Chipotle Mexican Grill, Inc.
Summary
- Chipotle Mexican Grill, Inc. often known simply as Chipotle, is an American chain of fast casual restaurants specializing in bowls, tacos and Mission burritos made to order in front of the customer.
- Inspired by the popularity of taquerías and San Francisco burritos, Ells, the founder, opened the first Chipotle Mexican Grill in Denver, Colorado, in 1993, using a loan of $85,000 from his father.
- Chipotle had over 3,200 restaurants as of March 31, 2023, in the United States, Canada, the United Kingdom, France and Germany.
- CMG manages its operations based on eight regions and has aggregated them into one reportable segment. However, their revenue can be divided into two parts based on the sources: food and beverage revenue, and delivery service revenue.
- In 2022, the company's sales reached $8,634 million showing an increase of 14.4% compared to 2021.
- The gross profit for 2022 was $2,062 million reflecting a difference of $355 million or 20.9% compared to 2021's.
- The operating income in 2022 amounted to $1,181 million surpassing 2021's operating income of $824 million by $357 million or 43.5%.
- Net income for 2022 stood at $899 million indicating a significant increase of $246 million or 37.6% compared to 2021's net income of $652 million.
Brief Company Overview
Chipotle Mexican Grill, Inc. (NYSE:CMG), a Delaware-based corporation is known as provider of a relevant menu of burritos, burrito bowls (a burrito without the tortilla), quesadillas, tacos, and salads. CMG provides services in various locations primarily in the U.S., Canada, France, Germany, and the United Kingdom. It strives to gain a competitive advantage by establishing a supply chain, employing a classic cooking style, sourcing fresh food, and refraining from using artificial colors and preservatives. This policy attracts conscious and environmentally-friendly customers, which serves as the driving force behind the brand's reputation. The first Chipotle restaurant opened in Denver, Colorado, in 1993. Their strategies to use fresh ingredients has become successful in sustaining their presence in the market. As of December 31, 2022, they owned and operated 3,129 Chipotle restaurants throughout the United States, 53 international Chipotle restaurants, and five non-Chipotle Pizzeria Locale restaurants. Pizzeria Locale is a fast casual pizza concept that is owned and operated by a consolidated entity that CMG is an investor in.
CMG manages its operations based on eight regions and has aggregated its operations into one reportable segment. Its revenue is derived from sales made by its restaurants. The majority portion of the sales comes from the dine-in service. CMG has a digital platform that offers convenient digital ordering options. The company also offers unlimited customization, contactless delivery, and group ordering through enhancements in its app and website also offer. In recent years, they have upgraded their capabilities by digitizing their restaurant kitchens, expanding partnerships with third-party delivery services, and constructing more Chipotlanes, which are drive-through formats for customer pick-up of digital orders. In 2022, digital sales represented 39.4% of food and beverage revenue.
As of July 2023, the company's stock price has fluctuated within a range of $1,233.61 to $2,147.52 over the past 52 weeks. The trailing price-to-earnings (P/E) ratio stands at 55.57 times, and the price-to-sales ratio (ttm) is 6.39 times. The profit margin is 11.49%, while the operating margin (ttm) is 15.17%. Additionally, the company's return on assets (ttm) is 12.60%, and the return on equity stands at 44.74%. The diluted earnings per share (ttm) is reported at $37.05, representing the company's earnings per share adjusted for potential dilution.
As of July 12, 2023, the enterprise value $59.36B based on the closing price reported on the New York Stock Exchange. As of February 6, 2023, there were 27,621,847 shares of the registrant’s common stock, par value of $0.01 per share outstanding.
Recent Developments
- During the year ended December 31, 2022, CMG opened 236 new restaurants, which included 202 restaurants with a Chipotlane.
- During 2022, it also issued shares as part of employee compensation pursuant to the Amended and Restated Chipotle Mexican Grill, Inc. 2011 Stock Incentive Plan (the “2011 Incentive Plan”), which was replaced on May 18, 2022 by the Chipotle Mexican Grill, Inc. 2022 Stock Incentive Plan (the “2022 Incentive Plan”).
- CMG expect to open approximately 255-285 new restaurants in 2023 (including 10 to 15 relocations), which assumes utility, construction, permit and material supply delays do not worsen. It expects that at least 80% of new restaurants will include a Chipotlane.
Recent Financing Activities
- In April 2022 CMG announced the formation of the Cultivate Next Fund, a venture that will make early-stage investments into strategically aligned companies that further Its mission to Cultivate a Better World. The venture fund has an initial size of $50.0 million and will be financed almost entirely by Chipotle. As of December 31, 2022, CMG have made $11.0 million in investments through this fund.1
- CMG's total capital expenditures for 2022 amounted to $479.2 million. During that year, it averaged spending approximately $1.2 million on development and construction costs for each new restaurant.
- Cash used in financing activities was $929.4 million for the year ended December 31, 2022, the change was primarily due to increased treasury stock repurchases of $363.7 million.
- On February 1, 2023, CMG amended their revolving credit facility to replace the reference rate for borrowings from LIBOR to the Secured Overnight Financing Rate plus a credit spread adjustment of 0.10%
Financial Performance Highlights
Quarterly Highlights
Total revenue in the first quarter of 2023 was $2.4 billion, marking a 17.2% increase compared to the first quarter of 2022. The surge in total revenue was primarily propelled by a 10.9% rise in comparable restaurant sales and the opening of new restaurants. In-restaurant sales for the first quarter of 2023 experienced a significant increase of 22.9% in comparison to the first quarter of 2022, while digital sales accounted for 39.3% of the total food and beverage revenue. Net income for the first quarter of 2023 reached $291.6 million, equivalent to $10.50 per diluted share, contrasting with $158.3 million, or $5.59 per diluted share, in the first quarter of 2022.
Annual Performance Highlights
In 2022, the company's sales reached $8,634.65 million showing a significant increase of $1,087.59 million or 14.4% compared to 2021 when sales were $7,547.06 million. The gross profit for 2022 was $2,062 million, reflecting a difference of $355 million or 20.9% compared to 2021's gross profit of $1,707 million. The operating income in 2022 amounted to $1,181.54 million, surpassing 2021's operating income of $824.23 million by $357.31 million or 43.5%. Net income for 2022 stood at $899 million, indicating a significant increase of $246 million or 37.6% compared to 2021's net income of $653 million. The diluted earnings per share (EPS) for 2022 reported as $32.04, representing an increase of $9.14 or 40.2% compared to 2021's diluted EPS of $22.90.
Comparable restaurant sales increased 8.0% for the year ended December 31, 2022. The increase is primarily attributable to an increase in menu prices and, to a lesser extent, an increase in transactions, partially offset by a decrease in group size from the continued resurgence of its in-restaurant business. Comparable restaurant sales represent the change in period-over-period total revenue for restaurants in operation for at least 13 full calendar months. In-restaurant sales increased 26.4% for the year ended December 31, 2022 compared to the year ended December 31, 2021. The increase was primarily due to menu price increases, a shift in consumer behaviors related to COVID-19 from digital sales to in-restaurant sales across the country, and new restaurant openings. In-restaurant sales represent food and beverage revenue generated on-premise and include revenue deferrals associated with Chipotle Rewards.
Digital sales represented 39.4% of food and beverage revenue for the year ended December 31, 2022, compared to 45.0% of food and beverage revenue for the year ended December 31, 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 the Chipotle website, Chipotle app or third-party delivery aggregators and includes revenue deferrals associated with Chipotle Rewards.
During the year ended December 31, 2022, CMG’s restaurant operating costs (food, beverage and packaging; labor; occupancy; and other operating costs) were 76.1% of total revenue, a decrease from 77.4% during the year ended December 31, 2021. The decrease was driven primarily by sales leverage and, to a lesser extent, lower delivery expenses associated with lower volume of delivery transactions, partially offset by wage inflation and higher commodity inflation primarily from avocados, packaging, dairy, beef and chicken.
Diluted earnings per share was $32.04, a 39.9% increase from $22.90, which includes a $0.74 after-tax impact from expenses related to certain legal proceedings, expenses related to the 2018 performance share COVID-19 related modification, corporate restructuring costs, employee separation costs, restaurant asset impairment and closure costs, and other costs, partially offset by an unrealized gain on investments. CMG is not required to pay any dividends and have not declared or paid any cash dividends on common stock. It intends to continue to retain earnings for use in the operation and expansion of their business and to repurchase shares of common stock (subject to market conditions), and therefore do not anticipate paying any cash dividends on their common stock in the foreseeable future.
Cash provided by operating activities was $1.32 billion for the year ended December 31, 2022, compared to $1.28 billion for the year ended December 31, 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 $830.0 million for the year ended December 31, 2022, compared to $522.0 million for the year ended December 31, 2021. The change was primarily associated with a $267.3 million increase in U.S. Treasury security purchases net of U.S. Treasury security maturities and, to a lesser extent, increased capital expenditures of $36.7 million primarily related to costs associated with new restaurant development. Cash used in financing activities was $929.4 million for the year ended December 31, 2022, compared to $548.6 million for the year ended December 31, 2021. The change was primarily due to increased treasury stock repurchases of $363.7 million and, to a lesser extent, $19.1 million of elevated payments of tax withholdings related to stock compensation for the year ended December 31, 2022.
Business Overview
Chipotle Mexican Grill, Inc. is serving responsibly sourced, classically-cooked, real food with wholesome ingredients without artificial colors, flavors or preservatives. Chipotle had over 3,200 restaurants as of March 31, 2023, in the United States, Canada, the United Kingdom, France and Germany and is the only restaurant company of its size that owns and operates all its restaurants. Chipotle is ranked on the Fortune 500 and is recognized on the 2022 list for Fortune's Most Admired Companies. Chipotle boasts a workforce of over 100,000 employees. Chipotle's focus on digital advancements, technological integration, and sustainable business helps it to expanding business every year.
CMG manages its operations across eight regions, which are consolidated into a single reportable segment. However, the company's revenue can be classified into two main categories: food and beverage sales, and revenue derived from delivery services. Although the revenue from the delivery service is relatively low, it plays a role in boosting the overall revenue of the food and beverage segment. In 2022, the revenue from food and beverage amounted to $8,558 million, while the revenue from the delivery service reached $76.7 million. Notably, within the $8,558 million of food and beverage revenue, 39.4% was derived from digital orders facilitated by the delivery service.
CMG offers delivery services to customers in nearly all geographic regions, relying on third-party service providers to fulfill these services. Delivery sales are conducted through different channels: either directly through Chipotle's website or app (referred to as "White Label Sales"), or through non-Chipotle platforms such as the delivery partner's website or app (known as "Marketplace Sales"). For White Label Sales, CMG maintains control over the delivery services and recognizes revenue, including delivery fees, when the delivery partner transfers the food to the customer. Payment for these sales is received directly from the customer at the time of purchase. As for Marketplace Sales, CMG recognizes revenue (excluding delivery fees collected by the delivery partner) when control of the food is transferred to the delivery partner. Payment from the delivery partner is received after the food transfer, and the payment terms are typically short-term in nature.
Seasonal factors cause CMG’s profitability to fluctuate from quarter to quarter. Historically, their 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 their sales. 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 their quarterly sales, such as unexpected publicity impacting their 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 the sales, although, on an overall annual basis, changes in trading days do not have a significant impact.
Other Business Information
Food safety and food-borne illness concerns may have an adverse effect on CMG’s business by decreasing sales and increasing costs. Even with strong preventative controls and interventions, food safety risks cannot be completely eliminated in every restaurant. Any report, legitimate or rumored, of food-borne illness such as E. coli, hepatitis A, norovirus or salmonella, or other food safety issue, such as food tampering or contamination, at one of their restaurants could adversely affect their reputation and have a negative impact on sales.
CMG’s digital business, which accounted for a significant portion of its 2022 total revenue, is also subject to risks. In 2022, 39.4% of its food and beverage revenue was derived from digital orders, which includes third-party delivery and customer pickup in-restaurant and through Chipotlanes. Approximately 19% of its 2022 food and beverage revenue consisted of delivery orders for which they are reliant on third-party delivery companies. These delivery companies maintain control over data regarding their guests who use their platform and over the guest experience. If a third-party delivery driver fails to make timely deliveries or fails to deliver the complete order, CMG’s guests may attribute the bad customer experience to Chipotle and could stop ordering from them.
Company History
Chipotle Mexican Grill, Inc., commonly referred to as Chipotle, is an American fast casual restaurant chain that specializes in made-to-order bowls, tacos, and Mission-style burritos prepared in front of customers. The name "Chipotle" is derived from the smoked and dried jalapeño chili pepper. Founded by Ells, the inaugural Chipotle Mexican Grill opened in 1993 in Denver, Colorado, with a loan of $85,000 from Ells' father. The restaurant experienced immediate success, selling over 1,000 burritos per day within a month. Chipotle's expansion continued, with the opening of its second and third locations in 1995, financed through internal cash flow and an SBA loan. To facilitate further growth, Ells' father made a $1.5 million investment, and additional funds were raised through a board of directors and a comprehensive business plan. In 1998, Chipotle ventured beyond Colorado and inaugurated its first restaurant in Kansas City, Missouri, followed by its entry into the Minnesota market near the University of Minnesota campus in 1999.
In 1998, McDonald's initially made a minority investment in Chipotle. Over the next few years, McDonald's became Chipotle's largest investor by 2001. This significant investment from McDonald's provided Chipotle with the necessary resources to fuel rapid expansion. As a result, the company swiftly grew from 16 restaurants in 1998 to over 500 stores by 2005.2
However, in October 2006, McDonald's made the strategic decision to fully divest from Chipotle. This divestment was part of a broader initiative by McDonald's to shed all non-core business restaurants, which included Chipotle among them.
Following McDonald's divestment, Chipotle took the opportunity to repurchase the few franchises it had previously sold, ultimately transitioning to a 100% company-owned model. With this move, Chipotle gained full control over its operations and brand direction.
In 2007, Chipotle went public, marking an important milestone in the company's journey. The initial public offering (IPO) allowed Chipotle to raise additional capital and further establish its presence in the market. Going public also provided increased visibility and access to the public markets, setting the stage for future growth and expansion opportunities for the company.
Chipotle continued its expansion efforts, which included significant milestones such as opening its inaugural international location in Toronto in 2008. In 2009, Monty Moran was promoted to the position of co-CEO, and during this period, the company received commendations for its remarkable growth and commitment to quality. In fact, Chipotle secured the eighth spot in the list of fastest-growing restaurant chains in 2009, based on year-over-year increases in sales within the United States. The following year, in 2010, Chipotle's impressive performance propelled it to the third position in the same rankings. Furthermore, in 2011, Chipotle received recognition from Consumer Reports, being named the best Mexican fast-food chain.
With an estimated daily customer base of around 750,000 individuals, Chipotle has solidified its position as a popular choice among consumers. In December 2010, the company enlisted the expertise of Chef Nate Appleman to spearhead the development of new cuisine. Appleman, a decorated culinary figure who has received accolades such as the Rising Star Chef from the James Beard Foundation and the title of "Best New Chef" from Food & Wine magazine, even competed on the renowned cooking competition, The Next Iron Chef.
In December 2016, Chipotle made the announcement that co-CEO Monty Moran would be stepping down from his role immediately, leaving Steve Ells as the sole CEO. Approximately eleven months later, in November 2017, Ells himself revealed his decision to step down from the CEO position, marking a significant leadership transition within the company.
In February 2018, Chipotle made a significant announcement regarding a change in leadership. Taco Bell CEO Brian Niccol was appointed as the new CEO, effective from March 5, while Steve Ells, the previous CEO, would retain his position as chairman. This news had a positive impact on Chipotle's stock, which increased by $30.27, representing a 12.04% surge, following the announcement.
In May 2018, Chipotle revealed plans to relocate its headquarters from Denver to Newport Beach, California, specifically in Southern California. As part of this transition, corporate functions that were previously handled in Denver and New York offices would be shifted to Newport Beach or an existing office in Columbus, Ohio. Additionally, in June 2018, the company announced the closure of 65 under-performing restaurants.
In the same year, with Brian Niccol assuming the role of CEO, Chipotle completed its headquarters relocation to Newport Beach, California. Despite facing challenges such as immigration audits, the company has successfully maintained its position as a leading fast-food chain.
In 2020, Steve Ells departed from Chipotle by resigning as chairman and stepping down from the board of directors, marking his departure from the company.
