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Chipotle's CFO: Lower income tax rate will save $40-$50 million in 2018

February 6, 2018

Chipotle Mexican Grill reported today that its revenue increased 7.3 percent to $1.1 billion during its fourth quarter for the year ended Dec. 31, 2017. CFO Jack Hartung also said today that he's pleased that the tax law change will result in Chipotle saving $40 to $50 million in 2018.

The chain's 2017 effective tax rate was 36.1 percent, a decrease of 4.7 percent from 2016, due to the enactment of the Tax Cuts and Jobs Act, and a lower state tax rate. This decrease was partially offset by federal credits on overall higher pre-tax operating income. The Tax Cuts and Jobs Act reduced the federal corporate income tax rate to 21 percent starting in 2018. As a result, the chain recognized a $6 million benefit related to the remeasurement of its deferred tax position at the lower rate.

"We plan to invest more than one-third of these tax savings in our people, including by making all of our restaurant managers and crew eligible for a one-time cash bonus, awarding one-time stock bonuses to a broad group of staff employees, and enhancing a number of other benefits such as parental leave and short-term disability, all to help position Chipotle as the employer of choice in the restaurant industry," Hartung said in a company press release. "We're excited to share further details about these programs in the coming days."

Overview for the fourth quarter of 2017 as compared to the fourth quarter of 2016 included:

• Comparable restaurant sales increased 0.9 percent for the quarter.
• Restaurant level operating margin was 14.9 percent, an increase from 13.5 percent.
• Net income was $43.8 million, an increase from $16.0 million.
• Diluted earnings per share was $1.55, including a benefit of $0.21 per share resulting from changes in U.S. tax law, compared to $0.55 in the fourth quarter of 2016
• Opened 38 restaurants.

Overview for the year ended Dec. 31, 2017 as compared to the prior year:

• Revenue increased 14.7 percent to $4.5 billion.
• Comparable restaurant sales increased 6.4 percent.
• Restaurant level operating margin was 16.9 percent, an increase from 12.8 percent.
• Net income was $176.3 million, an increase from net income of $22.9 million.
• Diluted earnings per share was $6.17, including a benefit of $0.21 per share resulting from changes in U.S. tax law, compared to $0.77 in 2016.
• Opened 183 new restaurants and closed or relocated 25, including 15 ShopHouse Southeast Asian Kitchen Restaurants

"During 2017, we have made considerable changes around leadership, operations, and long-term planning and it is clear that, while there is still work to be done, we are starting to see some success," Steve Ells, founder, chairman and CEO, said in a company press release. "2018 marks the 25th anniversary of Chipotle, and I am encouraged by the dedication all of our guests and employees have to this brand. Our focus this year will be to continue perfecting the dining experience, enhancing the guest experience through innovations in digital and catering, and reinvesting in our restaurants. We are making good progress on our search for a new CEO who can improve execution, drive sales and enable Chipotle to realize our enormous potential."

Ells announcedin November that he would be leaving the CEO role.

Net income for the full year 2017 was $176.3 million, or $6.17 per diluted share, compared to net income of $22.9 million, or $0.77 per diluted share, for the prior year.

For 2018, management is expecting the following:

• Comparable restaurant sales increases in the low single digits.
• 130-150 restaurant openings.
• An estimated effective tax rate for the full year of between 30 percent and 31 percent, which includes an underlying effective tax rate of about 27 percent to 28 percent, plus the effect of prior year employee equity plans which may either expire without vesting (resulting in no tax deduction), or vest at lower realized values (resulting in a lower tax deduction). While we expect future underlying effective tax rates in the 27 percent to 28 percent range, these rates will be further impacted by volatility due to accounting for taxes associated with previous and future stock-based compensation awards as well as a deferred tax asset related to market-based performance stock awards which may not vest.