Cautionary Note Regarding Forward-Looking Statements
Certain statements in this report, including the potential future impact of COVID-19 on our results of operations or liquidity, the potential impact of actions we have taken to mitigate the impact of COVID-19, the expected benefit of the CARES Act on our liquidity 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," 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 endedDecember 31, 2019 , as updated in our Form 10-Q for the quarter endedMarch 31, 2020 and in other reports filed subsequently with theSEC .
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 ofJune 30, 2020 , the majority of our restaurants have been reopened for dine-in with restrictions, such as social distancing, 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. About 30 restaurants remain temporarily closed, mainly inside malls and shopping centers. 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 did not make any stock buybacks during the second quarter and do not expect to do so until the economic environment stabilizes. Refer to the "Liquidity and Capital Resources" for further detail. Given the on-going uncertainty surrounding the future impact of COVID-19 on the broader US economy and any specific impact to our company, we are not providing fiscal 2020 guidance related to comparable restaurant sales growth, new restaurant openings, and effective full year tax rate.
Second Quarter 2020 Financial Highlights, which incorporate the impact of COVID-19, year over year:
?Revenue decreased 4.8% to
?Comparable restaurant sales declined 9.8%
?Diluted earnings per share was
Sales Trends. With changes in consumer behavior resulting from COVID-19, we have seen an increase in entrees per transaction, due in part to a shift towards digital group orders. Comparable restaurant sales decreased 9.8% with a 13.7% decrease in comparable entrees and a 3.9% increase in average comparable check. The decrease in comparable restaurant sales was most severe inApril 2020 , with a 24.4% decrease in year over year comparable restaurant sales. Sales trends improved meaningfully in May andJune 2020 , with a 7.0% decrease and a 2.0% increase in year over year comparable restaurant sales, respectively. Digital sales grew 216.3% to$829.3 million for the three months endedJune 30, 2020 as compared to the three months endedJune 30, 2019 and represented 60.7% of sales. Contributing to this result was increased digital awareness via advertising, new delivery partnerships withUber Eats , growth inChipotle Rewards, as well as the expansion of our digital capabilities intoCanada . These initiatives are attracting new customers and increasing convenient access. Notably, partnering with the major third-party delivery aggregators has led to an increase in orders, a reduction in delivery time and cancellations, and an improvement in overall customer ratings. 11
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Restaurant Operating Costs. Our restaurant operating costs (food, beverage and packaging; labor; occupancy; and other operating costs) as a percentage of revenue increased 870 basis points to 87.8% for the three months endedJune 30, 2020 , as compared to 79.1% for the three months endedJune 30, 2019 . The increase in restaurant operating costs as a percentage of revenue was driven primarily by higher delivery expense associated with increased delivery sales, sales deleverage, several temporary investments in our business as a result of COVID-19 including assistance pay, and increased delivery promotions. These increases in expenses were partially offset by lower avocado prices and the benefit from menu price increases in late 2019.Restaurant Development . We opened 37 new restaurants, including three relocations, and closed three restaurants during the three months endedJune 30, 2020 . Of the 37 new restaurants, 21 included a drive through format which we call a "Chipotlane." We recently announced a milestone with the opening of our 100th Chipotlane. 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 ofChipotle restaurants in theU.S. We believe our strong financial position will allow us to build a robust new unit development pipeline. As a result, we expect to see an acceleration in the number of units opened in 2021. Restaurant Activity
The following table details restaurant unit data for the periods indicated:
Three months ended Six months ended June 30, June 30, 2020 2019 2020 2019 Beginning of period 2,638 2,504 2,622 2,491 Chipotle openings 37 20 56 35 Chipotle permanent closures (3) (1) (5) (3) Chipotle relocations (3) - (4) -
Total restaurants at end of period 2,669 2,523 2,669
2,523 Results of Operations
Our results of operations as a percentage of revenue and period-over-period change are discussed in the following section.
Revenue Three months ended Six months ended June 30, Percentage June 30, Percentage 2020 2019 change 2020 2019 change (dollars in millions) (dollars in millions) Revenue$ 1,364.7 $ 1,434.2
(4.8%)
$ 2.2 $ 2.1 5.6% $ 2.2$ 2.1 5.6% Comparable restaurant sales increase (decrease) (9.8%) 10.0% (3.5%) 10.0%
(1) Average restaurant sales refer to the average trailing 12-month sales for restaurants in operation for at least 12 full calendar months.
Revenue decreased for the three months endedJune 30, 2020 , compared toJune 30, 2019 , primarily due to comparable restaurant sales decreases of$144.4 million , partially offset by increases in revenue from restaurants not yet in the comparable base of$74.9 million , of which$57.1 million is due to restaurants opened in 2019. Revenue increased for the six months endedJune 30, 2020 , compared toJune 30, 2019 , primarily due to revenue from restaurants not yet in the comparable base of$137.1 million , of which$117.6 million is due to restaurants opened in 2019, and was partially offset by comparable restaurant sales decreases of$104.0 million . COVID-19 negatively impacted comparable restaurant sales for the three and six months endedJune 30, 2020 , due to restrictions put in place for restaurants. Comparable restaurant sales for the months endedApril 30, 2020 ,May 31, 2020 , andJune 30, 2020 were a 24.4% decrease, a 7.0% decrease, and a 2.0% increase, respectively. 12
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Food, Beverage and Packaging Costs
Three months ended
Six months ended
June 30, Percentage June 30, Percentage 2020 2019 change 2020 2019 change (dollars in millions) (dollars in millions) Food, beverage and packaging$ 454.8 $ 483.3 (5.9%)$ 917.1 $ 904.7 1.4% As a percentage of revenue 33.3% 33.7%
(0.4%) 33.0% 33.0% 0.0%
Food, beverage and packaging costs decreased as a percentage of revenue for the three months endedJune 30, 2020 compared toJune 30, 2019 , primarily due to lower avocado costs, the benefit of menu price increases in late 2019, and to a lesser extent, lower waste, freight, and paper costs. These decreases were partially offset by elevated beef prices and increased incidence of steak, bottled beverages, and burritos. Food, beverage and packaging costs remained flat as a percentage of revenue for the six months endedJune 30, 2020 compared toJune 30, 2019 , primarily due to the benefit of menu price increases in late 2019, lower avocado costs, and, to a lesser extent, lower paper costs. These decreases were offset by higher costs of several ingredients including beef and dairy; and increased incidence of steak ,bottled beverages, and burritos; as well as free food costs associated withChipotle Rewards and digital ordering incentives. COVID-19 increased food, beverage and packaging costs as a percentage of revenue for the three and six months endedJune 30, 2020 compared toJune 30, 2019 , as beef prices were elevated due to COVID-19 related shut down of processing plants, increased incidence of bottled beverages and burritos, and to a lesser extent, increased spoilage due to right sizing food purchases to align with the new sales level. Labor Costs Three months ended Six months ended June 30, Percentage June 30, Percentage 2020 2019 change 2020 2019 change (dollars in millions) (dollars in millions) Labor costs$ 385.3 $ 368.1 4.7%$ 778.8 $ 716.9 8.6% As a percentage of revenue 28.2% 25.7%
2.5% 28.1% 26.1% 2.0%
Labor costs increased as a percentage of revenue for the three and six months endedJune 30, 2020 compared toJune 30, 2019 , primarily due to increased crew wages including temporary assistance pay for our crew working during COVID-19, lower sales, and more managers per store, partially offset by labor efficiencies with the digital make line and closed dining rooms. COVID-19 increased labor costs as a percentage of revenue for the three and six months endedJune 30, 2020 compared toJune 30, 2019 , by 1.4% and 0.8%, respectively, as we made additional employee investments in the form of assistance pay and expanded our emergency leave benefits to accommodate those directly affected by COVID-19. Our assistance pay program endedJune 7, 2020 . Occupancy Costs Three months ended Six months ended June 30, Percentage June 30, Percentage 2020 2019 change 2020 2019 change (dollars in millions) (dollars in millions) Occupancy costs$ 95.6 $ 89.9 6.3%$ 190.9 $ 178.7 6.8% As a percentage of revenue 7.0% 6.3% 0.7% 6.9% 6.5% 0.4% Occupancy costs increased as a percentage of revenue for the three and six months endedJune 30, 2020 compared toJune 30, 2019 , primarily due to increased rent expense associated with new restaurants and to a lesser extent the impact by change in revenue.
COVID-19 had an immaterial impact on occupancy costs for the three and six
months ended
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Table of Contents Other Operating Costs Three months ended Six months ended June 30, Percentage June 30, Percentage 2020 2019 change 2020 2019 change (dollars in millions) (dollars in millions) Other operating costs$ 262.4 $ 193.3 35.7%$ 473.1 $ 368.1 28.6% As a percentage of revenue 19.2% 13.5%
5.7% 17.0% 13.4% 3.6%
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 increased as a
percentage of revenue for the three and six months ended
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 fromMarch 15, 2020 throughMay 10, 2020 , and discounted delivery beginningMay 11, 2020 .
General and Administrative Expenses
Three months ended
Six months ended
June 30, Percentage June 30, Percentage 2020 2019 change 2020 2019 change (dollars in millions) (dollars in millions) General and administrative expense$ 102.6 $ 121.4 (15.4%)$ 209.1 $ 224.1 (6.7%) As a percentage of revenue 7.5% 8.5% (1.0%) 7.5% 8.2% (0.7%) General and administrative expenses decreased in dollar terms for the three months endedJune 30, 2020 compared toJune 30, 2019 , primarily due to a reduction in the following:$19.2 million in estimated loss contingencies related to a number of legal matters and legal expenses,$2.4 million in travel expense, and$2.1 million in expense associated with the corporate restructuring. These decreases were partially offset by increases of$2.8 million in outside service expense related to company initiatives to support restaurant growth, including digitizing our restaurant experience and$2.1 million in other expenses. General and administrative expenses decreased in dollar terms for the six months endedJune 30, 2020 compared toJune 30, 2019 , primarily due to a reduction in the following:$25.8 million in estimated loss contingencies related to a number of legal matters and legal expenses,$5.0 million in expense associated with the corporate restructuring, and$2.0 million in travel expense. These decreases were partially offset by increases of$7.0 million in outside service expense related to company initiatives to support restaurant growth, including digitizing our restaurant experience,$5.2 million due to severance and stock modification charges associated with the departure of our former Executive Chairman, and$1.0 million in other expenses. In addition, the prior period included a$4.6 million reduction to an estimated liability associated with the data security incident, which is inflating general and administrative expenses in the current year as compared to the prior year. COVID-19 had a minimal impact on general and administrative expenses for the three and six months endedJune 30, 2020 . We will continue to assess additional planned general and administrative investments as we better understand the length and severity of the COVID-19 impacts. Depreciation and Amortization Three months ended Six months ended June 30, Percentage June 30, Percentage 2020 2019 change 2020 2019 change (dollars in millions) (dollars in millions) Depreciation and amortization$ 60.0 $ 51.6 16.2%$ 118.4 $ 105.4 12.3% As a percentage of revenue 4.4% 3.6% 0.8% 4.3% 3.8% 0.5% Depreciation and amortization increased as a percentage of revenue for the three and six months endedJune 30, 2020 compared toJune 30, 2019 , due to an increase in depreciation expense associated with new restaurants, upgrading equipment in our restaurants primarily to support the growth in our digital business, and depreciation associated with our website and mobile app. 14
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Impairment, Closure Costs, and Asset Disposals
Three months ended Six months ended June 30, Percentage June 30, Percentage 2020 2019 change 2020 2019 change (dollars in millions) (dollars in millions) Impairment, closure costs, and asset disposals$ 5.4 $ 4.5 20.0%$ 14.7 $ 11.4 28.8% As a percentage of revenue 0.4% 0.3% 0.1% 0.5% 0.4% 0.1% Impairment, closure costs, and asset disposals increased in dollar terms for the three months endedJune 30, 2020 compared toJune 30, 2019 , primarily due to charges related to the replacement of certain kitchen equipment and leasehold improvements, and, to a lesser extent, impairments on restaurants and equipment. Impairment, closure costs, and asset disposals increased in dollar terms for the six months endedJune 30, 2020 compared toJune 30, 2019 , primarily due to impairments on restaurants and equipment, and to a lesser extent charges related to the replacement of certain kitchen equipment and leasehold improvements. COVID-19 had a negative impact on our assumptions for future restaurant level cash flows. These changes in assumptions resulted in elevated impairment charges for the three and six months endedJune 30, 2020 .
Benefit (Provision) for Income Taxes
Three months ended
Six months ended
June 30, Percentage June 30, Percentage 2020 2019 change 2020 2019 change (dollars in millions)
(dollars in millions)
Benefit (provision) for income taxes
289.4% 26.6% (21.6%) 24.5% The effective tax rate for the three months endedJune 30, 2020 , was a benefit of 289.4%, a change from an effective income tax provision of 26.6% for the three months endedJune 30, 2019 , primarily due to excess tax benefits related to option exercises in the quarter, along with a decrease in income before tax. The effective tax rate for the six months endedJune 30, 2020 , was a benefit of -21.6%, a change from an effective income tax provision of 24.5% for the six months endedJune 30, 2019 , primarily due to excess tax benefits related to option exercises and equity vesting, along with a decrease in income before tax.
The CARES Act did not have a material impact on our tax rate for the three or
six months ended
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
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
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$906.6 million , excluding restricted cash of$28.0 million . We also expect to see a liquidity benefit of about$100 million primarily from deferring social security tax payments and accelerating tax depreciation in previous income tax returns as allowed by the CARES Act. We expect to utilize this, along with cash flow from operations to continue investments in new store construction, remodels for restaurants that do not have a digital make line or Chipotlane and technology. Additionally, as ofJune 30, 2020 , we had$600.0 million of undrawn borrowing capacity under a line of credit facility with JPMorgan Chase bank. 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, inMarch 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 are delaying non-essential reinvestments, including deferring all remodels except for those that involve a digital make line or the addition of a Chipotlane. 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 our comparable restaurant sales improvement continues, we expect that we may be able to generate positive cash flow through the balance of the year. Should our business take longer to recover than we currently anticipate, there are other actions we can take to further conserve liquidity. We have not required significant working capital because customers pay in full at the time of purchase 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
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 endedDecember 31, 2019 .
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