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 number of new restaurants we expect to open this year and the number of restaurants we intend to open in the longer term, 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, the resurgence of COVID-19 infections, the circulation of novel variants of COVID-19 and its ultimate impact on our business; the ability of our third-party suppliers and business partners to fulfill their responsibilities and commitments; increasing supply costs (including beef, avocados and packaging); risks of food safety incidents and food-borne illnesses; risks associated with our reliance on certain information technology systems and potential failures or interruptions; potential negative impacts of privacy or cyber security incidents, including through our digital app; material failures of our information technology systems; the impact of competition, including from sources outside the restaurant industry; the competitive labor market and changes in the availability and cost of labor and the impact of any union organizing efforts and our responses to such efforts; the financial impact of increasing our average hourly wage; 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 and the equipment needed to fully outfit new restaurants; 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 as a result of increasing inflation, fear of possible recession and higher gas prices, or the inability to increase menu prices or realize the benefits of menu price increases; risks associated with 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, 2021 , and in other reports filed with theSEC .
As of
Throughout "Management's Discussion and Analysis of Financial Condition and Results of Operations" we commonly discuss the following key operating metrics which we believe will drive our financial results and long-term growth model. We believe these metrics are useful to investors because management uses these metrics to assess the growth of our business and the effectiveness of our marketing and operational strategies:
?Comparable restaurant sales
?Restaurant operating costs as a percentage of total revenue
?New restaurant openings
Third Quarter 2022 Financial Highlights, year-over-year:
?Total revenue increased 13.7% to
?Comparable restaurant sales increased 7.6%
?Diluted earnings per share was
Sales Trends. Comparable restaurant sales increased 7.6% for the three months endedSeptember 30, 2022 . The increase is primarily attributable to an increase in menu prices, partially offset by a decrease in group size from the continued resurgence of our in-restaurant business and, to a lesser extent, lower transactions. Comparable restaurant sales and transactions represent the change in period-over-period sales or transactions for restaurants in operation for at least 13 full calendar months. 12
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In-restaurant sales increased 22.1% in the three months endedSeptember 30, 2022 , compared to the three months endedSeptember 30, 2021 . The increase was primarily due to menu price increases, new restaurants, and a shift in consumer behaviors related to COVID-19 from digital sales to in-restaurant sales across the country. In-restaurant sales represent food and beverage revenue generated on-premise and include revenue deferrals associated withChipotle Rewards. Digital sales represented 37.2% of food and beverage revenue for the three months endedSeptember 30, 2022 , compared to 42.8% for the three months endedSeptember 30, 2021 . The decrease in digital sales as a percentage of food and beverage revenue is primarily related to the increase of in-restaurant sales discussed above. Digital sales represent food and beverage revenue generated through theChipotle website,Chipotle app or third-party delivery aggregators and includes revenue deferrals associated withChipotle Rewards. We updated the definition of digital sales in the first quarter of 2022 to include revenue deferrals related toChipotle Rewards. We made this change to allow for a reconciliation to total food and beverage revenue as we now present in-restaurant sales. Restaurant Operating Costs. During the three months endedSeptember 30, 2022 , our restaurant operating costs (food, beverage and packaging; labor; occupancy; and other operating costs) were 74.7% of total revenue, a decrease from 76.5% during the three months endedSeptember 30, 2021 . The decrease was primarily attributable to sales leverage and, to a lesser extent, lower delivery expense due to lower volumes of delivery transactions. These decreases were partially offset by higher food costs as a result of inflationary pressures and, to a lesser extent, higher labor expenses as a result of wage inflation.Restaurant Development . For the three months endedSeptember 30, 2022 , we opened 43 new restaurants, which included 38 restaurants with a 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 have experienced delays in our development timelines, which included equipment and construction material shortages, construction labor challenges, as well as permitting, utilities, and inspection delays. While we expect these challenges to continue into 2023, we remain confident in the long-term opportunity to more than double the number ofChipotle restaurants inNorth America . We expect to open 255 to 285 new restaurants in 2023.Cultivate Fund . InApril 2022 we announced the formation of theCultivate Fund , a venture that will make early-stage investments into strategically aligned companies that further our mission to Cultivate a Better World. The venture fund has an initial size of$50.0 million and will be financed almost entirely byChipotle . As ofSeptember 30, 2022 , we have made two investments in this fund. The investments consisted of a$5.0 million purchase of a convertible note receivable, and a$2.0 million purchase of a non-marketable equity securities.
Restaurant Activity
The following table details restaurant unit data for the periods indicated.
Three months ended Nine months ended
September 30, September 30,
2022 2021 2022 2021
Beginning of period 3,052 2,853 2,966 2,768
Chipotle openings 43 41 136 137
Chipotle permanent closures (1) - (3) (10)
Chipotle relocations (4) (2) (9) (3)Total restaurants at end of period 3,090 2,892 3,090
2,892
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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
2022 2021 change 2022 2021 change
(dollars in millions) (dollars in millions)
Food and beverage revenue $ 2,202.3 $ 1,932.4 14.0% $ 6,394.1 $ 5,517.8 15.9%
Delivery service revenue 17.8 19.9 (10.4%) 60.0 68.7 (12.7%)
Total revenue $ 2,220.2 $ 1,952.3 13.7% $ 6,454.1 $ 5,586.4 15.5%
Average restaurant sales (1) $ 2.8 $ 2.5 12.8% $ 2.8 $ 2.5 12.8%
Comparable restaurant sales increase 7.6% 15.1% 8.9% 20.8%
(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, 2022 compared to the three months endedSeptember 30, 2021 , were comparable restaurant sales increases and new restaurant openings. Total revenue increased due to comparable restaurant sales increases of$138.1 million and restaurants not yet in the comparable base of$129.8 million , of which$64.3 million was due to restaurants opened in 2022. The significant factors contributing to the total revenue increase for the nine months endedSeptember 30, 2022 compared to the nine months endedSeptember 30, 2021 , were comparable restaurant sales increases and new restaurant openings. Total revenue increased due to comparable restaurant sales increases of$470.6 million and restaurants not yet in the comparable base of$397.3 million , of which$116.7 million was due to restaurants opened in 2022. Food, Beverage and Packaging Costs Three months ended Nine months ended September 30, Percentage September 30, Percentage 2022 2021 change 2022 2021 change (dollars in millions) (dollars in millions) Food, beverage and packaging$ 662.5 $ 591.3 12.0%$ 1,963.4 $ 1,688.5 16.3% As a percentage of total revenue 29.8% 30.3% (0.5%)
30.4% 30.2% 0.2%
Food, beverage and packaging costs decreased as a percentage of total revenue for the three months endedSeptember 30, 2022 compared to the three months endedSeptember 30, 2021 , due to the benefit of menu price increases, partially offset by inflation across the menu, primarily related to higher costs for dairy, packaging, tortillas, and avocados. Food, beverage and packaging costs increased as a percentage of total revenue for the nine months endedSeptember 30, 2022 compared to the nine months endedSeptember 30, 2021 , due to inflation across the menu, primarily related to higher costs for avocados, packaging, dairy, beef, and chicken, partially offset by the benefit of menu price increases. 14
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Labor Costs
Three months ended Nine months ended
September 30, Percentage September 30, Percentage
2022 2021 change 2022 2021 change
(dollars in millions) (dollars in millions)
Labor costs $ 557.2 $ 502.8 10.8% $ 1,639.0 $ 1,400.9 17.0%
As a percentage of total
revenue 25.1% 25.8% (0.7%) 25.4% 25.1% 0.3%
Labor costs decreased as a percentage of total revenue for the three months endedSeptember 30, 2022 compared to the three months endedSeptember 30, 2021 , primarily due to sales leverage. This decrease was partially offset by restaurant wage inflation 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 received in 2021. Labor costs increased as a percentage of total revenue for the nine months endedSeptember 30, 2022 compared to the nine months endedSeptember 30, 2021 , primarily due to restaurant wage inflation and, to a lesser extent, an employee retention payroll tax credit received in 2021 under the CARES Act for wages paid to employees who were absent from work during the COVID-19 pandemic. These increases were partially offset by sales leverage. Occupancy Costs Three months ended Nine months ended September 30, Percentage September 30, Percentage 2022 2021 change 2022 2021 change (dollars in millions) (dollars in millions) Occupancy costs$ 115.8 $ 104.2 11.1%$ 341.8 $ 309.4 10.5% As a percentage of total revenue 5.2% 5.3% (0.1%) 5.3% 5.5% (0.2%) Occupancy costs decreased as a percentage of total revenue for the three and nine months endedSeptember 30, 2022 compared to the three and nine months endedSeptember 30, 2021 , primarily due to sales leverage, partially offset by increased rent expense associated with new restaurants. Other Operating Costs Three months ended Nine months ended September 30, Percentage September 30, Percentage 2022 2021 change 2022 2021 change (dollars in millions) (dollars in millions) Other operating costs$ 322.1 $ 294.7 9.3%$ 970.3 $ 876.6 10.7% As a percentage of total revenue 14.5% 15.1% (0.6%) 15.0% 15.7% (0.7%) Other operating costs include, among other items, marketing and promotional costs, delivery expense, bank and credit card processing fees, restaurant utilities, technology costs, and maintenance costs. Other operating costs decreased as a percentage of total revenue for the three and nine months endedSeptember 30, 2022 compared to the three and nine months endedSeptember 30, 2021 , due to sales leverage and, to a lesser extent, lower delivery expenses associated with lower volume of delivery transactions. These decreases were partially offset by inflation across the board, most notably higher utilities primarily related to inflation in natural gas and electricity. 15
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General and Administrative Expenses
Three months ended Nine months ended
September 30, Percentage September 30, Percentage
2022 2021 change 2022 2021 change
(dollars in millions) (dollars in millions)
General and administrative
expense $ 140.9 $ 145.9 (3.4%) $ 429.1 $ 447.1 (4.0%)
As a percentage of total
revenue 6.3% 7.5% (1.2%) 6.6% 8.0% (1.4%)
General and administrative expenses decreased in dollar terms for the three
months ended September 30, 2022 compared to the three months ended September 30,
2021 , primarily due to an $11.2 million decrease in stock-based compensation,
mostly attributable to the impact of the December 2020 modification of 2018
performance awards related to COVID-19 in the prior year. This decrease was
partially offset by a $5.9 million increase in outside services expense related
to corporate initiatives.
General and administrative expenses decreased in dollar terms for the nine
months ended September 30, 2022 compared to the nine months September 30, 2021 ,
primarily due to a $60.4 million decrease in stock-based compensation, mostly
attributable to the impact of the December 2020 modification of 2018 performance
awards related to COVID-19 in the prior year. This decrease was partially offset
by increases of $16.1 million in employee wages primarily due to headcount
growth, $15.4 million of outside services expense related to corporate
initiatives; and $13.4 million associated with the biennial All Managers'
Conference that was held in March 2022 .
Depreciation and Amortization
Three months ended Nine months ended
September 30, Percentage September 30, Percentage
2022 2021 change 2022 2021 change
(dollars in millions) (dollars in millions)
Depreciation and
amortization $ 71.4 $ 63.2 13.0% $ 212.8 $ 188.4 13.0%
As a percentage of total
revenue 3.2% 3.2% 0.0% 3.3% 3.4% (0.1%)
Depreciation and amortization remained flat as a percentage of revenue for the
three months ended
Depreciation and amortization decreased as a percentage of revenue for the nine months endedSeptember 30, 2022 compared to the nine months endedSeptember 30, 2021 , primarily due to sales leverage, partially offset by increased depreciation expense associated with new restaurants.
Impairment, Closure Costs, and Asset Disposals
Three months ended Nine months ended
September 30, Percentage September 30, Percentage
2022 2021 change 2022 2021 change
(dollars in millions) (dollars in millions)
Impairment, closure costs,
and asset disposals $ 6.4 $ 4.7 36.6% $ 15.4 $ 14.6 5.2%
As a percentage of total
revenue 0.3% 0.2% 0.1% 0.2% 0.3% (0.1%)
Impairment, closure costs, and asset disposals increased in dollar terms for the
three months ended
Impairment, closure costs, and asset disposals increased in dollar terms for the nine months endedSeptember 30, 2022 , compared to the nine months endedSeptember 30, 2021 , primarily due to higher charges related to the replacement of leasehold improvements. This increase was partially offset by elevated impairments of operating lease assets in the comparable period. These elevated impairments were primarily the result of the COVID-19 pandemic negatively impacting our near-term restaurant level cash flow forecasts. 16
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Provision for Income Taxes
Three months ended Nine months ended
September 30, Percentage September 30, Percentage
2022 2021 change 2022 2021 change
(dollars in millions) (dollars in millions)
Provision for income taxes $ (82.8) $ (35.1) 135.8% $ (202.8) $ (125.7) 61.3%
Effective income tax rate 24.4% 14.7% n/m* 23.1% 19.5% n/m*
*Not meaningful
The effective income tax rate for the three months ended September 30, 2022 , was
24.4%, an increase from an effective income tax rate of 14.7% for the three
months ended September 30, 2021 . The increase is primarily due to a decrease in
tax benefits related to option exercises and equity vesting, a reduction in
return to provision benefits, and an increase in ASC 740-10 tax reserves,
partially offset with a reduction in nondeductible expenses.
The effective income tax rate for the nine months ended September 30, 2022 , was
23.1%, an increase from an effective income tax rate of 19.5% for the nine
months ended September 30, 2021 . The increase is primarily due to fewer tax
benefits related to option exercises and equity vesting, a reduction in return
to provision benefits, and an increase in ASC 740-10 tax reserves, partially
offset with a reduction in nondeductible expenses in the nine months ended
September 30, 2022 compared to the nine months ended September 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 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
As ofSeptember 30, 2022 , we had a cash and marketable investments balance of$1.2 billion , excluding restricted cash of$31.0 million and non-marketable investments of$51.7 million . After funding the current operations in our restaurants and support centers, the first planned use of our cash flow from operations is to provide capital for the continued investment in new restaurant construction. In addition to continuing to invest in our restaurant expansion, we expect to utilize cash flow from operations to: repurchase additional shares of our common stock subject to market conditions; invest in, maintain, and refurbish our existing restaurants; and for general corporate purposes. As ofSeptember 30, 2022 ,$412.8 million remained available for repurchases of shares of our common stock, which includes the$200.0 million additional authorization approved by our Board of Directors onSeptember 13, 2022 . 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, 2022 , we had$500.0 million of undrawn borrowing capacity under a line of 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 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, within ten days, thereby reducing the need for incremental working capital to support our growth. 17
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Cash Flows
Cash provided by operating activities was$921.6 million for the nine months endedSeptember 30, 2022 , compared to$843.7 million for the nine months endedSeptember 30, 2021 . The increase was primarily due to higher net earnings partially offset by net cash used by changes in operating assets and liabilities. Cash used in investing activities was$646.3 million for the nine months endedSeptember 30, 2022 , compared to$363.1 million for the nine months endedSeptember 30, 2021 . The change was primarily associated with a$265.4 million increase inU.S. Treasury security purchases net ofU.S. Treasury security maturities and, to a lesser extent, increased capital expenditures of$15.0 million primarily related to costs associated with new restaurant development. Cash used in financing activities was$722.7 million for the nine months endedSeptember 30, 2022 , compared to$366.6 million for the nine months endedSeptember 30, 2021 . The change was primarily due to increased treasury stock repurchases of$329.0 million and, to a lesser extent,$28.9 million of elevated payments of tax withholdings related to stock compensation for the nine months endedSeptember 30, 2022 .
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, 2021 .
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