CHIPOTLE PAPER
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Transcript of CHIPOTLE PAPER
Executive Summary
Chipotle Mexican Grill (CMG) and Taco Bell are two major companies in the Mexican
fast-food restaurant industry. This paper studies specifically the Mexican fast-food restaurant
industry by comparing both of these competitors. This paper also does an analysis on the financ ia l
statements of both of these companies to show their marketplace value, business operations, and
overall performance. A detailed calculation of ratios and other financial analysis is done to show
which company holds a better position in the market. It looks like Taco Bell is the market leader
when it comes to fast food Mexican food in terms of revenue, production, expansion, and
profitability. It continues to be a strong force in the restaurant industry and has YUM! Brands
backing its every move leaving Chipotle to fend for itself and suffer because it simply can’t
compete with the size of the Taco Bell chain. Based on the results of the ratio and financ ia l
analysis, it can be seen that Taco Bell would be a better investment over Chipotle.
Introduction
Chipotle Mexican Grill, Inc, also known as “Chipotle” incorporated on January 30, 1993
and is based out of Denver, Colorado. It was founded by Steve Ells, who serves as Chairman of
the Board, and Co-Chief Executive Officer of Chipotle Mexican Grill Inc. Chipotle Mexican Grill
restaurants serve items such as burritos, tacos, burrito bowls, and salads. The company provides a
variety of extras such as tortilla chips, guacamole, salsa, in addition with margaritas and beer
(www.reuters.com/finance/stocks). As of May 2015, this publicly traded company owns and
operates more than 1,650 restaurants in the fast casual dining space. The Company uses
ingredients, which include chicken, and steak that is marinated and grilled in its restaurants,
carnitas (seasoned and braised pork), barbacoa (spicy shredded beef) and vegetarian pinto and
black beans. The Company adds its rice, which is tossed with lime juice and freshly chopped
cilantro, as well as freshly shredded cheese, sour cream, lettuce, peppers and onions, depending
on each customer's request. It also uses various herbs, spices and seasonings to prepare its meats
and vegetables. The Company's restaurants serve only meats that were raised without the use of
non-therapeutic antibiotics or added hormones which are branded as responsibly raised
(www.reuters.com/finance/stocks). Ells’s vision is that food served fast doesn’t have to be low
quality and that delicious food doesn’t have to be expensive, which is the foundation on which
Chipotle is based. This visionary thinking has led Chipotle to extraordinary accomplishments, such
as growing from a single restaurant to over 2,000 and serving more responsibly-raised meat than
any other restaurant company. This thinking has also resulted in Mr. Ells remaining a principa l
driving force behind making Chipotle innovative and striving for constant improvement, as he
continues to provide important leadership to our executive officers, management team, and Board.
He is also one of the largest individual shareholders of our company
(www.wikiinvest.com/stock/chipotle).
Chipotle has approximately over 5,000 employees and over 1,000 shareholders as of this
year (mergentonline.com). Chipotle is the market leader in the Mexican-style fast casual dining
sector with restaurants not only in the U.S. but also in Canada. U.K. France, and Germany. This
company also operates nine ShopHouse Southeast Asian Kitchen restaurants, serving casual, Asian
cuisine, and is an investor in a consolidated entity that owns and operates two Pizzeria Locale
restaurants, a fast casual pizza concept. However, for this project we are looking at Chipotle
Mexican Grill solely and not its other entities. The goal of this project is to conduct a financ ia l
analysis on Chipotle and its major competitor (s).
Management discussion
One of the first things we want to focus on is the size of this particular industry. Some of
the major companies in this industry include McDonalds Corporation, Panera Bread, and Yum!
Brands Inc., which operates through Pizza Hut, KFC, and Taco Bell Corporation. This industry
focuses specifically on quick service fast food dining. While other restaurant chains can be a part
of this industry, we want to look directly at those who pose a major threat to Chipotle by being
direct competitors. (www.investopedia.com).
Another aspect of running a successful business in the restaurant industry is food safety
and cleanliness. Chipotle has had to ensure that it has followed all safety protocols making sure
their food is properly contained after food-borne illness, E.coli surfaced in their restaurants early
in 2015. They have suffered recent market share loss due to their restaurants making headlines for
illnesses caused by E. Coli in their food, initially in Washington and Oregon, but then spreading
to 12 other states. This has caused a negative impact for shareholders because profits declined
quickly and loyal customers also quickly left the chain. Negative publicity did not aid in bringing
customers into the stores and company stakeholders knew they would have to do damage control
quick. Chipotle had to spend more money than it lost to ensure all food safety measures were up
to par after their sudden E. Coli exposure and had to develop a marketing plan to bring back their
customers. Chipotle Mexican Grill (CMG) posted a decline in its same-store sales growth of
29.7%. It was lower than analysts' estimate of 28.6%. The decline in same-store sales growth was
mainly due to a decline in traffic. It was down by 21.1%. After the poor performance of -36.4% in
January, the company showed some improvement. In February, its same-store sales growth was -
26.1%. In March 2016, four of its employees in Boston were sick. Following Chipotle’s protocol,
the employees didn’t report for work. According to its enhanced food safety procedures, the
company temporarily closed. The incident circulated in the news as another outbreak. In March,
the same-store sales growth was -26.4%. To win back its customers, the company implemented
several enhanced food safety measures and conducted aggressive marketing and promotiona l
campaigns. Under the “Rain Check mobile promotion,” customers redeemed over 6 million free
burritos in February and March. The mobile offer was followed by direct mail promotions. More
than 20 million households were contacted. It’s important to note that 17.5% of the mail
promotions were redeemed. Despite all of these efforts, the first three weeks of April showed
mixed results. The same-store sales growth was -26%. In 1Q16, Panera Bread and Brinker
International recorded same-store sales growth of 4.7% and -3.6% (Nathan, R. (2016, May 1).
Chipotle reported its 1Q16 results on April 26, 2016, after the Market closed. The company’s
revenues were at $834.5 million—a decline of 23.4% from 1Q15. Its EPS (earnings per share)
declined by 122.2% to $0.88 (Nathan, R. (2016, April 28). Since the E. coli outbreak in October
2015, Chipotle’s share price has been falling. Year-to-date, Chipotle’s share price is down by
13.1%. During the same period, the share prices of Chipotle’s peers Panera Bread, Shake Shack,
and Brinker International have returned 9.5%, -5.3%, and -4.3%.
Since the E. coli outbreak, the traffic at its restaurants fell. Customers are skeptical about
the quality of Chipotle’s food. Being in a brick-and-mortar business, restaurants lose revenue when
they close locations, even temporarily. Chipotle closed all of its restaurants on February 8, 2016.
It held a national all-company meeting. This also reduced Chipotle’s revenue. Although Chipotle
implemented enhanced food safety measures, analysts expect the recovery to take time. In 2016,
they estimate that Chipotle will post revenue of $4.3 billion. This represents a decline of 5.3%
from $4.5 billion in 2015 (Nathan, R. (2016, April 28).
From 2011 through 2014, the company grew its annual sales consecutively at an average
rate of 22%. In 2015, revenue continued to rise quarterly for the first three quarters. Even with the
food contamination news breaking out in August, Chipotle still finished that quarter with more
sales, though at a much slower growth rate. Chipotle's 22% sales growth rate dwarfs the 1.84%
rate for its peers and the 4.18% average rate for the industry. Even as it tries to reassure customers
of its food safety, Chipotle can still expect some growth, however small it may be (Wei, J. (2015).
2015 was the most challenging year in Chipotle’s history . The events of the year impacted their
performance in terms of market share, market price, profits, losses, and their reputation. Prior to
the challenges encountered in 2015, Chipotle was on track for another year of growth. Through
the third quarter, they had seen healthy growth in virtually every measure, with revenue up 15.3%
on the opening of 150 new restaurants and comparable restaurant sales increases of 5.5%. This led
to a 25.6% increase in diluted earnings per share through the first nine months of 2015.
Unfortunately, the fourth quarter weighed heavily on the full year results, and overall sales for the
year were up only 9.6%, and Earnings per Share increased 6.9% to $15.10 (Chipotle Investor
Relations. (2016, February 05).
Taco Bell as a competitor to Chipotle Mexican Grill
Taco Bell is the number one Mexican fast food chain in the U.S. with over 6,400 locations.
Taco Bell also has international locations in over 20 countries including 7 units in India. Parent
YUM! Brands also operates KFC and Pizza Hut. The restaurant features a wide range of Mexican
style menu items including tacos, burritos, nachos, quesadillas, etc. YUM! Brands Inc., through
its subsidiaries operates quick service restaurants. The first Taco Bell restaurant was opened in
1962 by Glen Bell in Downey, California. In 1964, the first Taco Bell franchise was sold. Taco
Bell delivered a fantastic 2015 surpassing $9 billion in system sales. Taco bell is setting an industry
standard with product development, brand positioning, social engagement and advertising. One of
their most exciting products, the Quesalupa, was launched this year during the infamous Super
Bowl 50. They also introduced a loyalty program in November to increase brand awareness, which
rewards social behavior. They are also focused on core value messaging to drive transactions.
There has been tremendous sales growth for Taco Bell over the last 3 years. There has been
8% sales growth in 2015 when compared to 4% for both 2013 and 2014. Although YUM! Brands
did not do as well as they would have liked to in 2013 with a decline in their EPS of 9% and
worldwide operating profit decline of 10%, Taco Bell still led the way by delivering restaurant
margins of 19% over their other concepts, Pizza Hut and KFC. Taco Bell was also named marketer
of the year and had the highest overall operating results in the company. Taco bell contributed to
two-thirds, or approximately $451 million of Yum’s 2013 operating profit (Wong, V. (2014,
February 6). Making a Run Inside the Border: Taco Bell’s Huge U.S. Growth Plans).
In 2014, system sales and operating profit increased by 4% and 5%. Same-store sales
increased 3% and the Division opened 236 new units. In 2014, the decrease in Company sales and
Restaurant profit associated with store portfolio actions was driven by refranchising, partially
offset by net new unit growth. Significant other factors impacting Company sales and/or
Restaurant profit were commodity inflation and higher food and labor costs due to the launch of
breakfast. A major reason operating profit increased was due in part for their breakfast roll out.
The chain took a high-stakes gamble in the spring when it rolled out the breakfast menu nationa lly.
Instead of conventional fast-food breakfast sandwiches, it rolled out items such as Breakfast Tacos
and Breakfast Burritos. It ran humorous ads featuring dozens of men appropriately named Ronald
McDonald, who said they preferred Taco Bell's breakfast. Taco Bell's U.S. and global same-store
sales grew 2% in the quarter and were expected to increase in the upcoming year as the chain
discussed launching mobile ordering. (Horovitz, Bruce. "Yum: Pizza Hut Off; Taco Bell up."
Usatoday.com).
In 2015, they continued to build their day-part breakfast where sales are growing at twice
the rate of businesses as a whole. They grew their breakfast transactions by 6% in the fourth
quarter. They had a record number of U.S. openings in 2015 and expect even more growth in
2016). Taco Bell’s same store sales jumped 6% year-over- year, while its operating margin
climbed to 29.5% from 24.8% (Ramer, L. (2015, July 15). Yum Stock: Earnings Show Slow-But-
Steady Improvement). Taco Bell Division system sales increased 7%, driven by 3% unit growth
and 4% same-store sales growth. Taco Bell Division also opened 62 new restaurants; 81% of these
new units were opened by franchisees. Company sales also rose from $344 million in 2014 to $366
million in 2015. Taco Bell is also planning on opening 300 global new restaurants in 2016 paving
the way for higher earnings, market share, and definitely higher sales growth
(yum.com/annualreport).
Analysis of the Financial Statements- Chipotle Mexican Grill
Typically, Chipotle ends its fiscal year on December 31 of each year. The company also
does quarterly reporting along with annual reporting to keep stockholders and investors aware of
the company’s performance, areas of weakness and strength. Both forms of reporting make it
easier for problems to be addressed should a decline in profits or EPS become apparent due to
market place inflation, market demand, seasonality, marketing, or any other operating function.
Balance Sheet
By analyzing the balance sheet, we noticed that current assets for Chipotle increased from
2013 from $653,095 to $859,511 2014. Unfortunately, they did decrease by 2015 to $814,647.
This could be a result of the negative publicity from the E.coli outbreak, which led to declining
sales. It also appears as though total assets have increased from 2013 into 2015. Assets and
liabilities have a cause and effect relationship as such total current liabilities and total liabilit ies
also increased due to assets increasing. This was because more stores have opened since 2013,
causing Chipotle to borrow more to alleviate operating costs. Shareholders equity has also grown
since 2013, with a significant jump from 2013 to 2014, but a light increase for 2015 as the negative
publicity, and temporary restaurant closings surrounding Chipotle during this time did not help it
gain any traction in positive sales/ market place value (Ref. Page 48 10K Report 2015)
Taco Bell’s balance sheet was consolidated with YUM! Brands to show a more simplif ied
picture of the earnings. Both current assets, current liabilities and total liabilities increased from
2014 to 2015. This was due in part to the growth YUM! Brands achieved with Pizza Hut, KFC,
and Taco Bell. They opened new stores not only in the U.S., but expanded their restaurant chains
to different countries, thereby borrowing more and becoming a more valuable brand (Ref. Item 6
Proxy).
Income Statement
Chipotle’s net income has increased from 2013 to 2015 from $327,438 to $475, 602. Their
earnings per share have also increased by almost $5.00 as in 2013 it was $10.58 to 2015 $15.30.
Their food, beverage, and labor costs have all risen, but this is all attributed to inflation and rising
costs in the marketplace. Their total operating expenses and income from operations have also
increased due to more locations opening, more marketing efforts. In 2015, increased revenue was
primarily driven by new restaurant openings. Revenue from restaurants not yet in the comparable
base contributed $390.4 million of the increase in sales in 2015, of which $183.6 million was
attributable to restaurants opened during the year. Revenue in 2015 was $4,501,223 when
compared to $3,214,591 in 2013. In 2014, the significant factors contributing to our increases in
revenue were comparable restaurant sales and new restaurant openings. Food, beverage and
packaging costs decreased as a percentage of revenue in 2015 primarily due to the benefit of the
nation-wide menu price increases taken in the second quarter of 2014 and relief in dairy and
avocado costs. The decrease was partially offset by inflation on beef costs. Food, beverage and
packaging costs increased as a percentage of revenue in 2014 due to inflation on many food items,
primarily beef, avocados, and dairy. The increase was partially offset by the impact of menu price
increases. Labor costs as a percentage of revenue increased in 2015 due primarily to wage infla t ion
and an increased number of crew and managers in each of our restaurants caused by scheduling
inefficiencies occurring earlier in the year. Based on expected lower average restaurant sales, we
expect labor costs as a percentage of revenue to increase for 2016. Labor costs as a percentage of
revenue decreased in 2014 due primarily to the benefit of higher average restaurant sales, includ ing
the impact of menu price increases, partially offset by an increased number of managers and crew
in our restaurants and normal wage inflation (Ref. Page 49 10K Report 2015)
We have to focus yet again on a consolidated income statement for Taco Bell under YUM!
Brands. Net income has increased for this brand as a whole over the course of three years, which
can be attributed to Taco Bell doing so well not only locally but worldwide as well. Earnings per
share have also risen from $2.41 to 2.97 in 2015. Their total revenues have not been as steady with
an increase from 2013 to 2014, but a slight drop in 2015. This was mainly due to Pizza Hut not
doing as well as they had hoped. Their operating profit has increased over the last three years,
while their total costs/expenses rose from 2013 to 2014, but declined heavily in 2015. This is a
good thing because they must have learned how to manage their expenses adequately, while still
ensuring that they gained operating profit (Ref. Item 6 Proxy).
Statement of Cash Flow
The overall cash flow for Chipotle Mexican Grill has increased from 2013 to 2015 as net
income increased from $327,438 to $475,602. Net cash provided by operating activities has also
increased slightly from 2014 to 2015 from $682,067 to $683,316. Net cash used in financ ing
activities decreased heavily from 2013 to 2014, but managed to increase from 2014 to 2015. This
may have been a result of expansion and additional costs associated with market place growth. Net
cash used in investing activities increased from 2013 to 2014, but decreased in 2015. Chipotle may
have pulled back some investing efforts over the course of three years due to budget restraints,
market demand and possibly labor costs (Ref Page 52 10K Report 2015).
YUM! Brands has seen increasing cash flow in the last three years, which is a positive sign
for the company as it continues to expand globally and roll out new marketing plans for each of
its concepts. Net income increased from $1,064 to 1,298 (in millions). Surprisingly, net cash from
operating activities was $2,139 in 2013 but decreased in 2014. However, it was back at $2,139 in
2015. This may have been a result of the company understanding and analyzing why the decline
occurred in the first place. Pizza Hut and KFC were not performing so well outside of the U.S. and
were bringing the overall profit down. Once the company was able to see where it needed to invest,
they began to keep their efforts focused on Taco Bell by launching new marketing strategies. As
such, they launched their breakfast menu and slowly began to see profits rise, which led to the
2015 overall net cash increase. Net cash used in investing activities saw a sharp rise in 2014 but
declined in 2015. This may be due in part to the loss they suffered in 2014 with below than
expectations performance. Net cash used in financing activities increased from 2014 to 2015
slightly, which means YUM did not want to invest too much and put too much at stake and be at
a loss so they strategically invested this time around as opposed to 2013 where they suffered by
investing so much (Ref. Item 6 Proxy)
Statement of Shareholders’ Equity
Chipotle has increased its value over the last three years with shareholders’ equity rising
from 35,245 shares of stock to 35,790 in 2015. More people have invested into the Chipotle name
and have caused share prices to rise. Each share also went from $352 in 2013 to $358 in 2015.
While this increase may be minimal, it still adds up to a larger number when combined with the
number of shareholders. Chipotle built a name for itself and was at the top of the food chain in
2014-2015 before the E. coli outbreak enticing investors to come and invest. (Ref. Page 51 10K
Report 2015)
Taco Bell was consolidated with YUM! Brands for this as well. It appears as though for
the brand as a whole shares have decreased since 2013. Total shareholders’ equity has also declined
with $1,604 in 2014 and $969 in 2015. This may be because YUM! Brands did not do as well with
Pizza Hut in 2013 and 2014, which caused the company as a whole to have lower shares. Their
shares will possibly be higher this year as their marketing for all three concepts has been top notch
and they have done exceptionally well so far this quarter according to their quarterly reports. (Page
57 10K Report 2015)
References
I. (2015, May). Who are Chipotle's (CMG) main competitors? Retrieved May 02,
2016, from http://www.investopedia.com/ask/answers/052015/who-are-chipotles -
cmg-main-competitors.asp
II. Nathan, R. (2016, May 1). Why Did Chipotle’s 1Q16 Same-Store Sales Growth
Decline? Retrieved May 2, 2016, from https://sg.finance.yahoo.com/news/why-
did-chipotle-1q16-same-050635199.html
III. Nathan, R. (2016, April 28). Chipotle Reported a Loss for the First Time in Its
History. Retrieved May 2, 2016, from http://marketrealist.com/2016/04/chipot le -
reported-loss-first-time
history/?utm_source=yahoo&utm_medium=feed&utm_content=toc-
1&utm_campaign=chipotles-1q16-store-sales-growth-decline
IV. Wei, J. (2015). Chipotle's 3 Key Financial Ratios (CMG). Retrieved May 02, 2016,
from http://www.investopedia.com/articles/active-trading/021916/chipotles -3-
key-financial-ratios-cmg.asp
V. Chipotle Investor Relations. (2016, February 05). Retrieved May 02, 2016, from
http://ir.chipotle.com/phoenix.zhtml?c=194775&p=irol-sec
VI. Horovitz, Bruce. "Yum: Pizza Hut Off; Taco Bell up." Usatoday.com. Usa.today,
16 July 2014. Web. 08 May 2016.
<http://www.usatoday.com/story/money/business/2014/07/16/yum-earnings-taco-
bell-kfc-pizza-hut-fast-food/12749581/>.
VII. Wong, V. (2014, February 6). Making a Run Inside the Border: Taco Bell’s Huge
U.S. Growth Plans. Retrieved May 08, 2016, from
http://www.bloomberg.com/news/articles/2014-02-06/yum-brands-has-big-plans-
for-taco-bell-in-the-u-dot-s
VIII. Ramer, L. (2015, July 15). Yum Stock: Earnings Show Slow-But-Steady
Improvement. Retrieved May 08, 2016, from
http://investorplace.com/2015/07/yum-stock-earnings-china-taco-
bell/#.Vy_9Yo7mrIs
IX. http://www.yum.com/annualreport/pdf/YUM2016_Combined-Proxy-10K.pdf
X. http://ir.chipotle.com/phoenix.zhtml?c=194775&p=irol-
SECText&TEXT=aHR0cDovL2FwaS50ZW5rd2l6YXJkLmNvbS9maWxpbmcueG1
sP2lwYWdlPTEwNzEzNjM4JkRTRVE9MCZTRVE9MCZTUURFU0M9U0VDVEl
PTl9FTlRJUkUmc3Vic2lkPTU3