly competitive with respect to taste preferences, price, food quality and selection, customer service, brand reputation, digital engagement, advertising levels and promotional initiatives, and the location, attractiveness and maintenance of restaurants. We also compete with a number of non-traditional market participants, such as convenience stores, grocery stores, coffee shops, meal kit delivery services, and “ghost” or dark kitchens, where meals are prepared at separate takeaway premises rather than a restaurant. Competition from food delivery services has also increased in recent years, particularly during COVID-19, and is expected to continue to increase. Increased competition could have an adverse effect on our sales, profitability and development plans. If consumer or dietary preferences change, if our marketing efforts are unsuccessful, or if our restaurants are unable to compete successfully with other restaurant outlets, our business could be adversely affected.
We continue to believe that our commitment to higher-quality and responsibly sourced ingredients gives us a competitive advantage; however, more competitors have made claims related to the quality of their ingredients and lack of artificial flavors, colors and preservatives. The increasing use of these claims by competitors, regardless of the accuracy of such claims, may lessen our differentiation and make it more difficult for us to compete. If we are unable to continue to maintain our distinctiveness and compete effectively, our business, financial condition and results of operations could be adversely affected.
Our digital business, which accounted for almost half of revenues in 2020, is subject to risks.
In 2020, 46.2% of our revenue was derived from digital orders, which includes delivery and customer pickup, compared to 18% of our revenues in 2019. The growth in digital orders is attributable to more guests dining at home due to COVID-19, our expanded partnerships with multiple third-party delivery services and our expansion of Chipotlanes, which is our drive through format for digital order pickups. Depending on which ordering platform a digital order is placed - our platform or the platform of a third-party delivery service – the delivery fee we collect from the guest may be less than the actual delivery cost, which has a negative impact on our profitability. In the fall of 2020, we implemented a menu price increase to partially offset higher delivery costs; however, our higher menu prices may cause some guests to shift their purchases to other restaurants offered on the platform. As our digital business grows, we are increasingly reliant on third-party delivery companies, which maintain control over data regarding guests that use their platform and over the customer experience. If a third-party delivery company driver fails to make timely deliveries or fails to deliver the complete order, our guests may attribute the bad customer experience to Chipotle and could stop ordering from us. The ordering and payment platforms used by these third-parties, or our mobile app or online ordering system, could be interrupted by technological failures, user errors, cyber-attacks or other factors, which could adversely impact sales through these channels and negatively impact our overall sales and reputation. The third-party delivery business is intensely competitive, with a number of players competing for market share, online traffic capital, and delivery drivers. If the third-party delivery companies we utilize cease or curtail operations, increase their fees, or give greater priority or promotions on their platforms to our competitors, our delivery business and our sales may be negatively impacted. The delivery business has been consolidating and may continue to consolidate, and fewer third-party delivery companies may give them more leverage in negotiating the terms and pricing of contracts, which could negatively impact our profits from delivery orders.
Our inability or failure to recognize, respond to and effectively manage the accelerated impact of social media could have a material adverse impact on our business.
Social media and internet-based communications, including video-sharing, social networking and messaging platforms, give users immediate access to a broad audience. These platforms have dramatically increased the speed of dissemination and accessibility of information, including negative publicity related to food safety incidents and negative guest and employee experiences. Accurate and inaccurate or misleading information can be widely disseminated before there is any meaningful opportunity to respond or address an issue. As a result of our highly publicized food safety incidents in 2015 - 2018, negative social media posts about our business may generate a disproportionately negative response than would be the results at other companies without a similar history. It is impossible to for us to fully predict or control social media backlash to potential issues, which could harm our business, prospects, financial condition, and results of operations, regardless of the information’s accuracy.
Use of social media platforms is an important element of our marketing efforts and became increasingly more important during the COVID-19 pandemic. New social media platforms are developing rapidly, and we need to continuously innovate and evolve our social media strategies in order to maintain broad appeal with guests and brand relevance. We also continue to invest in other digital marketing initiatives to reach our guests and build their awareness of, engagement with, and loyalty to us, including our national loyalty program called Chipotle Rewards. These initiatives may not be successful, resulting in expenses incurred without the benefit of higher revenues, increased employee engagement or brand recognition. Other risks associated with the use of social media include improper disclosure of proprietary information, negative comments about us, exposure of personally identifiable information, fraud, hoaxes or malicious dissemination of false information. The inappropriate use of social media by our guests or employees could increase our costs, lead to litigation or result in negative publicity that could damage our reputation.
If we do not continue to persuade consumers of the benefits of paying higher prices for our higher-quality food, our sales and results of operations could be hurt.
Our success depends in large part on our ability to persuade consumers that food made with ingredients that were raised or grown in accordance with our Food With Integrity principles is worth paying a higher price at our restaurants relative to prices of some of our competitors, particularly quick-service restaurant competitors. Under our Food With Integrity principles, for example, animals must be responsibly raised, and the milk in our sour cream, cheese and queso must come from cows that have not been treated with rBGH, which practices typically are more costly than conventional farming. If we are not able to successfully persuade consumers that consuming food made consistent with our Food With Integrity principles is better for them and the environment, or if consumers are not willing to pay the prices we charge, our sales could be adversely affected, which would negatively impact our results of operations.
Risks Related to the COVID-19 Pandemic
The novel coronavirus (COVID-19) pandemic has adversely affected and could continue to adversely affect our financial results, operations and outlook for an extended period of time.
The novel coronavirus (COVID-19) pandemic, and restrictions imposed by federal, state and local governments in response to the outbreak, have disrupted and will continue to disrupt our business. During 2020, individuals in many areas where we operate our
restaurants were required to practice social distancing, restricted from gathering in groups and/or mandated to “stay home” except for “essential” purposes. In response to the COVID-19 outbreak and government restrictions, we were required to close some of our restaurants, close many of our dining rooms and offer only takeout and delivery, and/or implement modified work hours. The mobility restrictions, fear of contracting the coronavirus and the sharp increase in unemployment caused by the closure of businesses in response to the COVID-19 outbreak, have adversely affected and will continue to adversely affect our guest traffic, which in turn adversely impacts our liquidity, financial condition or results of operations. Even as and when the mobility restrictions are loosened or lifted, guests may still be reluctant to return to in-restaurant dining and the impact of lost wages due to COVID-19 related unemployment may dampen consumer spending for the foreseeable future.
Our restaurant operations have been and could continue to be disrupted by employees who are unable or unwilling to work, whether because of illness, quarantine, fear of contracting COVID-19 or caring for family members due to COVID-19 disruptions or illness. Restaurant closures, limited service options or modified hours of operation due to staffing shortages could materially adversely affect our liquidity, financial condition or results of operations. To protect the health and safety of our employees and guests, we provide face coverings for all restaurant employees, offer enhanced health and welfare benefits, provided temporary wage increases during the initial onset of the pandemic, provide 14 days of paid emergency leave for COVID-related concerns, paid discretionary bonuses to restaurant employees, purchased additional sanitation supplies and personal protective materials, implemented a tamper evident packaging seal for all digital orders, and created a new steward role to sanitize high-traffic restaurant areas. These measures have increased our operating costs and adversely affected our liquidity.
The COVID-19 outbreak also has affected and may continue to adversely affect the ability of certain of our suppliers to fulfill their obligations to us, which may negatively affect our restaurant operations. These suppliers include third parties that supply and/or prepare our ingredients, packaging, paper and cleaning products and other necessary operating materials, distribution centers, and logistics and transportation services providers. If our suppliers are unable to fulfill their obligations to us, we could face shortages of food items or other supplies at our restaurants, and our operations and sales could be adversely impacted.
We also modified our plans for opening new restaurants and remodeling existing restaurants due to the COVID-19 outbreak. To preserve liquidity, we delayed new restaurant construction and restaurant remodels that were scheduled to begin during the first half of the year, and we limited restaurant remodels to restaurants that do not have a digital make line or Chipotlane. These changes may materially adversely affect our ability to grow our business, particularly if these construction projects are delayed for a significant amount of time.
We cannot predict how long the COVID-19 outbreak will last or if it will reoccur even after the vaccines are widely administered, when government restrictions and mandates will be imposed or lifted, or how quickly, if at all, guests will return to their pre-COVID-19 purchasing behaviors, so we cannot predict how long our results of operations and financial performance will be adversely impacted.
Risks Related to Labor and Supply Chain
Increase in ingredient and other operating costs, including those caused by climate and/or other sustainability risks, could adversely affect our results of operations.
Our profitability depends in part on our ability to anticipate and react to changes in commodity costs, including ingredients, paper, supplies, fuel, utilities and distribution, and other operating costs, including leasing costs and labor. Any volatility in key commodity prices or fluctuation in labor costs could adversely affect our operating results by impacting restaurant profitability. The markets for some of the ingredients we use, such as beef, avocado and chicken, are particularly volatile due to factors such as limited sources, seasonal shifts, climate conditions, industry demand, including as a result of animal disease outbreaks in other parts of the world, international commodity markets, food safety concerns, product recalls and government regulation. Increasing weather volatility or other long-term changes in global weather patterns, including related to global climate change, could have a significant impact on the price or availability of some of our ingredients. These factors are beyond our control and, in many instances, unpredictable. Volatility in prices or disruptions in supply also may result from governmental actions, such as changes in trade-related tariffs or controls, sanctions and counter sanctions, government-mandated closure of our suppliers’ operations, and asset seizures. The cost and disruption of responding to governmental investigations or inquiries, whether or not they have merit, or the impact of these other measures, may impact our results and could cause reputational or other harm.
In addition, our supply chain is subject to increased costs arising from the effects of climate change, greenhouse gases and diminishing energy and water resources. The ongoing and long-term costs of these impacts related to climate change and other sustainability related issues could have a material adverse effect on our business and financial condition if not properly mitigated.
We also could be adversely impacted by price increases specific to meats raised in accordance with our sustainability and animal welfare criteria, and ingredients grown in accordance with our Food With Integrity specifications, the markets for which are generally smaller and more concentrated than the markets for conventionally raised or grown ingredients. Any increase in the prices of the ingredients most critical to our menu, such as chicken, beef, dairy (for cheese and sour cream), avocados, beans, rice, tomatoes and
pork, would have a particularly adverse effect on our operating results. If the cost of one or more ingredients significantly increases, we may choose to temporarily suspend serving the menu items that use those ingredients, such as guacamole or one of our proteins, rather than pay the increased cost. Any such changes to our available menu may negatively impact our restaurant traffic and could adversely impact our sales and brand. We can only partially address future price risk through forward contracts, careful planning and other activities, and therefore increases in commodity costs could have an adverse impact on our profitability.
Shortages or interruptions in the supply of ingredients could adversely affect our operating results.
Our business is dependent on frequent and consistent deliveries of ingredients that comply with our Food With Integrity specifications. We may experience shortages, delays or interruptions in the supply of ingredients and other supplies to our restaurants due to inclement weather, natural disasters, labor issues or other operational disruptions at our suppliers, distributors or transportation providers, or other conditions beyond our control. In addition, we have a single or a limited number of suppliers for some of our ingredients, including certain cuts of beef, tomatoes, tortillas and adobo. Although we believe we have potential alternative suppliers and sufficient reserves of ingredients, shortages or interruptions in our supply of ingredients could adversely affect our financial results.
If we fail to comply with various applicable federal and state employment and labor laws and regulations, it could have a material, adverse impact on our business.
Various federal and state employment and labor laws and regulations govern our relationships with our employees, and similar laws and regulations apply to our operations outside of the U.S. These laws and regulations relate to matters such as employment discrimination, wage and hour laws, predictive scheduling (“fair workweek”) and “just cause” termination laws, requirements to provide meal and rest periods or other benefits, family leave mandates, requirements regarding working conditions and accommodations to certain employees, citizenship or work authorization and related requirements, insurance and workers’ compensation rules, healthcare laws and anti-discrimination and anti-harassment laws. Complying with these laws and regulations subjects us to substantial expense and non-compliance could expose us to significant liabilities. For example, previously a number of lawsuits have been filed against us alleging violations of federal and state laws regarding employee wages and payment of overtime, meal and rest breaks, employee classification, employee record-keeping and related practices with respect to our employees. We incur legal costs to defend, and we could suffer losses from, these and similar cases, and the amount of such losses or costs could be significant. In addition, several states and localities in which we operate, and the federal government have from time to time enacted minimum wage increases, changes to eligibility for overtime pay, paid sick leave and mandatory vacation accruals, and similar requirements. These changes have increased our labor costs and may have a further negative impact on our labor costs in the future.
In addition, several jurisdictions, including New York City, Philadelphia, Chicago, Seattle, Oregon, San Francisco and San Jose, have implemented fair workweek legislation, which impose complex requirements related to scheduling for certain restaurant and retail employees. Other jurisdictions where we operate are considering enacting similar legislation. Several jurisdictions also have implemented sick pay/paid time off legislation, which requires employers to provide paid time off to employees, and “just cause” termination legislation, which restricts companies’ ability to terminate employees unless they can prove “just cause” or a “bona fide economic reason” for the termination. All of these regulations impose additional obligations on us and could increase our costs of doing business. Our failure to comply with any of these laws and regulations could lead to higher employee turnover and negative publicity, and subject us to penalties and other legal liabilities, which could adversely affect our business and results of operations and potentially cause us to close some restaurants in these jurisdictions.
In addition, a significant number of our restaurant crew are paid at rates impacted by the applicable minimum wage. To the extent implemented, federal, state and local proposals that increase minimum wage requirements or mandate other employee matters could, to the extent implemented, materially increase our labor and other costs. Several states in which we operate have approved minimum wage increases that are above the federal minimum. As more jurisdictions implement minimum wage increases, we expect our labor costs will continue to increase. Our ability to respond to minimum wage increases by increasing menu prices depends on willingness of our guests to pay the higher prices and our perceived value relative to competitors. Our distributors and suppliers could also be affected by higher minimum wage, benefit standards and compliance costs, which could result in higher costs for goods and services supplied to us.
Additionally, while our employees are not currently covered by any collective bargaining agreements, union organizers have engaged in efforts to organize our employees and those of other restaurant companies. If a significant portion of our employees were to become covered by collective bargaining agreements, our labor costs could increase, and it could negatively impact our culture and reduce our flexibility to attract and retain top performing employees. Labor unions have attempted, and likely will continue to attempt, to attract media attention to their organizing efforts in our restaurants, and their organizing efforts include claims that Chipotle mistreats or undervalues its employees. Despite our efforts to provide more accurate information about our policies and practices, these messages may dissuade guests from patronizing our restaurants.
If we are not able to hire, train, reward and retain qualified restaurant crew and/or if we are not able to appropriately plan our workforce, our growth plan and profitability could be adversely affected.
We rely on our restaurant-level employees to consistently provide high-quality food and positive experiences to our guests. In addition, our ability to continue to open new restaurants depends on our ability to recruit, train and retain high-quality crew members to manage and work in our restaurants. Maintaining appropriate staffing in our existing restaurants and hiring and training staff for our new restaurants requires precise workforce planning, which has become more complex due to predictive scheduling (“fair workweek”) laws and “just cause” termination legislation. If we fail to appropriately plan our workforce, it could adversely impact guest satisfaction, operational efficiency and restaurant profitability. In addition, if we fail to adequately monitor and proactively respond to employee dissatisfaction, it could lead to poor guest satisfaction, higher turnover, litigation and unionization efforts. The COVID-19 pandemic has exacerbated staffing complexities for us and other restaurant operators, and during 2020 we were forced to temporarily close some restaurants or limit operating hours due to employee illnesses, fear of contracting COVID or caregiving responsibilities among our restaurant crew. COVID-19 has also resulted in aggressive competition for talent, wage inflation and pressure to improve benefits and workplace conditions to remain competitive. Our failure to recruit and retain new restaurant crew members in a timely manner or higher employee turnover levels all could affect our ability to open new restaurants and grow sales at existing restaurants, and we may experience higher than projected labor costs.
Risks Related to IT Systems, Cybersecurity and Data Privacy
Cybersecurity breaches or other privacy or data security incidents could result in unauthorized access, theft, modification or destruction of confidential guest, personal employee and other material, confidential information that is stored in our systems or by third parties on our behalf, which may adversely affect our business.
A cyber incident generally refers to any intentional attack or an unintentional event that results in unauthorized access to systems to disrupt operations, corrupt data or steal or expose confidential information or intellectual property. A cyber incident that compromises the information of our guests or employees could result in widespread negative publicity, damage to our reputation, a loss of guests, disruption of our business and legal liabilities. As our reliance on technology has grown, the scope and severity of risks posed to our systems from cyber threats has increased. In addition, as more business activities have shifted online and more people are working remotely, including as a result of COVID-19, we have experienced an increase in cybersecurity threats and attempts to breach our security networks. The techniques and sophistication used to conduct cyber-attacks and breaches of information technology systems, as well as the sources and targets of these attacks, change frequently and are often not recognized until attacks are launched or have been in place for a period of time. We continuously monitor and develop our information technology networks and infrastructure to prevent, detect, address and mitigate the risk of unauthorized access, misuse, malware and other events that could have a security impact; however there can be no assurance that these measures will be effective.
The majority of our restaurant sales are made by credit or debit cards, and we also maintain personal information regarding our employees and confidential information about our guests and suppliers. We segment our card data environment and employ a cyber security protection program that is based on proven industry frameworks. This program includes but is not limited to cyber security techniques, tactics and procedures, including the deployment of a robust set of security controls, continuous monitoring and detection programs, network protections, vendor selection criteria, secure software development programs and ongoing employee training, awareness and incident response preparedness. In addition, we continuously scan our environment for any vulnerabilities, perform penetration testing, engage third parties to assess effectiveness of our security measures and collaborate with members of the cyber security community. However, there are no assurances that such programs will prevent or detect cyber security breaches.
From time to time we have been, and likely will continue to be, the target of cyber and other security threats. For example, some of our guests have experienced account takeover fraud, in which guests use the same log in credentials on multiple websites and, when a third party fraudulently obtains those credentials, they can gain unauthorized access to their accounts and charge food orders to the credit card linked to the account (without accessing credit card data). We may in the future become subject to other legal proceedings or governmental investigations for purportedly fraudulent transactions arising out of the actual or alleged theft of our consumers’ credit or debit card information or if consumer or employee information is obtained by unauthorized persons or used inappropriately. Any such claim or proceeding, or any adverse publicity resulting from such an event, may have a material adverse effect on our business and we may incur significant remediation costs.
Cybersecurity breaches also could result in a violation of applicable U.S. and international privacy and other laws, and subject us to private consumer, business partner, or securities litigation and governmental investigations and proceedings, any of which could result in our exposure to material civil or criminal liability. For example, the European Union’s General Data Protection Regulation (“GDPR”) requires companies to meet certain requirements regarding the handling of personal data, including its use, protection and transfer and the ability of persons whose data is stored to correct or delete such data about themselves. Failure to meet the GDPR requirements could result in penalties of up to 4% of annual worldwide revenue. Additionally, the California Privacy Act of 2018 (“CCPA”), which became effective on January 1, 2020, provides a private right of action for data breaches and requires companies that process information on California residents to make new disclosures to consumers about their data collection, use and sharing practices, allow consumers to opt out of certain data sharing with third parties and the right for consumers to request deletion of
personal information (subject to certain exceptions). If we fail, or are perceived to have failed, to properly respond to security breaches of our or third party’s information technology systems or fail to properly respond to consumer requests under the CCPA, we could experience reputational damage, adverse publicity, loss of consumer confidence, reduced sales and profits, complications in executing our growth initiatives and regulatory and legal risk, including criminal penalties or civil liabilities.
Compliance with the GDPR, the CCPA and other current and future applicable international and U.S. privacy, cybersecurity and related laws can be costly and time-consuming. We make significant investments in technology, third-party services and internal personnel to develop and implement systems and processes that are designed to anticipate cyber-attacks and to prevent or minimize breaches of our information technology systems or data loss, but these security measures cannot provide assurance that we will be successful in preventing such breaches or data loss. In addition, media or other reports of existing or perceived security vulnerabilities in our systems or those of our third-party business partners or service providers can also adversely impact our brand and reputation and materially impact our business, even if no breach has been attempted or has occurred.
We may incur increased costs to comply with privacy and data protection laws and, if we fail to comply, we could be subject to government enforcement actions, private litigation and adverse publicity.
The regulatory environment related to data privacy and cybersecurity is changing at an ever-increasing pace, with new and increasingly rigorous requirements applicable to our business. Complying with newly developed laws and regulations, which are subject to change and uncertain interpretations and may be inconsistent from state to state or country to country, may lead to a decline in guest engagement or cause us to incur substantial costs or modifications to our operations or business practices to comply.
We are subject to the European Union’s GDPR, which requires companies to meet certain requirements regarding the handling of personal data, including its use, protection and transfer and the ability of persons whose data is stored to correct or delete such data about themselves. Failure to meet the GDPR requirements could result in penalties of up to 4% of annual worldwide revenue. Additionally, in July 2020, the European Court of Justice’s invalidation of cross-border data transfer mechanisms such as the U.S.-E.U. Privacy Shield and the Standard Contractual Clauses has imposed new uncertainty in privacy compliance and an adverse impact on operational efficiency with our third-party vendors.
The Federal Trade Commission and many State Attorneys General are also interpreting federal and state consumer protection laws to impose standards for the online collection, use, dissemination and security of data. Maintaining our compliance with those requirements may limit our ability to obtain data used to provide a more personalized guest experience. The CCPA provides a private right of action for data breaches and requires companies that process information on California residents to make new disclosures to consumers about their data collection, use and sharing practices, allows consumers to opt-out of certain data sharing with third parties and gives consumers the right to request deletion of personal information (subject to certain exceptions). If we fail, or are perceived to have failed, to properly respond to security breaches of our or third party’s information technology systems or fail to properly respond to consumer requests under the CCPA, we could experience regulatory fines, reputational damage, adverse publicity, loss of consumer confidence, reduced sales and profits, complications in executing our growth initiatives and regulatory and legal risk, including criminal penalties or civil liabilities.
We rely heavily on information technology systems and failures or interruptions in our IT systems could harm our ability to effectively operate our business and/or result in the loss of guests or employees.
We rely heavily on information technology systems, including the point-of-sale and payment processing system in our restaurants, technologies supporting our online ordering, digital and delivery business, technologies that traceback ingredients to suppliers and growers and manage our supply chain, our rewards program, technologies that facilitate marketing initiatives, employee engagement and payroll processing, and various other processes and transactions. Our ability to effectively manage our business and coordinate the procurement, production, distribution, safety and sale of our products depends significantly on the availability, reliability and security of these systems. Many of these critical systems are provided and managed by third parties, and we are reliant on these third-party providers to implement protective measures that ensure the security and availability of their systems. Although we have operational safeguards in place, these safeguards may not be effective in preventing the failure of these third-party systems or platforms to operate effectively and be available. Failures may be caused by various factors, including power outages, catastrophic events, physical theft, computer and network failures, inadequate or ineffective redundancy, problems with transitioning to upgraded or replacement systems or platforms, flaws in third-party software or services, errors or improper use by our employees or the third-party service providers. If any of our critical IT systems were to become unreliable, unavailable, compromised or otherwise fail, and we were unable to recover in a timely manner, we could experience an interruption in our operations that could have a material adverse impact on our profitability.
Our inability or failure to execute on a comprehensive business continuity plan at our restaurant support centers following a disaster or force majeure event could have a material adverse impact on our business.
Many of our corporate systems and processes and corporate support for our restaurant operations are centralized at one location. We have disaster recovery procedures and business continuity plans in place to address crisis-level events, including hurricanes and other natural disasters, and back up and off-site locations for recovery of electronic and other forms of data and information, and the COVID-19 pandemic has provided a limited test of our ability to manage our business remotely. However, if we are unable to fully implement our disaster recovery plans, we may experience delays in recovery of data, inability to perform vital corporate functions, tardiness in required reporting and compliance, failures to adequately support field operations and other breakdowns in normal communication and operating procedures that could have a material adverse effect on our financial condition, results of operation and exposure to administrative and other legal claims. In addition, these threats are constantly evolving, which increases the difficulty of accurately and timely predicting, planning for and protecting against the threat. As a result, our disaster recovery procedures and business continuity plans security may not adequately address all threats we face or protect us from loss.
Legal and Regulatory Risks
A violation of Chipotle’s Deferred Prosecution Agreement could have an adverse effect on our business and reputation.
In April 2020, Chipotle signed a Deferred Prosecution Agreement (the “DPA”), which was filed in the U.S. District Court for the Central District of California, to settle an official criminal investigation conducted by the U.S. Attorney’s Office for the Central District of California, in conjunction with the U.S. Food and Drug Administration’s Office of Criminal Investigations (collectively, the “DOJ”), into company-wide food safety matters that occurred in our restaurants dating back to January 1, 2013. Pursuant to the DPA, the DOJ filed a two-count Class A Misdemeanor Information in the United States District Court for the Central District of California charging Chipotle with adulterating and causing food to be adulterated within the meaning of the Federal Food, Drug and Cosmetic Act (“FDCA”) while such food was held for sale. Under the DPA, Chipotle paid a $25 million fine and is required to enhance and maintain a comprehensive compliance program that is designed to ensure Chipotle complies with all applicable federal and state food safety laws. The DOJ agreed that if Chipotle is in full compliance with all of its obligations under the DPA at the conclusion of the three-year deferred prosecution term, the DOJ will move to dismiss the two-count information filed against Chipotle. Full compliance with the DPA requires, among other things, Chipotle to conduct a root cause analysis of the historic food safety matters, maintain and annually update a comprehensive food safety plan and comply with applicable provisions of the FDCA.
Chipotle owns and operates over 2,700 restaurants and we dedicate substantial resources to our food safety program; however, even with strong preventative controls and interventions, food safety risks cannot be completely eliminated in any restaurant. Food safety risks may arise due to possible failures by restaurant crew or suppliers to follow food safety policies and procedures, employees or guests coming to the restaurant while ill or serving contaminated food ingredients. If Chipotle is found to have breached the terms of the DPA, the DOJ may elect to prosecute, or bring a civil action against the company for conduct alleged in the DPA’s Statement of Facts, which could result in additional fines, penalties, and have material adverse impacts on our results of operations. In addition, further action by the DOJ may significantly and adversely affect our brand and reputation, especially in light of our highly publicized food safety incidents in 2015 – 2017.
We could be party to litigation or other legal proceedings that could adversely affect our business, results of operations and reputation.
We have been and, in the future, we likely will be subject to litigation and other legal proceedings that may adversely affect our business. These legal proceedings may involve claims brought by employees, guests, government agencies, suppliers, shareholders or others through private actions, class actions, administrative proceedings, regulatory actions or other litigation. These legal proceedings may involve allegations of illegal, unfair or inconsistent employment practices, including wage and hour, employment of minors, discrimination, wrongful termination, and vacation and family leave laws; food safety issues including food-borne illness, food contamination and adverse health effects from consumption of our food products; data security or privacy breaches; guest discrimination; personal injury in our restaurants; trademark infringement; violation of the federal securities laws or other concerns. For example, a number of lawsuits have been filed against us alleging violations of federal and state employment laws, including wage and hour claims; and in 2020 we settled an official criminal investigation by the U.S. Attorney’s Office for the Central District of California, in conjunction with the U.S. Food and Drug Administration’s Office of Criminal Investigations, related to company-wide food safety matters dating back to 2013. We could be involved in similar or even more significant litigation and legal proceedings in the future. Even if the allegations against us in current or future legal matters are unfounded or we ultimately are not held liable, the costs to defend ourselves may be significant and the litigation may subject us to substantial settlements, fines, penalties or judgments against us and may divert management's attention away from operating our business, all of which could negatively impact our financial condition and results of operations. Litigation also may generate negative publicity, regardless of whether the allegations are valid, or we ultimately are liable, which could damage our reputation, and adversely impact our sales and our relationship with our employees and guests.
We are subject to extensive laws, government regulation, and other legal requirements and our failure to comply with existing or new laws and regulations could adversely affect our operational efficiencies, ability to attract and retain talent and results of operations.
Our business is subject to extensive federal, state, local and international laws and regulations, including those relating to:
preparation, sale and labeling of food, including regulations of the Food and Drug Administration, which oversees the safety of the entire food system, including inspections and mandatory food recalls, menu labeling and nutritional content;
employment practices and working conditions, including minimum wage rates, wage and hour practices, Fair Workweek legislation, employment of minors, discrimination, harassment, classification of employees, paid and family leave, workplace safety, immigration and overtime among others;
health, sanitation, safety and fire standards and the sale of alcoholic beverages;
building and zoning requirements, including state and local licensing and regulation governing the design and operation of facilities and land use;
public accommodations and safety conditions, including the Americans with Disabilities Act and similar state laws that give civil rights protections to individuals with disabilities in the context of employment, public accommodations, and other areas;
data privacy laws and standards for the protection of personal information, including social security numbers, financial information (including credit card numbers), and health information, and payment card industry standards and requirements;
environmental matters, such as emissions and air quality, water consumption, the discharge, storage, handling, release, and disposal of hazardous or toxic substances, and local ordinances restricting the types of packaging we can use in our restaurants; and
public company compliance, disclosure and governance matters, including accounting and tax regulations, SEC and NYSE disclosure requirements.
Compliance with these laws and regulations, and future new laws or changes in these laws or regulations that impose additional requirements, can be costly. Any failure or perceived failure to comply with these laws or regulations could result in, among other things, revocation of required licenses, administrative enforcement actions, fines and civil and criminal liability.
Risks Related to Our Growth and Business Strategy
If we are unable to meet our projections for new restaurant openings, or efficiently maintain the attractiveness of our existing restaurants, our profitability could suffer.
Our growth strategy depends on our ability to continue to open new restaurants and operate them profitably. Historically, it can take up to 24 months to ramp up the sales and profitability of a new restaurant. During the ramp-up phase, the restaurant’s sales and income are below the levels at which we expect them to normalize and costs may be higher as we train new employees and adjust our food deliveries and preparation to sales trends. If we are unable to build the customer base that we expect or overcome the initial higher costs associated with new restaurants, our new restaurants may not be as profitable as our existing restaurants. Our ability to open and profitably operate new restaurants also is subject to various risks, such as the identification and availability of economically viable locations, the negotiation of acceptable lease terms, the ability to operate with a Chipotlane, the need to obtain all required governmental permits (including zoning approvals and liquor licenses) and to comply with other regulatory requirements, the availability of capable contractors and subcontractors, the ability to meet construction schedules and budgets, the ability to manage labor activities that could delay construction, increases in labor and building material costs, changes in weather or other acts of God that could result in construction delays and adversely affect the results of one or more restaurants for an indeterminate amount of time, our ability to hire and train qualified management personnel and general economic and business conditions. At each potential location, we compete with other restaurants and retail businesses for desirable development sites, construction contractors, management personnel, hourly employees and other resources. If we are unable to successfully manage these risks, we could face increased costs and lower than anticipated sales and earnings in future periods.
In addition, in an effort to increase same-restaurant sales and improve our operating performance, we continue to improve our existing restaurants through remodels, upgrades and regular upkeep. If the costs associated with remodels, upgrades or regular upkeep are higher than anticipated, restaurants are closed for remodeling for longer periods than planned or remodeled restaurants do not perform as expected, we may not realize our projected desired return on investment, which could have a negative effect on our operating results.
Substantially all of our restaurants operate in leased properties subject to long-term leases. If we are unable to secure new leases on favorable terms, terminate unfavorable leases or renew or extend favorable leases, our profitability may suffer.
We operate substantially all of our restaurants in leased facilities. It is becoming increasing challenging to locate and secure favorable lease facilities for new restaurants as competition for restaurant sites in our target markets is intense. Development and leasing costs are increasing, particularly for urban locations. These factors could negatively impact our ability to manage our occupancy costs, which may adversely impact our profitability. In addition, any of these factors may be exacerbated by economic factors, which may result in an increased demand for developers and contractors that could drive up our construction and leasing costs. Also, as we open and operate more restaurants, our rate of expansion relative to the size of our existing restaurant base will decline, making it increasingly difficult to achieve levels of sales and profitability growth that we achieved in prior years.
From time to time we may close or relocate a restaurant if a current location becomes less profitable as a result of adverse economic conditions or local regulatory compliance in the area. We also have closed some restaurants where the impact of COVID-19 was severe. If the closures continue for a long period of time we may not be able to recover our investment due to the high rental rates. Because substantially all of our restaurants operate in leased facilities, we may incur significant lease termination expenses when we close or relocate a restaurant and are often obligated to continue rent and other lease related payments after restaurant closure. We also may incur significant asset impairment and other charges in connection with closures and relocations. If the lease termination cost is significant, we may decide to keep underperforming restaurants open. Ongoing lease obligations at closed or underperforming restaurant locations could decrease our results of operations. In addition, we may be unable to renew a lease without substantial additional cost at the end of the lease term and expiration of all renewal periods. As a result, we may be required to close or relocate a restaurant, which could subject us to construction and other costs and risks that may have an adverse effect on our operating performance.
Our failure to effectively manage our growth could have a negative adverse effect on our business and financial results.
As of December 31, 2020, we owned and operated 2,764 Chipotle restaurants and we plan to open a significant number of new restaurants in the next several years. Our existing restaurant management systems, back office technology systems and processes, financial and management controls, information systems and personnel may not be adequate to support our continued growth. To effectively manage a larger number of restaurants, we may need to upgrade and expand our infrastructure and information systems, automate more processes that currently are manual or require manual intervention and hire, train and retain restaurant crew and corporate support staff, all of which may result in increased costs and at least temporary inefficiencies. We also place a lot of importance on our culture, which we believe has been an important contributor to our success, and as we continue to grow, it may be increasingly difficult to maintain our culture. Our failure to sufficiently invest in our infrastructure and information systems and maintain our strong staffing and culture could harm our brand and operating results.
A failure to recruit, develop and retain effective leaders or the loss or shortage of personnel with key capacities and skills could impact our strategic growth plans and jeopardize our ability to meet our business performance expectations and growth targets.
Our ability to continue to grow our business depends substantially on the contributions and abilities of our executive leadership team and other key management personnel. Changes in senior management could expose us to significant changes in strategic direction and initiatives. A failure to maintain appropriate organizational capacity and capability to support our strategic initiatives or to build adequate bench strength with key skillsets required for seamless succession of leadership, could jeopardize our ability to meet our business performance expectations and growth targets. If we are unable to attract, develop, retain and incentivize sufficiently experienced and capable management personnel, our business and financial results may suffer.
The market price of our common stock may be more volatile than the market price of our peers.
We believe the market price of our common stock generally has traded at a higher price-earnings ratio than stocks of most of our peer companies as well as the overall market, which typically has reflected market expectations for higher future operating results. At any given point in time, our price-earnings ratio may trade at more than twice the price-earnings ratio of the S&P 500. Also, the trading market for our common stock has been volatile at times, including as a result of adverse publicity events. As a result, if we fail to meet market expectations for our operating results in the future, any resulting decline in the price of our common stock could be significant.
General Risk Factors
Economic and business factors that are largely beyond our control may adversely affect consumer behavior and the results of our operations.
Restaurant dining generally is dependent upon consumer discretionary spending, which may be affected by general economic conditions that are beyond our control. For example, international, domestic and regional economic conditions, consumer income levels, financial market volatility, a slow or stagnant pace of economic growth, rising energy costs, rising interest rates, social unrest, and governmental, political and budget concerns or divisions may have a negative effect on consumer confidence and discretionary
spending. In addition, a new presidential and legislative administration recently took office, and it is not yet known what changes the new administration will make to economic or tax policies and how those policies will impact the economy or consumer discretionary spending. Any significant decrease in our guest traffic or average transactions would negatively impact our financial performance. Any actual or perceived threat of a pandemic or communicable disease, terrorist attack, mass shooting, heightened security requirements, including cybersecurity, or a failure to protect information systems for critical infrastructure, such as the electrical grid and telecommunications systems, could harm our operations, the economy or consumer confidence generally. Any of the above factors or other unfavorable changes in business and economic conditions affecting our guests could increase our costs, reduce traffic in some or all of our restaurants or limit our ability to increase pricing, any of which could lower our profit margins and have a material adverse effect on our sales, financial condition and results of operations. These factors also could cause us to, among other things, reduce the number and frequency of new restaurant openings, close restaurants or delay remodeling of our existing restaurant locations. Further, poor economic conditions may force nearby businesses to shut down, which could reduce traffic to our restaurants or cause our restaurant locations to be less attractive.
Our quarterly financial results may fluctuate significantly, including due to factors that are not in our control.
Our quarterly financial results may fluctuate significantly and could fail to meet investors’ expectations for various reasons, including:
negative publicity about the safety of our food, employment-related issues, litigation or other issues involving our restaurants;
fluctuations in supply costs, particularly for our most significant ingredients, and our inability to offset the higher cost with price increases without adversely impacting guest traffic;
labor availability and wages of restaurant management and crew;
increases in marketing or promotional expenses;
the timing of new restaurant openings and related revenues and expenses, and the operating costs at newly opened restaurants;
the impact of inclement weather and natural disasters, such as freezes and droughts, which could decrease guest traffic and increase the costs of ingredients;
the amount and timing of stock-based compensation;
litigation, settlement costs and related legal expenses;
tax expenses, asset impairment charges and non-operating costs; and
variations in general economic conditions, including the impact of declining interest rates on our interest income.
As a result of any of these factors, results for any one quarter are not necessarily indicative of results to be expected for any other quarter or for any year. Average restaurant sales or comparable restaurant sales in any particular future period may decrease.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
As of December 31, 2020, there were 2,768 restaurants operated by Chipotle and our consolidated subsidiaries, 2,764 of which were Chipotle restaurants. Our main office is located at 610 Newport Center Drive, Newport Beach, CA 92660 and our telephone number is (949) 524-4000. We lease our main office and substantially all of the properties on which we operate restaurants. We own 17 properties and operate restaurants on all of them. For additional information regarding the lease terms and provisions, see Note 10. “Leases” in our consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data.”
ITEM 3. LEGAL PROCEEDINGS
For information regarding legal proceedings, see Note 12. “Commitments and Contingencies” in our consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data.”
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock trades on the New York Stock Exchange under the symbol “CMG.”
As of February 8, 2021, there were approximately 935 shareholders of record. This does not include persons whose stock is in nominee or “street name” accounts through brokers.
Purchases of Equity Securities by the Issuer
On March 20, 2020, we temporarily suspended our stock repurchase program. The total remaining dollar value of shares that may yet be purchased under our stock repurchase program is $115.0 million as of December 31, 2020.
Dividend Policy
We are not required to pay any dividends and have not declared or paid any cash dividends on our common stock. We intend to continue to retain earnings for use in the operation and expansion of our business and to repurchase shares of common stock (subject to market conditions), and therefore do not anticipate paying any cash dividends on our common stock in the foreseeable future.
COMPARISON OF CUMULATIVE TOTAL RETURN
The following graph compares the cumulative annual stockholders return on our common stock from December 31, 2015, through December 31, 2020, to that of the total return index for the S&P 500 and the S&P 500 Restaurants Index assuming an investment of $100 on December 31, 2015. In calculating total annual stockholder return, reinvestment of dividends, if any, is assumed. The indices are included for comparative purposes only. They do not necessarily reflect management’s opinion that such indices are an appropriate measure of the relative performance of our common stock. The values shown are neither indicative nor determinative of future performance. This graph is not “soliciting material,” is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference in any of our filings under the Securities Act or the Exchange Act, whether made before or after the date hereof and irrespective of any general incorporation language in any such filing.
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Company/Index | Dec. 31, 2015 |
| Dec. 30, 2016 |
| Dec. 30, 2017 |
| Dec. 30, 2018 |
| Dec. 30, 2019 |
| Dec. 29, 2020 | ||||||
Chipotle Mexican Grill, Inc. | $ | 100 |
| $ | 79 |
| $ | 60 |
| $ | 90 |
| $ | 174 |
| $ | 289 |
S&P 500 |
| 100 |
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| 110 |
|
| 131 |
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| 123 |
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| 158 |
|
| 184 |
S&P 500 Restaurants |
| 100 |
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| 101 |
|
| 124 |
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| 134 |
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| 163 |
|
| 188 |
*$100 invested on December 31, 2015 in stock or index, including reinvestment of dividends.
Fiscal year ending December 31.
Source data: S&P Capital IQ
ITEM 6. SELECTED FINANCIAL DATA
Our selected consolidated financial data shown below should be read together with Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and respective notes included in Item 8. “Financial Statements and Supplementary Data.” The data shown below is not necessarily indicative of results to be expected for any future period (dollar and share amounts in thousands, except per share data).
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| Year ended December 31, | |||||||||||||
| 2020 |
| 2019 |
| 2018 |
| 2017 |
| 2016 | |||||
Statement of Income: |
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Food and beverage revenue | $ | 5,920,545 |
| $ | 5,561,036 |
| $ | 4,860,626 |
| $ | 4,476,412 |
| $ | 3,904,384 |
Delivery service revenue |
| 64,089 |
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| 25,333 |
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| 4,359 |
|
| - |
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| - |
Total revenue |
| 5,984,634 |
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| 5,586,369 |
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| 4,864,985 |
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| 4,476,412 |
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| 3,904,384 |
Food, beverage and packaging costs |
| 1,932,766 |
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| 1,847,916 |
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| 1,600,760 |
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| 1,535,428 |
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| 1,365,580 |
Labor costs |
| 1,593,013 |
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| 1,472,060 |
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| 1,326,079 |
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| 1,205,992 |
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| 1,105,001 |
Occupancy costs |
| 387,762 |
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| 363,072 |
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| 347,123 |
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| 327,132 |
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| 293,636 |
Other operating costs |
| 1,030,012 |
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| 760,831 |
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| 680,031 |
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| 651,644 |
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| 641,953 |
General and administrative expenses |
| 466,291 |
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| 451,552 |
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| 375,460 |
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| 296,388 |
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| 276,240 |
Depreciation and amortization |
| 238,534 |
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| 212,778 |
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| 201,979 |
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| 163,348 |
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| 146,368 |
Pre-opening costs |
| 15,515 |
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| 11,108 |
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| 8,546 |
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| 12,341 |
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| 17,162 |
Impairment, closure costs and asset disposals |
| 30,577 |
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| 23,094 |
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| 66,639 |
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| 13,345 |
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| 23,877 |
Total operating expenses |
| 5,694,470 |
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| 5,142,411 |
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| 4,606,617 |
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| 4,205,618 |
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| 3,869,817 |
Income from operations |
| 290,164 |
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| 443,958 |
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| 258,368 |
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| 270,794 |
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| 34,567 |
Interest and other income, net |
| 3,617 |
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| 14,327 |
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| 10,068 |
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| 4,949 |
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| 4,172 |
Income before income taxes |
| 293,781 |
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| 458,285 |
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| 268,436 |
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| 275,743 |
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| 38,739 |
Benefit/(provision) for income taxes |
| 61,985 |
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| (108,127) |
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| (91,883) |
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| (99,490) |
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| (15,801) |
Net income | $ | 355,766 |
| $ | 350,158 |
| $ | 176,553 |
| $ | 176,253 |
| $ | 22,938 |
Earnings per share: |
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Basic | $ | 12.74 |
| $ | 12.62 |
| $ | 6.35 |
| $ | 6.19 |
| $ | 0.78 |
Diluted | $ | 12.52 |
| $ | 12.38 |
| $ | 6.31 |
| $ | 6.17 |
| $ | 0.77 |
Weighted average common shares: outstanding |
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Basic |
| 27,917 |
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| 27,740 |
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| 27,823 |
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| 28,491 |
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| 29,265 |
Diluted |
| 28,416 |
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| 28,295 |
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| 27,962 |
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| 28,561 |
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| 29,770 |
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| December 31, | |||||||||||||
| 2020 |
| 2019 |
| 2018 |
| 2017 |
| 2016 | |||||
Balance Sheet Data: |
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Total current assets | $ | 1,420,237 |
| $ | 1,072,204 |
| $ | 814,794 |
| $ | 629,535 |
| $ | 522,374 |
Total assets | $ | 5,982,896 |
| $ | 5,104,604 |
| $ | 2,265,518 |
| $ | 2,045,692 |
| $ | 2,026,103 |
Total current liabilities | $ | 822,199 |
| $ | 666,593 |
| $ | 449,990 |
| $ | 323,893 |
| $ | 281,793 |
Total liabilities | $ | 3,962,761 |
| $ | 3,421,578 |
| $ | 824,179 |
| $ | 681,247 |
| $ | 623,610 |
Total shareholders’ equity | $ | 2,020,135 |
| $ | 1,683,026 |
| $ | 1,441,339 |
| $ | 1,364,445 |
| $ | 1,402,493 |
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion together with Item 6. “Selected Financial Data” and our consolidated financial statements and related notes included in Item 8. “Financial Statements and Supplementary Data.” This section of the Form 10-K generally discusses 2020 and 2019 items and year-to-year comparisons of 2020 to 2019. Discussions of 2018 items and year-to-year comparisons of 2019 and 2018 that are not included in this Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 on our Annual Report on Form 10-K for the year ended December 31, 2019. The discussion contains forward-looking statements involving risks, uncertainties and assumptions that could cause our results to differ materially from expectations. See “Cautionary Note Regarding Forward-Looking Statements.” Factors that might cause such differences include those described in Item 1A. “Risk Factors” and elsewhere in this report.
Overview
As of December 31, 2020, we operated 2,724 Chipotle restaurants throughout the United States, 40 international Chipotle restaurants, and four non-Chipotle restaurants. We are committed to making good food more accessible to everyone while continuing to be a brand with a demonstrated purpose.
Overview of the Impact of COVID-19
The COVID-19 pandemic has adversely affected, and will continue to adversely affect, our operations and financial results for the foreseeable future. In response to COVID-19, we temporarily closed some restaurants and dining rooms in our restaurants. We continue to follow guidance from health officials in determining the appropriate restrictions to put in place for each restaurant. As of December 31, 2020, the majority of our restaurants have been reopened for dine-in with restrictions, such as social distancing and mask requirements for all customers, to ensure the health and safety of our guests and employees. Certain restaurants only offer take-out, digital order ahead and delivery services in accordance with local guidance and regulations. For a further discussion of the impacts that COVID-19 has had on our financial results refer to the “Results of Operations.”
We remain in regular contact with our major suppliers and while to date we have not experienced significant disruptions in our supply chain, we could see future disruptions should the impacts of COVID-19 extend for a considerable amount of time. Within our restaurants, we have taken a number of steps to enhance our robust food safety protocols including the creation of the steward role which is focused on sanitization in high-touch and high-traffic areas, providing masks for all employees, and having a tamper evident packaging seal for all digital orders. To support our employees, we have eliminated non-essential travel, implemented work from home for our support centers, and significantly expanded employee benefits. We remain focused on reducing non-essential controllable costs and judiciously spending on return generating projects to preserve liquidity. We suspended our stock buyback program during the first quarter of 2020. If our business continues to improve and the economy continues to stabilize, we may begin buying again in the first or second quarter of 2021.
2020 Financial Highlights
Total revenue increased 7.1% to $6.0 billion in 2020 compared to $5.6 billion in 2019
Comparable restaurant sales increased 1.8%
Diluted earnings per share (“diluted EPS”) for 2020 increased to $12.52, which included an income tax benefit of $3.79, offset by a $2.00 after-tax impact from expenses related to legal, corporate restructuring, restaurant closure costs, and certain other costs, a 1.1% increase from $12.38 in 2019.
Sales Trends. Average restaurant sales were $2.223 million for the year ended December 31, 2020, an increase from $2.205 million for the year ended December 31, 2019. We define average restaurant sales as the average trailing 12-month food and beverage sales for restaurants in operation for at least 12 full calendar months.
Total revenue was $6.0 billion in 2020, an increase of 7.1% from $5.6 billion in 2019. The increase was attributable to new restaurant openings and increased comparable restaurant sales. Comparable restaurant sales increased 1.8% for the full year 2020. Comparable restaurant sales represent the change in period-over-period sales or transactions for restaurants in operation for at least 13 full calendar months.
We continue to invest in improving our digital platforms and have significantly upgraded our capabilities by digitizing almost all of our digital-make lines, expanding our partnerships with multiple third-party delivery services and building more Chipotlanes, which is our drive through format for digital order pickups. Digital sales, which includes delivery and customer pick-up, increased 174.1% year over year and accounted for 46.2% of 2020 sales, compared to 10.9% of 2019 sales. The shift to digital sales accelerated in March 2020 as a result of the COVID-19 pandemic.
Restaurant Operating Costs. During the year ended December 31, 2020, our restaurant operating costs (food, beverage and packaging; labor; occupancy; and other operating costs) were 82.6% of total revenue, an increase from 79.5% in 2019. The increase was driven primarily by COVID-19 related impacts including increased delivery expenses, assistance and exclusion pay, elevated beef prices, increased incidence of steak, and fewer sales of high margin beverages. The increase was partially offset by benefits from menu price increases, lower avocado pricing and improved labor efficiency realized from digital enhancements to the restaurants.
Restaurant Development. For the full year 2020, we opened 161 new restaurants, which included 100 restaurants with a Chipotlane. We expect to open approximately 200 new restaurants in 2021.
Restaurant Activity
The following table details restaurant unit data for the years indicated.
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| Year ended December 31, | ||||
| 2020 |
| 2019 |
| 2018 |
Beginning of period | 2,622 |
| 2,491 |
| 2,408 |
Chipotle openings | 160 |
| 139 |
| 137 |
Pizzeria Locale openings | 1 |
| 1 |
| - |
Chipotle permanent closures | (9) |
| (7) |
| (43) |
Chipotle relocations | (6) |
| (2) |
| (5) |
Pizzeria Locale closures | - |
| - |
| (5) |
TastyMade closures | - |
| - |
| (1) |
Total restaurants at end of period | 2,768 |
| 2,622 |
| 2,491 |
Results of Operations
Our results of operations as a percentage of total revenue and period-over-period change are discussed in the following section.
Revenue
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| Year ended December 31, |
| Percentage change | |||||||||
| 2020 |
| 2019 |
| 2018 |
| 2020/2019 |
| 2019/2018 | |||
| (dollars in millions) |
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Food and beverage revenue | $ | 5,920.5 |
| $ | 5,561.0 |
| $ | 4,860.6 |
| 6.5% |
| 14.4% |
Delivery service revenue |
| 64.1 |
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| 25.3 |
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| 4.4 |
| 153.0% |
| 475.8% |
Total revenue | $ | 5,984.6 |
| $ | 5,586.4 |
| $ | 4,865.0 |
| 7.1% |
| 14.8% |
Average restaurant sales (1) | $ | 2.2 |
| $ | 2.2 |
| $ | 2.0 |
| (1.0%) |
| 10.8% |
Comparable restaurant sales increase (decrease) |
| 1.8% |
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| 11.1% |
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| 4.0% |
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(1) Average restaurant sales refer to the average trailing 12-month food and beverage sales for restaurants in operation for at least 12 full calendar months. |
The significant factors contributing to the total revenue increase in 2020 were new restaurant openings and comparable restaurant sales increases. Comparable restaurant sales increased $77.7 million and revenue from restaurants not yet in the comparable restaurant base contributed $319.9 million to the total revenue increase, of which $126.4 million was attributable to restaurants opened in 2020.
Food, Beverage and Packaging Costs
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| Year ended December 31, |
| Percentage change | |||||||||
| 2020 |
| 2019 |
| 2018 |
| 2020/2019 |
| 2019/2018 | |||
| (dollars in millions) |
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Food, beverage and packaging | $ | 1,932.8 |
| $ | 1,847.9 |
| $ | 1,600.8 |
| 4.6% |
| 15.4% |
As a percentage of total revenue |
| 32.3% |
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| 33.1% |
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| 32.9% |
| (0.8%) |
| 0.2% |
Food, beverage and packaging costs decreased as a percentage of total revenue in 2020 primarily due to menu price increases taken in the second half of 2020, favorable avocado pricing and better waste control. These benefits were partially offset by fewer sales of high margin beverages, COVID-19 related mix shifts, elevated beef pricing due to plant shutdowns in the summer of 2020, and higher dairy pricing.
Labor Costs
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| Year ended December 31, |
| Percentage change | |||||||||
| 2020 |
| 2019 |
| 2018 |
| 2020/2019 |
| 2019/2018 | |||
| (dollars in millions) |
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Labor costs | $ | 1,593.0 |
| $ | 1,472.1 |
| $ | 1,326.1 |
| 8.2% |
| 11.0% |
As a percentage of total revenue |
| 26.6% |
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| 26.4% |
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| 27.3% |
| 0.2% |
| (0.9%) |
Labor costs increased as a percentage of total revenue in 2020 primarily due to COVID-19 related labor costs, which included assistance pay for restaurant employees and expansion of our emergency leave benefits to accommodate those directly affected by COVID-19. Our assistance pay program ended on June 7, 2020, while the expansion of emergency leave benefits remains in place as of December 31, 2020. These COVID-19 related increases were partially offset by the benefits of menu price increases taken in the second half of 2020 and improved labor efficiency realized from digital enhancements to the restaurants.
Occupancy Costs
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| Year ended December 31, |
| Percentage change | |||||||||
| 2020 |
| 2019 |
| 2018 |
| 2020/2019 |
| 2019/2018 | |||
| (dollars in millions) |
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Occupancy costs | $ | 387.8 |
| $ | 363.1 |
| $ | 347.1 |
| 6.8% |
| 4.6% |
As a percentage of total revenue |
| 6.5% |
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| 6.5% |
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| 7.1% |
| 0.0% |
| (0.6%) |
Occupancy costs as a percentage of total revenue remained consistent in 2020 as compared to 2019. COVID-19 had an immaterial impact on occupancy costs for the year ended December 31, 2020.
Other Operating Costs
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| Year ended December 31, |
| Percentage change | |||||||||
| 2020 |
| 2019 |
| 2018 |
| 2020/2019 |
| 2019/2018 | |||
| (dollars in millions) |
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Other operating costs | $ | 1,030.0 |
| $ | 760.8 |
| $ | 680.0 |
| 35.4% |
| 11.9% |
As a percentage of total revenue |
| 17.2% |
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| 13.6% |
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| 14.0% |
| 3.6% |
| (0.4%) |
Other operating costs include, among other items, marketing and promotional costs, delivery expenses, bank and credit card processing fees, and restaurant utilities and maintenance costs. Other operating costs increased as a percentage of total revenue in 2020 primarily due to increased delivery expenses caused by the significant increase in delivery sales in 2020.
As a result of COVID-19, we are adapting our restaurant operations to the changing environment and are reducing non-essential controllable costs. Sales shifted towards delivery after we temporarily closed our dining rooms to help control the spread of COVID-19. We reprioritized marketing efforts by offering free delivery several times in 2020.
General and Administrative Expenses
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| Year ended December 31, |
| Percentage change | |||||||||
| 2020 |
| 2019 |
| 2018 |
| 2020/2019 |
| 2019/2018 | |||
| (dollars in millions) |
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General and administrative expense | $ | 466.3 |
| $ | 451.6 |
| $ | 375.5 |
| 3.3% |
| 20.3% |
As a percentage of total revenue |
| 7.8% |
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| 8.1% |
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| 7.7% |
| (0.3%) |
| 0.4% |
General and administrative expenses increased in dollar terms in 2020, primarily due to the following: a $20.1 million increase in outside service expense related to company initiatives to support digital and restaurant growth; a $15.8 million increase in wages and benefits primarily due to headcount increase; and $3.8 million increase of lease costs primarily related to our previous corporate headquarters. These increases were partially offset by a $10.7 million decrease in non-cash stock-based compensation expense, primarily related to performance share awards, and a $7.1 million decrease in travel expense related to our decision to halt non-essential employee travel due to the COVID-19 pandemic.
Other than the impact on travel expenses and stock-based compensation discussed above, COVID-19 had a minimal impact on general and administrative expenses. We will continue to assess additional planned general and administrative investments as we better understand the length and severity of the COVID-19 impacts.
Depreciation and Amortization
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| Year ended December 31, |
| Percentage change | |||||||||
| 2020 |
| 2019 |
| 2018 |
| 2020/2019 |
| 2019/2018 | |||
| (dollars in millions) |
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Depreciation and amortization | $ | 238.5 |
| $ | 212.8 |
| $ | 202.0 |
| 12.1% |
| 5.3% |
As a percentage of total revenue |
| 4.0% |
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| 3.8% |
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| 4.2% |
| 0.2% |
| (0.4%) |
Depreciation and amortization increased as a percentage of total revenue in 2020 due to accelerated depreciation associated with our website, mobile app and other technology, new restaurant openings and equipment upgrades in the restaurants primarily to support the growth in our digital business. This increase was partially offset by sales leverage on a partially fixed-cost base.
Impairment, Closure Costs, and Asset Disposals
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| Year ended December 31, |
| Percentage change | |||||||||
| 2020 |
| 2019 |
| 2018 |
| 2020/2019 |
| 2019/2018 | |||
| (dollars in millions) |
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Impairment, closure costs, and asset disposals | $ | 30.6 |
| $ | 23.1 |
| $ | 66.6 |
| 32.4% |
| (65.3%) |
As a percentage of total revenue |
| 0.5% |
|
| 0.4% |
|
| 1.4% |
| 0.1% |
| (1.0%) |
Impairment, closure costs, and asset disposals increased in dollar terms in 2020 primarily due to impairments of leasehold improvements, property and equipment and operating lease assets. COVID-19 had a negative impact on our assumptions for future near-term restaurant level cash flows which resulted in elevated impairment charges.
Benefit/(Provision) for Income Taxes
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| Year ended December 31, |
| Percentage change | |||||||||
| 2020 |
| 2019 |
| 2018 |
| 2020/2019 |
| 2019/2018 | |||
| (dollars in millions) |
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Benefit/(provision) for income taxes | $ | 62.0 |
| $ | (108.1) |
| $ | (91.9) |
| (157.3%) |
| 17.7% |
Effective tax rate |
| (21.1%) |
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| 23.6% |
|
| 34.2% |
| (44.7%) |
| (10.6%) |
The effective income tax rate for the year ended December 31, 2020 was lower than the effective income tax rate for the year ended December 31, 2019, primarily due to the federal net operating loss that is estimated for tax year 2020, which we expect to carryback to tax years 2015-2017. The tax benefit is due to the federal income tax rate differential between the 2020 statutory federal income tax rate of 21% and the 2015-2017 statutory federal income tax rate of 35%.
Quarterly Financial Data/Seasonality
See Note 15. “Quarterly Financial Data (Unaudited)” for a table presenting data from the consolidated statements of income for each of the eight quarters in the period ended December 31, 2020.
Seasonal factors cause our profitability to fluctuate from quarter to quarter. Historically, our average daily restaurant sales and net income are lower in the first and fourth quarters due, in part, to the holiday season and because fewer people eat out during periods of inclement weather (the winter months) than during periods of mild or warm weather (the spring, summer and fall months). Other factors also have a seasonal effect on our results. For example, restaurants located near colleges and universities generally do more business during the academic year. Seasonal factors, however, might be moderated or outweighed by other factors that may influence our quarterly results, such as unexpected publicity impacting our business in a positive or negative way, worldwide health pandemics, fluctuations in food or packaging costs, or the timing of menu price increases or promotional activities and other marketing initiatives. The number of trading days in a quarter can also affect our results, although, on an overall annual basis, changes in trading days do not have a significant impact.
Our quarterly results are also affected by other factors such as the amount and timing of non-cash stock-based compensation expense and related tax rate impacts, litigation, settlement costs and related legal expenses, impairment charges and non-operating costs, timing of marketing or promotional expenses, the number and timing of new restaurants opened in a quarter, and closure of restaurants. New restaurants typically have lower margins following opening because of the expenses associated with their opening
and operating inefficiencies in the months immediately following opening. Accordingly, results for a particular quarter are not necessarily indicative of results to be expected for any other quarter or for any year.
Liquidity and Capital Resources
Historically, our primary liquidity and capital requirements are for new restaurant construction, initiatives to improve the guest experience in our restaurants, working capital and general corporate needs. As of December 31, 2020, we had a cash and marketable investments balance of $1.1 billion, excluding restricted cash of $27.8 million. We expect to utilize cash flow from operations to continue investments in new restaurant construction, remodels primarily for restaurants that do not have a digital make line or Chipotlane and technology. Additionally, as of December 31, 2020, we had $600.0 million of undrawn borrowing capacity under a line of credit facility, which expires in May 2021.
As sales fell quickly from the impact of COVID-19, we proactively implemented several actions to reduce cash outlays and expenses. As part of our cash preservation strategy, in March 2020 we temporarily suspended our stock buyback program. In our restaurants, we are working to minimize waste, effectively schedule labor hours, and reduce non-essential controllable costs. We halted all non-essential travel and expenses. We believe that cash from operations, together with our cash and investment balances, will be sufficient to meet ongoing capital expenditures, working capital requirements and other cash needs for the foreseeable future. Assuming no significant declines in comparable restaurant sales, we expect that we will generate positive cash flow through the foreseeable future. Should our business deteriorate due to changing conditions, there are other actions we can take to further conserve liquidity.
We have not required significant working capital because customers generally pay using cash or credit and debit cards and because our operations do not require significant receivables, nor do they require significant inventories due, in part, to our use of various fresh ingredients. In addition, we generally have the right to pay for the purchase of food, beverages and supplies sometime after the receipt of those items, generally within ten days, thereby reducing the need for incremental working capital to support our growth.
Our total capital expenditures for 2020 were $373.4 million. In 2020, we spent on average about $1.1 million in development and construction costs per new restaurant, or about $1.0 million net of landlord reimbursements of $0.1 million. In 2021, we expect to incur about $390 million in total capital expenditures. We expect approximately $220 million in capital expenditures related to our construction of new restaurants, before any reductions for landlord reimbursements. For new restaurants to be opened in 2021, we anticipate average development costs will remain higher than the historical average due to a significant portion including Chipotlanes. We expect approximately $120 million in capital expenditures related to investments in existing restaurants, including updated equipment, technology, remodeling and similar improvements. Finally, we expect a portion of our capital expenditures for the year to be incurred for additional corporate initiatives including building corporate offices, upgrading our mobile app, and other projects.
Contractual Obligations
Our contractual obligations as of December 31, 2020 were as follows:
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| Payments Due by Fiscal Year | |||||||||||||
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| Total |
| 2021 |
| 2022-2023 |
| 2024-2025 |
| Thereafter | |||||
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Operating leases(1) |
| $ | 4,502 |
| $ | 332 |
| $ | 715 |
| $ | 679 |
| $ | 2,776 |
Purchase obligations(2) |
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| 1,862 |
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| 584 |
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| 359 |
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| 454 |
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| 465 |
Deemed landlord financing(1) |
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| 2 |
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| - |
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| 1 |
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| 1 |
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| - |
Total |
| $ | 6,366 |
| $ | 916 |
| $ | 1,075 |
| $ | 1,134 |
| $ | 3,241 |
(1)See Note 10. “Leases” of our consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data.” This includes commitments related to reasonably certain renewal periods.
(2)Purchase obligations include agreements to purchase goods or services that are enforceable and legally binding on us and that specify all significant terms. We have excluded agreements that are cancelable without penalty. The majority of our purchase obligations relate to amounts owed for produce and other ingredients and supplies, orders submitted for equipment for restaurants under construction and planned remodels, information technology, and marketing initiatives and corporate sponsorships.
The above table does not include income tax liabilities for uncertain tax positions for which we are not able to make a reasonably reliable estimate of the amount and period of related future payments. Additionally, we have excluded our estimated loss contingencies, due to uncertainty regarding the timing and amount of payment. See Note 12. “Commitments and Contingencies” of our consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data.”
Off-Balance Sheet Arrangements
As of December 31, 2020 and 2019, we had no material off-balance sheet arrangements or obligations.
Inflation
The primary areas of our operations affected by inflation are food, labor, rent, healthcare costs, fuel, utility costs, and materials used in the construction of our restaurants. Although a significant majority of our crew members make more than the federal and applicable state and local minimum wage, increases in the applicable federal or state minimum wage may have an impact on our labor costs by causing wage inflation above the minimum wage level. Additionally, many of our leases require us to pay property taxes, maintenance, and utilities, all of which are generally subject to inflationary increases. In the past we have largely been able to offset inflationary increases with menu price increases. If we do raise menu prices in the future, general competitive pressures or negative consumer responses may limit our ability to completely recover cost increases attributable to inflation.
Critical Accounting Estimates
We describe our significant accounting policies in Note 1. “Description of Business and Summary of Significant Accounting Policies” of our consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data.” Critical accounting estimates are those that we believe are both significant and that require us to make difficult, subjective or complex judgments, often because we need to estimate the effect of inherently uncertain matters. We base our estimates and judgments on historical experiences and various other factors that we believe to be appropriate under the circumstances. Actual results may differ from these estimates, and we might obtain different estimates if we used different assumptions or factors.
Leases
We determine if a contract contains a lease at inception. Our material operating leases consist of restaurant locations and office space. Our leases generally have remaining terms of 1-20 years and most include options to extend the leases for additional 5-year periods. Generally, the lease term is the minimum of the noncancelable period of the lease or the lease term inclusive of reasonably certain renewal periods up to a term of 20 years. If the estimate of our reasonably certain lease term was changed, our depreciation and rent expense could differ materially.
Operating lease assets and liabilities are recognized at time of lease inception. Operating lease liabilities represent the present value of lease payments not yet paid. Operating lease assets represent our right to use an underlying asset and are based upon the operating lease liabilities adjusted for prepayments or accrued lease payments, initial direct costs, lease incentives, and impairment of operating lease assets. To determine the present value of lease payments not yet paid, we estimate incremental borrowing rates corresponding to the reasonably certain lease term. As we have no outstanding debt nor committed credit facilities, secured or otherwise, we estimate this rate based on prevailing financial market conditions, comparable company and credit analysis, and management judgment. If the estimate of our incremental borrowing rate was changed, our operating lease assets and liabilities could differ materially.
Chipotle Rewards Loyalty Program
Eligible customers who enroll in the Chipotle Rewards loyalty program generally earn points for every dollar spent. After accumulating a certain number of points, the customer earns a reward that can be redeemed for a free entrée. Earned rewards generally expire one to two months after they are issued, and points generally expire if an account is inactive for a period of six months.
The estimation of the standalone selling price of points and other rewards issued to customers involves several assumptions, primarily the estimated value of product for which the reward is expected to be redeemed and the probability that the points or reward will expire. Our estimate of points and other rewards we expect to be redeemed is based on historical company specific data. These inputs are subject to change over time due to factors such as menu price increases, changes in point redemption options and changes in customer behavior.
Impairment of Long-Lived Assets
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. For the purpose of reviewing restaurant assets to be held and used for potential impairment, assets are grouped together at the market level, or in the case of a potential relocation or closure, at the restaurant level. We manage our restaurants as a group with significant common costs and promotional activities; as such, an individual restaurant’s cash flows are not generally independent of the cash flows of others in a market.
The fair value measurement for asset impairment is based on Level 3 inputs. We first compare the carrying value of the asset (or asset group, referred interchangeably throughout as asset) to the asset’s estimated future undiscounted cash flows. If the estimated
undiscounted future cash flows are less than the carrying value of the asset, we determine if we have an impairment loss by comparing the carrying value of the asset to the asset's estimated fair value. The estimated fair value of the asset is generally determined using the income approach to measure the fair value, which is based on the present value of estimated future cash flows. Key inputs to the income approach for restaurant assets include the discount rate, projected revenue and expenses, and sublease income if we are closing the restaurant. In certain cases, management uses other market information, when available, to estimate the fair value of an asset. The impairment charges represent the excess of each asset’s carrying amount over its estimated fair value and are allocated among the long-lived asset or assets of the group.
Our estimates of future revenues and expenses are highly subjective judgments based on internal projections and knowledge of our operations, historical performance, and trends in sales and restaurant operating costs, and can be significantly impacted by changes in our business or economic conditions. The determination of asset fair value is also subject to significant judgment and utilizes valuation techniques including discounting estimated future cash flows and market-based analyses to determine fair value. If our estimates or underlying assumptions, including discount rate and sublease income change in the future, our operating results may be materially impacted.
Stock-based Compensation
We recognize compensation expense for equity awards over the requisite service period based on the award’s fair value. We use the Black-Scholes valuation model to determine the fair value of our stock-only stock appreciation rights (“SOSARs”), and we use the Monte Carlo simulation model to determine the fair value of stock awards that contain market conditions. Both of these models require assumptions to be made regarding our stock price volatility, the expected life of the award and expected dividend rates. The volatility assumption was based on our historical data and implied volatility, and the expected life assumptions were based on our historical data. Similarly, the compensation expense of performance share awards is based in part on the estimated probability of achieving levels of performance associated with particular levels of payout for performance shares. We determine the probability of achievement of future levels of performance by comparing the relevant performance level with our internal estimates of future performance. Those estimates are based on a number of assumptions, including but not limited to growth in comparable restaurant sales and average restaurant level margin, and different assumptions may have resulted in different conclusions regarding the probability of our achieving future levels of performance relevant to the payout levels for the awards. Had we arrived at different assumptions of stock price volatility or expected lives of our SOSARs, or if we changed our assumptions regarding the probability of our achieving future levels of performance with respect to performance share awards, our stock-based compensation expense and results of operations may be materially different.
Insurance Liability
We are self-insured for a significant portion of our employee health benefits programs, and carry significant retentions for risks and associated liabilities with respect to workers’ compensation, general liability, property and auto damage, employment practices liability, cyber liability and directors and officer’s liability. Predetermined loss limits have been arranged with third-party insurance companies to limit exposure to these claims. We record a liability that represents our estimated cost of claims incurred and unpaid as of the balance sheet date. Our estimated liability is not discounted and is based on a number of assumptions and factors, including historical trends, actuarial assumptions and economic conditions, and is closely monitored and adjusted when warranted by changing circumstances. If a greater amount of claims occurs compared to what we have estimated, or if medical costs increase beyond what we expected, our accrued liabilities might not be sufficient and we may be required to record additional expense. Actual claims experience could also be more favorable than estimated, which would result in expense reductions. Unanticipated changes may produce materially different amounts of expense than that reported under these programs.
Reserves/Contingencies for Litigation and Other Matters
We are involved in various claims and legal actions that arise in the ordinary course of business. We record an accrual for legal contingencies when we determine that it is probable that we have incurred a liability and we can reasonably estimate the amount of the loss. Although we have recorded liabilities related to a number of legal actions, our estimates used to determine the amount of these liabilities may not be accurate, and there are other legal actions for which we have not recorded a liability. As a result, in the event legal actions for which we have not accrued a liability or for which our accrued liabilities are not accurate are resolved, such resolution may affect our operating results and cash flows.
Income Taxes
Our benefit/(provision) for income taxes, deferred tax assets and liabilities including valuation allowance requires the use of estimates based on our management’s interpretation and application of complex tax laws and accounting guidance. We are primarily subject to income taxes in the United States. We establish reserves for uncertain tax positions for material, known tax exposures in accordance with Accounting Standards Codification (“ASC”) 740 relating to deductions, transactions and other matters involving some uncertainty as to the measurement and recognition of the item. We may adjust these reserves when our judgment changes as a result of the evaluation of new information not previously available and will be reflected in the period in which the new information is available. While we believe that our reserves are adequate, issues raised by a tax authority may be resolved at an amount different than the related reserve and could materially increase or decrease our income tax provision in future periods.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Commodity Price Risks
We are exposed to commodity price risks. Many of the ingredients we use to prepare our food, as well as our packaging materials and utilities to run our restaurants, are ingredients or commodities that are affected by the price of other commodities, exchange rates, foreign demand, weather, seasonality, production, availability and other factors outside our control. We work closely with our suppliers and use a mix of forward pricing protocols under which we agree with our supplier on fixed prices for deliveries at some time in the future, fixed pricing protocols under which we agree on a fixed price with our supplier for the duration of that protocol, formula pricing protocols under which the prices we pay are based on a specified formula related to the prices of the goods, such as spot prices, and range forward protocols under which we agree on a price range for the duration of that protocol. Generally, our pricing protocols with suppliers can remain in effect for periods ranging from one to 36 months, depending on the outlook for prices of the particular ingredient. In some cases, we have minimum purchase obligations. We have tried to increase, where practical, the number of suppliers for our ingredients, which we believe can help mitigate pricing volatility, and we follow industry news, trade issues, exchange rates, foreign demand, weather, crises and other world events that may affect our ingredient prices. Increases in ingredient prices could adversely affect our results if we choose for competitive or other reasons not to increase menu prices at the same rate at which ingredient costs increase, or if menu price increases result in customer resistance. We also could experience shortages of key ingredients if our suppliers need to close or restrict operations due to the impact of the COVID-19 outbreak.
Changing Interest Rates
We are exposed to interest rate risk through fluctuations of interest rates on our investments. Changes in interest rates affect the interest income we earn, and therefore impact our cash flows and results of operations. As of December 31, 2020, we had $1.0 billion in investments and interest-bearing cash accounts, including insurance-related restricted trust accounts classified in restricted cash, and $59.7 million in accounts with an earnings credit we classify as interest and other income, which combined earned a weighted average interest rate of 0.20%.
Foreign Currency Exchange Risk
A portion of our operations consist of activities outside of the U.S. and we have currency risk on the transactions in other currencies and translation adjustments resulting from the conversion of our international financial results into the U.S. dollar. However, a substantial majority of our operations and investment activities are transacted in the U.S., and therefore our foreign currency risk is not material at this date.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Chipotle Mexican Grill, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Chipotle Mexican Grill, Inc. (the Company) as of December 31, 2020 and 2019, the related consolidated statements of income, comprehensive income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 9, 2021 expressed an unqualified opinion thereon.
Adoption of New Accounting Standard
As discussed in Note 10 to the consolidated financial statements, the Company changed its method for accounting for leases in 2019.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the account or disclosure to which it relates.
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| Valuation and accounting for stock-based compensation |
Description of the Matter |
| The Company incurred $84.5 million in stock-based compensation expense during the year ended December 31, 2020. Approximately 229,000 of the Company’s vested and non-vested stock awards were subject to service and performance conditions during the year ended December 31, 2020. As described in Notes 1 and 8 of the consolidated financial statements, the Company estimates the grant date fair value of the stock awards and expenses the fair value of stock awards subject to service conditions over the respective vesting period. Stock-based compensation expense of stock awards subject to performance conditions is based on the estimated probability of achieving levels of performance associated with particular levels of payout. Additionally, at each reporting period, the Company evaluates the probable outcome of the performance conditions including consideration of significant assumptions and as applicable, recognizes the cumulative effect of the change in estimate in the period of the change.
Auditing the grant date fair value and the appropriateness of the accounting treatment of the Company’s stock awards was complex and judgmental. In particular, the fair value estimate for stock awards subject to performance conditions is sensitive to significant assumptions including management’s internal estimates of the Company’s future performance.
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How We Addressed the Matter in Our Audit |
| We obtained an understanding, evaluated the design, and tested the operating effectiveness of management’s controls over stock-based compensation. We tested controls over management’s review of the valuation model methodology and assumptions used with regards to the service and performance conditions. We also tested management's controls to validate that data used in the valuation model was complete and accurate.
Our substantive audit procedures included, among others, testing the significant assumptions underlying the performance conditions (e.g., certain targets related to growth in comparable restaurant sales and average restaurant margin) and testing the completeness and accuracy of the underlying data. We evaluated management’s significant assumptions by comparing the assumptions to current market and economic trends, historical results of the Company’s business, and to other relevant factors. We additionally performed a sensitivity analysis of the significant assumptions to evaluate the change in the fair value of the stock awards subject to performance conditions resulting from changes in the assumptions. We also evaluated the adequacy of the Company’s stock-based compensation disclosures included in Notes 1 and 8 of the consolidated financial statements in relation to these matters. |
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 1997.
Irvine, California
February 9, 2021
CHIPOTLE MEXICAN GRILL, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
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| December 31, | ||||
| 2020 |
| 2019 | ||
Assets |
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Current assets: |
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Cash and cash equivalents | $ | |
| $ | |
Accounts receivable, net |
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Inventory |
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Prepaid expenses and other current assets |
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Income tax receivable |
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Investments |
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Total current assets |
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Leasehold improvements, property and equipment, net |
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Long-term investments |
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Restricted cash |
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Operating lease assets |
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Other assets |
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Goodwill |
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Total assets | $ | |
| $ | |
Liabilities and shareholders' equity |
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Current liabilities: |
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Accounts payable | $ | |
| $ | |
Accrued payroll and benefits |
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Accrued liabilities |
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Unearned revenue |
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Current operating lease liabilities |
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Total current liabilities |
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Commitments and contingencies (Note 12) |
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Long-term operating lease liabilities |
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Deferred income tax liabilities |
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Other liabilities |
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Total liabilities |
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Shareholders' equity: |
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Preferred stock, $ |
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Common stock, $ |
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Additional paid-in capital |
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Treasury stock, at cost, |
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Accumulated other comprehensive loss |
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Retained earnings |
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Total shareholders' equity |
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Total liabilities and shareholders' equity | $ | |
| $ | |
See accompanying notes to consolidated financial statements.
CHIPOTLE MEXICAN GRILL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
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| Year ended December 31, | |||||||
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| 2019 |
| 2018 | |||
Food and beverage revenue | $ | |
| $ | |
| $ | |
Delivery service revenue |
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Total revenue |
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Restaurant operating costs (exclusive of depreciation and amortization shown separately below): |
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Food, beverage and packaging |
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Labor |
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Occupancy |
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Other operating costs |
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General and administrative expenses |
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Depreciation and amortization |
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Pre-opening costs |
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Impairment, closure costs, and asset disposals |
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Total operating expenses |
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Income from operations |
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Interest and other income, net |
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Income before income taxes |
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Benefit/(provision) for income taxes |
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Net income | $ | |
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Earnings per share: |
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Basic | $ | |
| $ | |
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Diluted | $ | |
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Weighted-average common shares outstanding: |
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Diluted |
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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
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| Year ended December 31, | |||||||
| 2020 |
| 2019 |
| 2018 | |||
Net income | $ | |
| $ | |
| $ | |
Other comprehensive income (loss), net of income taxes: |
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Foreign currency translation adjustments |
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Unrealized gain on available-for-sale securities, net of income taxes |
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Other comprehensive income (loss), net of income taxes |
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Comprehensive income | $ | |
| $ | |
| $ | |
See accompanying notes to consolidated financial statements.
CHIPOTLE MEXICAN GRILL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(in thousands)
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| Available-for-Sale Securities |
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| Foreign Currency Translation |
| Total | ||||||
Balance, December 31, 2017 | |
| $ | |
| $ | |
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| $ | ( |
| $ | |
| $ | ( |
| $ | ( |
| $ | |
Stock-based compensation | |
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Stock plan transactions and other | |
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Acquisition of treasury stock | |
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Net income | |
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Other comprehensive income (loss), net of income taxes | |
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Balance, December 31, 2018 | |
| $ | |
| $ | |
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| $ | ( |
| $ | |
| $ | ( |
| $ | ( |
| $ | |
Adoption of ASU No. 2016-02, Leases (Topic 842) | |
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Stock-based compensation | |
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Stock plan transactions and other | |
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Acquisition of treasury stock | |
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Net income | |
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Other comprehensive income (loss), net of income taxes | |
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Balance, December 31, 2019 | |
| $ | |
| $ | |
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| $ | ( |
| $ | |
| $ | |
| $ | ( |
| $ | |
Adoption of ASU No. 2016-13, Financial Instrument-Credit Losses (Topic 326) | |
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Stock-based compensation | |
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Stock plan transactions and other | |
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Acquisition of treasury stock | |
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Net income | |
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Other comprehensive income (loss), net of income taxes | |
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Balance, December 31, 2020 | |
| $ | |
| $ | |
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| $ | ( |
| $ | |
| $ | |
| $ | ( |
| $ | |
See accompanying notes to consolidated financial statements.
CHIPOTLE MEXICAN GRILL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
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| Year ended December 31, | |||||||
| 2020 |
| 2019 |
| 2018 | |||
Operating activities |
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Net income | $ | |
| $ | |
| $ | |
Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation and amortization |
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Amortization of operating lease assets |
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Deferred income tax provision |
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Impairment, closure costs, and asset disposals |
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Provision for credit losses |
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Stock-based compensation expense |
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Other |
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Changes in operating assets and liabilities: |
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Accounts receivable |
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Inventory |
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Prepaid expenses and other current assets |
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Other assets |
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Accounts payable |
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Accrued payroll and benefits |
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Accrued liabilities |
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Unearned revenue |
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Income tax payable/receivable |
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Deferred rent |
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Operating lease liabilities |
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Other long-term liabilities |
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Net cash provided by operating activities |
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Investing activities |
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Purchases of leasehold improvements, property and equipment |
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Purchases of investments |
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Maturities of investments |
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Proceeds from sale of equipment |
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Acquisitions of equity method investments |
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Net cash used in investing activities |
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Financing activities |
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Acquisition of treasury stock |
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Tax withholding on stock-based compensation awards |
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Other financing activities |
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Net cash used in financing activities |
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Effect of exchange rate changes on cash, cash equivalents and restricted cash |
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Net change in cash, cash equivalents, and restricted cash |
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Cash, cash equivalents, and restricted cash at beginning of year |
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Cash, cash equivalents, and restricted cash at end of year | $ | |
| $ | |
| $ | |
Supplemental disclosures of cash flow information |
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Income taxes paid | $ | |
| $ | |
| $ | |
Purchases of leasehold improvements, property, and equipment accrued in accounts payable and accrued liabilities | $ | |
| $ | |
| $ | |
Acquisition of treasury stock accrued in accounts payable and accrued liabilities | $ | |
| $ | |
| $ | |
See accompanying notes to consolidated financial statements.
CHIPOTLE MEXICAN GRILL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollar and share amounts in thousands, unless otherwise specified)
In this annual report on Form 10-K, Chipotle Mexican Grill, Inc., a Delaware corporation, together with its subsidiaries, is collectively referred to as “Chipotle,” “we,” “us,” or “our.”
We develop and operate restaurants that serve a relevant menu of burritos, burrito bowls, tacos, and salads, made using fresh, high-quality ingredients. As of December 31, 2020, we operated
Our consolidated financial statements include our accounts and our wholly and majority owned subsidiaries after elimination of all intercompany accounts and transactions. Certain prior-year amounts have been reclassified to conform to the current year presentation.
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements, as well as the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates under different assumptions or conditions.
We consider highly liquid investment instruments purchased with an initial maturity of three months or less to be cash equivalents. We maintain cash and cash equivalent balances that exceed federally-insured limits with a number of financial institutions.
We maintain certain cash balances restricted as to withdrawal or use. Restricted cash assets are primarily insurance-related restricted trust assets.
Accounts receivable primarily consists of receivables from third party gift card distributors, tenant improvement receivables from landlords, vendor rebates, delivery receivables and interest receivables.
We closely monitor accounts receivable and held to maturity investment balances and estimate the allowance for credit losses. Our estimate is based on historical collection experience, external market data and other factors, including those related to current market conditions and events. Our credit losses associated with accounts receivable and held-to-maturity investments have not historically been material. We adopted Accounting Standards Update (“ASU”) 2016-13 using the modified retrospective approach on January 1, 2020. The allowance for credit losses was $
Inventory, consisting principally of food, beverages, and supplies, is valued at the lower of first-in, first-out cost or net realizable value.
Investments classified as trading securities are carried at fair value with any unrealized gain or loss being recorded in the consolidated statements of income. Investments classified as available-for-sale are carried at fair value with unrealized gains and losses, net of tax, included as a component of other comprehensive income (loss), net of income taxes on the consolidated statements of comprehensive income. Held-to-maturity securities are carried at amortized cost. Impairment charges on investments are recognized in interest and other income, net on the consolidated statements of income when management believes the decline in the fair value of the investment is other-than-temporary.
Fair value is the price we would receive to sell an asset or pay to transfer a liability (exit price) in an orderly transaction between market participants. For assets and liabilities recorded or disclosed at fair value, we determine fair value based on the following:
Level 1: Quoted prices in active markets for identical assets or liabilities that the entity has the ability to access.
Level 2: Observable inputs other than prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated with observable market data.
Level 3: Unobservable inputs for the asset or liability. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.
Our international operations use the local currency as the functional currency. Assets and liabilities are translated at exchange rates in effect as of the balance sheet date. Income and expense accounts are translated monthly using average monthly exchange rates. Resulting translation adjustments are recorded as a separate component of other comprehensive income (loss), net of income taxes on the consolidated statement of comprehensive income.
Leasehold improvements, property and equipment are recorded at cost. Internal costs directly associated with the acquisition, development and construction of a restaurant are capitalized. During the years ended December 31, 2020, 2019 and 2018, we capitalized $
At least annually, or when impairment indicators are present, we evaluate, and adjust when necessary, the estimated useful lives of leasehold improvements, property and equipment. The changes in estimated useful lives did not have a material impact on depreciation in any period. The estimated useful lives are:
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Leasehold improvements and buildings | |
Furniture and fixtures | |
Equipment |
We determine if a contract contains a lease at inception. Our material operating leases consist of restaurant locations and office space. Our leases generally have remaining terms of
Operating lease assets and liabilities are recognized at the lease commencement date, which is the date we take possession of the property. Operating lease liabilities represent the present value of lease payments not yet paid. Operating lease assets represent our right to use an underlying asset and are based upon the operating lease liabilities adjusted for prepayments or accrued lease payments, initial direct costs, lease incentives, and impairment of operating lease assets. To determine the present value of lease payments not yet paid, we estimate incremental borrowing rates corresponding to the lease term including reasonably certain renewal periods. As we have
Our leases typically contain rent escalations over the lease term. We recognize expense for these leases on a straight-line basis over the lease term. Additionally, tenant incentives used to fund leasehold improvements are recognized when earned and reduce our right-of-use asset related to the lease. These are amortized through the operating lease asset as reductions of expense over the lease term.
Some of our leases include rent escalations based on inflation indexes and fair market value adjustments. Certain leases contain contingent rental provisions that include a fixed base rent plus an additional percentage of the restaurant’s sales, generally in excess of a stipulated amount. Operating lease liabilities are calculated using the prevailing index or rate at lease commencement. Subsequent escalations in the index or rate and contingent rental payments are recognized as variable lease expenses. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.
Goodwill is not subject to amortization, but instead is tested for impairment at least annually, or when impairment indicators are present, and we are required to record any necessary impairment adjustments. Impairment is measured as the excess of the carrying value over the fair value of the goodwill.
Other assets consist primarily of a rabbi trust as described further in Note 9. “Employee Benefit Plans,” software as a service implementation costs where the service period is greater than one year, transferable liquor licenses which are carried at the lower of fair value or cost, rental deposits related to leased properties and an equity method investment described further in Note 4. “Fair Value of Financial Instruments.”
We are self-insured for a significant portion of our employee health benefits programs, and carry significant retentions for risks and associated liabilities with respect to workers’ compensation, general liability, property and auto damage, employment practices liability, cyber liability and directors and officer’s liability. Predetermined loss limits have been arranged with third party insurance companies to limit exposure to these claims. We record a liability that represents our estimated cost of claims incurred and unpaid as of the balance sheet date. Our estimated liability is not discounted and is based on a number of assumptions and factors, including historical trends, actuarial assumptions and economic conditions, and is closely monitored and adjusted when warranted by changing circumstances.
We are involved in various claims and legal actions that arise in the ordinary course of business. We record an accrual for legal contingencies when we determine that it is probable that we have incurred a liability and we can reasonably estimate the amount of the loss.
We compute income taxes using the asset and liability method, under which deferred income tax assets and liabilities are recognized based on the differences between the financial reporting bases and the respective tax bases of assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which we expect the temporary differences to reverse. Any effects of changes in income tax rates or tax laws are included in the provision for income taxes in the period that includes the enactment date.
We routinely assess the realizability of our deferred tax assets by jurisdiction and may record a valuation allowance if, based on all available positive and negative evidence, we determine that some portion of the deferred tax assets may not be realized prior to expiration. If we determine that we may be able to realize our deferred tax assets in the future in excess of their net recorded amount, we would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes during the period in which the determination was made that the deferred tax asset can be realized.
We evaluate our tax filing positions and recognize a tax benefit from an uncertain tax position only if it is more likely than not that based on its technical merits the tax position will be sustained upon examination by the relevant taxing authorities, including resolutions of any related appeals or litigation processes. The tax benefits recognized in the financial statements from such a position are measured based on the largest tax benefit that has a greater than
We recognize interest to be paid on an underpayment of income taxes in interest expense and any related statutory penalties in the provision for income taxes in our consolidated statements of income. Accrued interest and penalties are included within the related tax reserve on our consolidated balance sheets.
We generally recognize revenue, net of discounts and incentives, when payment is tendered at the point of sale. We report revenue net of sales-related taxes collected from customers and remitted to governmental taxing authorities. Beginning with the quarter ended September 30, 2020, we modified the presentation in our consolidated statements of income to disaggregate total revenue between food and beverage revenue and delivery service revenue. Delivery service revenue is comprised of delivery and related service fees charged to customers on sales made through Chipotle’s app and website. Food and beverage revenue primarily relates to the sale of food and beverages. Prior year balances have been reclassified to conform with current year presentation.
Delivery
We offer our customers delivery in almost all of our geographic regions. Delivery services are fulfilled by third-party service providers. In some cases, we make delivery sales through our website Chipotle.com or the Chipotle App (“White Label Sales”). In other cases, we make delivery sales through a non-Chipotle owned channel, such as the delivery partner’s website or mobile app (“Marketplace Sales”). With respect to White Label Sales, we control the delivery services and generally recognize revenue, including delivery fees, when the delivery partner transfers food to the customer. For these sales, we receive payment directly from the customer at the time of sale. With respect to Marketplace Sales, we generally recognize revenue, excluding delivery fees collected by the delivery partner, when control of the food is transferred to the delivery partner. We receive payment from the delivery partner subsequent to the transfer of food and the payment terms are short-term in nature.
Gift Cards
We sell gift cards, which do not have expiration dates and we do not deduct non-usage fees from outstanding gift card balances. Gift card balances are initially recorded as unearned revenue. We recognize revenue from gift cards when the gift card is redeemed by the customer. Historically, the majority of gift cards are redeemed within one year. In addition, based on historical redemption rates, a portion of gift cards are not expected to be redeemed and will be recognized as breakage over time in proportion to gift card redemptions. The breakage rates are based on company and program specific information, including historical redemption patterns, and expected remittance to government agencies under unclaimed property laws, if applicable. We evaluate our breakage rate estimate annually, or more frequently as circumstances warrant, and apply that rate to gift card redemptions. Gift card liability balances are typically highest at the end of each calendar year following increased gift card sales during the holiday season; accordingly, revenue recognized from gift card liability balances is highest in the first quarter of each calendar year.
Chipotle Rewards
Eligible customers who enroll in the Chipotle Rewards loyalty program generally earn points for every dollar spent. After accumulating a certain number of points, the customer earns a reward that can be redeemed for a free entrée. We may also periodically offer promotions, which provide the customer with the opportunity to earn bonus points or free food vouchers (“Bonus Vouchers”). Earned rewards generally expire to
We defer revenue associated with the estimated selling price of points or Bonus Vouchers earned by customers as each point or Bonus Voucher is earned, net of points we do not expect to be redeemed. The estimated selling price of each point or Bonus Voucher earned is based on the estimated value of product for which the reward is expected to be redeemed. Our estimate of points and Bonus Vouchers we expect to be redeemed is based on historical company specific data. The cost associated with rewards and Bonus Vouchers redeemed are included in food, beverage, and packaging expense on our consolidated statements of income.
We recognize loyalty revenue within food and beverage revenue on the consolidated statements of income when a customer redeems an earned reward. Deferred revenue associated with Chipotle Rewards is included in unearned revenue on our consolidated balance sheets.
Advertising and marketing costs are expensed as incurred and totaled $
We issue shares as part of employee compensation pursuant to the Amended and Restated Chipotle Mexican Grill, Inc. 2011 Stock Incentive Plan (the “2011 Incentive Plan”). Stock-only stock appreciation rights, or “SOSARs”, and stock awards generally vest equally over and
Pre-opening costs, including rent, wages, benefits and travel for training and opening teams, food and other restaurant operating costs, are expensed as incurred prior to a restaurant opening for business, and are included in operating expenses on the consolidated statements of income.
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. For the purpose of reviewing restaurant assets to be held and used for potential impairment, assets are grouped together at the market level, or in the case of a potential relocation or closure, at the restaurant level. We manage our restaurants as a group with significant common costs and promotional activities; as such, an individual restaurant’s cash flows are not generally independent of the cash flows of others in a market.
The fair value measurement for asset impairment is based on Level 3 inputs. See “Fair Value Measurements” above for a description of level inputs. We first compare the carrying value of the asset (or asset group, referred interchangeably throughout as asset) to the asset’s estimated future undiscounted cash flows. If the estimated undiscounted future cash flows are less than the carrying value of the asset, we determine if we have an impairment loss by comparing the carrying value of the asset to the asset's
estimated fair value. The estimated fair value of the asset is generally determined using the income approach to measure the fair value, which is based on the present value of estimated future cash flows. Key inputs to the income approach for restaurant assets include the discount rate, projected restaurant revenues and expenses, and sublease income if we are closing the restaurant. In certain cases, management uses other market information, when available, to estimate the fair value of an asset. The impairment charges represent the excess of each asset’s carrying amount over its estimated fair value and are allocated among the long-lived asset or assets of the group.
Basic earnings per share is calculated by dividing income available to common shareholders by the weighted-average number of shares of common stock outstanding during each period. Diluted earnings per share (“diluted EPS”) is calculated using income available to common shareholders divided by diluted weighted-average shares of common stock outstanding during each period. Potentially dilutive securities include shares of common stock underlying SOSARs and non-vested stock awards (collectively “stock awards”). Diluted EPS considers the impact of potentially dilutive securities except in periods in which there is a loss because the inclusion of the potential common shares would have an anti-dilutive effect. Stock awards are excluded from the calculation of diluted EPS in the event they are subject to performance conditions or are antidilutive.
Recently Issued Accounting Standards
In December 2019, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2019-12, “Simplifying the Accounting for Income Taxes (Topic 740)”, which modifies certain technical guidelines for accounting for income taxes. ASU 2019-12 is effective for reporting periods beginning after December 15, 2020, and early adoption is permitted. We will adopt ASU 2019-12 in the fiscal year beginning January 1, 2021 and do not expect the adoption of ASU 2019-12 will result in a material change to our consolidated financial statements.
We reviewed all other recently issued accounting pronouncements and concluded that they were either not applicable or not expected to have a significant impact to the consolidated financial statements.
Recently Adopted Accounting Standards
On January 1, 2020 we adopted ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326)”, along with related clarifications and improvements. This pronouncement requires companies to measure credit losses utilizing a methodology that reflects expected credit losses and requires a consideration of a broader range of reasonable and supportable information to inform credit loss estimates. We adopted the standard using the modified-retrospective approach as of the effective date and therefore, we have not applied the standard to the comparative periods presented in our consolidated financial statements. The modified-retrospective approach requires an entity to recognize a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which this guidance is effective. As of January 1, 2020, the adoption of this standard resulted in a net increase to the allowance for credit losses of $
Leasehold improvements, property and equipment, net were as follows:
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| December 31, | ||||
| 2020 |
| 2019 | ||
Land | $ |
| $ | ||
Leasehold improvements and buildings |
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Furniture and fixtures |
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Equipment |
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Construction in Progress |
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Leasehold improvements, property and equipment |
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Accumulated depreciation |
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Leasehold improvements, property and equipment, net | $ |
| $ |
Accrued payroll and benefits were as follows:
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| December 31, | ||||
| 2020 |
| 2019 | ||
Workers' compensation liability | $ |
| $ | ||
Accrued payroll |
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Accrued employer payroll taxes, deferred pursuant to the CARES Act |
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Other accrued payroll and benefits |
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Accrued payroll and benefits | $ |
| $ |
Accrued liabilities were as follows:
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| December 31, | ||||
| 2020 |
| 2019 | ||
Sales and use tax payable | $ |
| $ | ||
Legal reserve liability |
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Other accrued liabilities |
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Accrued liabilities | $ |
| $ |
Gift Cards
The gift card liability included in unearned revenue on the consolidated balance sheets was as follows:
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| December 31, |
| December 31, | ||
| 2020 |
| 2019 | ||
Gift card liability | $ | |
| $ | |
Revenue recognized from the redemption of gift cards that was included in unearned revenue at the beginning of the year was as follows:
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| Year ended | |||||||
| December 31, | |||||||
| 2020 |
| 2019 |
| 2018 | |||
Revenue recognized from gift card liability balance at the beginning of the year | $ | |
| $ | |
| $ | |
Chipotle Rewards
Changes in our Chipotle Rewards liability included in unearned revenue on the consolidated balance sheets were as follows:
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| Year ended | |||||||
| December 31, | |||||||
| 2020 |
| 2019 |
| 2018 | |||
Chipotle Rewards liability, beginning balance | $ | |
| $ | |
| $ | |
Revenue deferred |
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Revenue recognized |
| ( |
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| ( |
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Chipotle Rewards liability, ending balance | $ | |
| $ | |
| $ | |
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The carrying value of our cash and cash equivalents, accounts receivable and accounts payable approximate fair value because of their short-term nature.
Our investments consist of U.S. Treasury notes with maturities of up to
Investments, all of which are classified as held-to-maturity, are carried at amortized cost. The fair value of these investments was less than the amortized cost by $
We have elected to fund certain deferred compensation obligations through a rabbi trust, the assets of which are designated as trading securities, as described further in Note 9. “Employee Benefit Plans.”
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Assets recognized or disclosed at fair value on the consolidated financial statements on a nonrecurring basis include items such as leasehold improvements, property and equipment, operating lease assets, other assets and goodwill. Fair value of these assets are measured using Level 3 inputs (unobservable inputs for the asset or liability). Unobservable inputs include the discount rate, projected restaurant revenues and expenses, and sublease income if we are closing the restaurant. These assets are measured at fair value whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Carrying value after impairment approximates fair value.
The following table summarizes our assets measured at fair value by hierarchy level on a nonrecurring basis:
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| Carrying Value | ||||
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| December 31, | ||||
| Level | 2020 |
| 2019 | ||
Leasehold improvements, property and equipment, net | 3 | $ | |
| $ | |
Operating lease assets | 3 |
| |
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Total |
| $ | |
| $ | |
For the years ended December 31, 2020, 2019 and 2018 we recorded asset impairments related to restaurants and offices of $
Equity Method Investment
On April 16, 2020, we acquired approximately
In May 2018, we announced that we would open a headquarters office in Newport Beach, California, consolidate certain corporate administrative functions into our existing office in Columbus, Ohio, and close our existing headquarters offices in Denver, Colorado, as well as additional corporate offices in New York, New York. All affected employees were either offered an opportunity to continue in the new organization or were offered a severance package. We record severance as a one-time termination benefit and recognize the expense ratably over the employees’ required future service period.
All other costs, including other employee transition costs, recruitment and relocation costs, office asset impairment and other office closure costs, and third-party and other costs, are recognized in the period incurred.
Corporate restructuring costs consist of the following:
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| Year ended December 31, | |||||||
| 2020 |
| 2019 |
| 2018 | |||
Employee severance and other employee transition costs(1) | $ | |
| $ | |
| $ | |
Recruitment and relocation costs(1) |
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Office asset impairment and other office closure costs(2) |
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Third-party and other costs(1) |
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Stock-based compensation(1) |
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Total corporate restructuring costs | $ | |
| $ | |
| $ | |
__________________
(1)
(2)
Upon the adoption of Accounting Standards Codification Topic 842 on January 1, 2019, lease termination and other closure liabilities of $
Changes in our corporate restructuring liabilities which are included in accrued liabilities on the consolidated balance sheets were as follows:
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| December 31, 2019 |
| Charges |
| Payments |
| December 31, 2020 | ||||
Employee severance and other employee transition costs | $ | |
| $ | |
| $ | ( |
| $ | |
Recruitment and relocation costs |
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| ( |
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Third-party and other costs |
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| ( |
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Total restructuring liability | $ | |
| $ | |
| $ | ( |
| $ | |
Income before income taxes, classified by source of income, was as follows:
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| Year ended December 31, | |||||||
| 2020 |
| 2019 |
| 2018 | |||
Domestic | $ | |
| $ | |
| $ | |
Foreign |
| ( |
|
| ( |
|
| ( |
Income before income taxes | $ | |
| $ | |
| $ | |
The components of the benefit/(provision) for income taxes were as follows:
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| Year ended December 31, | |||||||
| 2020 |
| 2019 |
| 2018 | |||
Current tax: |
|
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|
|
|
|
|
|
U.S. Federal | $ | |
| $ | ( |
| $ | ( |
U.S. State |
| ( |
|
| ( |
|
| ( |
Foreign |
| ( |
|
| ( |
|
| ( |
|
| |
|
| ( |
|
| ( |
Deferred tax: |
|
|
|
|
|
|
|
|
U.S. Federal |
| ( |
|
| ( |
|
| ( |
U.S. State |
| |
|
| ( |
|
| ( |
Foreign |
| |
|
| |
|
| |
|
| ( |
|
| ( |
|
| ( |
Valuation allowance |
| ( |
|
| ( |
|
| ( |
Benefit/(provision) for income taxes | $ | |
| $ | ( |
| $ | ( |
The effective tax rate differs from the statutory tax rates as follows:
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| Year ended December 31, | ||||||||
| 2020 |
| 2019 |
| 2018 | ||||
Statutory U.S. federal income tax rate |
| | % |
| | % |
| | % |
State income tax, net of related federal income tax benefit |
| |
|
| |
|
| |
|
Federal credits |
| ( |
|
| ( |
|
| ( |
|
Executive compensation disallowed |
| |
|
| |
|
| |
|
Meals and entertainment |
| |
|
| |
|
| |
|
Enhanced deduction for food donation |
| ( |
|
| |
|
| ( |
|
Valuation allowance |
| |
|
| |
|
| |
|
Other |
| |
|
| |
|
| |
|
Return to provision and other discrete items |
| |
|
| |
|
| |
|
Equity compensation related adjustments |
| ( |
|
| ( |
|
| |
|
Federal net operating loss |
| ( |
|
| - |
|
| - |
|
Effective income tax rate |
| ( | % |
| | % |
| | % |
The effective tax rate for the year ended December 31, 2020, was lower than the effective tax rate for the year ended December 31, 2019, primarily due to stock-based compensation, partially offset by current year increases in non-deductible executive compensation and net excess benefits from the federal net operating loss (“NOL”) generated in the current year that will be carried back to tax years 2015-2017.
We have estimated a federal NOL for the year ended December 31, 2020. We expect to carryback the federal NOL generated in the current year to tax years 2015-2017 when the corporate federal income tax rate was
The components of the deferred income tax assets and liabilities were as follows:
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| December 31, | ||||
|
|
|
| 2020 |
| 2019 | ||
Deferred income tax liability: |
|
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|
|
|
|
Leasehold improvements, property and equipment |
|
|
| $ | |
| $ | |
Goodwill and other assets |
|
|
|
| |
|
| |
Prepaid assets and other |
|
|
|
| ( |
|
| |
Operating lease asset |
|
|
|
| |
|
| |
Total deferred income tax liability |
|
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|
| |
|
| |
Deferred income tax asset: |
|
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|
|
|
Gift card liability |
|
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| |
|
| |
Capitalized transaction costs |
|
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| |
|
| |
Stock-based compensation and other employee benefits |
|
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|
| |
|
| |
Foreign net operating loss carry-forwards |
|
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|
| |
|
| |
State credits |
|
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| |
|
| |
Operating lease liabilities |
|
|
|
| |
|
| |
Allowances, reserves and other |
|
|
|
| |
|
| |
State net operating loss carry-forwards |
|
|
|
| |
|
| - |
Valuation allowance |
|
|
|
| ( |
|
| ( |
Total deferred income tax asset |
|
|
|
| |
|
| |
Deferred income tax liabilities |
|
|
| $ | |
| $ | |
Gross foreign NOLs were $
Gross state NOLs generated across all jurisdictions in which we operate were $
We had gross valuation allowances against certain foreign deferred tax assets of $
Unrecognized Tax Benefits
A reconciliation of the unrecognized tax benefits was as follows:
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|
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|
| Year ended December 31, | |||||||
| 2020 |
| 2019 |
| 2018 | |||
Beginning of year | $ | |
| $ | |
| $ | |
(Decrease)/Increase resulting from prior year tax position |
| ( |
|
| |
|
| |
Increase resulting from current year tax position |
| |
|
| |
|
| |
Settlements with taxing authorities |
| |
|
| ( |
|
| |
Lapsing of statutes of limitations |
| ( |
|
| ( |
|
| ( |
End of year | $ | |
| $ | |
| $ | |
Interest expense related to uncertain tax positions is recognized in interest and other income, net on the consolidated statements of income. Penalties related to uncertain tax positions are recognized in benefit/(provision) for income taxes on the consolidated statements of income. For the years ended December 31, 2020, 2019 and 2018, we recognized $
We are no longer subject to U.S. federal tax examinations by tax authorities for tax years before 2016. For the majority of states where we have a significant presence, we are no longer subject to tax examinations by tax authorities for tax years before 2016. Currently, we expect expirations of statutes of limitations, excluding indemnified amounts, on reserves of approximately $
It is reasonably possible the amount of the unrecognized benefit with respect to certain unrecognized positions could significantly increase or decrease within the next twelve months and would have an impact on net income.
Coronavirus Aid, Relief and Economic Security Act (“CARES Act”)
On March 27, 2020, President Trump signed into law the CARES Act. Intended to provide economic relief to those impacted by the COVID-19 pandemic, the CARES Act includes provisions, among others, addressing the carryback of NOLs for specific periods, refunds of alternative minimum tax credits, temporary modifications to the limitations placed on the tax deductibility of net interest expenses, and technical amendments for qualified improvement property (“QIP”). Additionally, the CARES Act, in efforts to enhance business’ liquidity, provides for refundable employee retention tax credits and the deferral of the employer-paid portion of social security taxes.
The CARES Act provides for the deferral of the employer-paid portion of social security payroll taxes. We have elected to defer the employer-paid portion of social security payroll taxes through December 31, 2020, of $
We accelerated tax depreciation expenses due to the technical amendments made by the CARES Act to QIP. As of December 31, 2020, accelerated tax depreciation expenses of $
The CARES Act provides refundable employee retention credits, which can be used to offset payroll tax liabilities. For the year ended December 31, 2020, we recorded a benefit of $
Tax Cuts and Jobs Act
Effective for tax years beginning after December 31, 2017, the U.S. corporate income tax rate is
We have had a stock repurchase program in place since 2008. Through December 31, 2020, we had announced authorizations by our Board of Directors to repurchases shares of common stock which, in the aggregate, authorized expenditures of up to $
During the years ended December 31, 2020, 2019, and 2018, shares of common stock at a total cost of $
Pursuant to the 2011 Incentive Plan, we grant stock options, SOSARs, restricted stock units (“RSUs”), or performance and/or market based restricted stock units (“PSUs”) to employees and non-employee directors. We issue shares of common stock upon the exercise of SOSARs and the vesting of RSUs and PSUs.
Under the 2011 Incentive Plan,
The following table sets forth total stock-based compensation expense:
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| Year ended December 31, | |||||||
| 2020 |
| 2019 |
| 2018 | |||
Stock-based compensation | $ | |
| $ | |
| $ | |
Stock-based compensation, net of income taxes | $ | |
| $ | |
| $ | |
Total capitalized stock-based compensation included in net leasehold improvements, property and equipment on the consolidated balance sheets | $ | |
| $ | |
| $ | |
Excess tax benefit (deficit) on stock-based compensation recognized in provision for income taxes | $ | |
| $ | |
| $ | ( |
SOSARs
A summary of SOSAR activity was as follows (in thousands, except years and per share data):
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| Shares |
| Weighted-Average Exercise Price per Share |
| Weighted-Average Remaining Contractual Life (Years) |
| Aggregate Intrinsic Value | ||||
Outstanding, January 1, 2020 |
| |
| $ | |
|
|
|
| $ | |
Granted |
| |
|
| |
|
|
|
|
|
|
Exercised |
| ( |
|
| |
|
|
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|
|
Forfeited or cancelled |
| ( |
|
| |
|
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|
|
|
Outstanding, December 31, 2020 |
| |
|
| |
|
|
|
| | |
Exercisable, December 31, 2020 |
| |
|
| |
|
|
|
| | |
Vested and expected to vest, December 31, 2020 |
| |
|
| |
|
|
|
| |
The total intrinsic value of SOSARs exercised during the years ended December 31, 2020, 2019 and 2018, was $
The weighted average assumptions utilized in the Black-Scholes option-pricing model to estimate the fair value of SOSARs granted each year were as follows:
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|
| 2020 |
| 2019 |
| 2018 | ||||||
Risk-free interest rate |
|
| % |
|
| % |
|
| % | |||
Expected life (years) |
|
|
|
|
|
|
|
|
| |||
Expected dividend yield |
|
| % |
|
| % |
|
| % | |||
Volatility |
|
| % |
|
| % |
|
| % | |||
Weighted-average Black-Scholes fair value per share at date of grant |
| $ |
|
| $ |
|
| $ |
|
The risk-free interest rate is based on U.S. Treasury rates for instruments with similar terms, and the expected life assumption is based on our historical data. We have not paid dividends to date and do not plan to pay dividends in the near future. The volatility assumption is based on our historical data and implied volatility.
Non-Vested Stock Awards (RSUs)
A summary of RSU award activity was as follows (in thousands, except per share data):
|
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|
|
|
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|
|
|
|
| Shares |
| Weighted-Average Grant Date Fair Value per Share | |||
Outstanding, January 1, 2020 |
|
|
|
|
|
|
| |
| $ | |
Granted |
|
|
|
|
|
|
| |
|
| |
Vested |
|
|
|
|
|
|
| ( |
|
| |
Forfeited or cancelled |
|
|
|
|
|
|
| ( |
|
| |
Outstanding, December 31, 2020 |
|
|
|
|
|
|
| |
|
| |
Vested and expected to vest, December 31, 2020 |
|
|
|
|
|
|
| |
|
| |
The weighted average grant date fair value per RSU granted during the years ended December 31, 2019 and 2018, was $
Non-Vested Performance Stock Awards (PSUs)
A summary of PSU award activity was as follows (in thousands, except per share data):
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|
| Shares |
| Weighted-Average Grant Date Fair Value per Share | |||
Outstanding, January 1, 2020 |
|
|
|
|
|
|
| |
| $ | |
Granted |
|
|
|
|
|
|
| |
|
| |
Vested |
|
|
|
|
|
|
| ( |
|
| |
Expired |
|
|
|
|
|
|
| ( |
|
| |
Outstanding, December 31, 2020 |
|
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|
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| |
|
| |
Vested and expected to vest, December 31, 2020 |
|
|
|
|
|
|
|
|
| |
The weighted average fair value per PSU granted during the years ended December 31, 2019 and 2018, was $
During the year ended December 31, 2020 we awarded performance share awards that are subject to service, market, and performance vesting conditions. The quantity of shares that will vest will range from
During the year ended December 31, 2019, we awarded
During the year ended December 31, 2018, we awarded performance share awards that are subject to service and performance vesting conditions. The quantity of shares that will vest range from
Defined Contribution Plan—We maintain the Chipotle Mexican Grill 401(k) Plan (“401(k) Plan”). We match
Deferred Compensation Plan—We also maintain the Chipotle Mexican Grill, Inc. Supplemental Deferred Investment Plan (the “Deferred Plan”) which covers our eligible employees. The Deferred Plan is a non-qualified plan that allows participants to make tax-deferred contributions that cannot be made under the 401(k) Plan because of Internal Revenue Service limitations. Participants’ earnings on contributions made to the Deferred Plan fluctuate with the actual earnings and losses of a variety of available investment choices selected by the participant. Total liabilities under the Deferred Plan as of December 31, 2020 and 2019, were $
We have elected to fund our deferred compensation obligation through a rabbi trust. The rabbi trust is subject to creditor claims in the event of insolvency, but the assets held in the rabbi trust are not available for general corporate purposes. Amounts in the rabbi trust are invested in mutual funds, consistent with the investment choices selected by participants in their Deferred Plan accounts, which are designated as trading securities, carried at fair value, and are included in other assets on the consolidated balance sheets. Fair value of rabbi trust investments in mutual funds is measured using Level 1 inputs. The fair value of the investments in the rabbi trust was $
Employee Stock Purchase Plan—We also offer an employee stock purchase plan (“ESPP”). Employees become eligible to participate after
Related to the adoption of Topic 842, and for leases executed subsequent to the adoption of Topic 842 our policy elections are as follows:
|
|
|
|
|
|
Separation of lease and non-lease components |
| We elected this expedient to account for lease and non-lease components as a single component for our entire population of operating lease assets. |
Short-term policy |
| We have elected the short-term lease recognition exemption for all applicable classes of underlying assets. Short-term disclosures include only those leases with a term greater than one month and 12 months or less, and expense is recognized on a straight-line basis over the lease term. Leases with an initial term of 12 months or less, that do not include an option to purchase the underlying asset that we are reasonably certain to exercise, are not recorded on the consolidated balance sheets. |
The weighted average remaining lease term and discount rate were as follows:
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|
| December 31, |
| December 31, | ||
| 2020 |
| 2019 | ||
Weighted average remaining lease term (years) |
| |
|
| |
Weighted average discount rate |
|
|
|
The components of lease cost were as follows:
|
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| Year ended | ||||
|
| December 31, | ||||
| Classification | 2020 |
| 2019 | ||
Operating lease cost | Occupancy, Other operating costs, General and administrative expenses and Pre-opening costs | $ | |
| $ | |
Short-term lease cost | Other operating costs |
| |
|
| |
Variable lease cost | Occupancy |
| |
|
| |
Sublease income | General and administrative expenses |
| ( |
|
| ( |
Total lease cost |
| $ | |
| $ | |
As previously disclosed in our 2018 Annual Report on Form 10-K and under the previous lease accounting, rental expense for the year ended December 31, 2018 was $
Supplemental disclosures of cash flow information related to leases were as follows:
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| Year ended | ||||
| December 31, | ||||
| 2020 |
| 2019 | ||
Cash paid for operating lease liabilities | $ | |
| $ | |
Operating lease assets obtained in exchange for operating lease liabilities(1) | $ | |
| $ | |
Derecognition of operating lease assets due to terminations or impairment | $ | |
| $ | |
(1)
Maturities of lease liabilities were as follows as of December 31, 2020: |
|
|
|
|
|
| Operating Leases | |
2021 | $ | |
2022 |
| |
2023 |
| |
2024 |
| |
2025 |
| |
Thereafter |
| |
Total lease payments |
| |
Less: imputed interest |
| |
Present value of lease liabilities | $ | |
As of December 31, 2020, the total lease payments include $
In April 2020, the FASB issued guidance allowing entities to make a policy election whether to account for lease concessions related to the COVID-19 pandemic as lease modifications. The election applies to any lessor-provided lease concession related to the impact of the COVID-19 pandemic, provided the concession does not result in a substantial increase in the rights of the lessor or in the obligations of the lessee. During the year ended December 31, 2020, we have received non-substantial concessions from certain landlords in the form of rent deferrals and abatements. We have elected to not account for these rent concessions as lease modifications. The recognition of rent concessions did not have a material impact on our consolidated financial statements as of December 31, 2020.
We have
The following table sets forth the computations of basic and diluted earnings per share:
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| Year ended December 31, | |||||||
| 2020 |
| 2019 |
| 2018 | |||
Net income | $ | |
| $ | |
| $ | |
Shares: |
|
|
|
|
|
|
|
|
Weighted-average number of common shares outstanding (for basic calculation) |
| |
|
| |
|
| |
Dilutive stock awards |
| |
|
| |
|
| |
Weighted-average number of common shares outstanding (for diluted calculation) |
| |
|
| |
|
| |
Basic earnings per share | $ | |
| $ | |
| $ | |
Diluted earnings per share | $ | |
| $ | |
| $ | |
The following stock awards were excluded from the calculation of diluted earnings per share:
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| Year ended December 31, | |||||||
| 2020 |
| 2019 |
| 2018 | |||
Stock awards subject to performance conditions |
| |
|
| |
|
| |
Stock awards that were antidilutive |
| |
|
| |
|
| |
Total stock awards excluded from diluted earnings per share |
| |
|
| |
|
| |
Purchase Obligations
We enter into various purchase obligations in the ordinary course of business, generally of a short-term nature. Those that are binding primarily relate to commitments for food purchases and supplies, amounts owed under contractor and subcontractor agreements, orders submitted for equipment for restaurants under construction, and marketing initiatives and corporate sponsorships.
Litigation
Settlement of DOJ Investigation
On January 28, 2016, we were served with a Federal Grand Jury Subpoena from the U.S. District of California relating to an official criminal investigation being conducted by the U.S. Attorney’s Office for the Central District of California, in conjunction with the U.S. Food and Drug Administration’s Office of Criminal Investigations (collectively, the “DOJ”). The subpoena required the production of documents and information related to company-wide food safety matters dating back to January 1, 2013. On April 21, 2020, we announced that we have signed a Deferred Prosecution Agreement to resolve this investigation. Pursuant to the Agreement, the DOJ has agreed to take no legal action relating to these past incidents for three years provided that Chipotle complies with its obligations under the Agreement, which include payment of a $
Shareholder Class Action
On January 8, 2016, Susie Ong filed a complaint in the U.S. District Court for the Southern District of New York on behalf of a purported class of purchasers of shares of our common stock between February 4, 2015 and January 5, 2016. The complaint purports to state claims against us, each of the co-Chief Executive Officers serving during the claimed class period and the Chief Financial Officer under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and related rules, based on our alleged failure during the claimed class period to disclose material information about our quality controls and safeguards in relation to consumer and employee health. The complaint asserts that those failures and related public statements were false and misleading and that, as a result, the market price of our stock was artificially inflated during the claimed class period. The complaint seeks damages on behalf of the purported class in an unspecified amount, interest, and an award of reasonable attorneys’ fees, expert fees, and other costs. On March 22, 2018, the court granted our motion to dismiss, with prejudice. On April 20, 2018, the plaintiffs filed a motion for relief from the judgment and seeking leave to file a third amended complaint, and on November 20, 2018, the court denied the motion. On December 20, 2018, the plaintiff initiated an appeal to the U.S. Court of Appeals for the Second Circuit, and on October 1, 2020, the court denied the plaintiffs' motion for an en banc rehearing.
Miscellaneous
We are involved in various other claims and legal actions, such as wage and hour, wrongful termination and other employment-related claims, slip and fall and other personal injury claims, and lease and other commercial disputes, that arise in the ordinary course of business, some of which may be covered by insurance. The outcomes of these actions are not predictable, but we do not believe that the ultimate resolution of these actions will have a material adverse effect on our financial position, results of operations, liquidity, or capital resources. However, a significant increase in the number of these claims, or one or more successful claims under which we incur greater liabilities than we currently anticipate, could materially and adversely affect our business, financial condition, results of operations and cash flows.
Accrual for Estimated Liability
As of December 31, 2020, we had a balance of $
The following table presents summarized unaudited quarterly financial data from the consolidated statements of income for each of the eight quarters in the periods ended December 31, 2020 and December 31, 2019. The operating results for any quarter are not necessarily indicative of the results for any subsequent quarter. Basic and diluted net income per share calculations for each quarter is based on the weighted average diluted shares outstanding for that quarter and may not sum to the full year total amount as presented on our consolidated statements of income:
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| 2020 | ||||||||||
|
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|
|
| March 31 |
| June 30 |
| September 30 |
| December 31 | ||||
Total Revenue |
|
|
|
| $ | |
| $ | |
| $ | |
| $ | |
Income (loss) from operations |
|
|
|
| $ | |
| $ | ( |
| $ | |
| $ | |
Net income |
|
|
|
| $ | |
| $ | |
| $ | |
| $ | |
Basic earnings per share |
|
|
|
| $ | |
| $ | |
| $ | |
| $ | |
Diluted earnings per share |
|
|
|
| $ | |
| $ | |
| $ | |
| $ | |
|
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|
|
|
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|
| 2019 | ||||||||||
|
|
|
|
| March 31 |
| June 30 |
| September 30 |
| December 31 | ||||
Total Revenue |
|
|
|
| $ | |
| $ | |
| $ | |
| $ | |
Income from operations |
|
|
|
| $ | |
| $ | |
| $ | |
| $ | |
Net income |
|
|
|
| $ | |
| $ | |
| $ | |
| $ | |
Basic earnings per share |
|
|
|
| $ | |
| $ | |
| $ | |
| $ | |
Diluted earnings per share |
|
|
|
| $ | |
| $ | |
| $ | |
| $ | |
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to ensure that information required to be disclosed in Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Evaluation of Disclosure Controls and Procedures
As of December 31, 2020, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this annual report.
Changes in Internal Control over Financial Reporting
There were no changes during the fiscal quarter ended December 31, 2020, in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
Management’s Annual Report on Internal Control over Financial Reporting
The management of Chipotle Mexican Grill, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of assets that could have a material effect on our financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2020, based on the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control—Integrated Framework (the “2013 framework”). Based on that assessment, management concluded that, as of December 31, 2020, our internal control over financial reporting was effective based on the criteria established in the 2013 framework.
Our independent registered public accounting firm, Ernst & Young LLP, has issued an attestation report on the effectiveness of our internal control over financial reporting as of December 31, 2020. This report follows.
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Chipotle Mexican Grill, Inc.
Opinion on Internal Control Over Financial Reporting
We have audited Chipotle Mexican Grill, Inc.’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Chipotle Mexican Grill, Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets as of December 31, 2020 and 2019, the related consolidated statements of income, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2020, and the related notes and our report dated February 9, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Irvine, California
February 9, 2021
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Incorporated by reference from the definitive proxy statement for our 2021 annual meeting of shareholders, which will be filed no later than 120 days after December 31, 2020.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference from the definitive proxy statement for our 2021 annual meeting of shareholders, which will be filed no later than 120 days after December 31, 2020.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Securities Authorized for Issuance Under Equity Compensation Plans
The following table presents information regarding options and rights outstanding under our equity compensation plans as of December 31, 2020. All options/SOSARs reflected are options to purchase common stock.
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| (a) |
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| (b) |
| (c) |
Equity Compensation Plans Approved by Security Holders | 939,823 |
| $ | 533.71 |
| 2,359,635 |
Equity Compensation Plans Not Approved by Security Holders | None |
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| N/A |
| None |
Total | 939,823 |
| $ | 533.71 |
| 2,359,635 |
__________________
(1)Includes shares issuable in connection with awards with performance and market conditions, which will be issued based on achievement of performance criteria associated with the awards, with the number of shares issuable dependent on our level of performance. The weighted-average exercise price in column (b) includes the weighted-average exercise price of SOSARs only.
(2)Includes 2,114,279 shares remaining available under the Amended and Restated Chipotle Mexican Grill, Inc. 2011 Stock Incentive Plan, and 245,356 shares remaining available under the Chipotle Mexican Grill, Inc. Employee Stock Purchase Plan. In addition to being available for future issuance upon exercise of SOSARs or stock options that may be granted after December 31, 2020, all of the shares available for grant under the Amended and Restated Chipotle Mexican Grill, Inc. 2011 Stock Incentive Plan may instead be issued in the form of restricted stock, restricted stock units, performance shares or other equity-based awards. Each share underlying a full value award such as restricted stock, restricted stock units or performance shares counts as two shares used against the total number of securities authorized under the plan.
Additional information for this item is incorporated by reference from the definitive proxy statement for our 2021 annual meeting of shareholders, which will be filed no later than 120 days after December 31, 2020.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Incorporated by reference from the definitive proxy statement for our 2021 annual meeting of shareholders, which will be filed no later than 120 days after December 31, 2020.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Incorporated by reference from the definitive proxy statement for our 2021 annual meeting of shareholders, which will be filed no later than 120 days after December 31, 2020.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
1. All Financial statements
Consolidated financial statements filed as part of this report are listed under Item 8. “Financial Statements and Supplementary Data.”
2. Financial statement schedules
No schedules are required because either the required information is not present or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements or the notes thereto.
3. Exhibits
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| Description of Exhibit Incorporated Herein by Reference | ||||
Exhibit Number | Exhibit Description | Form | File No. | Filing Date | Exhibit Number | Filed Herewith |
3.1 | Amended and Restated Certificate of Incorporation of Chipotle Mexican Grill, Inc. | 10-Q | 001-32731 | October 26, 2016 | 3.1 |
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3.2 | 8-K | 001-32731 | October 6, 2016 | 3.1 |
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4.1 | 10-K | 001-32731 | February 10, 2012 | 4.1 |
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4.2 | 10-K | 001-32731 | February 5, 2020 | 4.2 |
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10.1† | 10-Q | 001-32731 | April 25, 2019 | 10.1 |
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10.2† | Form of 2019 Transformation Performance Share Unit Agreement (1) | - | - | - | - | X |
10.3† | 10-Q | 001-32731 | July 24, 2019 | 10.1 |
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10.4† | Form of Participation and Restrictive Covenant Agreement for Change in Control Severance Plan | 10-Q | 001-32731 | July 24, 2019 | 10.2 |
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10.5† | Amended and Restated Chipotle Mexican Grill, Inc. 2011 Stock Incentive Plan | 8-K | 001-32731 | May 24, 2018 | 10.1 |
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10.6† | 10-Q | 001-32731 | April 20, 2012 | 10.1 |
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10.7† | 10-K | 001-32731 | February 7, 2017 | 10.2.4 |
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10.8† | Form of 2014 Performance-Based Stock Appreciation Rights Agreement | 10-K | 001-32731 | February 7, 2017 | 10.2.5 |
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10.9† | 10-Q | 001-32731 | April 27, 2016 | 10.1 |
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10.10† | Retention Agreement, dated January 9, 2018, between Jack Hartung and Chipotle Mexican Grill, Inc. | 8-K | 001-32731 | January 12, 2018 | 10.1 |
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10.11† | 10-K | 001-32731 | March 17, 2006 | 10.6 |
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10.12† | 10-Q | 001-32731 | April 26, 2018 | 10.4 |
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10.13† | 10-Q | 001-32731 | July 27, 2018 | 10.3 |
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10.14† | Retention Agreement, dated January 9, 2018, between Curt Garner and Chipotle Mexican Grill, Inc. | 10-Q | 001-32731 | April 26, 2018 | 10.5 |
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10.15† | 8-K | 001-32731 | March 21, 2007 | 10.1 |
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10.16† | Offer Letter, dated February 11, 2018, between Brian R. Niccol and Chipotle Mexican Grill, Inc. | 8-K | 001-32731 | February 15, 2018 | 10.1 |
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10.17† | 10-K | 001-32731 | February 10, 2012 | 10.11 |
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10.18† | Non-Plan Inducement SOSARs Agreement between Brian R. Niccol and Chipotle Mexican Grill, Inc. | S-8 | 33-223467 | March 6, 2018 | 4.3 |
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10.19† | Non-Plan Inducement RSUs Agreement between Brian R. Niccol and Chipotle Mexican Grill, Inc. | S-8 | 33-223467 | March 6, 2018 | 4.4 |
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10.20 | 8-K | 001-32731 | December 19, 2016 | 10.1 |
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10.21 | 10-K | 001-32731 | February 7, 2017 | 10.11 |
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10.22† | 8-K/A | 001-32731 | April 3, 2018 | 10.2 |
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10.23† | Executive Agreement dated May 29, 2017 between Chipotle Mexican Grill, Inc. and Scott Boatwright | 8-K | 001-32731 | September 15, 2017 | 10.1 |
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10.24† | 8-K/A | 001-32731 | April 3, 2018 | 10.3 |
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10.25† | 8-K | 001-32731 | December 1, 2017 | 10.1 |
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10.26† | Offer Letter, dated March 9, 2018, between Christopher Brandt and Chipotle Mexican Grill, Inc. | 10-Q | 001-32731 | April 26, 2018 | 10.13 |
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10.27† | 10-Q | 001-32731 | April 26, 2018 | 10.14 |
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10.28† | 10-Q | 001-32731 | April 26, 2018 | 10.15 |
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10.29† | 10-K | 001-32731 | February 5, 2020 | 10.34 |
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10.30† | 10-Q | 001-32731 | April 29, 2020 | 10.1 |
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10.31† | 8-K | 001-32731 | April 21, 2020 | 10.1 |
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10.32 | 8-K | 001-32731 | May 8, 2020 | 10.1 |
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10.33 | Director Compensation Program and Stock Ownership Guidelines | - | - | - | - | X |
10.34† | - | - | - | - | X | |
10.35† | - | - | - | - | X | |
10.36† | - | - | - | - | X | |
21.1 | - | - | - | - | X | |
23.1 | - | - | - | - | X | |
24.1 | Power of Attorney (included on signature page of this report) | - | - | - | - | X |
31.1 | - | - | - | - | X | |
31.2 | - | - | - | - | X | |
32.1 | - | - | - | - | X |
101.INS | Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document) | - | - | - | - | X |
101.SCH | Inline XBRL Taxonomy Extension Schema Document | - | - | - | - | X |
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | - | - | - | - | X |
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | - | - | - | - | X |
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | - | - | - | - | X |
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | - | - | - | - | X |
104 | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) | - | - | - | - | X |
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| (1) Portions of this exhibit have been omitted as permitted by applicable regulations. †- Management contracts and compensatory plans or arrangements required to be filed as exhibits. |
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ITEM 16. FORM 10-K SUMMARY
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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CHIPOTLE MEXICAN GRILL, INC. | |
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By: | /s/ JOHN R. HARTUNG |
Name: | John R. Hartung |
Title: | Chief Financial Officer |
Date: February 9, 2021
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Brian Niccol and John Hartung, and each of them, his or her true and lawful attorneys-in-fact, each with full power of substitution, for him or her in any and all capacities, to sign any amendments to this report on Form 10-K and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact or their substitute or substitutes may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
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Signature |
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| Title |
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/s/ BRIAN NICCOL |
| February 9, 2021 |
| Chief Executive Officer and Chairman of the Board of Directors (principal executive officer) |
Brian Niccol |
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/s/ JOHN R. HARTUNG |
| February 9, 2021 |
| Chief Financial Officer (principal financial and accounting officer) |
John R. Hartung |
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/s/ ALBERT S. BALDOCCHI |
| February 9, 2021 |
| Director |
Albert S. Baldocchi |
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/s/ GREGG L. ENGLES |
| February 9, 2021 |
| Director |
Gregg L. Engles |
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/s/ PATRICIA FILI-KRUSHEL |
| February 9, 2021 |
| Director |
Patricia Fili-Krushel |
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/s/ NEIL W. FLANZRAICH |
| February 9, 2021 |
| Director |
Neil W. Flanzraich |
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/s/ ROBIN S. HICKENLOOPER |
| February 9, 2021 |
| Director |
Robin S. Hickenlooper |
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/s/ SCOTT MAW |
| February 9, 2021 |
| Director |
Scott Maw |
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/s/ ALI NAMVAR |
| February 9, 2021 |
| Director |
Ai Namvar |
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/s/ MARY A. WINSTON |
| February 9, 2021 |
| Director |
Mary Winston |
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Exhibit 10.2
Note: This Award Agreement replaces the form of award agreement previously filed with the SEC. The form of award agreement previously filed inadvertently omitted certain provisions that had been approved by the Compensation Committee.
Certain information has been excluded from this exhibit because it is not material and would likely cause competitive harm to the company if publicly disclosed. Redacted information is indicated by brackets.
Transformation Incentive Award Agreement
Name of Participant: |
Participant Name |
Target Number of Performance Shares: |
# of Shares |
Grant Date: |
February 8, 2019 |
Performance Period: |
January 1, 2019 – December 31, 2020 |
This Performance Share Agreement (“Agreement”) evidences the grant to the Participant by Chipotle Mexican Grill, Inc. (the “Company”) of the right to receive shares of Common Stock of the Company, $.01 par value per share (“Common Stock”), on the terms and conditions provided for herein pursuant to the Amended and Restated Chipotle Mexican Grill, Inc. 2011 Stock Incentive Plan (the “Plan”). Except as specifically set forth herein, this Agreement and the rights granted hereunder are expressly subject to all of the terms, definitions and provisions of the Plan as it may be amended and restated from time to time. Capitalized terms used in this Agreement and not defined herein shall have the meanings attributed to them in the Plan.
1. Grant of Performance Shares. Subject to the terms and provisions of this Agreement and the Plan, the Company hereby grants to Participant the right to be issued shares of Common Stock as provided in this Agreement, including Appendix A hereto (the “Performance Shares”), subject to the following conditions:
(a) Certification by the Committee of the extent to which the Performance Goals set forth on Appendix A have been achieved;
(b) Participant being continuously employed (subject to the provisions of Section 2) with the Company (as defined in the Plan) from the Grant Date through February 8, 2022 (as to 40% of the Performance Shares) and February 8, 2023 (as to the remaining 60% of the Performance Shares); and
(c) The satisfaction or occurrence of any additional conditions to vesting set forth on Appendix A.
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The date on which all of the conditions set forth above are satisfied is a “Vesting Date,” and the Company will issue one share of Common Stock for each Performance Share earned and vested to the Participant on the March 15th immediately following each Vesting Date, subject to (i) earlier payment in connection with a Change in Control under Section 3(c) or to the extent administratively practicable following a Vesting Date, or (ii) later payment as permitted without resulting in tax under Section 409A of the Code (the date of such issuance of shares following a Vesting Date, the “Payout Date”).
This Agreement represents the Company’s unfunded and unsecured promise to issue Common Stock at a future date, subject to the terms of this Agreement and the Plan. Participant has no rights under this Agreement other than the rights of a general unsecured creditor of the Company.
Subject to the satisfaction of any tax withholding obligations described in Section 6 below, Participant may elect to defer the receipt of any of the shares of Common Stock underlying the Performance Shares by submitting to the Company a deferral election in the form provided by the Company. In the event Participant intends to defer the receipt of Performance Shares, Participant must submit to the Company a completed deferral election form no later than the Final Election Date (as defined below). By submitting such deferral election, Participant represents that he/she understands the effect of any such deferral under relevant federal, state and local tax and social security laws, including, but not limited to, the fact that social security contributions may be due upon a Vesting Date notwithstanding the deferral election. Any deferral election may be amended or terminated prior to the Final Election Date. A deferral election shall become irrevocable on the Final Election Date and any deferral election or revision of a deferral election submitted after the Final Election Date shall be void and of no force or effect. The “Final Election Date” shall be June 30, 2020, provided that in no circumstances will the Final Election Date be later than the date Participant ceases to provide services to the Company or the date that the making of such election causes the Performance Shares to become subject to the tax pursuant to Code Section 409A.
2. Termination of Employment. Subject to the provisions that follow in this Section 2 and Section 3, if at any time prior to a Vesting Date Participant’s service with the Company terminates, then notwithstanding any contrary provision of this Agreement, the Performance Shares subject to this Agreement will be forfeited and cancelled automatically as of the date of such termination, and no shares of Common Stock will be issued hereunder.
Notwithstanding the foregoing or any contrary provision in the Plan, if Participant’s employment terminates prior to the Vesting Date as a result of Participant’s death, or the Committee determines that such termination is in connection with Participant’s Retirement (as defined below), or is as a result of Participant’s medically diagnosed permanent physical or mental inability to perform his or her job duties, then the award evidenced by this Agreement will continue in force following the date of such termination, and, subject to any then effective deferral election, a pro-rata portion of the shares of Common Stock underlying the Performance Shares will be issued to Participant (or if applicable his or her estate, heirs or beneficiaries) on the Payout Date, in an amount reflecting the period of Participant’s continued service to the Company from and after the Grant Date through the date of termination of Participant’s service. The Committee will determine the pro-rata portion of the Performance Shares to be paid out under the following formula: Total number of shares of Common Stock issuable on account of attaining the Performance Goals based upon the actual performance results during the Performance Period multiplied by a fraction, the numerator of which is the number of days of service following the Grant Date and the denominator of which is the total number of days following the Grant Date through the Vesting Date.
2
For purposes of this Section 2, “Retirement” means that a Participant having a combined Age and Years of Service (as those terms are defined below) of at least 70 (a) has given the Chief Executive Officer of the Company or his or her designee at least six months prior written notice of such Participant’s retirement, (b) has signed and delivered to the Company an agreement providing for such restrictive covenants, for a period of two years after such retirement, as may be determined from time to time by the Committee, based on individual facts and circumstances, to be reasonably necessary to protect the Company’s interests, (c) has signed and delivered to the Company, within 21 days of the Executive’s date of employment termination (or such later time as required under applicable law) a general release agreement of claims against the Company and its affiliates in a form reasonably acceptable to the Committee, which is not later revoked, and (d) voluntarily terminates from service with the Company. The term “Age” of a Participant means (as of a particular date of determination), the Participant’s age on that date in whole years and any fractions thereof, and the term “Years of Service” means the number of years and fractions thereof during the period beginning on a Participant’s most recent commencement of employment with the Company or a subsidiary or parent of the Company (or such other Company-associated entity as the Committee may determine from time to time) and ending on the date of such Participant’s termination of service with the Company or a subsidiary or parent of the Company. The Participant’s refusal to meet any of the conditions set forth in (a), (b), (c) or (d) above, or breach of any agreement entered into pursuant to (b) or (c) above, shall constitute a waiver by the Participant of the benefits attributable to Retirement under this Agreement.
Notwithstanding the foregoing, if at any time prior to the Payout Date Participant’s service with the Company terminates for Cause, then notwithstanding any contrary provision of this Agreement, the Performance Shares subject to this Agreement will be forfeited and cancelled automatically as of the date of such termination, and no shares of Common Stock will be issued hereunder.
(a) In the event of a Change in Control that does not also constitute a “change in the ownership or effective control of a corporation, or a change in the ownership of a substantial portion of the assets of a corporation” under Treas. Reg. § 1.409A-3(i)(5), then (i) the Performance Shares subject to this Agreement shall remain outstanding, (ii) the Performance Shares shall continue to be subject to the terms of this Agreement, and (iii) the provisions of the first paragraph of Section 7(b) of the Plan (regarding rights upon a Qualifying Termination) shall not apply to such Performance Shares.
(b) In the event of a Change in Control that is also a “change in the effective control of a corporation” under Treas. Reg. § 1.409A-3(i)(5)(vi), then (i) the Performance Shares subject to this Agreement shall remain outstanding, (ii) the Performance Shares shall continue to be subject to the terms of this Agreement, (iii) the provisions of the first paragraph of Section 7(b) of the Plan shall apply to such Performance Shares, and (iv) such Performance Shares shall be paid out upon the Payout Date based upon the actual level of performance.
(c) In the event of a Change in Control that is also a “change in the ownership of a corporation” under Treas. Reg. § 1.409A-3(i)(5)(v) or a “change in the ownership of a substantial portion of a corporation’s assets” under Treas. Reg. § 1.409A-3(i)(5)(vii) (a “Special CIC”), the Performance Shares subject to this Agreement shall immediately vest and the Participant shall receive, within 10 days of such Special CIC, the consideration (including all stock, other securities or assets, including cash) payable in respect of (i) in the event of a Special CIC that occurs prior to the end of the Performance Period, the Target Number of Performance Shares (or, if greater, the number of Performance Shares based on actual performance from the beginning of the Performance Period until the Special CIC, as reasonably determined by the Committee based on available information) or (ii) in the event of a Special CIC that occurs after the end of the Performance Period, the number of Performance Shares based on
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actual performance, in each case, as if they were vested, issued and outstanding at the time of such Special CIC; provided, however, that with respect to Performance Shares that are otherwise subject to a “substantial risk of forfeiture” under Treas. Reg. § 1.409A-1(d) and to the extent permitted by Treas. Reg. § 1.409-3, the Committee may arrange for the substitution for the Performance Shares with the grant of a replacement award (the “Replacement Award”) to Participant of shares of restricted stock of the surviving or successor entity (or the ultimate parent thereof) in such Change in Control, but only if all of the following criteria are met:
(i) Such Replacement Award shall consist of securities listed for trading following such Change in Control on a national securities exchange;
(ii) Such Replacement Award shall have a value as of the date of such Change in Control equal to (i) in the event of a Change in Control that occurs prior to the end of the Performance Period, the value of the Target Number of Performance Shares (or, if greater, the number of Performance Shares based on actual performance from the beginning of the Performance Period until the Special CIC, as reasonably determined by the Committee based on available information) or (ii) in the event of a Change in Control that occurs after the end of the Performance Period, the number of Performance Shares based on actual performance, in each case, calculated as if the Performance Shares were exchanged for the consideration (including all stock, other securities or assets, including cash) payable for shares of Common Stock in such Change in Control transaction;
(iii) Such Replacement Award shall become vested and the securities underlying the Replacement Award shall be issued to the Participant on the applicable Vesting Date, subject to Participant’s continued employment with the surviving or successor entity (or a direct or indirect subsidiary thereof) through such date, provided, however, that such Replacement Award will vest immediately upon and the securities underlying the Replacement Award shall be issued within 60 days after the date that (i) Participant’s employment is terminated by the surviving or successor entity Without Cause, (ii) Participant’s employment is terminated for Good Reason, (iii) Participant’s death or (iv) Participant’s medically diagnosed permanent physical or mental inability to perform his or her job duties;
(iv) Notwithstanding Section 3(c), such Replacement Award shall vest immediately prior to and the securities underlying the Replacement Award shall be issued to Participant upon (A) any transaction with respect to the surviving or successor entity (or parent or subsidiary company thereof) of substantially similar character to a Change in Control, or (B) the securities constituting such Replacement Award ceasing to be listed on a national securities exchange, in each case so long as Participant remains continuously employed until such time; and
(v) The Replacement Award or the right to such Replacement Award does not cause the Performance Shares to become subject to tax under Code Section 409A.
Upon such substitution the Performance Shares shall terminate and be of no further force and effect.
4. Rights as Shareholder. Participant shall not have any of the rights of a shareholder with respect to the Performance Shares except to the extent that shares of Common Stock on account of such Performance Shares are issued to Participant in accordance with the terms and conditions of this Agreement and the Plan.
5. No Right to Continued Employment. Nothing contained in this Agreement shall be deemed to grant Participant any right to continue in the employ of the Company for any period of time or to any right to
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continue his or her present or any other rate of compensation, nor shall this Agreement be construed as giving Participant, Participant’s beneficiaries or any other person any equity or interests of any kind in the assets of the Company or creating a trust of any kind or a fiduciary relationship of any kind between the Company and any such person.
6. Withholding Taxes. No later than the date as of which an amount first becomes includible in the gross income of Participant for federal income or employment tax purposes with respect to the Performance Shares, Participant shall pay to the Company or make arrangements satisfactory to the Committee regarding the payment of, any federal, state, local or foreign taxes of any kind required by law to be withheld with respect to such amount. To the extent approved in writing by the Committee, a Participant shall have the right to direct the Company to satisfy the minimum amount (or an amount up to a Participant’s highest marginal tax rate as may be permitted under the Plan from time to time provided such withholding does not trigger liability accounting under FASB ASC Topic 718 or its successor) required for federal, state and local tax withholding with Shares, including without limitation Shares otherwise delivered upon exercise of the SARs. The obligations of the Company under the Plan and this Agreement shall be conditional on such payment, and the Company shall, to the extent permitted by law, have the right to deduct any such taxes from any payment otherwise due to the Participant.
7. No Fractional Shares. If any terms of this Agreement call for payment of a fractional Performance Share, the number of Performance Shares issuable hereunder will be rounded down to the nearest whole number.
8. Non-Transferability of Award. The Common Stock underlying the Performance Shares shall not be assignable or transferable by Participant prior to their vesting and issuance in accordance with this Agreement, except by will or by the laws of descent and distribution. In addition, no Performance Shares shall be subject to attachment, execution or other similar process prior to vesting.
9. Applicability of the Plan. Except as specifically set forth herein, the Performance Shares are subject to all provisions of the Plan and all determinations of the Committee made in accordance with the terms of the Plan. By executing this Agreement, the Participant expressly acknowledges (i) receipt of the Plan and any current Plan prospectus and (ii) the applicability of the provisions of the Plan to the Performance Shares.
10. Additional Conditions to Issuance of Performance Shares. Notwithstanding the occurrence of the Vesting Date or Payout Date, the Company shall not be required to issue any Common Stock underlying the Performance Shares hereunder so long as the Company reasonably anticipates that such issuance will violate federal or state securities law or other applicable law; provided however, that in such event the Company shall issue such Performance Shares at the earliest possible date at which the Company reasonably anticipates that the issuance of the shares will not cause such violation.
11. Modification; Waiver. Except as provided in the Plan or this Agreement, no provision of this Agreement may be amended, modified, or waived unless such amendment or modification is agreed to in writing and signed by Participant and by a duly authorized officer of the Company, and such waiver is set forth in writing and signed by the party to be charged, provided that any change that is advantageous to Participant may be made by the Committee without Participant’s consent or written signature or acknowledgement. No waiver by either party hereto at any time of any breach by the other party hereto of any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. Participant acknowledges and agrees that the Committee has the right to amend this Agreement in whole or in part from time-to-time if the Committee believes, in its sole and absolute discretion, such amendment is required or appropriate in order to conform the award evidenced hereby to, or otherwise satisfy any legal requirement (including without limitation
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the provisions of Section 409A of the Code). Such amendments may be made retroactively or prospectively and without the approval or consent of Participant to the extent permitted by applicable law, provided that the Committee shall not have any such authority to the extent that the grant or exercise of such authority would cause any tax to become due under Section 409A of the Code.
12. Notices. Except as the Committee may otherwise prescribe or allow in connection with communications procedures developed in coordination with any third party administrator engaged by the Company, all notices, including notices of exercise, requests, demands or other communications required or permitted with respect to the Plan, shall be in writing addressed or delivered to the parties. Such communications shall be deemed to have been duly given to any party when delivered by hand, by messenger, by a nationally recognized overnight delivery company, by facsimile, or by first-class mail, postage prepaid and return receipt requested, in each case to the applicable addresses set forth below:
If to Participant:
to Participant’s most recent address on the records of the Company
If to the Company:
Chipotle Mexican Grill, Inc.
610 Newport Center Drive, Suite 1300
Newport Beach, CA 92660
Attn: Sr. Director – Total Rewards
(or to such other address as the party in question shall from time to time designate by written notice to the other parties).
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13. Compensation Recovery. The Company may cancel, forfeit or recoup any rights or benefits of, or payments to, the Participant hereunder, including but not limited to any Shares issued by the Company following vesting of the Performance Shares under this Agreement or the proceeds from the sale of any such Shares, under any future compensation recovery policy that it may establish and maintain from time to time, to meet listing requirements that may be imposed in connection with the Dodd-Frank Wall Street Reform and Consumer Protection Act or otherwise. The Company shall delay the exercise of its rights under this Section for the period as may be required to preserve equity accounting treatment.
14. Governing Law. Except to the extent that provisions of the Plan are governed by applicable provisions of the Code or other substantive provisions of federal law, this Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Delaware without regard to the principles of conflicts of law thereof.
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CHIPOTLE MEXICAN GRILL, INC. |
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By: /s/ Neil Flanzraich |
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By: Neil Flanzraich |
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Chairman, Compensation Committee |
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Participant Name |
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Appendix A to Transformation Incentive Award Agreement
Performance Criteria
The performance criteria under this Incentive Award are Digital Sales, G&A Expense as a Percentage of Revenue, and the successful completion of 2 initiatives through the stage gate process, as such terms are defined below.
Performance Goals
Target Payout: In order to earn the Target Number of Shares under this Agreement, each of the following goals must be achieved by the end of the Performance Period (as defined in the Performance Share Agreement), on an all or nothing basis:
Digital Sales: Annual Digital Sales for the fiscal year ending December 31, 2020 of at least [$_____]
Underlying G&A Expense as Percentage of Revenue: [________] for the fiscal year ending December 31, 2020
Strategic Initiatives: Successful completion of [_____________________] prior to December 31, 2020
For the avoidance of doubt, all three goals outlined above must be achieved for the Performance Goals to be deemed satisfied. If any of the goals is not achieved, the Performance Goals will not be met and no Performance Shares will be earned.
Performance Modifier: If all the goals described above are achieved, then the Participant will have the opportunity to earn an above target payout according to the Performance Goal table below:
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2020 Digital Sales |
Payout Percentage |
<$[___]M (threshold) |
0% |
$[___]M |
100% |
$[___]M |
200% |
≥$[___]M (maximum) |
300% |
Straight-line interpolation shall be used to determine the Payout Percentage when Digital Sales is between two stated levels in the table.
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The following terms shall have the respective means set forth below when determining achievement of the Performance Goals:
Underlying G&A: with respect to a fiscal year, means the general and administrative expenses of the Company, as determined in accordance with generally accepted accounting principles, excluding the following “Approved Adjustments”: stock compensation expense, including payroll taxes related to stock compensation; payouts under the annual incentive plan in excess of 100%; legal settlements or judgments included in the Company’s non-GAAP adjustments; corporate restructuring costs; G&A expenses associated with accounting changes from ASU 2018-15; and other expenses that the Committee determines are unusual or non-recurring items. The Committee may (but has no obligation to) modify the list of expenses that constitute Approved Adjustments upon the occurrence of extraordinary events or circumstances and/or to prevent undue or unintended impacts.
Digital Sales: with respect to a fiscal year, means the net sales, as determined in accordance with generally accepted accounting principles, from digital order ahead, delivery and catering.
Revenue: with respect to a fiscal year, means the net sales attributable to the Company including deferred revenue, as determined in accordance with generally accepted accounting principles.
Other Provisions
If the Committee determines after granting an Incentive Award that there has been a change in law or accounting rules, that impacts Digital Sales and/or G&A Expense as set forth in this Appendix A, the Committee shall modify these measures, in whole or in part, as it deems appropriate and equitable in its discretion for such events that were not determinable or considered at the Grant Date. For the avoidance of doubt, no adjustments otherwise authorized under Section 8 of the Plan shall be made with respect to the Performance Shares except as specifically provided in this Appendix A.
The Target Number of Performance Shares shall be adjusted to prevent the enlargement or dilution of rights under this Award Agreement due to any increase or decrease in issued shares of the Company’s Common Stock without consideration consistent with the terms of the Plan.
Performance Shares that are earned under this Appendix A shall only be issued to the Participant to the extent that the continued employment conditions set forth in this Award Agreement have been satisfied.
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Exhibit 10.33
Chipotle Mexican Grill, Inc.
Director Compensation Program and Stock Ownership Guidelines
Effective July 1, 2019
Set forth below is the compensation program for non-employee directors of Chipotle Mexican Grill, Inc. Members of Chipotle’s Board of Directors who are employees of Chipotle do not receive compensation for their services as directors.
Retainer Type |
Cash |
Restricted Stock Units (RSUs) |
Annual Director Retainer |
$110,000 |
$150,000 |
Committee Chair Retainers: |
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Audit |
$30,000 |
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Compensation |
$25,000 |
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Nominating and Corporate Governance |
$20,000 |
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Committee Member Retainers (excluding Committee Chair): |
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Audit |
$15,000 |
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Compensation |
$12,500 |
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Nominating and Corporate Governance |
$10,000 |
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Lead Independent Director |
$50,000 |
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Compensation Period and Payments
Director compensation will be paid based on the directors’ one-year term of service from one annual meeting of shareholders to the next annual meeting of shareholders (i.e., from May to May) (the “compensation year”).
All cash retainers will be paid in arrears, on a pro rata basis, at the end of November and April. No director may simultaneously receive a Committee Chair retainer and a Committee Member retainer for service on the Committee for which he or she serves as Chair.
The number of RSU’s granted to a director will be determined by dividing $150,000 by the closing stock price of Chipotle common stock on the grant date. RSUs are granted to non-employee directors on the date of Chipotle’s annual meeting of shareholders meeting each year and vest 100% on the one-year anniversary of the grant date; provided that, if Chipotle’s annual meeting of shareholders next occurring after a grant date occurs on a date prior to the one-year vesting date and a director does not stand for re-election at that annual meeting, the non-continuing director will be deemed to have fulfilled the continuous service requirement so long as he or she continues to serve on the Board until the date of the annual meeting next occurring after a grant date.
Changes During a Compensation Year
If a director is elected to the Board on a date that is between annual meetings, the newly elected director will receive (i) a prorated RSU award, granted on the date that is three (3) business days after the date of election, and (ii) prorated cash compensation, which will be paid in accordance with the regular director pay schedule. Both the total grant value of the RSU and the amount of cash compensation will be prorated based on the date of the director’s election to the Board and the number of days elapsed since the annual meeting of shareholders that most recently occurred (e.g., if the annual meeting is on May 31 and a director joins on October 1, that director will receive 243/365th of the annual compensation amount).
If a director is appointed to or leaves a Committee, or assumes or relinquishes a Chair or Lead Independent Director position, on a date that is between annual meetings, his or her cash compensation will be prorated based on the effective date of the change in service and the number of days elapsed since the annual meeting of shareholders that most recently occurred.
Deferral Election
A director may elect to defer the receipt of cash compensation or defer the receipt of shares of common stock that otherwise would be issuable upon vesting of an RSU by submitting to Chipotle a deferral election in the form provided by Chipotle. The deferral form must be received by Chipotle before the end of the calendar year immediately prior to the compensation year in which the cash compensation or RSU relates (for example, the deferral election is due before December 31, 2019 for director compensation payable for the compensation year May 2020 – May 2021).
Expense Reimbursement
Directors will be reimbursed for reasonable expenses directly incurred in connection with their service as directors, including travel and lodging expenses for meetings. Reimbursement is subject to a director providing timely substantiation of expenses pursuant to Chipotle’s expense policy.
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Stock Ownership Guidelines
Directors are expected to own, within five years after being elected to the Board, shares of Chipotle common stock having a total value of five (5) times the annual cash retainer payable to non-employee directors (excluding Committee, Chair and Lead Independent Director retainers).
The following forms of equity count towards the required stock ownership guidelines:
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shares of Chipotle common stock owned outright (including shares received upon vesting of restricted stock units) |
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unvested restricted stock |
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unvested restricted stock units |
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any cash or restricted stock units that have been deferred |
The following forms of equity do not count towards the required stock ownership guidelines:
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shares of Chipotle common stock transferred to any individual, other than the director’s spouse |
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unvested and vested stock options |
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unvested and vested stock appreciation rights |
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unearned performance shares/units |
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Exhibit 10.34
CHIPOTLE MEXICAN GRILL, INC.
PERFORMANCE SHARE AGREEMENT
Name of Participant:
Target Number of
Performance Shares:
Grant Date:
Performance Period: January 1, 2020 – December 31, 2022
Vesting Date: Date of the Performance Certification (as defined below)
This Performance Share Agreement (this “Agreement”), dated as of the Grant Date stated above, is delivered by Chipotle Mexican Grill, Inc., a Delaware corporation (the “Company”), to the Participant named above (the “Participant” or “you”).
WHEREAS, the Company is awarding you performance shares (“Performance Shares”) representing the right to receive shares of Common Stock of the Company (the “Shares”) on the terms and conditions provided below and pursuant to the Amended and Restated Chipotle Mexican Grill, Inc. 2011 Stock Incentive Plan (the “Plan”). This Agreement and the Performance Shares granted hereunder are expressly subject to all of the terms, definitions and provisions of the Plan. Except as expressly indicated herein, defined terms used in this Agreement have the meanings set forth in the Plan.
WHEREAS, the Compensation Committee (the “Committee”) of the Company’s Board of Directors (the “Board”) has approved this award of Performance Shares (the “Award”).
NOW, THEREFORE, the parties hereby agree as follows:
1. Grant of Performance Shares. The Company hereby grants to you the Award with respect to the target number of Performance Shares set forth above, pursuant to which you shall be eligible to receive a number of equivalent Shares for each Performance Share that vests, subject to your fulfillment of the vesting and other conditions set forth in this Agreement, including Appendix A hereto, including both:
(a) Certification by the Committee of the extent to which the Performance Goals set forth on Appendix A have been achieved (the “Performance Certification”), if at all, and the satisfaction or occurrence of any additional conditions to vesting set forth on Appendix A, with such Performance Certification occurring on February 15, 2023, which follows the conclusion of the Performance Period; and
(b) Your continuous employment with the Company (subject to the provisions of Section 2) from the Grant Date through the date of Performance Certification (the “Vesting Date”).
2. Effect of Termination of Employment and Change in Control.
(a) Termination of Employment Due to Death, Disability or Retirement. Unless otherwise determined by the Committee, or except as provided in an agreement between you and your Employer, if your employment terminates by reason your death, termination by the Company due to Disability, or Retirement (each as defined below) prior to the Vesting Date, you shall vest in the Performance Shares as follows:
(i) In the event of your Retirement prior to the one-year anniversary of the Grant Date, you shall become vested on the Vesting Date in a pro rata portion of the Performance Shares, determined by multiplying the total number of Performance Shares determined based on actual achievement during the Performance Period of the Performance Goals set forth on Appendix A by a fraction, the numerator of which is the number of days from the Grant Date through your Retirement and the denominator of which is 365.
(ii) In the event of your Retirement on or after the one-year anniversary of the Grant Date, the total number of Performance Shares determined based on actual achievement during the Performance Period of the Performance Goals set forth on Appendix A, without proration, shall become vested on the Vesting Date.
(iii) In the event of your death or termination by the Company due to Disability at any time after the Grant Date, the total number of Performance Shares determined based on actual achievement during the Performance Period of the Performance Goals set forth on Appendix A, without proration, shall become vested on the Vesting Date.
For purposes of this Agreement: “Disability” means your medically-diagnosed, permanent physical or mental inability to perform your duties as an employee of the Company; “Retirement” means that you have a combined Age and Years of Service (each as defined below) of at least 70 and you have done all of the following (w) given the Company at least six (6) months prior written notice of your Retirement; (x) signed and delivered to the Company an agreement providing for such restrictive covenants, as may be determined from time to time by the Committee, based on individual facts and circumstances, to be reasonably necessary to protect the Company’s interests, with such restrictive covenants continuing for a period of two (2) years after such Retirement (or, indefinitely, in the case of confidentiality and similar restrictive covenants), (y) signed and delivered to the Company, within 21 days of the date of your employment termination (or such later time as required under applicable law) a general release
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agreement of claims against the Company and its affiliates in a form reasonably acceptable to the Company, which is not later revoked, and (z) voluntarily terminated your employment with the Company. The term “Age” means (as of a particular date of determination), your age on that date in whole years and any fractions thereof; and “Years of Service” means the number of years and fractions thereof during the period beginning on your most recent commencement of employment with the Company and ending on the date your employment with the Company terminated. Your refusal to fulfill any of the conditions set forth in (w), (x), (y) or (z) above, your breach of any agreement entered into pursuant to (x) or (y) above, or if, after your Retirement, facts and circumstances are discovered that would have justified your termination for Cause (as defined below) if you were still employed by the Company, shall constitute a waiver by you of the benefits attributable to Retirement under this Agreement.
(b) Forfeiture of Performance Shares. Unless otherwise determined by the Committee, or except as provided in an agreement between you and the Company, if your employment terminates before the Vesting Date for any reason other than Death, termination by the Company due to Disability, Retirement or a Qualifying Termination (as described in Section 2(c) below), all Performance Shares subject to this Award shall be forfeited and canceled as of the date of such employment termination.
(c) Effect of a Change in Control.
(i) Satisfaction of Performance Goals. In the event of a Change in Control prior to the end of a Performance Period, the Performance Period shall end as of the date of the Change in Control and the Performance Goals shall be deemed to have been satisfied at the greater of (A) 100% of the target level, with the potential payout pro-rated based on the time elapsed in the Performance Period through the date of the Change in Control and (B) the actual level of achievement of the Performance Goals set forth in Appendix A as of the date of the Change in Control, as determined by the Committee, as constituted immediately prior to the Change in Control, without proration.
(ii) Settlement of Award Not Assumed. In the event of a Change in Control prior to the end of a Performance Period pursuant to which the Award is not assumed or continued by the surviving or acquiring corporation in such Change in Control (as determined by the Board or Committee, with appropriate adjustments to the number and kind of shares, in each case, that preserve the value of the Award and other material terms and conditions of this Award as in effect immediately prior to the Change in Control), the Performance Shares shall vest as of the date of the Change in Control, based on the performance level determined in accordance with clause (i) above and shall be settled within 60 days following the Change in Control; provided, however, if the Performance Shares are “nonqualified deferred compensation” within the meaning of Section 409A of the Code and the Change in Control is not a “change in control event” within the meaning of Section 409A of the Code or the settlement upon such Change in Control would otherwise be prohibited under Section 409A of the Code, then the Performance Shares shall be settled at the time specified in Section 3.
(iii) Settlement of Award Assumed. In the event of a Change in Control prior to the end of a Performance Period pursuant to which this Award is assumed or continued by the surviving or acquiring corporation in such Change in Control (as determined by the Board or Committee, with appropriate adjustments to the number and kind of shares, in each case, that preserve the value of the Award and other material terms and conditions of this Award as in effect immediately prior to the Change in Control) and either (A) you remain continuously and actively employed by the Company through the end of such Performance Period, (B) you experience a Qualifying Termination or your employment terminates due to death, termination by the Company due to Disability or Retirement following such Change in Control, then in any such case, the Performance Shares shall vest based on the performance level determined in accordance with clause (i) above and shall be settled within 60 days following the
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earlier to occur of (x) the end of the Performance Period and (y) the date of your death or such termination of employment.
For purposes of this Agreement and notwithstanding anything in the Plan to the contrary for purposes of determining whether a Qualifying Termination has occurred during the two-year period following a Change in Control: (A) “Cause” means, unless otherwise provided in an effective employment agreement or other written agreement with respect to the termination of your employment with the Company, the termination of your employment with the Company on account of: (u) your failure to substantially perform your duties (other than as a result of physical or mental illness or injury); (w) your willful misconduct or gross negligence which is materially injurious to the Company or results in reputational harm to the Company; (x) a breach by you of your fiduciary duty or duty of loyalty to the Company; (y) your commission of any felony or other serious crime involving moral turpitude; or (z) your material violation of Company policies or agreements between you and the Company and (B) “Good Reason” means, unless otherwise provided in an effective employment agreement or other written agreement with respect to the termination of your employment with the Company, the termination of your employment with the Company on account of: (x) a material diminution of your duties and responsibilities other than a change in your duties and responsibilities that results from becoming part of a larger organization following a Change in Control, (y) a material decrease in your base salary or bonus opportunity other than a decrease in bonus opportunity that applies to all employees of the Company otherwise eligible to participate in the applicable bonus plan, or (z) a relocation of your primary work location more than 30 miles from your work location on the Grant Date, without your prior written consent; provided that, within thirty days following the occurrence of any of the Good Reason events set forth herein, you shall have delivered written notice to the Company of your intention to terminate your employment for Good Reason, which notice specifies in reasonable detail the circumstances claimed to give rise to your right to terminate employment for Good Reason, and the Company shall not have cured such circumstances within thirty days following the Company’s receipt of such notice.
3. Distribution Upon Vesting. Subject to Sections 2 and 18, as soon as practicable following the expiration of the Performance Period (but no later than March 15th following the expiration of the Performance Period), the Company shall issue or deliver, subject to the conditions of this Agreement, the Shares for the vested Performance Shares to you. The Award may only be settled in Shares. Such issuance or delivery of Shares shall be evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company. The Company shall pay all original issue or transfer taxes and all fees and expenses incident to such issuance or delivery, except as otherwise provided in Section 6. Prior to the issuance to you of the Shares subject to the Award, you shall have no direct or secured claim in any specific assets of the Company or in such Shares, and will have the status of a general unsecured creditor of the Company.
4. No Shareholder Rights. Neither you nor any person claiming under or through you shall have rights as a holder of Shares (e.g., you have no right to vote or receive dividends) with respect to the Performance Shares granted hereunder unless and until such Performance Shares have been settled in Shares that have been registered in your name as owner.
5. Dividend Equivalents. Prior to the settlement of the Performance Shares, you shall accumulate dividend equivalents with respect to the Performance Shares, which dividend equivalents shall be paid in cash (without interest) to you only if and when the applicable Performance Shares vest and become payable. Dividend equivalents shall equal the dividends, if any, actually paid with respect to Shares prior to the settlement of the Award while (and to the extent) the Performance Shares remain outstanding and unpaid. In the event you forfeit Performance Shares, you also shall immediately forfeit any dividend equivalents held by the Company that are attributable to the Shares underlying such forfeited Performance Shares.
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6. Tax Withholding. As a condition precedent to the issuance of Shares following the vesting of the Performance Shares, you shall, upon request by the Company, pay to the Company such amount as the Company determines is required, under all applicable federal, state, local or other laws or regulations, to be withheld and paid over as income or other withholding taxes (the “Required Tax Payments”) with respect to such vesting of the Performance Shares. If you shall fail to advance the Required Tax Payments after request by the Company, the Company may, in its discretion, deduct any Required Tax Payments from any amount then or thereafter payable by the Company to you. Notwithstanding the foregoing, your obligation to advance the Required Tax Payments shall be satisfied by the Company withholding whole Shares that would otherwise be delivered to you upon vesting of the Performance Shares having an aggregate fair market value, determined as of the date on which such withholding obligation arises (the “Tax Date”), equal to the Required Tax Payments; however, if you submit a written request to the Company at least ten (10) days in advance of the Vesting Date, the Company may agree, in its discretion, to permit you to satisfy your obligation to advance the Required Tax Payments by a check or cash payment to the Company. Shares shall be withheld based on the applicable statutory minimum tax rate; however, if you submit a written request to the Company at least ten (10) days in advance of the Vesting Date, the Company (or, in the case of an individual subject to Section 16 of the Securities Exchange Act of 1934, as amended, the Committee) may agree, in its discretion, to withhold shares based on a higher tax rate permitted by applicable withholding rules and accounting rules without resulting in variable accounting treatment. No Share or certificate representing a Share shall be issued or delivered until the Required Tax Payments have been satisfied in full.
7. Repayment; Right of Set-Off. You agree and acknowledge that this Agreement is subject to any clawback policies of the Company in effect on the Grant Date and any subsequent policies that the Committee may adopt from time to time to comply with applicable law or regulation with respect to the repayment to the Company of any benefit received hereunder, including “clawback” or set-off policies. In addition, you agree that in the event the Company, in its reasonable judgment, determines that you owe the Company any amount due to any loan, note, obligation or indebtedness, including but not limited to amounts owed to the Company pursuant to the Company’s policies with respect to travel and business expenses, and if you have not satisfied such obligation, then the Company may instruct the plan administrator to withhold and/or sell Shares acquired by you upon settlement of the Award, or the Company may deduct funds equal to the amount of such obligation from other funds due to you from the Company.
8. Adjustment of Performance Shares. The number of Performance Shares subject to this Award and the related Performance Goals shall automatically be adjusted in accordance with Section 9 of the Plan to prevent accretion, or to protect against dilution, in the event of a change to the Common Stock resulting from a recapitalization, stock split, consolidation, spin-off, reorganization, or liquidation or other similar transactions.
9. Non-Transferability of Award. Unless the Committee specifically determines otherwise, the Performance Shares may not be transferred by you other than by will or the laws of descent and distribution. Except to the extent permitted by the foregoing sentence, the Award may not be sold, transferred, assigned, pledged, hypothecated, encumbered or otherwise disposed of (whether by operation of law or otherwise) or be subject to execution, attachment or similar process. Upon any attempt to so sell, transfer, assign, pledge, hypothecate, encumber or otherwise dispose of the Award, the Award and all rights hereunder shall immediately become null and void.
10. No Right to Continued Employment or Service. The granting of the Award shall not be construed as granting to you any right to continue your employment or Service with the Company.
11. Amendment of this Award. This Award or the terms of this Agreement may be amended by the Board or the Committee at any time (a) if the Board or the Committee determines, in its reasonable discretion, that amendment is necessary or appropriate to conform the Award to, or otherwise satisfy, any legal requirement (including without limitation the provisions of Section 409A of the Code), which amendments may
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be made retroactively or prospectively and without your approval or consent to the extent permitted by applicable law; provided that, such amendment shall not materially and adversely affect your rights hereunder; or (b) with your consent.
12. Electronic Delivery and Acceptance. You hereby consent and agree to electronic delivery of any Plan documents, proxy materials, annual reports and other related documents. You also hereby consent to any and all procedures that the Company has established or may establish for an electronic signature system for delivery and acceptance of Plan documents (including documents relating to any programs adopted under the Plan), and agree you’re your electronic signature is the same as, and shall have the same force and effect as, your manual signature. You consent and agree that any such procedures and delivery may be effected by a third party engaged by the Company to provide administrative services related to the Plan, including any program adopted under the Plan.
13. Governing Plan Document. The Award is subject to all the provisions of the Plan, the provisions of which are hereby made a part of this Agreement, and is further subject to all interpretations, amendments, rules and regulations which may from time to time be promulgated and adopted pursuant to the Plan. In the event of any conflict between the provisions of the Award or this Agreement and those of the Plan, the provisions of the Plan shall control.
14. Governing Law. The validity, construction, interpretation and effect of this Agreement shall exclusively be governed by and determined in accordance with the laws of the State of Delaware, without giving effect to conflict of law rules or principles.
15. Entire Agreement. This Agreement and the Plan constitute the entire understanding and agreement between the Company and the Participant with respect to the subject matter contained herein and supersedes any prior agreements, understandings, restrictions, representations, or warranties between the Company and the Participant with respect to such subject matter other than those as set forth or provided for herein.
16. No Waiver. No failure by any party to insist upon the strict performance of any covenant, duty, agreement or condition of this Agreement or to exercise any right or remedy consequent upon a breach thereof shall constitute waiver of any such breach or any other covenant, duty, agreement or condition.
17. Saving Clause. If any provision of this Agreement shall be determined to be illegal or unenforceable, such determination shall in no manner affect the legality or enforceability of any other provision hereof.
18. Compliance With Section 409A of the Code. This Award is intended to be exempt from or comply with Section 409A of the Code, and shall be interpreted and construed accordingly, and each payment hereunder shall be considered a separate payment. To the extent this Agreement provides for the Award to become vested and be settled upon the Holder’s termination of employment, the applicable shares of Stock shall be transferred to you or your beneficiary upon your “separation from service,” within the meaning of Section 409A of the Code; provided that if you are a “specified employee,” within the meaning of Section 409A of the Code, then to the extent the Award constitutes nonqualified deferred compensation, within the meaning of Section 409A of the Code, such Shares shall be transferred to you or your beneficiary upon the earlier to occur of (i) the six-month anniversary of such separation from service and (ii) the date of your death.
CHIPOTLE MEXICAN GRILL, INC.
Chief People Officer
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Appendix A to 2020 Performance Share Agreement
Name of Participant: Participant Name
Performance Criteria
The performance criteria under this Performance Share Award shall be 3 Year CRS Growth and 3 Year Average RCF Margin, as such terms are defined below. In addition, there is a cap on above target payout based on relative Total Shareholder Return (TSR) compared to the S&P 500.
Performance Period
Performance will be measured from January 1, 2020 through December 31, 2022 for CRS, RCF, and TSR.
Performance Goal Table
The number of Shares that can be earned under this Performance Share Award is equal to the Target Number of Performance Shares multiplied by the percentage determined under the Performance Goal Table set forth below (the “Payout Percentage”).
2020-2022 Avg RCF |
2020 - 2022 CRS Growth |
||||||||
|
3.50% |
4.00% |
4.50% |
5.00% |
5.50% |
6.00% |
6.50% |
7.00% |
|
21.50% |
0% |
0% |
50% |
50% |
75% |
100% |
125% |
150% |
|
22.00% |
0% |
25% |
75% |
75% |
75% |
125% |
175% |
200% |
|
23.00% |
25% |
50% |
75% |
100% |
125% |
175% |
225% |
275% |
|
24.00% |
50% |
75% |
100% |
150% |
175% |
250% |
275% |
300% |
|
24.50% |
75% |
100% |
125% |
200% |
225% |
250% |
300% |
300% |
In no event will any Performance Shares be earned under this Appendix A if either (a) the 3 Year Average RCF Margin is less than 21.5% or (b) the 3 Year CRS Growth is less than 3.5%. In no event may more than 300% of the Target Number of Performance Shares be earned under this Appendix A. If the level of performance for either 3 Year CRS Growth, 3 Year Average RCF Margin or both falls between two stated performance levels in the Performance Goal Table, the Payout Percentage shall be determined under the heading “Interpolation” below.
Cap on Above Target Payout
In no event may more than 100% of the Target Number of Performance Shares be earned under this Appendix A if Chipotle’s 3 Year TSR is below the 25th percentile of the constituent companies comprising the S&P 500 on the date of grant.
“TSR” means total shareholder return as determined by dividing (i) the sum of (A) the Ending Period Average Price minus the Beginning Period Average Price plus (B) all dividends and other distributions paid on the issuer’s shares during the Performance Period by (ii) the Beginning Period Average Price. In calculating TSR, all dividends are assumed to have been reinvested in shares when paid. TSR for a constituent company will be negative one hundred percent (-100%) if during the Performance Period it: (i) files for bankruptcy, reorganization, or liquidation under any chapter of the U.S. Bankruptcy Code; (ii) is the subject of an involuntary bankruptcy proceeding that is not dismissed within 30 days; (iii) is the subject of a stockholder approved plan of liquidation or dissolution; or (iv) ceases to conduct substantial business operations. If a
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constituent company is acquired, taken private or delisted (independent of situations covered in (i) through (IV) above) during the performance period, it will be excluded from the TSR calculation.
“Beginning Period Average Price” means the average closing price per share of the issuer over the 20-consecutive-trading days starting with and including the first day of the Performance Period (if the applicable day is not a trading day, the immediately preceding trading day), adjusted for stock splits or similar changes in capital structure.
“Ending Period Average Price” means the average closing price per share of the issuer over the 20-consecutive-trading days ending with and including the last day of the Performance Period (if the applicable day is not a trading day, the immediately preceding trading day), adjusted for stock splits or similar changes in capital structure.
3 Year CRS Growth
For purposes of the Performance Goal Table under this Appendix A, “3-Year CRS Growth” shall be determined with respect to the three-year period beginning on January 1, 2020 using the following formula:
[(1+X)*(1+Y)*(1+Z)]^(1/3)-1
Where:
“X” = the annual percentage change in the Comparable Restaurant Sales for the fiscal year ending December 31, 2020
“Y” = the annual percentage change in Comparable Restaurant Sales for the fiscal year ending December 31, 2021
“Z” = the annual percentage change in Comparable Restaurant Sales for the fiscal year ending December 31, 2022
The following terms shall have the respective meanings set forth below when determining 3-Year CRS Growth:
“Comparable Restaurant” means a restaurant operated under the Chipotle Mexican Grill and/or Pizzeria Locale brands by the Company or its direct or indirect Subsidiaries, beginning in such restaurant’s 13th full calendar month of operations.
“CRS” or “Comparable Restaurant Sales” with respect to a fiscal year, means the net sales attributable to Comparable Restaurants that are realized during such year, as determined in accordance with generally accepted accounting principles. For avoidance of doubt, net sales from a restaurant shall only be counted after it has become a Comparable Restaurant.
3 Year Average RCF Margin
For purposes of the Performance Goal Table under this Appendix A, “3 Year Average RCF Margin” shall be determined under the following formula:
X + Y + Z
3
8
Where:
“X” = the Company’s RCF Margin from restaurant operations for the fiscal year ending December 31, 2020
“Y” = the Company’s RCF Margin from restaurant operations for the fiscal year ending December 31, 2021.
“Z” = the Company’s RCF Margin from restaurant operations for the fiscal year ending December 31, 2022.
“RCF Margin” represents the Company’s total revenue less restaurant operating costs (exclusive of depreciation and amortization), expressed as a percentage of the Company’s total revenue, for the applicable Company fiscal year. RCF Margin shall be determined in accordance with generally accepted accounting principles as in effect on the first day of the applicable Performance Period.
Interpolation
The following rules shall be used to determine the Payout Percentage when the level of performance for either 3 Year CRS Growth, 3 Year Average RCF Margin or both falls between two stated performance levels in the Performance Goal Table:
(1) Determine what the Payout Percentage would have been without interpolation based on the highest actual results achieved and reflected in the Performance Goal Table for 3 Year CRS Growth and 3 Year Average RCF Margin. For example, assume that 3 Year Average RCF Margin is 21.75% and 3-Year CRS Growth is 4.25%. The Payout Percentage with no interpolation would be zero, as the highest achieved level of performance under the Performance Goal Table is 21.5% for 3 Year Average RCF Margin and 4.0% for 3 Year CRS Growth (with respect to each Performance Criteria, the “Base Achieved Level”).
(2) Calculate the CRS Adjustment Factor as follows:
(a) Determine what the Payout Percentage would have been had positive results in excess of the Base Achieved Level for 3 Year CRS Growth been rounded up to the next highest level of stated performance in the Performance Goal Table (the “CRS Rounded Up Level”). In the example noted in paragraph (1) above, the CRS Rounded Up Level would be 4.5% for 3 Year CRS Growth (4.25% rounded up to 4.5%), and the Payout Percentage based on the CRS Rounded Up Level would be 50% under the Performance Goal Table.
(b) Determine, as a percentage, the extent to which the Company achieved results for 3 Year CRS Growth greater than its Base Achieved Level as compared to its CRS Rounded Up Level, assuming that 3 Year Average RCF Margin equals its Base Achieved Level. In the example noted in Paragraph (1) above, the extent to which 3 Year CRS Growth was attained between its Base Achieved Level and CRS Rounded Up Level was 50%, assuming a Base Achieved Level of 21.5% for 3 Year Average RCF Margin (4.25% is halfway in between the Base Achieved Level and the CRS Rounded Up Level).
(c) Calculate the CRS Adjustment Factor by (A) multiplying the difference between the percentages in paragraphs (2)(a) and (1) above by the percentage determined in paragraph (2)(b) above, rounded to the nearest tenth of a percent. In the example noted in paragraph (1) above, the CRS Adjustment Factor is 25% (i.e., (50% - 0%) multiplied by 50%).
(3) Calculate the RCF Adjustment Factor as follows:
(a) Determine what the Payout Percentage would have been had positive results in excess of the Base Achieved Level for 3 Year Average RCF Margin been rounded up to the next highest level of stated
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performance in the Performance Goal Table (the “RCF Rounded Up Level”). In the example noted in paragraph (1) above, the RCF Rounded Up Level would be 22% for 3 Year Average RCF Margin (21.75% rounded up to 22%), and the Payout Percentage based on the RCF Rounded Up Level would be 25% under the Performance Goal Table.
(b) Determine, as a percentage, the extent to which the Company achieved results for 3 Year Average RCF Margin greater than its Base Achieved Level as compared to its RCF Rounded Up Level, assuming that 3 Year CRS Growth equals its Base Achieved Level. In the example noted in Paragraph (1) above, the extent to which 3 Year Average RCF Margin was attained between its Base Achieved Level and Rounded Up Level was 50%, assuming a Base Achieved Level of 4.0% for 3 Year CRS Growth.
(c) Calculate the RCF Adjustment Factor by (A) multiplying the difference between the percentages in paragraphs (3)(a) and (1) above by the percentage determined in paragraph (3)(b) above, rounded to the nearest tenth of a percent. In the example noted in paragraph (1) above, the RCF Adjustment Factor is 12.5% (i.e., (25% - 0%) multiplied by 50%).
(4) Calculate the Payout Percentage by adding the CRS Adjustment Factor and the RCF Adjustment Factor to the Base Achieved Level from Paragraph (1). In the example noted in paragraph (1) above, the interpolated Payout Percentage would be 37.5% (i.e. 25% + 12.5% + 0%).
See Appendix B for additional examples of the interpolation method used to determine Payout Percentages when the level of performance for either 3 Year CRS Growth, 3 Year Average RCF Margin or both falls between two stated performance levels in the Performance Goal Table.
Other Provisions
If the Committee determines after granting the Performance Share Award that there has been a change in law or accounting rules, that impacts CRS and/or Restaurant‐level Cash Flow Margin as set forth in this Appendix A, the Committee shall modify these measures, in whole or in part, as it deems appropriate and equitable in its discretion for such events that were not determinable or considered at the Grant Date. For the avoidance of doubt, no adjustments otherwise authorized under Section 8 of the Plan shall be made with respect to the Performance Shares except as specifically provided in this Appendix A.
Performance Shares that are earned under this Appendix A shall only be issued to the Participant to the extent that the continued employment conditions set forth in the Performance Share Agreement have been satisfied.
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Appendix B to 2020 Performance Share Agreement
Seth forth below are additional examples illustrating the interpolation method used to determine Payout Percentages when the level of performance for either 3 Year CRS Growth, 3 Year Average RCF Margin or both falls between two stated performance levels in the Performance Goal Table in Appendix A. The numbered steps below refer to the steps described in detail in Appendix A, above.
Example 1
Assume that 3 Year Average RCF Margin is 22.5% and 3-Year CRS Growth is 4.75%.
(1) The Base Achieved Level is 75%.
(2) The CRS Adjustment Factor is calculated as follows:
(a) The CRS Rounded Up Level would be 5% (4.75% rounded up to 5%), and the Payout Percentage based on the CRS Rounded Up Level would be 75% under the Performance Goal Table.
(b) The percentage reflecting the extent to which 3 Year CRS Growth was attained between its Base Achieved Level and CRS Rounded Up Level is 50% (4.75% is halfway in between 4.5% and 5%).
(c) The CRS Adjustment Factor is 0% (i.e., (75% - 75%) multiplied by 50%).
(3) The RCF Adjustment Factor is calculated as follows:
(a) The RCF Rounded Up Level would be 23% (22.5% rounded up to 23%), and the Payout Percentage based on the RCF Rounded Up Level would be 75% under the Performance Goal Table.
(b) The percentage reflecting the extent to which 3 Year Average RCF Margin was attained between its Base Achieved Level and Rounded Up Level was 50% (22.5% is halfway in between 19% and 20%).
(c) The RCF Adjustment Factor is 0% (i.e., (75% - 75%) multiplied by 50%).
(4) The interpolated Payout Percentage would be 75% (i.e. 0% + 0% + 75%).
Example 2
Assume that 3 Year Average RCF Margin is 23.5% and 3-Year CRS Growth is 6.75%.
(1) The Base Achieved Level is 225%.
(2) The CRS Adjustment Factor is calculated as follows:
(a) The CRS Rounded Up Level would be 7% (6.75% rounded up to 7%), and the Payout Percentage based on the CRS Rounded Up Level would be 275% under the Performance Goal Table.
(b) The percentage reflecting the extent to which 3 Year CRS Growth was attained between its Base Achieved Level and CRS Rounded Up Level is 50% (6.75% is halfway in between 6.5% and 7%).
(c) The CRS Adjustment Factor is 25% (i.e., (275% - 225%) multiplied by 50%).
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(3) The RCF Adjustment Factor is calculated as follows:
(a) The RCF Rounded Up Level would be 24% (23.5% rounded up to 24%), and the Payout Percentage based on the RCF Rounded Up Level would be 275% under the Performance Goal Table.
(b) The percentage reflecting the extent to which 3 Year Average RCF Margin was attained between its Base Achieved Level and Rounded Up Level was 50% (23.5% is halfway in between 23% and 24%).
(c) The RCF Adjustment Factor is 25% (i.e., (275% - 225%) multiplied by 50%).
(4) The interpolated Payout Percentage would be 275% (i.e. 25% + 25% + 225%).
Example 3
Assume that 3 Year Average RCF Margin is 23.2% and 3-Year CRS Growth is 5.4%.
(1) The Base Achieved Level is 100%.
(2) The CRS Adjustment Factor is calculated as follows:
(a) The CRS Rounded Up Level would be 5.5% (5.4% rounded up to 5%), and the Payout Percentage based on the CRS Rounded Up Level would be 125% under the Performance Goal Table.
(b) The percentage reflecting the extent to which 3 Year CRS Growth was attained between its Base Achieved Level and CRS Rounded Up Level is 80% (5.4% is four-fifths in between 5% and 5.5%).
(c) The CRS Adjustment Factor is 20% (i.e., (125% - 100%) multiplied by 80%).
(3) The RCF Adjustment Factor is calculated as follows:
(a) The RCF Rounded Up Level would be 24% (23.2% rounded up to 24%), and the Payout Percentage based on the RCF Rounded Up Level would be 150% under the Performance Goal Table.
(b) The percentage reflecting the extent to which 3 Year Average RCF Margin was attained between its Base Achieved Level and Rounded Up Level was 20% (23.2% is one-fifth in between 23% and 24%).
(c) The RCF Adjustment Factor is 10% (i.e., (150% - 100%) multiplied by 20%).
(4) The interpolated Payout Percentage would be 130% (i.e. 20% +10% + 100%).
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Exhibit 10.35
CHIPOTLE MEXICAN GRILL, INC.
RESTRICTED STOCK UNIT AGREEMENT
Vesting Dates: 2nd Anniversary of Grant Date
3rd Anniversary of Grant Date
This Restricted Stock Unit Agreement (this “Agreement”), dated as of the Grant Date stated above, is delivered by Chipotle Mexican Grill, Inc., a Delaware corporation (the “Company”), to the Participant named above (the “Participant” or “you”).
WHEREAS, the Company is awarding you restricted stock units (“RSUs”) representing the right to receive shares of Common Stock of the Company (the “Shares”) on the terms and conditions provided below and pursuant to the Amended and Restated Chipotle Mexican Grill, Inc. 2011 Stock Incentive Plan (the “Plan”). This Agreement and the RSUs granted hereunder are expressly subject to all of the terms, definitions and provisions of the Plan. Except as expressly indicated herein, defined terms used in this Agreement have the meanings set forth in the Plan.
WHEREAS, the Compensation Committee (the “Committee”) of the Company’s Board of Directors (the “Board”) has approved this award of RSUs (the “Award”).
NOW, THEREFORE, the parties hereby agree as follows:
1. Grant of Award. The Company hereby grants to you the Award with respect to the number of RSUs set forth above, pursuant to which you shall be eligible to receive a number of equivalent Shares, subject to your fulfillment of the vesting and other conditions set forth in this Agreement. The Award may only be settled in Shares.
2. Vesting.
(a) Regular Vesting. Except as otherwise provided in the Plan or in this Section 2, your RSUs will vest 50% on the 2nd anniversary of the Grant Date and the remaining 50% on the 3rd anniversary of the Grant Date, subject to your continued employment or service with the Company through the applicable vesting date. The period of time prior to the full vesting of the Award shall be referred to herein as the “Vesting Period.”
(b) Termination of Employment.
(i) Unless otherwise determined by the Committee, or except as provided in an agreement between you and the Company, in the event of your death, termination by the Company due to Disability or Retirement (each as defined below) prior to the expiration of the Vesting Period, you shall vest in the RSUs as follows:
(A) In the event of your Retirement prior to the one-year anniversary of the Grant Date, you shall continue to vest in a pro rata portion of the RSUs for the remainder of the Vesting Period. The pro rata portion shall be determined by multiplying the total number of RSUs subject to this Award, without proration, by a fraction, the numerator of which is the number of days from the Grant Date through your Retirement, and the denominator of which is 365.
(B) In the event of your Retirement on or after the one-year anniversary of the Grant Date, you shall continue to vest in the RSUs, without proration, for the remainder of the Vesting Period.
(C) In the event of your death or termination by the Company due to Disability, the total number of RSUs subject to this Award, without proration, shall become vested on the date of your death or termination by the Company due to Disability.
For purposes of this Agreement: “Disability” means your medically-diagnosed, permanent physical or mental inability to perform your duties as an employee of the Company; “Retirement” means that you have a combined Age and Years of Service (each as defined below) of at least 70 and you have done all of the following (w) given the Company at least six (6) months prior written notice of your Retirement; (x) signed and delivered to the Company an agreement providing for such restrictive covenants, as may be determined from time to time by the Committee, based on individual facts and circumstances, to be reasonably necessary to protect the Company’s interests, with such restrictive covenants continuing for a period of two (2) years after such Retirement (or, indefinitely, in the case of confidentiality and similar restrictive covenants), (y) signed and delivered to the Company, within 21 days of the date of your employment termination (or such later time as required under applicable law) a general release agreement of claims against the Company and its affiliates in a form reasonably acceptable to the Company, which is not later revoked, and (z) voluntarily terminated your employment with the Company. The term “Age” means (as of a particular date of determination), your age on that date in whole years and any fractions thereof; and “Years of Service” means the number of years and fractions thereof during the period beginning on your most recent commencement of employment with the Company and ending on the date your employment with the Company terminated. Your refusal to fulfill any of the conditions set forth in (w), (x), (y) or (z) above, your breach of any agreement entered into pursuant to (x) or (y) above, or if, after your Retirement, facts and circumstances are discovered that would have justified your termination for Cause (as defined below) if you were still employed by the Company, shall constitute a waiver by you of the benefits attributable to Retirement under this Agreement.
(ii) The RSUs will automatically and immediately vest in full if (A) you experience a Qualifying Termination or (B) upon a Change in Control if this Award is not assumed or continued by the surviving or acquiring corporation in such Change in Control (as determined by the Board or Committee, with appropriate adjustments to the number and kind of shares, in each case, that preserve the value of the Award and other material terms and conditions of this Award as in effect immediately prior to the Change in Control).
For purposes of this Agreement and notwithstanding anything in the Plan to the contrary for purposes of determining whether a Qualifying Termination has occurred during the two-year period following a Change in Control: (A) “Cause” means, unless otherwise provided in an effective employment agreement or other written agreement with respect to the termination of your employment with the Company, the termination of your employment with the Company on account of: (u) your failure to substantially perform your duties (other than as a result of physical or mental illness or injury); (w) your willful misconduct or gross negligence which is materially injurious to the Company or results in reputational harm to the Company; (x) a breach by you of your fiduciary duty or duty of loyalty to the Company; (y) your commission of any felony or other serious crime involving moral turpitude; or (z)
2
your material violation of Company policies or agreements between you and the Company and (B) “Good Reason” means, unless otherwise provided in an effective employment agreement or other written agreement with respect to the termination of your employment with the Company, the termination of your employment with the Company on account of: (x) a material diminution your duties and responsibilities other than a change in your duties and responsibilities that results from becoming part of a larger organization following a Change in Control, (y) a material decrease in your base salary or bonus opportunity other than a decrease in bonus opportunity that applies to all employees of the Company otherwise eligible to participate in the applicable bonus plan, or (z) a relocation of your primary work location more than 30 miles from your work location on the Grant Date, without your prior written consent; provided that, within thirty days following the occurrence of any of the Good Reason events set forth herein, you shall have delivered written notice to the Company of your intention to terminate your employment for Good Reason, which notice specifies in reasonable detail the circumstances claimed to give rise to your right to terminate employment for Good Reason, and the Company shall not have cured such circumstances within thirty days following the Company’s receipt of such notice.
(c) Forfeiture of Unvested RSUs. Unless otherwise determined by the Committee, or except as provided in an agreement between you and the Company, if your employment terminates prior to the expiration of the Vesting Period for any reason other than termination by the Company due to Disability, death, Retirement, or a Qualifying Termination, any unvested RSUs will be forfeited and canceled as of the date of such employment termination.
3. Distribution Upon Vesting. Subject to Section 18, as soon as practicable (but no later than sixty (60) days) after the vesting of the RSUs, the Company shall issue or deliver, subject to the conditions of this Agreement, the Shares for the vested RSUs to you; provided, however, that (i) in the event of vesting of the Award in connection with a Retirement, then Shares shall be distributed to you in accordance with the regular vesting schedule set forth in Section 2(a), (ii) in the event the Award constitutes nonqualified deferred compensation (within the meaning of Section 409A of the Code) because you would satisfy the Age and Service requirements for Retirement during the Vesting Period or otherwise and the vesting of the Award is in connection with a termination by the Company due to Disability or a Qualifying Termination following a Change in Control that does not constitute a “change in control event” (within the meaning of Section 409A of the Code), then the Shares shall be distributed to you in accordance with the regular vesting schedule set forth in Section 2(a) to the extent required to comply with Section 409A and (iii) in the event of a Change in Control in which Award is not effectively assumed pursuant to Section 2(b)(ii) and such Change in Control is not a “change in control event” (within the meaning of Section 409A of the Code) or settlement upon such Change in Control would otherwise be prohibited under Section 409A of the Code, then the Shares shall be distributed to you in accordance with the regular vesting schedule set forth in Section 2(a) to the extent required to comply with Section 409A of the Code or, if earlier, upon your death or termination of employment if permitted under Section 409A of the Code. Such issuance or delivery of Shares shall be evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company. The Company shall pay all original issue or transfer taxes and all fees and expenses incident to such issuance or delivery, except as otherwise provided in Section 6. Prior to the issuance to you of the Shares subject to the Award, you shall have no direct or secured claim in any specific assets of the Company or in such Shares, and will have the status of a general unsecured creditor of the Company.
4. No Shareholder Rights. Neither you nor any person claiming under or through you shall have rights as a holder of Shares (e.g., you have no right to vote or receive dividends) with respect to the RSUs granted hereunder unless and until such RSUs have been settled in Shares that have been registered in your name as owner.
3
5. Dividend Equivalents. During the Vesting Period, you shall accumulate dividend equivalents with respect to the RSUs, which dividend equivalents shall be paid in cash (without interest) to you only if and when the applicable RSUs vest and become payable. Dividend equivalents shall equal the dividends, if any, actually paid with respect to Shares during the Vesting Period while (and to the extent) the RSUs remain outstanding and unpaid. In the event you forfeit the RSUs, you also shall immediately forfeit any dividend equivalents held by the Company that are attributable to the Shares underlying such forfeited RSUs.
6. Tax Withholding. As a condition precedent to the issuance of Shares following the vesting of the Shares, you shall, upon request by the Company, pay to the Company such amount as the Company determines is required, under all applicable federal, state, local or other laws or regulations, to be withheld and paid over as income or other withholding taxes (the “Required Tax Payments”) with respect to such vesting of the Shares. If you shall fail to advance the Required Tax Payments after request by the Company, the Company may, in its discretion, deduct any Required Tax Payments from any amount then or thereafter payable by the Company to you. Notwithstanding the foregoing, your obligation to advance the Required Tax Payments shall be satisfied by the Company withholding whole Shares that would otherwise be delivered to you upon vesting of the Shares having an aggregate fair market value, determined as of the date on which such withholding obligation arises (the “Tax Date”), equal to the Required Tax Payments; however, if you submit a written request to the Company at least ten (10) days in advance of the Vesting Date, the Company may agree, in its discretion, to permit you to satisfy your obligation to advance the Required Tax Payments by a check or cash payment to the Company. Shares shall be withheld based on the applicable statutory minimum tax rate; however, if you submit a written request to the Company at least ten (10) days in advance of the Vesting Date, the Company (or, in the case of an individual subject to Section 16 of the Securities Exchange Act of 1934, as amended, the Committee) may agree, in its discretion, to withhold shares based on a higher tax rate permitted by applicable withholding rules and accounting rules without resulting in variable accounting treatment. No Share or certificate representing a Share shall be issued or delivered until the Required Tax Payments have been satisfied in full.
7. Repayment; Right of Set-Off. You agree and acknowledge that this Agreement is subject to any clawback policies of the Company in effect on the Grant Date and any subsequent policies that the Committee may adopt from time to time to comply with applicable law or regulation with respect to the repayment to the Company of any benefit received hereunder, including “clawback” or set-off policies. In addition, you agree that in the event the Company, in its reasonable judgment, determines that you owe the Company any amount due to any loan, note, obligation or indebtedness, including but not limited to amounts owed to the Company pursuant to the Company’s policies with respect to travel and business expenses, and if you have not satisfied such obligation, then the Company may instruct the plan administrator to withhold and/or sell Shares acquired by you upon settlement of the Award, or the Company may deduct funds equal to the amount of such obligation from other funds due to you from the Company.
8. Adjustment of RSUs. The number of RSUs subject to this Award will automatically be adjusted in accordance with Section 9 of the Plan to prevent accretion, or to protect against dilution, in the event of a change to the Common Stock resulting from a recapitalization, stock split, consolidation, spin-off, reorganization, or liquidation or other similar transactions.
9. Non-Transferability of Award. Unless the Committee specifically determines otherwise, the RSUs may not be transferred by you other than by will or the laws of descent and distribution. Except to the extent permitted by the foregoing sentence, the Award may not be sold, transferred, assigned, pledged, hypothecated, encumbered or otherwise disposed of (whether by operation of law or otherwise) or be subject to execution, attachment or similar process. Upon any attempt to so sell, transfer, assign, pledge, hypothecate, encumber or otherwise dispose of the Award, the Award and all rights hereunder shall immediately become null and void.
10. No Right to Continued Employment or Service. The granting of the Award shall not be construed as granting to you any right to continue your employment or service with the Company.
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11. Amendment of this Award. This Award or the terms of this Agreement may be amended by the Board or the Committee at any time (a) if the Board or the Committee determines, in its reasonable discretion, that amendment is necessary or appropriate to conform the Award to, or otherwise satisfy, any legal requirement (including without limitation the provisions of Section 409A of the Code), which amendments may be made retroactively or prospectively and without your approval or consent to the extent permitted by applicable law; provided that, such amendment shall not materially and adversely affect your rights hereunder; or (b) with your consent.
12. Electronic Delivery and Acceptance. You hereby consent and agree to electronic delivery of any Plan documents, proxy materials, annual reports and other related documents. You also hereby consent to any and all procedures that the Company has established or may establish for an electronic signature system for delivery and acceptance of Plan documents (including documents relating to any programs adopted under the Plan), and agree your electronic signature is the same as, and shall have the same force and effect as, your manual signature. You consent and agree that any such procedures and delivery may be effected by a third party engaged by the Company to provide administrative services related to the Plan, including any program adopted under the Plan.
13. Governing Plan Document. The Award is subject to all the provisions of the Plan, the provisions of which are hereby made a part of this Agreement, and is further subject to all interpretations, amendments, rules and regulations which may from time to time be promulgated and adopted pursuant to the Plan. In the event of any conflict between the provisions of the Award or this Agreement and those of the Plan, the provisions of the Plan shall control.
14. Governing Law. The validity, construction, interpretation and effect of this Agreement shall exclusively be governed by and determined in accordance with the laws of the State of Delaware, without giving effect to conflict of law rules or principles.
15. Entire Agreement. This Agreement and the Plan constitute the entire understanding and agreement between the Company and the Participant with respect to the subject matter contained herein and supersedes any prior agreements, understandings, restrictions, representations, or warranties between the Company and the Participant with respect to such subject matter other than those as set forth or provided for herein.
16. No Waiver. No failure by any party to insist upon the strict performance of any covenant, duty, agreement or condition of this Agreement or to exercise any right or remedy consequent upon a breach thereof shall constitute waiver of any such breach or any other covenant, duty, agreement or condition.
17. Saving Clause. If any provision of this Agreement shall be determined to be illegal or unenforceable, such determination shall in no manner affect the legality or enforceability of any other provision hereof.
18. Compliance With Section 409A of the Code. This Award is intended to be exempt from or comply with Section 409A of the Code, and shall be interpreted and construed accordingly, and each payment hereunder shall be considered a separate payment. To the extent this Agreement provides for the Award to become vested and be settled upon the Holder’s termination of employment, the applicable shares of Stock shall be transferred to you or your beneficiary upon your “separation from service,” within the meaning of Section 409A of the Code; provided that if you are a “specified employee,” within the meaning of Section 409A of the Code, then to the extent the Award constitutes nonqualified deferred compensation, within the meaning of Section 409A of the Code, such Shares shall be transferred to you or your beneficiary upon the earlier to occur of (i) the six-month anniversary of such separation from service and (ii) the date of your death.
5
CHIPOTLE MEXICAN GRILL, INC.
Chief People Officer
6
Exhibit 10.36
CHIPOTLE MEXICAN GRILL, INC.
STOCK APPRECIATION RIGHTS AGREEMENT
Name of Participant:
Grant Date:
Vesting Dates: 2nd Anniversary of Grant Date
3rd Anniversary of Grant Date
This Stock Appreciation Rights Agreement (this “Agreement”), dated as of the Grant Date stated above, is delivered by Chipotle Mexican Grill, Inc., a Delaware corporation (the “Company”), to the Participant named above (the “Participant” or “you”).
Recitals
WHEREAS, the Company is awarding you the right to receive shares of Common Stock of the Company (the “Shares”) on the terms and conditions provided below and pursuant to the Amended and Restated Chipotle Mexican Grill, Inc. 2011 Stock Incentive Plan (the “Plan”). This Agreement and the stock appreciation rights granted hereunder are expressly subject to all of the terms, definitions and provisions of the Plan. Except as expressly indicated herein, defined terms used in this Agreement have the meanings set forth in the Plan.
WHEREAS, the Compensation Committee (the “Committee”) of the Company’s Board of Directors (the “Board”) has approved this award of stock appreciation rights (“Award”).
NOW, THEREFORE, the parties hereby agree as follows:
1. Grant of Award. The Company hereby grants to you the Award with respect to the number of Base Shares set forth above, pursuant to which you shall be eligible to receive a number of Shares with a fair market value, determined on the date of exercise, equal to the product of (i) the aggregate number of Base Shares exercised multiplied by (ii) the excess of (A) the fair market value of a Share, determined on the date of exercise, over (B) the Base Price specified above, subject to your fulfillment of the vesting and other conditions set forth in this Agreement. The Award may only be settled in Shares.
2. Vesting.
(a) Regular Vesting. Except as otherwise provided in the Plan or in this Section 2, your Base Shares shall vest 50% on the 2nd anniversary of the Grant Date and the remaining 50% on the 3rd anniversary of the Grant Date, subject to your continued employment or service with the Company through the applicable vesting date. The period of time prior to the full vesting of the Award shall be referred to herein as the “Vesting Period.”
(b) Termination of Employment.
(i) Unless otherwise determined by the Committee, or except as provided in an agreement between you and the Company, in the event of your death, termination by the Company due to Disability or Retirement (each as defined below) prior to the expiration of the Vesting Period, you shall vest in the Base Shares as follows:
(A) In the event of your Retirement prior to the one-year anniversary of the Grant Date, you shall continue to vest in a pro rata portion of the Base Shares for the remainder of the Vesting Period. The pro rata portion of the Base Shares shall be determined by multiplying the total number of Base Shares issuable under this Award, without proration, by a fraction, the numerator of which is the number of days from the Grant Date through your Retirement, and the denominator of which is 365. The Base Shares that vest pursuant to this paragraph shall become exercisable in accordance with the normal vesting schedule set forth in Section 2(a) and shall expire at the earlier of (i) three years after the date of your Retirement, or (ii) the Expiration Date (as defined below).
(B) In the event of your Retirement on or following the one-year anniversary of the Grant Date, you shall continue to vest in the Base Shares, without proration, for the remainder of the Vesting Period. The Base Shares that vest pursuant to this paragraph shall become exercisable in accordance with the normal vesting schedule set forth in Section 2(a) and shall expire at the earlier of (i) three years after the date of your Retirement, or (ii) the Expiration Date (as defined below).
(C) In the event of your death or termination by the Company due to Disability, the total number of Base Shares issuable under this Award, without proration, shall become vested and exercisable on the date of your death or termination by the Company due to Disability.
For purposes of this Agreement: “Disability” means your medically-diagnosed, permanent physical or mental inability to perform your duties as an employee of the Company; “Retirement” means that you have a combined Age and Years of Service (each as defined below) of at least 70 and you have done all of the following (w) given the Company at least six (6) months prior written notice of your Retirement; (x) signed and delivered to the Company an agreement providing for such restrictive covenants, as may be determined from time to time by the Committee, based on individual facts and circumstances, to be reasonably necessary to protect the Company’s interests, with such restrictive covenants continuing for a period of two (2) years after such Retirement (or, indefinitely, in the case of confidentiality and similar restrictive covenants), (y) signed and delivered to the Company, within 21 days of the date of your employment termination (or such later time as required under applicable law) a general release agreement of claims against the Company and its affiliates in a form reasonably acceptable to the Company, which is not later revoked, and (z) voluntarily terminated your employment with the Company. The term “Age” means (as of a particular date of determination), your age on that date in whole years and any fractions thereof; and “Years of Service” means the number of years and fractions thereof during the period beginning on your most recent commencement of employment with the Company and ending on the date your employment with the Company terminated. Your refusal to fulfill any of the conditions set forth in (w), (x), (y) or (z) above, your breach of any agreement entered
2
into pursuant to (x) or (y) above, or if, after your Retirement, facts and circumstances are discovered that would have justified your termination for Cause (as defined below) if you were still employed by the Company, shall constitute a waiver by you of the benefits attributable to Retirement under this Agreement.
(ii) The Base Shares will automatically and immediately vest in full if (A) you experience a Qualifying Termination or (B) upon a Change in Control if this Award is not assumed or continued by the surviving or acquiring corporation in such Change in Control (as determined by the Board or Committee, with appropriate adjustments to the number and kind of shares, in each case, that preserve the value of the Award and other material terms and conditions of this Award as in effect immediately prior to the Change in Control).
For purposes of this Agreement and notwithstanding anything in the Plan to the contrary for purposes of determining whether a Qualifying Termination has occurred during the two-year period following a Change in Control: (A) “Cause” means, unless otherwise provided in an effective employment agreement or other written agreement with respect to the termination of your employment with the Company, the termination of your employment with the Company on account of: (u) your failure to substantially perform your duties (other than as a result of physical or mental illness or injury); (w) your willful misconduct or gross negligence which is materially injurious to the Company or results in reputational harm to the Company; (x) a breach by you of your fiduciary duty or duty of loyalty to the Company; (y) your commission of any felony or other serious crime involving moral turpitude; or (z) your material violation of Company policies or agreements between you and the Company and (B) “Good Reason” means, unless otherwise provided in an effective employment agreement or other written agreement with respect to the termination of your employment with the Company, the termination of your employment with the Company on account of: (x) a material diminution your duties and responsibilities other than a change in your duties and responsibilities that results from becoming part of a larger organization following a Change in Control, (y) a material decrease in your base salary or bonus opportunity other than a decrease in bonus opportunity that applies to all employees of the Company otherwise eligible to participate in the applicable bonus plan, or (z) a relocation of your primary work location more than 30 miles from your work location on the Grant Date, without your prior written consent; provided that, within thirty days following the occurrence of any of the Good Reason events set forth herein, you shall have delivered written notice to the Company of your intention to terminate your employment for Good Reason, which notice specifies in reasonable detail the circumstances claimed to give rise to your right to terminate employment for Good Reason, and the Company shall not have cured such circumstances within thirty days following the Company’s receipt of such notice.
(c) Forfeiture of Unvested Base Shares. Unless otherwise determined by the Committee, or except as provided in an agreement between you and the Company, if your employment terminates prior to the expiration of the Vesting Period for any reason other than termination by the Company due to Disability, death, Retirement, or a Qualifying Termination, any Base Shares will be forfeited and canceled as of the date of such employment termination. Notwithstanding anything to the contrary in this Section 2, your rights with respect to Base Shares, whether vested or unvested, shall in all events be immediately forfeited and canceled as of the date of your termination of employment for Cause (as defined above).
3
3. Expiration of the Base Shares. The Base Shares shall expire, and shall not be exercisable with respect to any vested portion as to which the Base Shares have not been exercised, on the first to occur of: (i) the seventh (7th) anniversary of the Grant Date (the “Expiration Date”); (ii) upon your termination for any reason other than death, Retirement, termination by the Company due to Disability or for Cause, the earlier of (A) the Expiration Date and (B) ninety (90) days after your termination of employment; (iii) upon your Retirement, the earlier of (A) the Expiration Date and (B) the third (3rd) anniversary of your termination of employment; (iv) upon your death or termination by the Company due to Disability, the earlier of (A) the Expiration Date and (B) the third (3rd) anniversary of your termination of employment and, prior the expiration of the Base Shares pursuant to this clause (iv), the Base Shares may be exercised by your executor, administrator, legal representative, guardian or similar person; and (v) immediately upon your termination of employment for Cause (as defined above), regardless of whether the Base Shares are vested or exercisable.
4. Exercise of Base Shares. Subject to the terms and conditions herein, vested Base Shares may be exercised, in whole or in part, from the date of vesting until the expiration of the term in accordance with Section 3. Base Shares may be exercised by giving written notice of exercise to the Company in the manner specified from time to time by the Company. The Base Shares may not be exercised with respect to a number of Base Shares that is less than the lesser of (i) twenty-five or (ii) the total number of Base Shares remaining available for exercise pursuant to this Agreement. Upon exercise, you will receive the number of Shares having a fair market value at the time of exercise equal to the product of (A) the excess of the fair market value of one Share at the time of exercise over the Base Price, multiplied by (B) the number of Base Shares exercised. For purposes of this Section 4, fair market value shall be the most recent real time trading price of a Share at the time the Base Share is exercised, as determined in good faith by the Company, based on transactions reported on the NYSE or other national securities exchange; provided that if the Shares are not then listed and traded on the NYSE or other national securities exchange, fair market value shall be determined by the Committee, using such criteria as it shall determine, in its discretion, to be appropriate for valuation.
5. Non-Transferability of Award. This Award and the Base Shares may not be transferred by you other than by will or the laws of descent and distribution or pursuant to the designation of one or more beneficiaries on the form prescribed by the Company; provided that anyone who becomes entitled to the Award pursuant to this sentence shall be bound by the provisions of the Plan and this Agreement to be treated as the “Participant” under the Plan and this Agreement. Except to the extent permitted by the foregoing sentence, (i) during your lifetime, the Award is exercisable only by your or your legal representative, guardian or similar person and (ii) the Award may not be sold, transferred, assigned, pledged, hypothecated, encumbered or otherwise disposed of (whether by operation of law or otherwise) or be subject to execution, attachment or similar process. Upon any attempt to so sell, transfer, assign, pledge, hypothecate, encumber or otherwise dispose of the Award, the Award and all rights hereunder shall immediately become null and void.
6. No Shareholder Rights. Neither you nor any person claiming under or through you shall have rights as a holder of Common Stock (e.g., you have no right to vote or receive dividends) with respect to the Base Shares granted hereunder unless and until the Base Shares have been exercised and you have been issued shares of Common Stock that have been registered in your name as owner.
7. Tax Withholding. As a condition precedent to the issuance of Shares following the vesting of the Shares, you shall, upon request by the Company, pay to the Company such amount as the Company determines is required, under all applicable federal, state, local or other laws or regulations, to be withheld and paid over as income or other withholding taxes (the “Required Tax Payments”) with respect to such vesting of the Shares. If you shall fail to advance the Required Tax Payments after request by the Company, the Company may, in its discretion, deduct any Required Tax Payments from any amount then or thereafter payable by the Company to you. Notwithstanding the foregoing, your obligation to advance the Required Tax Payments shall be satisfied by the Company withholding whole Shares that would otherwise be delivered to you upon vesting of the Shares having an aggregate fair market value, determined as of the date on which such withholding obligation arises
4
(the “Tax Date”), equal to the Required Tax Payments; however, if you submit a written request to the Company at least ten (10) days in advance of the Vesting Date, the Company may agree, in its discretion, to permit you to satisfy your obligation to advance the Required Tax Payments by a check or cash payment to the Company. Shares shall be withheld based on the applicable statutory minimum tax rate; however, if you submit a written request to the Company at least ten (10) days in advance of the Vesting Date, the Company (or, in the case of an individual subject to Section 16 of the Securities Exchange Act of 1934, as amended, the Committee) may agree, in its discretion, to withhold shares based on a higher tax rate permitted by applicable withholding rules and accounting rules without resulting in variable accounting treatment. No Share or certificate representing a Share shall be issued or delivered until the Required Tax Payments have been satisfied in full.
8. Repayment; Right of Set-Off. You agree and acknowledge that this Agreement is subject to any clawback policies of the Company in effect on the Grant Date and any subsequent policies that the Committee may adopt from time to time to comply with applicable law or regulation with respect to the repayment to the Company of any benefit received hereunder, including “clawback” or set-off policies. In addition, you agree that in the event the Company, in its reasonable judgment, determines that you owe the Company any amount due to any loan, note, obligation or indebtedness, including but not limited to amounts owed to the Company pursuant to the Company’s policies with respect to travel and business expenses, and if you have not satisfied such obligation, then the Company may instruct the plan administrator to withhold and/or sell Shares acquired by you upon settlement of the Award, or the Company may deduct funds equal to the amount of such obligation from other funds due to you from the Company.
9. Adjustments. The Award and the number of Base Shares subject to this Award will automatically be adjusted in accordance with Section 9 of the Plan to prevent accretion, or to protect against dilution, in the event of a change to the Shares resulting from a recapitalization, stock split, consolidation, spin-off, reorganization, liquidation or other similar transactions.
10. No Right to Continued Employment or Service. The granting of the Award shall not be construed as granting to you any right to continue your employment or service with the Company.
12. Amendment of this Award. This Award or the terms of this Agreement may be amended by the Board or the Committee at any time (a) if the Board or the Committee determines, in its reasonable discretion, that amendment is necessary or appropriate to conform the Award to, or otherwise satisfy, any legal requirement (including without limitation the provisions of Section 409A of the Code), which amendments may be made retroactively or prospectively and without your approval or consent to the extent permitted by applicable law; provided that, such amendment shall not materially and adversely affect your rights hereunder; or (b) with your consent.
13. Electronic Delivery and Acceptance. You hereby consent and agree to electronic delivery of any Plan documents, proxy materials, annual reports and other related documents. You also hereby consent to any and all procedures that the Company has established or may establish for an electronic signature system for delivery and acceptance of Plan documents (including documents relating to any programs adopted under the Plan), and agree your electronic signature is the same as, and shall have the same force and effect as, your manual signature. You consent and agree that any such procedures and delivery may be effected by a third party engaged by the Company to provide administrative services related to the Plan, including any program adopted under the Plan.
14. Governing Plan Document. The Award is subject to all the provisions of the Plan, the provisions of which are hereby made a part of this Agreement, and is further subject to all interpretations, amendments, rules and regulations which may from time to time be promulgated and adopted pursuant to the Plan. In the event of any conflict between the provisions of the Award or this Agreement and those of the Plan, the provisions of the Plan shall control.
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15. Governing Law. The validity, construction, interpretation and effect of this Agreement shall exclusively be governed by and determined in accordance with the laws of the State of Delaware, without giving effect to conflict of law rules or principles.
16. Entire Agreement. This Agreement and the Plan constitute the entire understanding and agreement between the Company and the Participant with respect to the subject matter contained herein and supersedes any prior agreements, understandings, restrictions, representations, or warranties between the Company and the Participant with respect to such subject matter other than those as set forth or provided for herein.
17. No Waiver. No failure by any party to insist upon the strict performance of any covenant, duty, agreement or condition of this Agreement or to exercise any right or remedy consequent upon a breach thereof shall constitute waiver of any such breach or any other covenant, duty, agreement or condition.
18. Saving Clause. If any provision of this Agreement shall be determined to be illegal or unenforceable, such determination shall in no manner affect the legality or enforceability of any other provision hereof.
Chief People Officer
6
Exhibit 21.1
SIGNIFICANT SUBSIDIARIES OF CHIPOTLE
Following is a list of subsidiaries of Chipotle, excluding certain subsidiaries that, in the aggregate as a single subsidiary, do not constitute a significant subsidiary.
|
|
Subsidiary
|
Jurisdiction of Incorporation
|
Chipotle Mexican Grill Canada Corp. |
Nova Scotia, Canada |
Chipotle Mexican Grill France SAS |
France |
Chipotle Mexican Grill Germany GMBH |
Germany |
Chipotle Mexican Grill of Berwyn Heights, LLC |
Maryland |
Chipotle Mexican Grill of Colorado, LLC |
Colorado |
Chipotle Mexican Grill of Kansas, LLC |
Kansas |
Chipotle Mexican Grill of Maryland, LLC |
Maryland |
Chipotle Mexican Grill Texas Holdings, LLC |
Colorado |
Chipotle Mexican Grill U.S. Finance Co., LLC |
Colorado |
Chipotle Mexican Grill UK Limited |
United Kingdom |
Chipotle Services, LLC |
Colorado |
Chipotle Texas, LLC |
Colorado |
CMG Concessions, LLC |
Colorado |
CMG of Prince Georges, LLC |
Maryland |
CMG Pepper, LLC |
Colorado |
CMG Strategy Co., LLC |
Colorado |
CMGGC, LLC |
Florida |
EMEA Tortilla, Ltd. |
United Kingdom |
N793WF Lease, LLC |
New Jersey |
PL Restaurant Holdings, LLC |
Colorado |
PL Restaurant LLC |
Colorado |
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the following Registration Statements:
(1) |
Registration Statement (Form S-8 No. 333-174474) pertaining to the Chipotle Mexican Grill, Inc. 2011 Stock Incentive Plan and the Chipotle Mexican Grill, Inc. Employee Stock Purchase Plan, |
(2) |
Registration Statement (Form S-8 No. 333-204380) pertaining to the Amended and Restated Chipotle Mexican Grill, Inc. 2011 Stock Incentive Plan, |
(3) |
Registration Statement (Form S-8 No. 333-223467) pertaining to certain Non-Plan Inducement Stock-Only Stock Appreciation Rights and Non-Plan Inducement Restricted Stock Units, |
(4) |
Registration Statement (Form S-8 No. 333-226376) pertaining to the Amended and Restated Chipotle Mexican Grill, Inc. 2011 Stock Incentive Plan, and |
(5) |
Registration Statement (Form S-3 No. 333-236966) pertaining to shares of common stock to be offered for resale by a selling shareholder; |
of our reports dated February 9, 2021, with respect to the consolidated financial statements of Chipotle Mexican Grill, Inc. and the effectiveness of internal control over financial reporting of Chipotle Mexican Grill, Inc. included in this Annual Report (Form 10-K) of Chipotle Mexican Grill, Inc. for the year ended December 31, 2020.
/s/ Ernst & Young LLP
Irvine, California
February 9, 2021
Exhibit 31.1
CERTIFICATION
I, Brian R. Niccol, certify that:
1. |
I have reviewed this annual report on Form 10-K of Chipotle Mexican Grill, Inc.; |
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. |
The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
(a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
(b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
(c) |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
(d) |
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. |
The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
(a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
(b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: February 9, 2021
|
|
/s/ Brian R. Niccol
|
Brian R. Niccol |
Chief Executive Officer (Principal Executive Officer) |
Exhibit 31.2
CERTIFICATION
I, John R. Hartung, certify that:
1. |
I have reviewed this annual report on Form 10-K of Chipotle Mexican Grill, Inc.; |
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. |
The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
(a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
(b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
(c) |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
(d) |
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. |
The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
(a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
(b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: February 9, 2021
|
|
/s/ John R. Hartung
|
John R. Hartung |
Chief Financial Officer (Principal Financial Officer) |
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In accordance with 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, Brian R. Niccol, the Chairman and Chief Executive Officer of Chipotle Mexican Grill, Inc. (the “Registrant”) and John R. Hartung, the Chief Financial Officer of the Registrant, each hereby certifies that, to the best of his knowledge:
1. |
The Registrant’s Annual Report on Form 10-K for the period ended December 31, 2020, to which this Certification is attached as Exhibit 32.1 (the “Periodic Report”), fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended; and |
2. |
The information contained in the Periodic Report fairly presents, in all material respects, the financial condition of the Registrant at the end of the period covered by the Periodic Report and results of operations of the Registrant for the periods covered by the Periodic Report. |
Date: February 9, 2021
|
|
/s/ Brian R. Niccol
|
/s/ John R. Hartung
|
Brian R. Niccol |
John R. Hartung |
Chairman and Chief Executive Officer (Principal Executive Officer) |
Chief Financial Officer (Principal Financial Officer) |
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