Chipotle 2005 Annual Report Download - page 31

stock into one-third share of class B common stock (the ‘‘Reclassification’’) as discussed more
thoroughly in Note 1 to the consolidated financial statements included in Item 8 ‘‘Financial
Statements and Supplementary Data.’’
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
You should read the following discussion together with Item 6 ‘‘Selected Consolidated Financial Data’’
and our consolidated financial statements and related notes included in Item 8 ‘‘Financial Statements and
Supplementary Data’’. The discussion contains forward-looking statements involving risks, uncertainties and
assumptions that could cause our results to differ materially from expectations. Factors that might cause
such differences include those described in Item ‘‘1A Risk Factors’’ under the discussion—Cautionary Note
Regarding Forward-Looking Statements, and elsewhere in this report.
Overview
How We Make Money: Restaurant Sales
We operate fast casual, fresh Mexican food restaurants in 21 states throughout the United States
and in the District of Columbia. As of December 31, 2005, we operated 481 restaurants and had eight
restaurants operated by franchisees. We generate revenue primarily through restaurant sales, which
represent sales of food and drinks in stores operated by Chipotle. Our total revenue was $627.7 million
in 2005, a 33.3% increase from 2004 and a 98.9% increase from 2003, driven primarily by the 260 new
store openings from January 1, 2003 to December 31, 2005 and higher average store sales. Several
factors affect our restaurant sales in any period, including mainly the number of stores in operation and
average store sales. We define average store sales as the average trailing 12-month sales for company-
owned stores in operation for at least 13 months.
New stores in existing and new markets have contributed substantially to our restaurant sales
growth in the last three years. We opened 80, 104 and 76 stores in 2005, 2004 and 2003, respectively.
We intend to open 80 to 90 stores in 2006, primarily in existing markets, although we do expect to
enter several new markets in 2006. We categorize our stores as either end-caps (at the end of a line of
stores), in-lines (in a line of stores), free-standing or urban. As we expand into central urban areas, our
average costs to open new stores will increase due to more significant reconstruction work that often
needs to be done on those sites. In 2005, we spent on average about $910,000 in development and
construction costs per store, with end-caps costing about $730,000, in-lines costing about $765,000,
free-standing costing about $1.2 million and urban costing about $1.3 million (in each case, reduced for
landlord reimbursements received and excluding rent expense incurred during the construction period).
Pre-opening cash rent expenses averaged approximately $18,000 per restaurant during 2005 (excluding
approximately $24,000 per restaurant in pre-opening straight-line rent during construction.)
Average store sales for stores open at least 12 full months were $1.440 million in 2005,
$1.361 million in 2004 and $1.274 million in 2003. There are two main factors increasing our average
store sales: comp store sales increases, which we define as year-over-year sales comparisons for stores
in operation for at least 12 full months (disregarding the portion of a month in which a store first
begins operating) and increases in new store opening sales. We believe both of these have been
impacted by the growing appeal of our core menu items, increasing consumer awareness and
appreciation of our food quality and our focus on building customer loyalty.
Our comp store sales increases were 10.2% in 2005, 13.3% in 2004 and 24.4% in 2003. 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 the right stations, at the
right time, doing the right things in the right order. We think the crew at our best performing through
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