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| CMG > SEC Filings for CMG > Form 10-Q on 23-Oct-2008 | All Recent SEC Filings |
23-Oct-2008
Quarterly Report
Cautionary Note Regarding Forward-Looking Statements
Certain statements in this report, including our estimates of the number of restaurants we intend to open as well as projections regarding potential changes in comparable restaurant sales and in the amount of certain expected expenses for 2008 and beyond, and statements regarding our expected stock repurchases, 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", 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, 2007, as updated in Item 1A of Part II of this report.
Overview
Chipotle operates fresh Mexican food restaurants serving burritos, tacos, burrito bowls (a burrito without the tortilla) and salads. We began with a simple philosophy: demonstrate that food served fast doesn't have to be a traditional "fast-food" experience. Over the years, that vision has evolved. Today, our vision is to change the way people think about and eat fast food. We do this by avoiding a formulaic approach when creating our restaurant experience, looking to fine-dining restaurants for inspiration. We use high-quality raw ingredients, classic cooking methods and a distinctive interior design, and have friendly people to take care of each customer-features that are more frequently found in the world of fine dining. Our approach is also guided by our belief in an idea we call "Food With Integrity". Our objective is to find the highest quality ingredients we can-ingredients that are grown or raised with respect for the environment, animals and people who grow or raise the food.
2008 Highlights
Restaurant Development. As of September 30, 2008, we had 798 restaurants in 33 states throughout the United States, the District of Columbia, and Toronto, Canada. New restaurants have contributed substantially to our restaurant sales growth. We opened 20 and 97 restaurants during the three and nine months ended September 30, 2008, respectively. We expect to open between 130 and 140 restaurants in 2008 and between 135 and 145 in 2009.
Sales Growth. In addition to growing our number of restaurants, we have experienced increases in our average restaurant sales from $1.708 million as of September 30, 2007 to $1.768 million as of September 30, 2008, driven primarily by comparable restaurant sales increases. Our comparable restaurant sales increases for the first nine months of 2008 were 6.6%. Comparable restaurant sales increases were due mainly to menu price increases and to an increase in the number of transactions processed at our registers. We expect comparable restaurant sales increases in the mid to low single digits for the full year. Our comparable restaurant sales increases decelerated in the third quarter, which we believe is due at least in part to the weakened economy. As a result, we expect comparable restaurant sales increases in the low single digits for the full year of 2009. We define average restaurant sales as the average trailing 12-month sales for company-operated restaurants in operation for at least 12 full calendar months. Comparable restaurant sales include company-operated restaurants only and represent the change in period-over-period sales for restaurants beginning in their 13th full month of operation.
Food Costs. The cost of many basic foods for humans and animals, including corn, wheat, rice and oil has increased over 2007 prices. This has resulted in upward pricing pressures on almost all of our raw ingredients including chicken, beef, tortillas and rice, and we expect that pressure to continue through 2008 and into 2009. In addition, freezes during 2007 in California and Chile put pricing pressure on avocados which has continued during 2008. We have also experienced a significant increase in cheese prices throughout 2008 as a result of the expiration of the pricing protocols under which we operated during 2007. We will also have a significant increase in the cost of rice, soy oil and sweet corn as a result of the renewal of those pricing protocols at the end of the third quarter of 2008. We expect to implement pricing plans during the fourth quarter of 2008 to help offset increased costs.
Labor. Although we have not been directly impacted by recent minimum wage increases, we experienced some upward pressure on our restaurant wages in the first nine months of 2008 and expect further pressure in the fourth quarter. Because we have now operated a full year with a national labor staffing model and self-insurance structures in place, we do not expect to see improvements in our labor expense as a percentage of revenue during the remainder of 2008.
In addition to excelling in providing quality food and customer service, restaurant managers are expected to contribute substantially to the development of their crew. Our restaurant management structure is designed to facilitate the development of crew members into restaurant managers, and we emphasized the importance of hiring and developing great crew at an all managers conference we held in August.
We continue to focus on ensuring our employee practices are as exceptional as our food. During 2008, we have sought to ensure that we have an effective and efficient field support system for restaurant managers that supports our efforts to identify people with potential, develops crew into managers and ensures high operating standards of our restaurants. In an effort to achieve this we continue to develop the Restaurateur program, which is designed to encourage the restaurant manager position as a career opportunity for our top performing restaurant managers. We have been working to leverage our Restaurateurs' leadership by giving select Restaurateurs responsibility for leading nearby restaurants with opportunities for improvement. We plan to expand this program in 2009 to give outstanding Restaurateurs responsibility for additional restaurants.
Food With Integrity. In addition to continuing to serve naturally raised pork in all our restaurants, we now serve naturally raised chicken in all of our restaurants and naturally raised beef in about 60%. We define naturally raised as coming from animals that are fed a pure vegetarian diet, never given antibiotics or hormones, and raised humanely in open pastures or deeply bedded pens. In 2008, 30% of all the beans we buy are organically grown, up from 25% in 2007. This summer we also purchased 25% of at least one produce item while in season for each of our restaurants from small and midsize local farmers.
Stock Repurchase. Our Board of Directors has approved the expenditure of up to $100 million to repurchase shares of our class B common stock. The shares may be repurchased from time to time in open market transactions, subject to market conditions. We intend to enter into an agreement with a broker under SEC rule 10b5-1, authorizing the broker to make purchases of class B common stock from time to time. The repurchase agreement and the Board's authorization of the repurchase program may be modified, suspended, or discontinued at any time.
Cash and Cash Equivalents. As of September 30, 2008, we had a cash and cash equivalent balance of $212.2 million. Given the recent financial turmoil, our cash and cash equivalents holdings consist of almost 80% U.S. Treasury funds held at a large prominent bank while the remainder are in highly-rated municipal commercial paper and overnight time deposits.
Restaurant Activity
The following table details restaurant unit data for the periods indicated.
For the three months For the nine months
ended September 30 ended September 30
2008 2007 2008 2007
Company-operated
Beginning of period 778 640 704 573
Openings 20 28 97 88
Closures - - (3 ) (1 )
Franchise acquisitions - - - 8
End of period 798 668 798 668
Franchises
Beginning of period - - - 8
Franchise acquisitions - - - (8 )
End of period - - - -
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Total restaurants at end of period 798 668 798 668
Results of Operations
Our results of operations as a percentage of revenue and period-over-period variances are discussed in the following section. As our business grows, as we open more restaurants and hire more employees, our aggregate restaurant operating costs increase.
Restaurant Sales
For the three months For the nine months
ended September 30 % ended September 30 %
2008 2007 increase 2008 2007 increase
(dollars in thousands)
Restaurant sales $ 340,543 $ 286,431 18.9 % $ 986,624 $ 796,137 23.9 %
Average restaurant sales $ 1,768 $ 1,708 3.5 % $ 1,768 $ 1,708 3.5 %
Comparable restaurant sales
increases 3.1 % 12.4 % 6.6 % 10.9 %
Number of company-operated
restaurants as of the end of the
period 798 668 19.5 % 798 668 19.5 %
Number of company-operated
restaurants opened in the period 20 28 97 88
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The significant factors contributing to our increase in sales for the three and nine months ended September 30, 2008 were restaurant openings and comparable restaurant sales performance. Restaurant sales for the three and nine months ended September 30, 2008 for restaurants not in the comparable restaurant base contributed to $46.8 million and $137.2 million of the increase in sales, respectively, of which $29.1 million and $54.2 million was attributable to restaurants opened in 2008. Comparable restaurant sales increases contributed to $7.4 million of the increase in restaurant sales for the third quarter of 2008, and $53.5 million of the increase in restaurant sales for the first nine months of 2008. Comparable restaurant sales growth was due primarily to menu price increases in selected markets in conjunction with the introduction of naturally raised beef or chicken. For the first nine months of 2008 an increase in the number of transactions processed at our register also contributed to the increase in comparable restaurant sales.
Food, Beverage and Packaging Costs
For the three months For the nine months
ended September 30 % ended September 30 %
2008 2007 increase 2008 2007 increase
(dollars in thousands)
Food, beverage and packaging $ 112,412 $ 92,075 22.1 % $ 321,003 $ 254,209 26.3 %
As a percentage of revenue 33.0 % 32.1 % 32.5 % 31.9 %
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Food, beverage and packaging costs increased as a percentage of revenue due to increased product costs, primarily cheese, chicken and avocados partially offset by menu price increases in selected markets in conjunction with the introduction of naturally-raised beef or chicken. We have seen significantly higher food costs for many of our raw ingredients and we expect that to continue through the rest of 2008 and into 2009.
Labor Costs
For the three months For the nine months
ended September 30 % ended September 30 %
2008 2007 increase 2008 2007 increase
(dollars in thousands)
Labor costs $ 89,534 $ 75,395 18.8 % $ 259,222 $ 211,965 22.3 %
As a percentage of revenue 26.3 % 26.3 % 26.3 % 26.6 %
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Labor costs as a percentage of revenue remained consistent in the third quarter of 2008 due to menu price increases and lower insurance claims benefiting us offset by increased average wage rates and labor inefficiencies associated with the newer restaurant openings.
Labor costs decreased as a percentage of revenue in the first nine months of 2008 primarily due to menu price increases, lower insurance claims benefiting us and labor inefficiencies in early 2007 before the national labor staffing model was fully rolled out. This decrease was partially offset by increased average wage rates and labor inefficiencies associated with the newer restaurant openings.
Occupancy Costs
For the three months For the nine months
ended September 30 % ended September 30 %
2008 2007 increase 2008 2007 increase
(dollars in thousands)
Occupancy costs $ 24,483 $ 19,745 24.0 % $ 69,720 $ 55,355 26.0 %
As a percentage of revenue 7.2 % 6.9 % 7.1 % 6.9 %
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Occupancy costs increased as a percentage of revenue primarily due to higher rents for new locations, which includes our opening proportionately more restaurants in expensive urban areas in 2007 and 2008. This increase was partially offset by higher average restaurant sales on a partially fixed-cost base.
Other Operating Costs
For the three months For the nine months
ended September 30 % ended September 30 %
2008 2007 increase 2008 2007 increase
(dollars in thousands)
Other operating costs $ 41,379 $ 33,240 24.5 % $ 122,649 $ 96,663 26.9 %
As a percentage of revenue 12.2 % 11.6 % 12.4 % 12.1 %
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In 2008, other operating costs as a percentage of revenue increased primarily due to increased utilities, repair and maintenance costs and credit card processing fees resulting from a higher percentage of our customers using credit cards. This increase was partially offset by lower marketing and promotional spend.
General and Administrative Expenses
For the three months For the nine months
ended September 30 % ended September 30 %
2008 2007 increase 2008 2007 increase
(dollars in thousands)
General and administrative expense $ 22,645 $ 19,279 17.5 % $ 64,889 $ 54,397 19.3 %
As a percentage of revenue 6.6 % 6.7 % 6.6 % 6.8 %
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The increase in general and administrative expenses in 2008 primarily resulted from hiring more employees as we grew, the cost of the all manager conference held in the third quarter, an increase in stock-based compensation expense resulting from the stock-based compensation awards granted in February 2008, and the impact during the second quarter of 2007 from the reversal of the $1.2 million credit card contingency reserve. The increase was partially offset by lower performance related bonus accruals in 2008.
As a percentage of total revenue, general and administrative expenses decreased due to lower performance related bonus accruals and menu price increases. This decrease was partially offset by the costs of the all manager conference held in the third quarter and the impact during the second quarter of 2007 from the reversal of the $1.2 million credit card contingency reserve.
Depreciation and Amortization
For the three months For the nine months
ended September 30 % ended September 30 %
2008 2007 increase 2008 2007 increase
(dollars in thousands)
Depreciation and amortization $ 13,769 $ 11,167 23.3 % $ 38,646 $ 31,907 21.1 %
As a percentage of revenue 4.0 % 3.9 % 3.9 % 4.0 %
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Depreciation and amortization increased primarily due to restaurants opened in 2008 and 2007.
As a percentage of total revenue, depreciation and amortization has increased during the third quarter due to new store openings increasing the average per store depreciable base and decreased for the nine months ended September 30, 2008 as a result of higher average restaurant sales on a partially fixed-cost base partially offset by new store openings.
Pre-opening Costs
For the three months For the nine months
ended September 30 % ended September 30 %
2008 2007 increase 2008 2007 increase
(dollars in thousands)
Pre-opening costs $ 2,884 $ 2,350 22.7 % $ 9,118 $ 6,730 35.5 %
As a percentage of revenue 0.8 % 0.8 % 0.9 % 0.8 %
Restaurant openings 20 28 97 88
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The increase in pre-opening costs is a result of an increase in rent expense recognized during the construction period due to an increase in the number of restaurants under construction and higher average rents as we open proportionately more restaurants in expensive urban areas. Pre-opening costs includes non-cash rent expense of $1.7 million and $1.3 million for the three months ended September 30, 2008 and 2007, respectively, and $4.8 million and $3.2 million for the nine months ended September 30, 2008 and 2007.
Loss on Disposal of Assets
For the three months For the nine months
ended September 30 % ended September 30 %
2008 2007 increase 2008 2007 increase
(dollars in thousands)
Loss on disposal of assets $ 2,379 $ 1,784 33.4 % $ 5,212 $ 4,919 6.0 %
As a percentage of revenue 0.7 % 0.6 % 0.5 % 0.6 %
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The increase in loss on disposal of assets was due to updating restaurants in certain markets during the third quarter of 2008, partially offset by the effect of increased costs in 2007 relating to the upgrade of restaurant security systems.
Interest Income
For the three months For the nine months
ended September 30 % ended September 30 %
2008 2007 decrease 2008 2007 decrease
(dollars in thousands)
Interest income $ 931 $ 1,597 (41.7 )% $ 3,199 $ 4,617 (30.7 )%
As a percentage of revenue 0.3 % 0.6 % 0.3 % 0.6 %
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Interest income resulted primarily from investing our incremental cash and cash equivalents in short-term investments with maturities of three months or less. The decrease is due to a lower yield on our investments in the first nine months of 2008 compared to the same period in 2007, in small part from moving our investments into more secure, but lower yielding U.S. Treasury funds late in the third quarter of 2008.
Provision for Income Taxes
For the three months For the nine months
ended September 30 % ended September 30 %
2008 2007 increase 2008 2007 increase
(dollars in thousands)
Provision for income taxes $ 12,434 $ 12,315 1.0 % $ 37,908 $ 32,096 18.1 %
As a percentage of revenue 3.7 % 4.3 % 3.8 % 4.0 %
Effective tax rate 39.0 % 37.4 % 38.2 % 37.7 %
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The 2008 estimated annual effective tax rate increased compared to 2007 due to a reduction in the yield on tax-exempt securities as well as a reduction in the amount of tax-exempt investments due to the on-going market credit crisis, partially offset by a decrease in the estimated statutory state tax rate. In the third quarter we increased our estimate of the 2008 annual effective tax rate due to fewer expected investment holdings in tax-exempt securities for the second half of 2008.
Seasonality
Seasonal factors cause our profitability to fluctuate from quarter to quarter. Historically, our restaurant sales 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. The number of trading days can also affect our results. Overall, on an annual basis, changes in trading days do not have a significant impact on our results.
Our quarterly results are also affected by other factors such as the number of new restaurants opened in a quarter and unanticipated events such as a severe credit restrictions or volatile financial markets. New restaurants have lower margins following opening as a result of the expenses associated with opening new restaurants and their 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, working capital and general corporate needs. We have a cash, cash equivalent, and short-term investment balance of $212.2 million that we expect to utilize, along with cash flow from operations, to provide capital to support the growth of our business (primarily through opening restaurants), to repurchase up to $100 million of our class B common stock subject to market conditions, and to continue to maintain our existing restaurants and for general corporate purposes. We believe that cash from operations, together with our cash balance, will be enough to meet ongoing capital expenditures, working capital requirements and other cash needs over at least the next 24 months.
We haven't required significant working capital because customers pay using cash or credit 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, beverage and supplies some time after the receipt of those items, generally within ten days, thereby reducing the need for incremental working capital to support growth.
Off-Balance Sheet Arrangements
As of September 30, 2008 and December 31, 2007, we had no 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 . . .
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