Chipotle 2007 Annual Report Download

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2007 ANNUAL REPORT
Changing the way the world thinks about and eats fast food.

Table of contents

  • Page 1
    2 0 0 7 A NN U A L R E P O R T Changing the way the world thinks about and eats fast food.

  • Page 2
    ... our raw ingredients and the methods we use to prepare food for our customers. Additionally, we continue to improve our customer service by attracting and retaining better managers and crews within our restaurants. We are making this happen by building a unique corporate culture: one that appeals to...

  • Page 3
    ... the closing prices of the registrant's class A and class B common stock on June 29, 2007, the last trading day of the registrant's most recently completed second fiscal quarter. For purposes of this calculation, shares of class A and class B common stock held by each executive officer and director...

  • Page 4
    ... Market Risk ...Financial Statements and Supplementary Data ...Changes in and Disagreements With Accountants on Accounting and Financial Disclosure ...Controls and Procedures ...Other Information ...PART III Item 10. Item 11. Item 12. Item 13. Item 14. Directors, Executive Officers and Corporate...

  • Page 5
    ...McDonald's initial investment in us, World Foods, Inc. merged with Chipotle Mexican Grill, Inc., a newly-formed Delaware corporation. We completed our initial public offering of class A common stock in January 2006. McDonald's sold a portion of its interest in us in the initial public offering, sold...

  • Page 6
    ...a hand-held point-of-sale terminal in a small number of our restaurants which allows customers to pay with a credit card while waiting in line. We continue to review other equipment and kitchen design modifications to improve the speed of service. By emphasizing speed of service without compromising...

  • Page 7
    ... restaurants helps to set us apart. Our crews use classic cooking methods: they marinate and grill meats, hand-chop produce and herbs, make fresh salsa and guacamole, and steam rice in small batches throughout the day. They work in kitchens that more closely resemble those of high-end restaurants...

  • Page 8
    ... the day. And although they may increase our labor costs, we believe that the benefits we provide to our employees, which include language training and our company car program for longer-term restaurant managers, help us to attract and keep top performing restaurant managers and crew members. In...

  • Page 9
    ... affect our business. Information Systems Chipotle uses an integrated information system to manage the flow of information within each restaurant and between the restaurants and the corporate office. This system includes a point-of-sales local area network that helps facilitate the operations of the...

  • Page 10
    ..., the point-of-sales system is used to authorize, batch and transmit credit card transactions, to record employee time clock information, and to produce a variety of management reports. Select information that is captured from this system is transmitted to the corporate office on a daily basis...

  • Page 11
    ... management systems, financial and management controls and information systems may be inadequate to support our expansion. Managing our growth effectively will require us to continue to enhance these systems, procedures and controls and to hire, train and retain restaurant managers and crew...

  • Page 12
    ... investments in advertising and promotional activity than we originally planned. We may find it more difficult in new markets to hire, motivate and keep qualified employees who can project our vision, passion and culture. Restaurants opened in new markets may also have lower average restaurant sales...

  • Page 13
    ...operating costs, and we believe good managers and crew are a key part of our success. We devote significant resources to recruiting and training our restaurant managers and crew. Increased labor costs due to factors like competition, increased minimum wage requirements, employee benefits and changes...

  • Page 14
    ... to change our culture, any of which could have a material adverse effect on our business and results of operations. Restaurant operators have traditionally experienced relatively high employee turnover rates. Any increase in our turnover rates for managers or crew could be costly. Various states in...

  • Page 15
    ... in family "food away from home" spending could cause our sales, operating results, profits, business or financial condition to decline. If we fail to adapt to changes in customer preferences and trends, we may lose customers and our sales may deteriorate. Competition from other restaurant companies...

  • Page 16
    ... supply relationships are disrupted for any reason, our business, financial condition, results of operations or cash flows could be adversely affected. We currently depend on multiple suppliers for our pork, chicken and beef supplies. Due to the unique nature of the products we receive from our pork...

  • Page 17
    ... our employees. We could suffer losses in this case or similar cases, and any such losses could be significant. In addition, several states in which we operate and the federal government have recently enacted minimum wage increases, and these increases could increase our labor costs. In recent years...

  • Page 18
    ... the ingredients we use or the occurrence of food-borne illnesses or other problems at our restaurants; changes in consumer preferences and discretionary spending; increases in infrastructure costs; fluctuations in supply prices; and tax expenses, impairment charges and other non-operating costs. 14...

  • Page 19
    ...any year. Average restaurant sales or comparable restaurant sales in any particular future period may decrease. In the future, operating results may fall below the expectations of securities analysts and investors, which could cause our stock prices to fall. We believe the market prices of our class...

  • Page 20
    ... class B common stock. Any of these provisions, as well as the provisions of our separation agreement with McDonald's described above under "Restrictions and indemnities in connection with the tax treatment of McDonald's exchange offer could adversely affect us," may discourage a potential acquirer...

  • Page 21
    ... and our telephone number is (303) 595-4000. We lease our main office and substantially all of the properties on which we operate restaurants. For additional information regarding the lease terms and provisions, see Item 7. "Management's Discussion and Analysis of Financial Condition and Results of...

  • Page 22
    ... or capital resources. However, a significant increase in the number of these claims, or one or more successful claims under which we incur greater liabilities than we currently anticipate could materially and adversely affect our business, financial condition, results of operation and cash flows...

  • Page 23
    ... owners of our class B common stock. Dividend Policy We are not required to pay any dividends and have not declared or paid any cash dividends on either class of our common stock. We intend to continue to retain earnings for use in the operation and expansion of our business and therefore do...

  • Page 24
    ...07 4/07 5/07 6/07 7/07 8/07 9/07 10/07 11/07 12/07 Chipotle Mexican Grill, Inc Class A Russell 2000 Chipotle Mexican Grill, Inc Class B S & P SmallCap 600 Restaurants * $100 invested on 1/26/06 in CMG , or $100 invested on 10/5/06 in CMGB stock, or index, including reinvestment of dividends. 20

  • Page 25
    ...Restaurant sales ...Franchise royalties and fees ...Total revenue ...Food, beverage and packaging costs ...Labor costs ...Occupancy costs ...Other operating costs ...General and administrative expenses ...Depreciation and amortization ...Pre-opening costs ...Loss on disposal of assets ...Total costs...

  • Page 26
    ... the change in period-over-period sales for restaurants beginning in their 13th full month of operation. Comparable restaurant sales increases were due mainly to an increase in the number of transactions processed at our registers and menu price increases. We expect our average restaurant sales to...

  • Page 27
    ... potential, develops crew into managers and ensures high operating standards of our restaurants. Throughput. We deliver our best customer service and hottest food when the line moves efficiently. Through effective restaurant staffing and training, we continue to increase the number of customers we...

  • Page 28
    ... our business grows, as we open more restaurants and hire more employees, our restaurant operating costs increase. Restaurant Sales % For the years ended increase December 31, 2007 over 2007 2006 2005 2006 (dollars in millions) % increase 2006 over 2005 Restaurant sales ...Average restaurant sales...

  • Page 29
    ... by an increase in hourly employee wages. In 2006, labor costs as a percentage of revenue decreased primarily due to higher average restaurant sales, partially offset by additional staffing costs as we transitioned to our enhanced restaurant structure. We launched the enhanced restaurant management...

  • Page 30
    ... employees, increase in stock-based compensation expense resulting from the one-time broad based option grant in conjunction with our initial public offering, incremental legal and audit costs due to growth and becoming a public company, costs incurred in conjunction with the secondary and exchange...

  • Page 31
    ... rates but are exempt from federal income taxes. In 2006 interest income increased as a result of investing our incremental cash and cash equivalents in short-term investments with maturities of three months or less. Our incremental cash and cash equivalents resulted from our initial public offering...

  • Page 32
    .... 31 (dollars in millions) Revenue ...Operating income ...Net income ...Number of restaurants opened in quarter ...Comparable restaurant sales increase ... $187.0 $204.9 $211.3 $219.7 $ 12.7 $ 15.9 $ 17.9 $ 15.5 $ 8.0 $ 10.8 $ 11.8 $ 10.8 15 14 30 35 19.7% 14.5% 11.6% 10.1% Seasonal factors cause...

  • Page 33
    ... purchase of food, beverage and supplies some time after the receipt of those items, generally within ten days, thereby reducing the need for incremental working capital to support our growth. While operations continue to provide cash, our primary use of cash is in new restaurant development. As we...

  • Page 34
    ...utility costs and materials used in the construction of our restaurants. Although almost all of our crew members make more than the minimum wage, increases in the applicable federal or state minimum wage will have an impact on our labor costs. Additionally, many of our leases require us to pay taxes...

  • Page 35
    ... monetary liability or financial impact with respect to these matters as of December 31, 2007 and 2006. Once resolved, however, these actions may affect our operating results and cash flows. Sabbatical Liability We offer our employees a sabbatical leave after each ten years of service they complete...

  • Page 36
    ... of the ingredients we use to prepare our food, as well as our packaging materials, are commodities that are affected by weather, seasonality, production, availability and other factors outside our control. We work closely with our suppliers and use a mix of forward pricing protocols under which we...

  • Page 37
    ... help mitigate pricing volatility, and we follow industry news, trade issues, weather, crises and other world events that may affect supply prices. Long-term increases in ingredient prices could adversely affect our future results if we could not increase menu prices at the same pace for competitive...

  • Page 38
    ...STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm ...Consolidated Balance Sheet as of December 31, 2007 and 2006 ...Consolidated Statement of Income for the years ended December 31, 2007, 2006 and 2005 ...Consolidated...

  • Page 39
    ... and Other Similar Benefits Pursuant to FASB Statement No. 43 Accounting for Compensated Absences. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Chipotle Mexican Grill, Inc.'s internal control over financial reporting as of...

  • Page 40
    ...assets: Cash and cash equivalents ...Accounts receivable, net of allowance for doubtful accounts of $237 and $344 as of December 31, 2007 and 2006, respectively ...Receivable-McDonald's Corp...Inventory ...Current deferred tax assets ...Prepaid expenses ...Income tax receivable ...Available-for-sale...

  • Page 41
    CHIPOTLE MEXICAN GRILL, INC. CONSOLIDATED STATEMENT OF INCOME (in thousands, except per share data) Years ended December 31 2007 2006 2005 Revenue: Restaurant sales ...Franchise royalties and fees ...Total revenue ...Restaurant operating costs (exclusive of depreciation and amortization shown ...

  • Page 42
    ... of common stock ...Costs to issue common stock ...Grant of common stock ...Conversion of common stock ...Stock-based compensation ...Stock option exercises ...Excess tax benefit on option exercises, net of utilization of $423 ...Tax sharing arrangement ...Separation from McDonald's ...Comprehensive...

  • Page 43
    ...-for-sale securities ...Franchise acquisitions ...Net cash used in investing activities ...Financing activities Net proceeds from sale of common stock ...Costs of issuing common stock ...Proceeds from McDonald's-tax sharing agreement ...Proceeds from option exercises ...Excess tax benefit on stock...

  • Page 44
    ... otherwise specified) 1. Description of Business and Summary of Significant Accounting Policies Chipotle Mexican Grill, Inc. (the "Company"), a Delaware corporation, develops and operates fast-casual, fresh Mexican food restaurants in 33 states throughout the United States and in the District of...

  • Page 45
    .... The Company has no minimum purchase commitments with its vendors. Certain key ingredients (steak, chicken, pork and tortillas) are purchased from a small number of suppliers. Available-for-Sale Securities Investments classified as available-for-sale securities are carried at fair market value with...

  • Page 46
    ...the location. Fair value of the restaurants was determined using the expected cash flows method of anticipated cash flows through the estimated date of closure. No impairment charges were recognized in 2005. Fair Value of Financial Instruments The carrying value of the Company's financial assets and...

  • Page 47
    ... a separate income tax return basis. Restaurant Pre-Opening Costs Pre-opening costs, including wages, benefits and travel for the training and opening teams, food and other restaurant operating costs, are expensed as incurred prior to a restaurant opening for business. These costs include rent since...

  • Page 48
    ...consist primarily of cash and cash equivalents, available-for-sale securities, and accounts receivables. The Company invests its cash and cash equivalents with financial institutions consistent with its investment policy. The Company's cash and securities balances may exceed federally insured limits...

  • Page 49
    ... to dispose of either their Chipotle franchise or their McDonald's franchise within 24 months after McDonald's ceased to own a majority of the outstanding common stock of the Company, which occurred on October 12, 2006. The acquisitions were accounted for using the purchase method as defined in FASB...

  • Page 50
    CHIPOTLE MEXICAN GRILL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) (dollar and share amounts in thousands, unless otherwise specified) 5. Borrowings Under Line of Credit In August 2007, the Company entered into a revolving line of credit available to support letters of credit issued...

  • Page 51
    ... unrecognized tax benefits. There was no change in the amount of unrecognized tax benefits as a result of tax positions taken during the year or in prior periods or due to settlements with taxing authorities or lapses of applicable statute of limitations. The Company is open to federal and state tax...

  • Page 52
    ... would pay McDonald's for its allocated tax liability or if it benefited from net losses or tax credits of other members of the consolidated tax return. Likewise, McDonald's would compensate the Company if it had a net operating loss or tax credit during the tax year that is used by other members of...

  • Page 53
    ..., the Company granted a one-time grant of 774 options to purchase shares of class A common stock to all of its salaried employees. The exercise price of the options was set at the grant date fair value, the initial public offering price, of $22.00 per share. The options granted vest three years from...

  • Page 54
    ...) (dollar and share amounts in thousands, unless otherwise specified) A summary of option activity as of and for the years ended December 31, 2007, 2006 and 2005 is as follows (in thousands, except per share data): WeightedAverage Exercise Price WeightedAverage Grant Date Fair Value Options...

  • Page 55
    ...rate ...Expected life (years) ...Expected dividend yield ...Volatility ...9. Employee Benefit Plans 4.7% 5.0 0.0% 35% 4.4% to 5.3% 0.1 to 5.0 0.0% 40.0% 3.9% 5.0 0.0% 37.0% In October 2006, effective upon consummation of the Disposition, the Company adopted the Chipotle Mexican Grill 401(k) plan...

  • Page 56
    ... of common area maintenance, property taxes, insurance and various other use and occupancy costs by the Company. In addition, the Company is the lessee under non-cancelable leases covering certain offices. Future minimum lease payments required under existing operating leases as of December 31, 2007...

  • Page 57
    ...do not qualify for sales leaseback accounting because of the Company's deemed continuing involvement with the buyer-lessor due to fixed price renewal options, which results in the transaction being recorded under the financing method. Under the financing method, the assets remain on the consolidated...

  • Page 58
    ...of state laws regarding employee record-keeping, meal and rest breaks, payment of overtime and related practices with respect to its employees. The case seeks damages, penalties and attorney's fees on behalf of a purported class of the Company's present and former employees. The Company is currently...

  • Page 59
    .... However, a significant increase in the number of these claims, or one or more successful claims resulting in greater liabilities than the Company currently anticipates, could materially and adversely affect the Company's business, financial condition, results of operation or cash flows. 14...

  • Page 60
    ... inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2007, based on the framework set forth by the Committee...

  • Page 61
    concluded that, as of December 31, 2007, the Company's internal control over financial reporting is effective based on the criteria established in Internal Control Integrated Framework. Our independent registered public accounting firm, Ernst & Young LLP, has issued an attestation report on the ...

  • Page 62
    ...effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, Chipotle Mexican Grill, Inc. maintained, in all material respects, effective...

  • Page 63
    ... 41,600 30,400 15,000 7,500 The stock appreciation rights have a base price of $102.65 per share, the closing market price of our class A common stock on the grant date, and include a three-year vesting period and seven-year term. No stock appreciation rights vest prior to the third anniversary of...

  • Page 64
    ... statements filed as part of this report are listed under Item 8. "Financial Statements and Supplementary Data." 2. Financial statement schedules No schedules are required because either the required information is not present or is not present in amounts sufficient to require submission of the...

  • Page 65
    ...of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CHIPOTLE MEXICAN GRILL, INC. By: /s/ JOHN R. HARTUNG Name: John R. Hartung Title: Chief Finance and Development Officer Date: February 26, 2008...

  • Page 66
    ..., IVAX Corporation; Private Investor Patrick J. Flynn Director Executive Vice President, Strategic Planning and Acquisitions, McDonald's Corp. (retired) Darlene J. Friedman Director Senior Vice President, Human Resources, Syntex Corp. (retired) STOCK EXCHANGE LISTING New York Stock Exchange Class...

  • Page 67