UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________________________
FORM
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For the quarterly period ended
or
For the transition period from to
Commission File Number:
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(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) |
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(Address of Principal Executive Offices) | (Zip Code) |
Registrant’s telephone number, including area code: (
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Securities registered pursuant to Section 12(b) of the Act:
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Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
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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| Accelerated filer | Non-accelerated filer |
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 is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes
As of July 20, 2021, there were
TABLE OF CONTENTS
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| PART I |
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Item 1. | 1 | |
| 1 | |
| Condensed Consolidated Statements of Income and Comprehensive Income | 2 |
| 3 | |
| 4 | |
| 5 | |
| Note 1 - Basis of Presentation and Update to Accounting Policy | 5 |
| 5 | |
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| 6 | |
| 8 | |
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| 9 | |
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| 10 | |
| 10 | |
| 11 | |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 12 |
Item 3. | 17 | |
Item 4. | 18 | |
| PART II |
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Item 1. | 18 | |
Item 1A. | 19 | |
Item 2. | 19 | |
Item 6. | 20 | |
| 21 |
PART I
ITEM 1. FINANCIAL STATEMENTS
CHIPOTLE MEXICAN GRILL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
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Assets |
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Current assets: |
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Cash and cash equivalents | $ | |
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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 | $ | |
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Liabilities and shareholders' equity |
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Current liabilities: |
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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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Current operating lease liabilities |
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Total current liabilities |
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Commitments and contingencies (Note 10) |
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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 condensed consolidated financial statements.
CHIPOTLE MEXICAN GRILL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(in thousands, except per share data)
(unaudited)
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Food and beverage revenue | $ | |
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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 (loss) from operations |
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Interest and other income (expense), net |
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Income (loss) 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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Basic |
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Diluted |
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Other comprehensive income (loss), net of income taxes: |
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Foreign currency translation adjustments | $ | |
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Comprehensive income | $ | |
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| $ | |
| $ | |
See accompanying notes to condensed consolidated financial statements.
CHIPOTLE MEXICAN GRILL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(in thousands)
(unaudited)
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| Common Stock |
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| Shares |
| Amount |
| Additional |
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| Amount |
| Retained |
| Accumulated Other Comprehensive Income (Loss) |
| Total | ||||||
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 tax | |
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Balance, March 31, 2020 | |
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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 tax | - |
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Balance, June 30, 2020 | |
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Balance, December 31, 2020 | |
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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 tax | |
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Balance, March 31, 2021 | |
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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 tax | - |
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Balance, June 30, 2021 | |
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See accompanying notes to condensed consolidated financial statements.
CHIPOTLE MEXICAN GRILL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
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Operating activities |
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Net income | $ | |
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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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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 period |
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Cash, cash equivalents, and restricted cash at end of period | $ | |
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Supplemental disclosures of cash flow information |
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Income taxes paid | $ | |
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Purchases of leasehold improvements, property, and equipment accrued in accounts payable and accrued liabilities | $ | |
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Acquisition of treasury stock accrued in accounts payable and accrued liabilities | $ | |
| $ | |
See accompanying notes to condensed consolidated financial statements.
CHIPOTLE MEXICAN GRILL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollar and share amounts in thousands, unless otherwise specified)
(unaudited)
In this quarterly report on Form 10-Q, 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, quesadillas, tacos, and salads, made using fresh, high-quality ingredients. As of June 30, 2021, we operated
Certain prior-year amounts have been reclassified to conform to the current year presentation.
Recently Issued Accounting Standards
In March 2020, the Financial Accounting Standards Board (the “FASB”) issued ASU No. 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” The pronouncement provides temporary optional expedients and exceptions to the current guidance on contract modifications and hedge accounting to ease the financial reporting burden related to the expected market transition from the London Interbank Offered Rate ("LIBOR") and other interbank offered rates to alternative reference rates. The guidance was effective upon issuance and generally can be applied to applicable contract modifications through December 31, 2022. We are currently evaluating the impact of the transition from LIBOR to alternative reference rates but do not expect a significant impact 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 condensed consolidated financial statements.
Recently Adopted Accounting Standards
On January 1, 2021, we adopted ASU 2019-12, “Simplifying the Accounting for Income Taxes (Topic 740)”, which modified certain technical guidelines for accounting for income taxes. The adoption of ASU 2019-12 did not result in a material change to our condensed consolidated financial statements.
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
The gift card liability included in unearned revenue on the condensed consolidated balance sheets was as follows:
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Gift card liability | $ | |
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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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Revenue recognized from gift card liability balance at the beginning of the year | $ | |
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| $ | |
| $ | |
Chipotle Rewards
We have a national loyalty program called Chipotle Rewards. Eligible customers who enroll in the program generally earn points for every dollar spent. After accumulating the required number of points, the customer may select a reward. We may also periodically offer promotions, which typically provide the customer with the opportunity to earn bonus points or other rewards. Earned rewards generally expire to
We defer revenue associated with the estimated selling price of points or rewards earned by customers as each point or reward is earned, net of points or rewards we do not expect to be redeemed. The estimated selling price of each point or reward earned is based on the estimated value of the product for which the point or reward is expected to be redeemed. Our estimate of points and rewards we expect to be redeemed (“rewards breakage rate”) is based on historical and other company specific data. The change in the Chipotle Rewards program in June 2021 did not materially impact our estimate of the stand-alone selling price or breakage rate of each point. The costs associated with rewards redeemed are primarily included in food, beverage, and packaging expense on our condensed consolidated statements of income and comprehensive income.
We recognize loyalty revenue within food and beverage revenue on the condensed consolidated statements of income and comprehensive income when a customer redeems an earned reward. Deferred revenue associated with Chipotle Rewards is included in unearned revenue on our condensed consolidated balance sheets.
Changes in our Chipotle Rewards liability included in unearned revenue on the condensed consolidated balance sheets were as follows:
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| 2020 |
| 2021 |
| 2020 | ||||
Chipotle Rewards liability, beginning balance | $ | |
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Revenue deferred |
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Revenue recognized |
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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, restricted cash, accounts receivable and accounts payable approximate fair value because of their short-term nature.
Our investments are comprised of held-to-maturity U.S. Treasury securities, non-marketable equity securities and an equity method investment. We also maintain a deferred compensation plan with related assets held in a rabbi trust.
Held-to-Maturity Investments
We invest in U.S. Treasury securities with maturities of up to
All held-to-maturity investments are carried at amortized cost. The amortized costs of these investments exceeded the fair value by $
Rabbi Trust
We maintain a rabbi trust to fund obligations under a deferred compensation plan. Amounts in the rabbi trust are invested in mutual funds, which are designated as trading securities carried at fair value and are included in other assets on the condensed 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 $
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Assets recognized or disclosed at fair value on the condensed consolidated financial statements on a nonrecurring basis include items such as leasehold improvements, property and equipment, operating lease assets, investments in non-marketable equity securities, other assets, and goodwill. 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.
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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| 2020 | ||
Leasehold improvements, property and equipment, net | 3 | $ | |
| $ | |
Operating lease assets | 3 |
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Total |
| $ | |
| $ | |
Fair value of these assets was 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. During the three months ended June 30, 2021 and 2020 we recorded asset impairments related to restaurants and offices of $
Non-Marketable Equity Securities
On March 23, 2021, we acquired
Equity Method Investment
5. Shareholders’ Equity
We have had a stock repurchase program in place since 2008. As of June 30, 2021, we had $
For the six months ended June 30, 2021, we granted stock only stock appreciation rights (“SOSARs”) on
For the six months ended June 30, 2021, we granted restricted stock units (“RSUs”) on
For the six months ended June 30, 2021, we awarded performance share units (“PSUs”) on
On December 30, 2020, due to the impact that the novel coronavirus (COVID-19) pandemic had on the growth in comparable restaurant sales and restaurant margin relative to the trajectory of both of these performance factors prior to the pandemic, and also due to the significant shareholder value created over the performance period of the original award, the Compensation Committee of our Board of Directors modified the 2018 PSU award. This modification pertained to all
The following table sets forth total stock-based compensation expense:
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| 2020 |
| 2021 |
| 2020 | ||||
Stock-based compensation | $ | |
| $ | |
| $ | |
| $ | |
Stock-based compensation, net of income taxes | $ | |
| $ | |
| $ | |
| $ | |
Total capitalized stock-based compensation included in leasehold improvements, property and equipment, net on the condensed consolidated balance sheets | $ | |
| $ | |
| $ | |
| $ | |
Excess tax benefit on stock-based compensation recognized in benefit/(provision) for income taxes on the condensed consolidated statements of income and comprehensive income | $ | |
| $ | |
| $ | |
| $ | |
The effective tax rate for the three months ended June 30, 2021, was a provision of
The effective income tax rate for the six months ended June 30, 2021, was a provision of
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
Supplemental disclosures of cash flow information related to leases are as follows:
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| 2020 |
| 2021 |
| 2020 | ||||
Cash paid for operating lease liabilities | $ | |
| $ | |
| $ | |
| $ | |
Operating lease assets obtained in exchange for operating lease liabilities | $ | |
| $ | |
| $ | |
| $ | |
Derecognition of operating lease assets due to terminations or impairment | $ | |
| $ | |
| $ | |
| $ | |
The following table sets forth the computations of basic and diluted earnings per share:
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| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||
Net income | $ | |
| $ | |
| $ | |
| $ | |
Shares: |
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Weighted-average number of common shares outstanding (for basic calculation) |
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Dilutive stock awards |
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Weighted-average number of common shares outstanding (for diluted calculation) |
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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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Stock awards subject to performance conditions |
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Stock awards that were antidilutive |
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Total stock awards excluded from diluted earnings per share |
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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
New York Legal Proceedings
On September 10, 2019, the New York City Department of Consumer and Worker Protection (“DCWP”) filed a complaint in the City of New York Office of Administrative Trials and Hearings alleging violations at
Other
We are involved in various claims and legal actions, such as wage and hour, wrongful termination and other employment-related claims, slip and fall and other personal injury claims, advertising and consumer 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, if there is a significant increase in the number of these claims, or if we incur greater liabilities than we currently anticipate under one or more claims, it could materially and adversely affect our business, financial condition, results of operations and cash flows.
Accrual for Estimated Liability
On May 8, 2020, we entered into a $
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cautionary Note Regarding Forward-Looking Statements
Certain statements in this report, including the potential future impact of COVID-19 on our results of operations, supply chain or liquidity, the potential impact of actions we have taken to mitigate the impact of COVID-19, the expected benefit of the CARES Act or the ARPA on our taxes and tax rate, the number of new restaurants we expect to open this year, our expectation to generate positive cash flow for the foreseeable future, our plans for continuing stock buybacks and the period of time during which our cash and short-term investment will fund our operations are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. We use words such as “anticipate,” “believe,” “could,” “should,” “estimate,” “expect,” “intend,” “may,” “predict,” “project,” “target,” “remain confident” and similar terms and phrases, including references to assumptions, to identify forward-looking statements. These forward-looking statements are based on information available to us as of the date any such statements are made, and we assume no obligation to update these 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. These risks and uncertainties include, but are not limited to, the risk factors described in our annual report on Form 10-K for the year ended December 31, 2020, this Quarterly Report on Form 10-Q and in other reports filed subsequently with the SEC.
Overview of the Impact of COVID-19
The COVID-19 pandemic has adversely affected, and may continue to adversely affect, our operations and financial results for the foreseeable future. We continue to follow guidance from health officials in determining the appropriate restrictions to put in place for each restaurant. Our restaurant operations have been and could continue to be disrupted by employees who are unable or unwilling to work, because of illness, quarantine, fear of contracting COVID-19 or caring for family members due to COVID-19, or for other reasons. 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.
For a further discussion of the impacts that COVID-19 has had on our financial results, refer to “Results of Operations” below.
Second Quarter 2021 Financial Highlights, year-over-year:
Total revenue increased 38.7% to $1.9 billion
Comparable restaurant sales increased 31.2%
Diluted earnings per share was $6.60, which included an $0.86 after-tax impact from expenses related to the 2018 PSU modification related to COVID-19, restaurant asset impairment and closure costs, certain legal expenses, as well as other costs
Sales Trends. Comparable restaurant sales increased 31.2% for the three months ended June 30, 2021, which included a 27.4% increase in transactions. We believe lapping the peak of the pandemic from last year, on-going strength in digital sales, the strong recovery of in-restaurant sales, as well as positive guest reception for our quesadillas contributed to second quarter growth.
Digital sales grew 10.5% to $916.5 million for the three months ended June 30, 2021, as compared to the three months ended June 30, 2020 and represented 48.5% of sales. Just over half of the digital sales were from order ahead transactions.
Loyalty. In June 2021 we enhanced the Chipotle Rewards program and introduced a new Rewards Exchange. This feature gives multiple redemption options and provides members with greater flexibility to redeem rewards and allows them to earn rewards faster. Members will continue to earn points for every dollar of eligible spend, and we will continue to defer revenue associated with the estimated selling price of points earned, net of points we do not expect to be redeemed.
Wage Increases. In May 2021 we announced that we are increasing restaurant wages resulting in a $15.00 average hourly wage as we look to continue to provide industry-leading benefits and accelerated growth opportunities for our restaurant employees. This wage increase was implemented across all restaurants by June 30, 2021.
Restaurant Operating Costs. Our restaurant operating costs (food, beverage and packaging; labor; occupancy; and other operating costs) as a percentage of total revenue decreased 1,230 basis points to 75.5% for the three months ended June 30, 2021, as compared to 87.8% for the three months ended June 30, 2020. The improvement was driven primarily by leverage from the comparable restaurant sales including menu price increases, and to a lesser extent lower promotional activity and beef prices. The decreases are partially offset by higher costs associated with new menu items, wage inflation for one month of the second quarter, and avocados.
Restaurant Development. We opened 56 new restaurants including one relocation, and closed five restaurants during the three months ended June 30, 2021. Of the 56 new restaurants, 45 included Chipotlanes. The Chipotlane format continues to perform very well and is helping enhance guest access and convenience, as well as increase new restaurant sales, margins, and returns. We remain confident in the long-term opportunity to more than double the number of Chipotle restaurants in North America. We believe our strong financial position will allow us to build a robust new unit development pipeline.
Restaurant Activity
The following table details restaurant unit data for the periods indicated.
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| Three months ended |
| Six months ended | ||||
| June 30, |
| June 30, | ||||
| 2021 |
| 2020 |
| 2021 |
| 2020 |
Beginning of period | 2,803 |
| 2,638 |
| 2,768 |
| 2,622 |
Chipotle openings | 56 |
| 37 |
| 96 |
| 56 |
Chipotle permanent closures | (5) |
| (3) |
| (10) |
| (5) |
Chipotle relocations | (1) |
| (3) |
| (1) |
| (4) |
Total restaurants at end of period | 2,853 |
| 2,669 |
| 2,853 |
| 2,669 |
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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| Percentage |
| June 30, |
| Percentage | ||||||||
| 2021 |
| 2020 |
| change |
| 2021 |
| 2020 |
| change | ||||
| (dollars in millions) |
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| (dollars in millions) |
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Food and beverage revenue | $ | 1,869.4 |
| $ | 1,350.2 |
| 38.5% |
| $ | 3,585.4 |
| $ | 2,752.3 |
| 30.3% |
Delivery service revenue |
| 23.2 |
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| 14.6 |
| 59.3% |
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| 48.8 |
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| 23.2 |
| 110.1% |
Total revenue | $ | 1,892.5 |
| $ | 1,364.7 |
| 38.7% |
| $ | 3,634.1 |
| $ | 2,775.5 |
| 30.9% |
Average restaurant sales (1) | $ | 2.5 |
| $ | 2.2 |
| 14.3% |
| $ | 2.5 |
| $ | 2.2 |
| 14.3% |
Comparable restaurant sales increase |
| 31.2% |
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| (9.8%) |
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| 24.1% |
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| (3.5%) |
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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 for the three months ended June 30, 2021 compared to the three months ended June 30, 2020, were comparable restaurant sales increases of $420.1 million, and to a lesser extent, increases in total revenue from restaurants not yet in the comparable base of $107.6 million, of which $33.3 million was attributable to restaurants opened in 2021.
The significant factors contributing to the total revenue increase for the six months ended June 30, 2021 compared to the six months ended June 30, 2020, were comparable restaurant sales increases of $654.5 million, and to a lesser extent, increases in total revenue from restaurants not yet in the comparable base of $203.7 million, of which $41.9 million was attributable to restaurants opened in 2021.
Food, Beverage and Packaging Costs
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| June 30, |
| Percentage |
| June 30, |
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| 2021 |
| 2020 |
| change |
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| 2020 |
| change | ||||
| (dollars in millions) |
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| (dollars in millions) |
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Food, beverage and packaging | $ | 574.5 |
| $ | 454.8 |
| 26.3% |
| $ | 1,097.1 |
| $ | 917.1 |
| 19.6% |
As a percentage of total revenue |
| 30.4% |
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| 33.3% |
| (2.9%) |
|
| 30.2% |
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| 33.0% |
| (2.8%) |
Food, beverage and packaging costs decreased as a percentage of total revenue for the three months ended June 30, 2021 compared to the three months ended June 30, 2020, primarily due to the benefit of menu price increases, and to a lesser extent, lower beef prices. These decreases were partially offset by higher costs associated with new menu items, like quesadillas, and, to a lesser extent, avocado costs.
Food, beverage and packaging costs decreased as a percentage of total revenue for the six months ended June 30, 2021 compared to the six months ended June 30, 2020, primarily due to the benefit of menu price increases, and to a lesser extent, lower beef prices. This decrease was partially offset by higher costs associated with cauliflower rice and fewer sales of high margin beverages.
COVID-19 had an immaterial direct impact on food, beverage and packaging costs for the three and six months ended June 30, 2021.
Labor Costs
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| June 30, |
| Percentage |
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| 2021 |
| 2020 |
| change |
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| 2020 |
| change | ||||
| (dollars in millions) |
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| (dollars in millions) |
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Labor costs | $ | 464.5 |
| $ | 385.3 |
| 20.6% |
| $ | 898.2 |
| $ | 778.8 |
| 15.3% |
As a percentage of total revenue |
| 24.5% |
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| 28.2% |
| (3.7%) |
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| 24.7% |
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| 28.1% |
| (3.4%) |
Labor costs decreased as a percentage of total revenue for the three and six months ended June 30, 2021 compared to the three and six months ended June 30, 2020, primarily due to sales leverage. This decrease was partially offset by restaurant wage increases implemented in June 2021 and to a lesser extent higher bonus expense.
COVID-19 increased labor costs as a percentage of total revenue for the three and six months ended June 30, 2021, by 0.2% and 0.3%, respectively. This was due to our emergency leave benefits to accommodate employees directly affected by COVID-19.
Occupancy Costs
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| June 30, |
| Percentage |
| June 30, |
| Percentage | ||||||||
| 2021 |
| 2020 |
| change |
| 2021 |
| 2020 |
| change | ||||
| (dollars in millions) |
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Occupancy costs | $ | 103.4 |
| $ | 95.6 |
| 8.2% |
| $ | 205.2 |
| $ | 190.9 |
| 7.5% |
As a percentage of total revenue |
| 5.5% |
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| 7.0% |
| (1.5%) |
|
| 5.6% |
|
| 6.9% |
| (1.3%) |
Occupancy costs decreased as a percentage of total revenue for the three and six months ended June 30, 2021 compared to the three and six months ended June 30, 2020, primarily due to sales leverage, partially offset by increased rent expense associated with new restaurants.
COVID-19 had an immaterial impact on occupancy costs for the three and six months ended June 30, 2021.
Other Operating Costs
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| June 30, |
| Percentage |
| June 30, |
| Percentage | ||||||||
| 2021 |
| 2020 |
| change |
| 2021 |
| 2020 |
| change | ||||
| (dollars in millions) |
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| (dollars in millions) |
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Other operating costs | $ | 287.2 |
| $ | 262.4 |
| 9.5% |
| $ | 582.0 |
| $ | 473.1 |
| 23.0% |
As a percentage of total revenue |
| 15.2% |
|
| 19.2% |
| (4.0%) |
|
| 16.0% |
|
| 17.0% |
| (1.0%) |
Other operating costs include, among other items, marketing and promotional costs, delivery expense, bank and credit card processing fees, restaurant utilities, and maintenance costs. Other operating costs decreased as a percentage of total revenue for the three months ended June 30, 2021 compared to the three months ended June 30, 2020, primarily due to sales leverage and lower delivery expenses primarily due to free delivery campaigns last year.
Other operating costs decreased as a percentage of total revenue for the six months ended June 30, 2021 compared to the six months ended June 30, 2020, primarily due to sales leverage and lower promotions due to free delivery campaigns last year. The decrease in other operating costs was partially offset by higher delivery expenses associated with increased delivery sales.
As a result of COVID-19, sales shifted towards delivery after we temporarily closed our dining rooms in response to COVID-19 and delivery sales have remained elevated from pre-pandemic levels. We are also continuing to limit non-essential controllable costs.
General and Administrative Expenses
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| June 30, |
| Percentage |
| June 30, |
| Percentage | ||||||||
| 2021 |
| 2020 |
| change |
| 2021 |
| 2020 |
| change | ||||
| (dollars in millions) |
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| (dollars in millions) |
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General and administrative expense | $ | 146.0 |
| $ | 102.6 |
| 42.3% |
| $ | 301.1 |
| $ | 209.1 |
| 44.0% |
As a percentage of total revenue |
| 7.7% |
|
| 7.5% |
| 0.2% |
|
| 8.3% |
|
| 7.5% |
| 0.8% |
General and administrative expense increased in dollar terms for the three months ended June 30, 2021 compared to the three months ended June 30, 2020, primarily due to a $22.8 million increase in stock-based compensation, primarily attributable to the modification of 2018 PSUs related to COVID-19, a $9.3 million increase in outside services expense related to initiatives to support our digital and restaurant growth, a $4.8 million increase in performance bonuses and a $4.1 increase in wages primarily due to headcount growth.
General and administrative expense increased in dollar terms for the six months ended June 30, 2021 compared to the six months ended June 30, 2020, primarily due to a $59.7 million increase in stock based compensation, of which $47.8 million relates to the modification of 2018 PSUs to account for the unplanned effects of COVID-19, a $16.7 million increase in outside services expense related to initiatives to support our digital and restaurant growth, a $8.9 million increase in performance bonuses and a $4.1 increase in wages primarily due to headcount growth.
Other than the impact on stock-based compensation discussed above, COVID-19 had an immaterial impact on general and administrative expenses for the three and six months ended June 30, 2021.
Depreciation and Amortization
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| June 30, |
| Percentage |
| June 30, |
| Percentage | ||||||||
| 2021 |
| 2020 |
| change |
| 2021 |
| 2020 |
| change | ||||
| (dollars in millions) |
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| (dollars in millions) |
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Depreciation and amortization | $ | 62.1 |
| $ | 60.0 |
| 3.4% |
| $ | 125.2 |
| $ | 118.4 |
| 5.7% |
As a percentage of total revenue |
| 3.3% |
|
| 4.4% |
| (1.1%) |
|
| 3.4% |
|
| 4.3% |
| (0.9%) |
Depreciation and amortization decreased as a percentage of total revenue for the three and six months ended June 30, 2021 compared to the three and six months ended June 30, 2020, primarily due to the benefit of sales leverage.
COVID-19 had an immaterial impact on depreciation and amortization for the three and six months ended June 30, 2021.
Impairment, Closure Costs, and Asset Disposals
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| June 30, |
| Percentage |
| June 30, |
| Percentage | ||||||||
| 2021 |
| 2020 |
| change |
| 2021 |
| 2020 |
| change | ||||
| (dollars in millions) |
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| (dollars in millions) |
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Impairment, closure costs, and asset disposals | $ | 4.3 |
| $ | 5.4 |
| (20.8%) |
| $ | 9.9 |
| $ | 14.7 |
| (32.5%) |
As a percentage of total revenue |
| 0.2% |
|
| 0.4% |
| (0.2%) |
|
| 0.3% |
|
| 0.5% |
| (0.2%) |
Impairment, closure costs, and asset disposals decreased in dollar terms for the three months ended June 30, 2021 compared to the three months ended June 30, 2020, primarily due to a comparison against elevated impairments of operating lease assets and leasehold improvements in 2020. These elevated impairments in 2020 were primarily the result of the COVID-19 pandemic negatively impacting our near-term restaurant level cash flow forecasts. The decrease in impairment, closure costs, and assets disposals is partially offset by asset impairment charges for restaurant equipment, and certain corporate equipment.
Impairment, closure costs, and asset disposals decreased in dollar terms for the six months ended June 30, 2021 compared to the six months ended June 30, 2020, primarily due to a comparison against elevated impairments of leasehold improvements and operating lease assets in 2020. These elevated impairments in 2020 were primarily the result of the COVID-19 pandemic negatively impacting our near-term restaurant level cash flow forecasts.
While the majority of our restaurants and markets have returned to pre-pandemic restaurant level cash flow levels, COVID-19 continues to have a negative impact on our assumptions for future near-term restaurant level cash flows for certain markets or restaurants.
Benefit/(Provision) for Income Taxes
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| June 30, |
| Percentage |
| June 30, |
| Percentage | ||||||||
| 2021 |
| 2020 |
| change |
| 2021 |
| 2020 |
| change | ||||
| (dollars in millions) |
|
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| (dollars in millions) |
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| ||||||||
Benefit/(provision) for income taxes | $ | (58.4) |
| $ | 12.5 |
| (567.6%) |
| $ | (90.6) |
| $ | 15.0 |
| (703.2%) |
Effective tax rate |
| 23.7% |
|
| 289.4% |
| n/m* |
|
| 22.3% |
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| (21.6%) |
| n/m* |
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*Not meaningful |
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The effective income tax rate changed from a benefit of 289.4% for the three months ended June 30, 2020, to a provision of 23.7% for the three months ended June 30, 2021. The change is primarily due to the proportionality of the excess tax benefits from option exercises and equity vesting relative to the profit or loss before tax in each respective quarter.
The effective income tax rate changed from a benefit of 21.6% for the six months ended June 30, 2020, to a provision of 22.3% for the six months ended June 30, 2021. The increase is primarily due to increased profit before tax and fewer excess tax benefits related to option exercise and equity vesting in the six months ended June 30, 2021 compared to the six months ended June 30, 2020.
COVID-19, the CARES Act and the ARPA did not have a material impact on our tax rate for the three or six months ended June 30, 2021.
Seasonality
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
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 June 30, 2021, we had a cash and marketable investments balance of $1.1 billion, excluding restricted cash of $27.9 million. We expect to utilize cash flow from operations to provide capital for the continued investment in new restaurant construction and to remodel restaurants, primarily those that do not have a digital kitchen or Chipotlane, to repurchase additional shares of our common stock subject to market conditions, and for general corporate purposes. As of June 30, 2021, $208.5 million remained available for repurchases of shares of our common stock under previously announced repurchase authorizations. Under the remaining repurchase authorizations, shares may be purchased from time to time in open market transactions, subject to market conditions. Additionally, as of June 30, 2021, we had $500.0 million of undrawn borrowing capacity under 5-year revolving credit facility.
In our restaurants, we are working to minimize waste and effectively schedule labor hours. 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 we will generate positive cash flow for 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.
Off-Balance Sheet Arrangements
As of June 30, 2021, and December 31, 2020, we had no material off-balance sheet arrangements or obligations.
Critical Accounting Estimates
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. We had no significant changes to our critical accounting estimates as described in our annual report on Form 10-K for the year ended December 31, 2020.
ITEM 3. 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 June 30, 2021, we had $1.1 billion in interest-bearing cash accounts, including insurance-related restricted trust accounts classified in restricted cash, and U.S. treasury securities. We had $67.2 million in accounts with an earnings credit we classify as interest and other income. Combined these earned a weighted-average interest rate of 0.09%.
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 4. 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 June 30, 2021, 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 report.
Changes in Internal Control over Financial Reporting
There were no changes during the fiscal quarter ended June 30, 2021, 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.
PART II
ITEM 1. LEGAL PROCEEDINGS
For information regarding legal proceedings, see Note 10. “Commitments and Contingencies” in our condensed consolidated financial statements included in Item 1. “Financial Statements.”
ITEM 1A. RISK FACTORS
The risk factor below updates the risk factors contained in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2020.
Our Bylaws contain exclusive forum provisions that may increase the costs for our shareholders to initiate certain types of legal disputes, discourage our shareholders from initiating such disputes, or limit our shareholders’ ability to obtain a favorable judicial forum for such disputes.
Our Amended and Restated Bylaws (the “Bylaws”) provide that, unless we consent in writing to an alternative forum, the sole and exclusive forum for certain legal actions specified in the Bylaws is the Court of Chancery of the State of Delaware (or another state or federal court located within the State of Delaware, if the Court of Chancery does not have subject matter jurisdiction) (collectively, “Delaware Courts”). These Bylaws provisions may limit a shareholder’s ability to initiate a dispute with us or our directors, officers or other employees in a judicial forum of their choosing, which may discourage these types of legal actions, and may increase the costs for the shareholder plaintiff, particularly if they do not reside in or near Delaware. The Delaware Courts may reach different results than would other courts, including courts where a shareholder would otherwise choose to initiate the legal action, and such results may be more favorable to us than to our shareholders. Our Bylaws also provide that, unless we consent to an alternative forum, the federal district courts of the United States of America shall be the sole and exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act of 1933, as amended. This provision does not relieve us of our obligation to comply with the federal securities laws and the rules and regulations thereunder, and our shareholders will not be deemed to have waived our compliance with these laws, rules and regulations; however this provision may discourage these types of legal actions.
A court might determine that these Bylaws provisions are inapplicable or unenforceable in any particular legal action, in which case we may incur additional litigation-related expenses in such legal action, and the legal action may result in outcomes unfavorable to us, which could have a material adverse impact on our reputation, business operations and financial results.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Purchases of Equity Securities by the Issuer
The table below reflects shares of common stock we repurchased during the second quarter of 2021.
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| Total Number of Shares Purchased |
| Average Price Paid Per Share |
| Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(1) |
| Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs(2) | ||
April |
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| 25,876 |
| $ | 1,496.89 |
| 25,876 |
| $ | 115,058,860 |
| Purchased 4/1 through 4/30 |
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May |
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| 39,109 |
| $ | 1,367.64 |
| 39,109 |
| $ | 261,571,846 |
| Purchased 5/1 through 5/31 |
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June |
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| 38,208 |
| $ | 1,389.08 |
| 38,208 |
| $ | 208,497,826 |
| Purchased 6/1 through 6/30 |
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Total |
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| 103,193 |
| $ | 1,407.99 |
| 103,193 |
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(1) Shares were repurchased pursuant to repurchase programs announced on February 4, 2020 and April 21, 2021.
(2) This column includes an additional $200 million in authorized repurchases approved on May 17, 2021 and announced July 20, 2021. There is no expiration date for this program, and the authorization to repurchase shares will end when we have repurchased the maximum amount of shares authorized, or our Board of Directors have determined to discontinue such repurchases.
ITEM 6. EXHIBITS
EXHIBIT INDEX
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| Description of Exhibit Incorporated Herein by Reference | ||||
Exhibit Number | Exhibit Description | Form | File No. | Filing Date | Exhibit Number | Filed Herewith |
10.1† | Director Compensation Program and Stock Ownership Guidelines (revised May 18, 2021) | - | - | - | - | X |
10.2† | - | - | - | - | 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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| †- Management contracts and compensatory plans or arrangements required to be filed as exhibits. |
SIGNATURES
Pursuant to the requirements 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
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Name: | John R. Hartung | |
Title: | Chief Financial Officer (principal financial officer and duly authorized signatory for the registrant) |
Date: July 23, 2021