News

Chipotle posts positive Q1 earnings, full-year outlook

April 25, 2018

Chipotle Mexican Grill Inc. has reported financial results for its first quarter ended March 31, and for the first time in recent memory, the results were encouraging.

In a press release, the company provided a year-over-year view of performance:

• Revenue increased 7.4 percent to $1.1 billion.
• Comparable restaurant sales increased 2.2 percent (net of 50 basis points related to Chiptopia revenue deferral from 2017).
• Restaurant level operating margin increased to 19.5 percent from 17.7 percent.
• Net income was $59.4 million, an increase from $46.1 million.
• Diluted earnings per share was $2.13, a 33.1 percent increase from $1.60.
• The company opened 35 new restaurants and closed two existing restaurants.

A statement from CEO Brian Niccol indicted that he views the results as just the beginning of a turnaround:

While the company made notable progress during the quarter, I firmly believe we can accelerate that progress in the future.

We are in the process of forming a path to greater performance in sales, transactions, margins and new restaurants.

This path to performance will be grounded in a strategy of executing the fundamentals while introducing consumer-meaningful innovation across the business.

It will also require a structure and organization built for creativity, action and accountability.

Finally, Chipotle will have a culture that is centered on running great restaurants, putting the customer first, innovating for today and tomorrow, supporting each other and delivering on commitments.

Q1 results

Revenue for the quarter was $1.1 billion, up 7.4 percent from the first quarter of 2017. The increase in revenue was driven by new restaurant openings and, to a lesser extent, by growth in comparable restaurant sales.

Comparable restaurant sales increases were attributable to an increase in average check, including a 4.9 percent benefit from menu price increases at almost all of the company's restaurants over the past 12 months, partially offset by fewer transactions.

The company opened 35 new restaurants during the quarter and closed two restaurants, bringing the current total to 2,441.

Food costs were 32.4 percent of revenue, a decrease of 140 basis points compared with Q1 2017. The benefits from menu price increases and decreased paper cost and use were partially offset by higher costs associated with preservative-free tortillas.

Restaurant-level operating margin in Q1 was 19.5 percent, an improvement of 180 basis points from 17.7 percent in the first quarter of 2017. This improvement was driven by lower marketing and promotional expense, and by comparable restaurant sales increases, partially offset by wage inflation at the crew and manager level.

General and administrative expenses were 6.7 percent of revenue for Q1, an increase of 20 basis points over Q1 2017, primarily due to increased headcount and higher bonus expenses.

Increases were partially offset by lower stock-based compensation expense as a result of forfeitures of stock during the quarter, and by making the annual stock grant later in Q1 2018, compared with Q1 2017.

The company's effective tax rate was 36.9 percent, of which 810 basis points related to discrete items — including 700 basis points for the write-off of deferred tax assets related to prior years' equity grants, which either expired without vesting, or vested at a lower value.

Net income was $59.4 million, or $2.13 per diluted share, compared with net income of $46.1 million, or $1.60 per diluted share, in Q1 2017.

The company's board of directors has approved the additional investment of up to $100 million, exclusive of commissions, to repurchase shares of common stock.

This repurchase authorization, in addition to up to approximately $50.2 million available as of March 31 under a previously announced repurchase authorization, may be modified, suspended, or discontinued at any time, the company said.

Outlook

For the full year 2018, management expects:

• Comparable restaurant sales increases in the low single digits.
• Between 130 and 150 new restaurant openings.
• An estimated effective full-year tax rate of approximately 32.5 percent to 33.5 percent, with quarterly tax rates of approximately 29 percent in the second and third quarters, and up to as much as 38.5 percent in the fourth quarter due to the additional anticipated write-off of deferred tax assets associated with stock-based compensation awards.