This summary is based on the third quarter fiscal 2008 earnings call conducted by Chipotle Mexican Grill, Inc. (CMG) on October 22, 2008.
Management:
Investor Relations: Chris Arnold
Founder, Chairman and Chief Executive Officer: Steve Ells
President and Chief Operating Officer: Monty Moran
Chief Financial Officer: John R. Hartung
Key Investors Issues
- EPS lipped to 59 cents per share compared to 62 cents per share a year ago.
- Profit slipped to $19.5 million compared to $20.6 million last year.
-Revenue increased nearly 19% to $340.5 million.
Third Quarter Highlights
The company increased revenue by 18.8% over the prior year to $340.2 million.
- These increases were driven by new restaurants, a 3.1% increase in comparable store sales.
- The comparable store sales increase was driven by the menu price increase impact of around 4%. The company did not take any additional menu price increases, so the entire 4% menu price increase was a rollover from increases in prior quarters.
- While sales held up well in July, they decelerated in August to the low single digits and have continued at that level into September and into October so far.
Food, beverage and packaging costs were 33%, up 90 basis points from 32.1% in the third quarter of 2007.
Annual pricing agreements for rice, corn and soy have recently been renewed at levels higher than last year, which will cause food costs to creep toward 34% in the fourth quarter before any menu price increases.
- The company would expect food inflation in the mid single-digits next year. The 33% food cost in the third quarter creeping toward 34% in the fourth quarter and mid single-digit inflation in 2009 would cause food costs to hit the 35% to 36% range in 2009 if the company didn''t increase menu prices.
- Labor costs were 26.3% of revenue, which was flat compared to the same quarter last year. Despite decelerating comparable store sales, deleveraging in management and crew labor was offset by better workers comparison experience for the quarter.
- Occupancy costs were $24.5 million or 7.2% of revenue, up from 6.9% last year.
- Other operating costs were 12.2% of revenue, up from 11.6% in the third quarter of 2007.
- G&A expenses were $22.6 million or 6.6% of revenue, down 10 basis points from the same quarter last year. The expenses for first-ever all Managers conference held in August were offset by a reduction in 2008 bonus accrual.
- Income from operations was $31.1 million, which is down 1.1% from the prior year.
- The company ended the quarter with a cash balance of $212 million. With the onset of the financial crisis and a lack of confidence in traditional liquid bank-held investments, the company became increasingly more conservative with investing cash, investing much of it in U.S. Treasuries to ensure capital preservation. Combined with lower interest rates in general compared to last year, interest income declined 30 basis points to $931,000. For the year interest income is $3.2 million, also down 30 basis points from the same period last year.
- Effective tax rate increased to 39% for the quarter. The tax rate impact in the fourth quarter will remain dependent on the stability of the financial sector and confidence in investing in tax-exempt securities.
- The company opened 20 new restaurants, which included Toronto opening.
- Shares outstanding as of quarter end decreased to 33.17 million as a result of the impact of the lower average share price on stock options included in the fully shares calculation.
Year-to-Date Financial Highlights
- Revenue increased 23.9% to $986.6 million. These increases were driven by new restaurants, a 6.6% comparable store sales increase for the year.
- The company is up 60 basis points to 32.5% over the prior year, increases primarily due to avocados, chicken and cheese, with avocados increasing more than expected in the quarter as the supply of California avocados ran out sooner than usual.
- The company saw 30 basis points of labor leverage and as it has lapped labor matrix early this year, the company continues to expect no labor leverage the remainder of the year.
- Occupancy costs are up 20 basis points to 7.1%.
- Other operating costs are 12.4% of revenue, up from 12.1% in 2007. While other operating is down 40 basis points from last quarter, driven by reduced marketing and promotional expenses, it is up over last year due to increased utility and higher maintenance and repair costs.
- Income from operations was $96.2 million, up 19.1% from last year.
Fourth Quarter 2008 Outlook
The company has planned a fourth quarter incremental price increase of about 6%, which began rolling out to individual markets last week and will continue through the end of the fourth quarter. The overall effective price increase in the fourth quarter, including the rollover of increases in previous quarters, is expected to be about 6% to 7%. This incremental price increase is not intended and will not fully offset food inflation in Q3, Q4 and into 2009. In fact, a 6% incremental price increase, when fully in effect, will only cover about 200 basis points in higher food costs. It can result in restaurant-level margins in the 19% to 20% range.
Fiscal 2008 Outlook
