Chipotle 2005 Annual Report Download - page 19

Despite the changes we’ve made to our information systems as a result of this matter, we still need
to periodically upgrade our software. We rely on commercially available software and other
technologies to provide security for processing and transmission of customer credit card data. During
2005, a significant portion of our sales were attributable to credit card transactions, and we expect
credit card usage to increase. Our systems could be compromised in the future, which could result in
the misappropriation of customer information or the disruption of our systems. Either of those
consequences could have a material adverse effect on our reputation and business or subject us to
additional liabilities. We engaged Internet Security Systems (‘‘ISS’’) to perform our Visa Payment Card
Industry audit. ISS submitted our full Report on Compliance (‘‘ROC’’) on December 30, 2005. The
ROC stated that ISS felt Chipotle had controls that were either ‘‘in place’’ or ‘‘in place with
compensating controls’’ for every section of the ROC. We are awaiting a response from Visa either
accepting our ROC or requesting further clarification.
Failure to receive frequent deliveries of higher-quality food ingredients and other supplies could harm our
operations.
Our ability to maintain our menu depends in part on our ability to acquire ingredients that meet
our specifications from reliable suppliers. Shortages or interruptions in the supply of ingredients caused
by unanticipated demand, problems in production or distribution, food contamination, inclement
weather or other conditions could adversely affect the availability, quality and cost of our ingredients,
which could harm our operations. If any of our distributors or suppliers performs 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 difficult to replace our pork
suppliers if we were no longer able to rely on them due to the unique nature of the products we
receive from them. We do not have long-term contracts with any of our suppliers. In addition, we’ve
relied on the McDonald’s distribution network. As we begin to increase our independence from
McDonald’s, we may have to seek new suppliers and service providers. If we cannot replace or engage
distributors or suppliers who meet our specifications in a short period of time, that could increase our
expenses and cause shortages of food and other items at our stores, which could cause a store to
remove items from its menu. If that were to happen, affected stores could experience significant
reductions in sales during the shortage or thereafter, if our customers change their dining habits as a
result. Our focus on a limited menu would make the consequences of a shortage of a key ingredient
more severe.
In addition, our approach to competing in the restaurant industry depends in large part on our
continued ability to adhere to the principle of ‘‘food with integrity.’’ We use a substantial amount of
naturally raised and sustainably grown ingredients, and try to make our food as fresh as we can, in light
of pricing considerations. As we increase our use of these ingredients, the ability of our suppliers to
expand output or otherwise increase their supplies to meet our needs may be constrained. Our inability
to obtain a sufficient and consistent supply of these ingredients on a cost-effective basis, or at all, could
cause us difficulties in aligning our brand with the principle of ‘‘food with integrity.’’ That could make
us less popular among our customers and cause sales to decline.
Our quarterly operating results may fluctuate significantly and could fall below the expectations of
securities analysts and investors due to various factors.
Our quarterly operating results may fluctuate significantly because of various factors, including:
• the impact of inclement weather, natural disasters and other calamities, such as hurricanes
Katrina and Rita in 2005;
• the timing of new store openings and related revenues and expenses;
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