CHIPOTLE MEXICAN GRILL, INC. 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 and our long-term opportunity to more than double the number of restaurants inNorth America , 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, uncertainty regarding the duration and severity of the ongoing COVID-19 pandemic and its ultimate impact on our business; the ability of our third-party suppliers and business partners to fulfill their responsibilities and commitments; risks of food safety and food-borne illnesses; risks associated with our reliance on certain information technology systems and potential failures or interruptions; privacy and potential cyber security incidents, including through our digital app; the impact of competition, including from sources outside the restaurant industry; the increasingly competitive labor market and changes in the availability and cost of labor; the financial impact of increasing our average hourly wage to$15.00 ; the impact of federal, state or local government regulations relating to our employees, employment practices, restaurant design and construction, and the sale of food or alcoholic beverages; our ability to achieve our planned growth, such as the availability of suitable new restaurant sites; the uncertainty of our ability to achieve expected levels of comparable restaurant sales due to factors such as changes in consumers' perceptions of our brand, including as a result of actual or rumored food safety concerns or other negative publicity, decreased overall consumer spending (including but not limited to the increase in unemployment caused by COVID-19), or the inability to increase menu prices or realize the benefits of menu price increases; risks associated with our increased focus on our digital business, including risks arising from our reliance on third party delivery services; risks relating to litigation, including possible governmental actions related to food safety incidents and potential class action litigation regarding employment laws, advertising claims or other matters; and the risk factors described in our Annual Report on Form 10-K for the year endedDecember 31, 2020 , in our Quarterly Reports on Form 10-Q and in other reports filed with theSEC .
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 COVID-19 related employee absences or due to changes in the availability and cost of labor. We remain in regular contact with our major suppliers and to date we have not experienced significant disruptions in our supply chain; however, we have experienced inflationary pressures in freight and the costs of some of our ingredients, which could increase and/or spread to more categories as the impacts of COVID-19 continue across the global supply chain.
Third Quarter 2021 Financial Highlights, year-over-year:
?Total revenue increased 21.9% to
?Comparable restaurant sales increased 15.1%
?Diluted earnings per share was$7.18 , which included a$0.16 after-tax net impact resulting from a return to provision benefit from a net operating loss generated and carried back to prior years based on our 2020 federal income tax return, which was partially offset by expenses related to the 2018 PSU modification to account for the unplanned effects of COVID-19, corporate restructuring costs, restaurant asset impairment and closure costs, and certain other expenses Sales Trends. Comparable restaurant sales increased 15.1% for the three months endedSeptember 30, 2021 . The increase is primarily attributable to an increase in transactions and higher average check, which includes menu price increases partially offset by a reduction in group size. A higher percentage of orders in the three months endedSeptember 30, 2021 , were derived from in store purchases, which have smaller group sizes than digital orders. We believe the on-going strength in digital sales, the strong recovery of in-restaurant sales, as well as positive guest reception to our new menu items contributed to the revenue growth in the third quarter. Digital sales were$840.4 million for the three months endedSeptember 30, 2021 and represented 42.8% of sales. A little more than half of the digital sales were from order ahead transactions. 12
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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 total revenue decreased 4.0% to 76.5% for the three months endedSeptember 30, 2021 , as compared to 80.5% for the three months endedSeptember 30, 2020 . The improvement was driven primarily by leverage from the comparable restaurant sales including menu price increases, partially offset by wage inflation and higher costs associated with beef and freight.Restaurant Development . We opened 41 new restaurants including two relocations during the three months endedSeptember 30, 2021 . Of the 41 new restaurants, 36 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 ofChipotle restaurants inNorth 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.
Three months ended Nine months ended
September 30, September 30,
2021 2020 2021 2020
Beginning of period 2,853 2,669 2,768 2,622
Chipotle openings 41 43 137 99
Pizzeria Locale openings - 1 - 1
Chipotle permanent closures - (3) (10) (8)
Chipotle relocations (2) - (3) (4)Total restaurants at end of period 2,892 2,710 2,892
2,710 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
Three months ended Nine months ended
September 30, Percentage September 30, Percentage
2021 2020 change 2021 2020 change
(dollars in millions) (dollars in millions)
Food and beverage revenue $ 1,932.4 $ 1,581.3 22.2% $ 5,517.8 $ 4,333.6 27.3%
Delivery service revenue 19.9 20.1 (0.9%) 68.7 43.3 58.6%
Total revenue $ 1,952.3 $ 1,601.4 21.9% $ 5,586.4 $ 4,376.9 27.6%
Average restaurant sales
(1) $ 2.5 $ 2.2 12.3% $ 2.5 $ 2.2 12.3%
Comparable restaurant sales
increase 15.1% 8.3% 20.8% 0.5%
(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 endedSeptember 30, 2021 compared to the three months endedSeptember 30, 2020 , were comparable restaurant sales increases of$236.5 million and, to a lesser extent, increases in total revenue from restaurants not yet in the comparable base of$114.6 million , of which$64.1 million is due to restaurants opened in 2021. The significant factors contributing to the total revenue increase for the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 , were comparable restaurant sales increases of$891.0 million and, to a lesser extent, increases in total revenue from restaurants not yet in the comparable base of$318.3 million , of which$106.0 million is due to restaurants opened in 2021. 13
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Food, Beverage and Packaging Costs
Three months ended Nine months ended
September 30, Percentage September 30, Percentage
2021 2020 change 2021 2020 change
(dollars in millions) (dollars in millions)
Food, beverage and packaging $ 591.3 $ 517.3 14.3% $ 1,688.5 $ 1,434.3 17.7%
As a percentage of total revenue 30.3% 32.3% (2.0%) 30.2% 32.8% (2.6%)
Food, beverage and packaging costs decreased as a percentage of total revenue for the three months endedSeptember 30, 2021 compared to the three months endedSeptember 30, 2020 , primarily due to the benefit of menu price increases and, to a lesser extent, lower cheese prices. These decreases were partially offset by higher costs for beef and freight. Food, beverage and packaging costs decreased as a percentage of total revenue for the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 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 freight and our limited time offering of cauliflower rice. Labor Costs Three months ended Nine months ended September 30, Percentage September 30, Percentage 2021 2020 change 2021 2020 change (dollars in millions) (dollars in millions) Labor costs$ 502.8 $ 405.8 23.9%$ 1,400.9 $ 1,184.6 18.3% As a percentage of total revenue 25.8% 25.3% 0.5%
25.1% 27.1% (2.0%)
Labor costs increased as a percentage of total revenue for the three months endedSeptember 30, 2021 compared to the three months endedSeptember 30, 2020 , primarily due to restaurant wage increases implemented inJune 2021 and, to a lesser extent, higher bonus expense. This increase was partially offset by sales leverage and, to a lesser extent, an employee retention payroll tax credit under the CARES Act for wages paid to employees who were absent from work during the COVID-19 pandemic. Labor costs decreased as a percentage of total revenue for the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 , primarily due to sales leverage and, to a lesser extent, an employee retention payroll tax credit under the CARES Act for wages paid to employees who were absent from work during the COVID-19 pandemic and various labor efficiencies. These decreases were partially offset by restaurant wage increases implemented inJune 2021 and, to a lesser extent, higher employee bonus expense. Occupancy Costs Three months ended Nine months ended September 30, Percentage September 30, Percentage 2021 2020 change 2021 2020 change (dollars in millions) (dollars in millions) Occupancy costs$ 104.2 $ 97.7 6.7%$ 309.4 $ 288.5 7.2% As a percentage of total revenue 5.3% 6.1% (0.8%) 5.5% 6.6% (1.1%) Occupancy costs decreased as a percentage of total revenue for the three and nine months endedSeptember 30, 2021 compared to the three and nine months endedSeptember 30, 2020 , primarily due to sales leverage, partially offset by increased rent expense associated with new restaurants. 14
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Other Operating Costs
Three months ended Nine months ended
September 30, Percentage September 30, Percentage
2021 2020 change 2021 2020 change
(dollars in millions) (dollars in millions)
Other operating costs $ 294.7 $ 268.4 9.8% $ 876.6 $ 741.6 18.2%
As a percentage of total revenue 15.1% 16.8% (1.7%) 15.7% 16.9% (1.2%)
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 September 30, 2021
compared to the three months ended September 30, 2020 , due to sales leverage
and, to a lesser extent, lower delivery expenses. These decreases were partially
offset by higher utilities.
Other operating costs decreased as a percentage of total revenue for the nine
months ended September 30, 2021 compared to the nine months ended September 30,
2020 , due to sales leverage and, to a lesser extent, lower promotion expense.
These decreases were partially offset by higher delivery expenses associated
with increased delivery sales.
General and Administrative Expenses
Three months ended Nine months ended
September 30, Percentage September 30, Percentage
2021 2020 change 2021 2020 change
(dollars in millions) (dollars in millions)
General and administrative
expense $ 145.9 $ 133.2 9.6% $ 447.1 $ 342.3 30.6%
As a percentage of total
revenue 7.5% 8.3% (0.8%) 8.0% 7.8% 0.2%
General and administrative expense increased in dollar terms for the three
months ended September 30, 2021 compared to the three months ended September 30,
2020 , primarily due to a $16.9 million increase in stock-based compensation,
primarily attributable to the December 2020 modification of 2018 performance
awards related to COVID-19 and upward revisions to our expected performance
stock award payouts, a $5.7 million increase in outside services expense related
to corporate initiatives, a $5.0 million increase in performance bonuses, a $4.2
million increase in employee taxes, and a $2.5 million increase in employee
wages primarily due to headcount growth. These increases were partially offset
by $27.1 million lower estimated loss contingencies related to legal matters in
2021 compared to 2020.
General and administrative expense increased in dollar terms for the nine months
ended September 30, 2021 compared to the nine months ended September 30, 2020 ,
primarily due to a $76.7 million increase in stock-based compensation, primarily
attributable to the December 2020 modification of 2018 performance awards
related to COVID-19, a $22.5 million increase in outside services expense
related to corporate initiatives, a $14.0 million increase in performance
bonuses, a $6.9 million increase in employee taxes, and a $6.6 million increase
in employee wages primarily due to headcount growth. These increases were
partially offset by $29.5 million lower estimated loss contingencies related to
legal matters in 2021 compared to 2020.
?
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Depreciation and Amortization
Three months ended Nine months ended
September 30, Percentage September 30, Percentage
2021 2020 change 2021 2020 change
(dollars in millions) (dollars in millions)
Depreciation and amortization $ 63.2 $ 60.2 5.0% $ 188.4 $ 178.6 5.5%
As a percentage of total revenue 3.2% 3.8% (0.6%) 3.4% 4.1% (0.7%)
Depreciation and amortization decreased as a percentage of total revenue for the
three and nine months ended September 30, 2021 compared to the three and nine
months ended September 30, 2020 , primarily due to the benefit of sales leverage.
Impairment, Closure Costs, and Asset Disposals
Three months ended Nine months ended
September 30, Percentage September 30, Percentage
2021 2020 change 2021 2020 change
(dollars in millions) (dollars in millions)
Impairment, closure costs,
and asset disposals $ 4.7 $ 8.0 (41.7%) $ 14.6 $ 22.7 (35.8%)
As a percentage of total
revenue 0.2% 0.5% (0.3%) 0.3% 0.5% (0.2%)
Impairment, closure costs, and asset disposals decreased in dollar terms for the three months endedSeptember 30, 2021 compared to the three months endedSeptember 30, 2020 , primarily due to a comparison against elevated impairments of digital technology and equipment, operating lease assets and leasehold improvements in 2020. Elevated impairments in 2020 for operating lease assets and leasehold improvements 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 disposals related to restaurant technology and the replacement of leasehold improvements. Impairment, closure costs, and asset disposals decreased in dollar terms for the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 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. Provision for Income Taxes Three months ended Nine months ended September 30, Percentage September 30, Percentage 2021 2020 change 2021 2020 change (dollars in millions) (dollars in millions) Provision for income taxes$ (35.1) $ (26.3) 33.8%$ (125.7) $ (11.2) 1,018.1% Effective income tax rate 14.7% 24.7% n/m* 19.5% 6.4% n/m* *Not meaningful The effective income tax rate for the three months endedSeptember 30, 2021 , was 14.7%, a decrease from an effective income tax rate of 24.7% for the three months endedSeptember 30, 2020 , primarily due to an increase in excess tax benefits from option exercises and equity vesting and a return to a federal provision tax benefit recorded during the three months endedSeptember 30, 2021 , partially offset by increased profit before tax. The effective income tax rate for the nine months endedSeptember 30, 2021 , was 19.5%, an increase from an effective income tax rate of 6.4% for the nine months endedSeptember 30, 2020 , primarily due to an increase in profit before tax and a decrease of excess tax benefits related to option exercises in the nine months endedSeptember 30, 2021 as compared to the nine months endedSeptember 30, 2020 , partially offset by a federal return provision tax benefit recorded in the nine months endedSeptember 30, 2021 . 16
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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 higher operating costs 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 ofSeptember 30, 2021 , we had a cash and marketable investments balance of$1.2 billion , excluding restricted cash of$27.9 million and non-marketable investments of$28.0 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 ofSeptember 30, 2021 ,$209.8 million remained available for repurchases of shares of our common stock, which includes the$100.0 million additional authorization approved by our Board of Directors and announced onOctober 21, 2021 . Under the remaining repurchase authorizations, shares may be purchased from time to time in open market transactions, subject to market conditions. Additionally, as ofSeptember 30, 2021 , we had$500.0 million of undrawn borrowing capacity under a 5-year revolving credit facility. 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
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, 2020 . 17
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