Chipotle 2005 Annual Report Download

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Table of contents

  • Page 1

  • Page 2
    ... find great sites and outstanding managers to run our restaurants. In 2006, we plan to open 80 to 90 new restaurants. Like our food, our people and operating philosophy are distinct. We hire employees who share a passion for food, and who are eager to contribute to our success by sharing their own...

  • Page 3
    Issaquah - Store #501 - Seattle, WA Evans - Store #1 - Denver, CO

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  • Page 5
    ... 12b-2 of the Act). Yes អ No ፤ The initial public offering of Chipotle Mexican Grill, Inc.'s Class A common stock, par value of $0.01 per share, commenced on January 26, 2006. There was no public market for the Company's common stock prior to that date. As of March 9, 2006 there were 9,103,605...

  • Page 6
    ... ...Management's Discussion and Analysis of Financial Condition and Results of Operations ...Quantitative and Qualitative Disclosures About Market Risk ...Financial Statements and Supplementary Data ...Changes in and Disagreements With Accountants on Accounting and Financial Disclosure ...Controls...

  • Page 7
    ... voting power of our outstanding stock and 65% of our economic interest after the initial public offering). We manage our operations based on four regions and have aggregated our operations into one reportable segment. Financial information regarding our operations, assets and liabilities, including...

  • Page 8
    ...; we've even been able to serve as many as 300 customers an hour at some locations. The natural flow of our store layout, including the floor plan and the design of our serving line, are designed to make the food ordering process intuitive and thus, we believe, more efficient. And we're focused...

  • Page 9
    ... with customers throughout 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 store managers, help us to attract and keep good store managers and crew members...

  • Page 10
    ... we believe can help mitigate pricing volatility, and we follow industry news, trade issues, weather, crises and other world events that may affect supply prices. We do not purchase raw materials directly from farmers or other suppliers. Instead, we train suppliers to purchase ingredients and other...

  • Page 11
    ... major grocery store chains. Many of our competitors have greater financial and other cafe resources, have been in business longer, have greater name recognition and are better established in the markets where our stores are located or are planned to be located. We believe we're well-positioned to...

  • Page 12
    .... There were 489 Chipotle stores as of December 31, 2005, 260 of which have opened since January 1, 2003. We plan to increase the number of our stores significantly in the next three years. This growth strategy and the substantial investment associated with the development of each new store (as well...

  • Page 13
    .... For example, we currently obtain beneficial pricing and/or service levels from certain suppliers and service providers, and pay McDonald's for the costs they incur in administering our 401(k) plan and providing certain health benefits, including workers compensation, for our employees. If McDonald...

  • Page 14
    ..., sales and profit growth would be adversely affected. Our failure to manage our growth effectively could harm our business and operating results. Our plans call for a significant number of new stores. Our existing store management systems, financial and management controls and information systems...

  • Page 15
    ... store base which includes company-operated stores opened for at least 13 months, likely will not continue to increase at the rates achieved over the past several years. Our ability to operate new stores profitably and increase average store sales and comp store sales will depend on many factors...

  • Page 16
    ... and quick-service segments of the restaurant industry also emphasize lower-cost, ''value meal'' menu options, a strategy we don't pursue. Our sales may be adversely affected by these products and price competition. Moreover, new companies may enter our markets and target our customers. For example...

  • Page 17
    ...of these health concerns or negative publicity, or as a result of a change in our menu or dining experience or a temporary closure of any of our stores, could materially harm our business. Changes in food and supply costs could adversely affect our results of operations. Our profitability depends in...

  • Page 18
    ...information systems at our stores vulnerable during periods before August 2004. Notably, without our knowledge, the card processing software we used inadvertently retained credit and debit card ''Track 2'' data, consisting of, among other items, the customer's name, card number, card expiration date...

  • Page 19
    ... inadequately, or our distribution or 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 three or four suppliers for our pork, chicken and beef supplies. It could be more...

  • Page 20
    ... of our 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 store managers and crew. Increased labor costs due to factors like competition, increased minimum wage requirements and employee benefits would...

  • Page 21
    ... we receive from those stores. We expect to need capital in the future, and we may not be able to raise that capital on acceptable terms. Developing our business will require significant capital in the future. Prior to our initial public offering, we funded our operations and growth primarily...

  • Page 22
    ... a system of mandated health insurance and flexible work time and other similar initiatives could, if implemented, adversely affect our operations. In recent years, there has been an increased legislative, regulatory and consumer focus on nutrition and advertising practices in the food industry...

  • Page 23
    ... nutritional content of food products they sell and disclosure and advertising practices. We may also be subject to this type of proceeding in the future and, even if not, publicity about these matters (particularly directed at the quick-service and fast-casual segments of the industry) may harm our...

  • Page 24
    ... could, for example, relate to: • disagreement over corporate opportunities; • competition between us and McDonald's; • management stock ownership; • employee retention or recruiting; • our dividend policy; and • the services and arrangements from which Chipotle benefits as a result...

  • Page 25
    ... liabilities between McDonald's and us for state tax purposes for those states in which we and McDonald's will continue to file tax returns on a combined basis. Future sales or distributions of our shares by McDonald's could depress our class A common stock price. After the initial public offering...

  • Page 26
    ... Should McDonald's exercise their registration rights and sell a large number of shares, the price of our class A common stock might decline. ITEM 2. PROPERTIES As of December 31, 2005, we and our franchisees operated 489 stores. The table below sets forth the locations (by state) of Chipotle stores...

  • Page 27
    ... number of these claims or an increase in amounts owing under successful claims could materially and adversely affect our business, financial condition, results of operation and cash flows. In addition, we're involved in claims relating to the possible theft of our customers' credit and debit card...

  • Page 28
    ... operation and expansion of our business and therefore do not anticipate paying any cash dividends on our common stock in the foreseeable future. Securities Authorized for Issuance Under Equity Compensation Plans As of the effective date of the initial public offering, all options outstanding under...

  • Page 29
    ... our initial public offering of our Class A common stock, $0.01 par value, pursuant to our Registration Statement on Form S-1, as amended (Reg. No. 333-129221) that was declared effective on January 25, 2006. We registered 9,060,606 shares of Class A Common Stock at a maximum offering price of...

  • Page 30
    ..., except per share data). 2005 For the years ended December 31, 2004 2003 2002 2001 Statements of Operations: Revenue Restaurant sales ...Franchise royalties and fees ...Total revenue ...Food, beverage and packaging costs Labor costs ...Occupancy costs ...Other operating costs ...General and...

  • Page 31
    .... Comp store sales reflect positive period-to-period growth due mainly to an increase in the number of customer transactions. In the third quarter of 2005, we began an initiative we call ''through put,'' which focuses our efforts on improving the customer service time by getting the right crew, at...

  • Page 32
    ... store managers and crew, bonuses, taxes and benefits, are the second-largest component of our expenses. We generally have two shifts at most of our stores, which helps us better predict our store payroll expenses and in return provides our employees with more stable and predictable work hours...

  • Page 33
    ... with those activities. Losses on disposal of assets include the costs related to store closures, store equipment retirements and costs to investigate potential store sites that we considered but subsequently rejected. Other Factors Affecting Our Results Benefit for Income Taxes During 2005, we...

  • Page 34
    ... initial public offering, and we'll fund our growth with cash flow from operations, proceeds from the initial public offering and other sources. We also currently benefit from our McDonald's relationship in other ways, such as pricing benefits for some products and services. We will incur increased...

  • Page 35
    ... 2005 2004 2003 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...

  • Page 36
    ... was due to 80 company-operated stores opened in 2005. Average store sales for the trailing 12-month period ended December 31, 2005 increased 5.8% to $1.440 million from $1.361 million for the trailing 12-month period ended December 31, 2004, driven primarily by comp store sales growth of 10.2% that...

  • Page 37
    ... there were fewer store openings in 2005 than in 2004. In October 2005, the Financial Accounting Standards Board (''FASB'') issued FASB Staff Position No. FAS 13-1, Accounting for Rental Costs Incurred during a Construction Period (''FSP 13-1''). FSP 13-1 requires rental costs associated with ground...

  • Page 38
    ... company-operated stores opened in 2003 and $41.7 million was due to comp store sales increases. A substantial majority of the comp store sales growth was due to an increase in the number of transactions and the remainder was driven primarily by menu price increases in certain markets. Average store...

  • Page 39
    ... more business during the academic year. The number of trading days can also affect our results. For example, 2004 was a leap year, which contributed about 3 percentage points of the increase in our restaurant sales in February of that year. Overall, on a year-to-year basis, changes in trading days...

  • Page 40
    ... business relationships with us), in each case as identified in our shareholders' agreement, for an aggregate purchase price of $65.0 million and $38.0 million, respectively. We haven't required significant working capital because customers pay using cash or credit cards and because our operations...

  • Page 41
    ... for the first year, with certain services it has historically provided, including, among others, accounting services, insurance policy coverage and certain welfare plans for our employees. The services agreement became operative on the closing date of the initial public offering, January 31, 2006...

  • Page 42
    ... initial public offering in January 2006, the fair value of the Company will be determined based upon quoted market prices. If we change these estimates in the future, we may be required to record impairment charges for goodwill. Leases We lease most of our store locations. We account for our leases...

  • Page 43
    ...current and preceding years. It requires an asset and liability approach for financial accounting and reporting of income taxes. We recognize deferred tax liabilities and assets for the future consequences of events that have been recognized in our consolidated financial statements or McDonald's tax...

  • Page 44
    ... risk through the investment of our cash. Prior to our initial public offering we operated under an agreement with McDonald's whereby they agreed to pay us interest on any excess cash at the 30-day commercial paper rate plus 50 basis points. Changes in interest rates affect the interest income we...

  • Page 45
    ...buy supplies at current market or spot prices. We've tried to increase, where necessary, the number of suppliers for our ingredients, which we believe can help mitigate pricing volatility, and we follow industry news, trade issues, weather, crises and other world events that may affect supply prices...

  • Page 46
    ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm ...Consolidated Balance Sheet as of December 31, 2005 and 2004 ...Consolidated Statement of Operations for the years ended December 31, 2005, 2004 ...

  • Page 47
    ..., and the related consolidated statements of operations, shareholders' equity and comprehensive income, and cash flows for each of the three years in the period ended December 31, 2005. These financial statements are the responsibility of the Company's management. Our responsibility is to express an...

  • Page 48
    ...000 shares authorized, no shares outstanding as of December 31, 2005 and 2004 ...Convertible Class B common stock, $0.01 par value, 30,000 shares authorized, 26,281 shares issued and outstanding as of December 31, 2005 and 2004 (Note 1) ...Additional paid-in capital ...Tax receivable-McDonald's Corp...

  • Page 49
    Chipotle Mexican Grill, Inc. Consolidated Statement of Operations (in thousands, except per share data) Years ended December 31 2005 2004 2003 Revenue: Restaurant sales ...Franchise royalties and fees ...Total revenue ...Restaurant operating costs: Food, beverage and packaging ...Labor ......

  • Page 50
    Chipotle Mexican Grill, Inc. Consolidated Statement of Shareholders' Equity and Comprehensive Income (in thousands) Class B Tax Accumulated Common Stock Additional Receivable Other (Note 1) Paid-in McDonald's Accumulated Comprehensive Shares Amount Capital Corp Deficit Income Total Balance, ...

  • Page 51
    ...amortization ...Current income tax (benefit) provision ...Deferred income tax (benefit) provision ...Change in valuation allowance ...Loss on disposal of assets ...Bad debt allowance ...Stock-based compensation ...Other ...Changes in operating assets and liabilities: Accounts receivable ...Inventory...

  • Page 52
    ...to Financial Statements (in thousands, except per share data) 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 21 states throughout...

  • Page 53
    ...principally of food, beverages, and supplies, is valued at the lower of first-in, first-out cost or market. The Company has no minimum purchase commitments with its vendors. The Company purchases certain key ingredients (steak, chicken, pork and tortillas) from a small number of suppliers. Leasehold...

  • Page 54
    ... for the years ended December 31, 2005, 2004 and 2003. Fair Value of Financial Instruments The carrying value of the Company's financial assets and liabilities, because of their short-term nature, approximates fair value. Income Taxes Prior to the Company's initial public offering in January...

  • Page 55
    ... costs include wages, benefits and travel for the training and opening teams, and food, beverage and other restaurant operating costs incurred prior to a restaurant opening for business. Insurance Liability The Company maintains various insurance policies for workers' compensation, employee health...

  • Page 56
    ... Issued Accounting Standards In October 2005, the Financial Accounting Standards Board (''FASB'') issued FASB Staff Position No. SFAS 13-1, Accounting for Rental Costs Incurred during a Construction Period (''FSP 13-1''). FSP 13-1 requires rental costs associated with ground or building operating...

  • Page 57
    ...process also resulted in the receivable from McDonald's being reduced by $3,352 in the same period. Lastly, the Company recorded adjustments to deferred tax assets and liabilities for enacted changes in state tax laws, which resulted in an additional $240 expense for the year ended December 31, 2005...

  • Page 58
    Chipotle Mexican Grill, Inc. Notes to Financial Statements (Continued) (in thousands, except per share data) The following table shows the principal reasons for the difference between the effective tax rate and the United States federal statutory income tax rate: Years ended December 31 2005 2004 ...

  • Page 59
    ... return basis. The Company 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...

  • Page 60
    ... 1) on January 1, 2005, compensation expense (as valued on the original grant date under SFAS 123) is recognized equally over the remaining life of the award. Compensation expense related to stock options was $350 ($211 net of tax) for the year ended December 31, 2005. No compensation expense was...

  • Page 61
    ... offering, 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. These options vest three years...

  • Page 62
    ... stock valuation and historical volatilities of competitors whose shares are traded in the public markets and are adjusted to reflect anticipated behavior specific to the Company. 2005 (SARs) 2003 (Options) Risk-free Expected Expected Volatility interest rate . . life (years) ...dividend...

  • Page 63
    ...stock option grants were issued to certain employees of the Company under the McDonald's Stock Ownership Incentive Plan (McDonald's Plan). The options became exercisable equally over four years, expire 10 years from the date of grant and have an exercise price of $29.43 per share of McDonald's stock...

  • Page 64
    Chipotle Mexican Grill, Inc. Notes to Financial Statements (Continued) (in thousands, except per share data) The Company leases office and restaurant space from McDonald's and its affiliates. Rent expense was $404, $306 and $243 for such leases for the years ended December 31, 2005, 2004 and 2003, ...

  • Page 65
    Chipotle Mexican Grill, Inc. Notes to Financial Statements (Continued) (in thousands, except per share data) landlord financing liability was $3,533 as of December 31, 2005. The future minimum lease payments for each of the next five years and thereafter for deemed landlord financing obligations are...

  • Page 66
    Chipotle Mexican Grill, Inc. Notes to Financial Statements (Continued) (in thousands, except per share data) 11. Contingencies In August 2004, the merchant bank that processes the Company's credit and debit card transactions, informed the Company it may have been the victim of a possible theft of ...

  • Page 67
    Chipotle Mexican Grill, Inc. Notes to Financial Statements (Continued) (in thousands, except per share data) The earnings (loss) per share presented reflects the retroactive application of the Reclassification. The quarterly results were impacted by the following unusual or infrequent events: In the...

  • Page 68
    ..., summarized and reported within the time periods specified in the Security Exchange Commission's rules and forms, and that such information is accumulated and communicated to our management, including the Chief Executive Officer, President and Chief Operating Officer and Chief Financial Officer, as...

  • Page 69
    ... later than 120 days after December 31, 2005. Information regarding the Company's Director Code of Conduct, Code of Conduct, Code of Ethics for the Chief Executive Officer, Code of Ethics for the Chief Financial Officer, Code of Ethics for President and Chief Operating Officer and Code of Ethics for...

  • Page 70
    ... Chipotle Stock Appreciation Rights Plan.*†Chipotle 2006 Cash Incentive Plan.*†Chipotle 2006 Stock Incentive Compensation Plan, including the form of Option Agreement and the form of Option Agreement for converted SARs.*†Services Agreement between Chipotle Mexican Grill, Inc. and McDonald...

  • Page 71
    ... 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: March 17, 2006 KNOW ALL PERSONS BY THESE...

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    ... Form 10-K Stockholders may obtain copies of Chipotle's annual report on Form 10-K for the year ended December 31, 2005 (exclusive of exhibits), including our audited financial statements, at no cost by writing to the Corporate Secretary, Chipotle Mexican Grill, Inc., 1543 Wazee Street, Suite 200...

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