Chipotle 2006 Annual Report Download

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2006 ANNUAL REPORT

Table of contents

  • Page 1
    2006 ANNUAL REPORT

  • Page 2
    ... opportunities for our employees, and make investments in equipment, technology and design to enhance our customers' experience in our restaurants. By doing these things, we believe we will achieve our goal of changing the way Americans think about and eat fast food. I believe the best is yet to...

  • Page 3

  • Page 4

  • Page 5
    ...on the closing price of the registrant's class A common stock on that date. For purposes of this calculation, shares of class A common stock held by each executive officer and director and by holders of more than 5% of the class A common stock have been excluded since those persons may under certain...

  • Page 6
    ... Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters ...Certain Relationships and Related Transactions and Director Independence ...Principal Accountant Fees and Services ...PART IV Item 15. Exhibits and Financial Statement Schedules ...Signatures ...57 58 57 57 57...

  • Page 7
    ... exchange offer, we now have two publicly-traded classes of common stock, class A and class B, and McDonald's no longer owns any interest in us. Our Menu and Food Preparation A Few Things, Thousands of Ways. We serve only a few things: burritos, burrito bowls, tacos and salads. But because customers...

  • Page 8
    ... the costs associated with natural and sustainable farming practices, many large suppliers have not found it economical to pursue business in this area. We believe that consumers' increasing concern about where and how food is raised, and in the environmental management, animal husbandry and labor...

  • Page 9
    ... restaurant managers and crew members to welcome and interact 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 restaurant managers...

  • Page 10
    ... learning about us and telling others. Some of our customers have gone so far as to develop websites about Chipotle, providing a way for Chipotle customers to share their stories. This kind of support helps promote our business without requiring additional advertising expenditures. Competition...

  • Page 11
    ... and printing orders in the appropriate locations within the restaurant. Additionally, 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...

  • Page 12
    ..., one of our biggest challenges is locating and securing an adequate supply of suitable new restaurant sites. Competition for those sites in our target markets is intense, and lease costs are increasing (particularly for urban locations). Our ability to open new restaurants also depends on other...

  • Page 13
    ... Our failure to manage our growth effectively could harm our business and operating results. New restaurants, once opened, may not be profitable, and the increases in average restaurant sales and comparable restaurant sales that we have experienced in the past may not be indicative of future results...

  • Page 14
    ... conditions, which can affect restaurant traffic, local labor costs and prices we pay for the ingredients and other supplies it uses; and changes in government regulation. If we fail to open restaurants as quickly as planned or if new restaurants do not perform as planned, our business and future...

  • Page 15
    ... affect sales. If we react to negative publicity by changing our menu or other key aspects of the Chipotle experience, we may lose customers who do not accept those changes, and may not be able to attract enough new customers to produce the revenue needed to make our restaurants profitable. In...

  • Page 16
    ... 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 could adversely...

  • Page 17
    ... and quick-service segments of the restaurant industry also emphasize lower-cost, "value meal" menu options, a strategy we do not 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 18
    ... 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 due to our new restaurant staffing structure would adversely impact our operating costs. Our success...

  • Page 19
    ... minimum wage increases, could increase our labor costs. In recent years, there has been an increased legislative, regulatory and consumer focus at the federal, state and municipal levels on the food industry including nutrition and advertising practices. Restaurants operating in the quick-service...

  • Page 20
    ... food-borne illnesses or other problems at our restaurants; changes in consumer preferences and discretionary spending; increases in infrastructure costs; and fluctuations in supply prices. Seasonal factors also cause our operating results to fluctuate from quarter to quarter. Our restaurant sales...

  • Page 21
    ... circumstances; and agreed to indemnify McDonald's for taxes and related losses it incurs as a result of the exchange failing to qualify as a tax-free transaction, if the taxes and related losses are attributable to (i) direct or indirect acquisitions of our stock or assets (regardless of whether we...

  • Page 22
    ...in-line or end-cap restaurant seats about 63 customers. Our average restaurant size is about 2,700 square feet. Most of our restaurants also feature outdoor patio space. Our main office is located at 1543 Wazee Street, Suite 200, Denver, Colorado, and our telephone number is (303) 595-4000. We lease...

  • Page 23
    ... 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 data. Through the...

  • Page 24
    ... earnings for use in the 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 The following table presents information regarding options and...

  • Page 25
    ... Grill, Inc Class B S & P SmallCap 600 Restaurants * $100 invested at the closing price of class A common stock on 1/26/06 and at the closing price of class B common stock on 10/12/06. Use of Proceeds from Sale of Registered Securities On January 30, 2006, we completed the initial public offering...

  • Page 26
    ...future period (in thousands, except per share data). For the years ended December 31, 2005 2004 2003 2006 2002 Statements of Income: Revenue Restaurant sales ...Franchise royalties and fees ...Total revenue ...Food, beverage and packaging costs ...Labor costs ...Occupancy costs ...Other operating...

  • Page 27
    ...tax assets and we reversed our valuation allowance of $20.3 million, resulting in a non-recurring tax benefit. (2) Earnings (loss) per share and shares used in computing earnings (loss) per share reflect the effect of the reclassification of all outstanding shares of preferred stock and common stock...

  • Page 28
    ... this report. Overview Chipotle operates fast casual, fresh Mexican food restaurants serving burritos, tacos, bowls and salads. We began with a simple philosophy: demonstrate that food served fast doesn't have to be a traditional "fast-food" experience. Over the years, that vision has evolved. Today...

  • Page 29
    ... structure have resulted in incremental staff training and development costs. In 2007 and future years, we expect these initiatives to result in a majority of restaurant managers being hired through internal promotions. Throughput. We deliver our best customer service and hottest food when the line...

  • Page 30
    ... on improving service time. The substantial majority of our comparable restaurant sales growth was due to an increase in the number of transactions, and the remainder was driven primarily by menu price increases in markets in conjunction with the introduction of naturally-raised beef or chicken. 24

  • Page 31
    ... more promotions from within our existing crew, which we believe will lower turnover, result in better managers and decrease training costs. In 2005, labor costs as a percentage of revenue decreased largely due to improved employee efficiency. Employee efficiency resulted in increased number of...

  • Page 32
    ...driven by hiring more employees over the past two years, 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...

  • Page 33
    ... (10.1)% Pre-opening costs increased in 2006 primarily as a result of the adoption of 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 or building operating leases incurred during...

  • Page 34
    .... 31 Revenue ...Operating income ...Net income ...Number of restaurants opened in quarter ...Comparable restaurant sales increase ... $133.4 $156.3 $164.7 $173.3 $ 4.4 $ 9.3 $ 9.5 $ 7.7 $ 2.6 $ 25.7 $ 5.1 $ 4.3 18 17 17 28 4.1% 9.6% 11.5% 14.3% Seasonal factors cause our profitability to fluctuate...

  • Page 35
    ... in the normal course of business and bears interest at our option at the Prime rate, a fixed rate determined by the bank or an adjusted LIBOR rate. We haven't required significant working capital because customers pay using cash or credit cards and because our operations do not require significant...

  • Page 36
    ...-year extensions, for end-cap and in-line restaurants, or 15 to 20 years with several five-year extensions, for free-standing restaurants. Our leases generally require us to pay a proportionate share of real estate taxes, insurance, common charges and other operating costs. Some restaurant leases...

  • Page 37
    ...be made regarding our stock price volatility, the expected life of the option and expected dividend rates. The volatility assumptions were derived from our annual independent stock valuations and historical volatilities of competitors whose shares are traded in the public markets and are adjusted to...

  • Page 38
    ...be reported as an adjustment to the opening balance of retained earnings for that fiscal year, presented separately. We do not expect the adoption of FIN 48 to have a material impact on our financial statements. In September 2006, the FASB issued FASB Staff Position AUG AIR-1, Accounting for Planned...

  • Page 39
    ...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 40
    ...STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm ...Consolidated Balance Sheet as of December 31, 2006 and 2005 ...Consolidated Statement of Income for the years ended December 31, 2006, 2005 and 2004 ...Consolidated...

  • Page 41
    ...1, 2005, the Company changed its method for accounting for share-based compensation to conform with FASB Standard No. 123(R), Share-Based Payments, and effective January 1, 2006, the Company changed its method for accounting for pre-opening rental costs to conform with FASB Staff Position No. FAS 13...

  • Page 42
    Chipotle Mexican Grill, Inc. Consolidated Balance Sheet (in thousands, except per share data) December 31 2006 2005 Assets Current assets: Cash ...Accounts receivable, net of allowance for doubtful accounts of $344 and $308 as of December 31, 2006 and 2005, respectively ...Receivable-McDonald's ...

  • Page 43
    ..., except per share data) Years ended December 31 2006 2005 2004 Revenue: Restaurant sales ...Franchise royalties and fees ...Total revenue ...Restaurant operating costs (exclusive of depreciation and amortization shown separately below): Food, beverage and packaging ...Labor ...Occupancy ...Other...

  • Page 44
    ... 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 45
    ... by operating activities ...Investing activities Purchases of leasehold improvements, property and equipment, net ...Net cash used in investing activities ...Financing activities Net proceeds from sale of common stock ...Costs of issuing common stock ...Proceeds from McDonalds-tax sharing agreement...

  • Page 46
    ...the end of each year. The Company manages its operations based on three regions and has aggregated its operations to one reportable segment and one reporting unit. Initial Public Offering In January 2006, the Company completed its offering of 6,061 shares of class A common stock, $0.01 par value, in...

  • Page 47
    ...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 48
    ... of the Company's financial assets and liabilities, because of their short-term nature, approximates fair value. Income Taxes Prior to the completion of the Company's initial public offering, its results of operations were included in the consolidated federal and state income tax returns of McDonald...

  • Page 49
    ...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 the adoption of FASB Staff Position No. FAS 13-1 Accounting...

  • Page 50
    .... The Company's international entity uses its local currency as the functional currency. Assets and liabilities are translated at exchange rates in effect as of the balance sheet date. Income and expense accounts are translated at the average monthly exchange rates during the year. Resulting...

  • Page 51
    ... the opening balance of retained earnings for that fiscal year, presented separately. The Company does not expect the adoption of FIN 48 to have a material impact on its consolidated financial statements. In September 2006, the FASB issued FASB Staff Position AUG AIR-1, Accounting for Planned Major...

  • Page 52
    ... to the initial public offering, the Company's results of operations were included in the consolidated federal income tax return and combined or consolidated state income tax returns, where permitted, of McDonald's and its affiliates. The Company continued to be included in some state tax returns of...

  • Page 53
    Chipotle Mexican Grill, Inc. Notes to Consolidated Financial Statements-(Continued) (dollar and share amounts in thousands, unless otherwise specified) The effective tax rate differs from the statutory tax rates as follows: Years ended December 31 2006 2005 2004 Statutory U.S. federal income tax ...

  • Page 54
    ... 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 55
    ... under the Plan cannot be less than fair market value at the date of grant. In conjunction with the initial public 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...

  • Page 56
    Chipotle Mexican Grill, Inc. Notes to Consolidated Financial Statements-(Continued) (dollar and share amounts in thousands, unless otherwise specified) A summary of option activity as of and for the years ended December 31, 2006, 2005 and 2004 is as follows (in thousands, except per share data): ...

  • Page 57
    ... of the option. The Company has not paid dividends to date and does not plan to pay dividends in the near future. The volatility assumptions were derived from the Company's annual independent stock valuation and historical volatilities of competitors whose shares are traded in the public markets and...

  • Page 58
    .... For the years ended December 31, 2005 and 2004, interest expense was $691 and $191, respectively. The Company previously invested its excess cash under short-term agreements with McDonald's. The agreement in place provided for interest at the 30-day Commercial Paper rate plus 50 basis points, was...

  • Page 59
    Chipotle Mexican Grill, Inc. Notes to Consolidated Financial Statements-(Continued) (dollar and share amounts in thousands, unless otherwise specified) Future minimum lease payments required under existing operating leases as of December 31, 2006 are as follows: 2007 ...2008 ...2009 ...2010 ...2011 ...

  • Page 60
    ...may have been the victim of a possible theft of credit and debit card data. Together with two forensic auditing firms, the Company investigated the alleged theft and reviewed its information systems and information security procedures. The Company also reported the problem to federal law enforcement...

  • Page 61
    Chipotle Mexican Grill, Inc. Notes to Consolidated Financial Statements-(Continued) (dollar and share amounts in thousands, unless otherwise specified) 14. Quarterly Financial Data (Unaudited) Summarized unaudited quarterly financial data: March 31 June 30 2006 September 30 December 31 Revenue ......

  • Page 62
    ...successful initial public offering and completion of our separation from McDonald's, while still delivering outstanding financial and operating result Terms of the grants include vesting in two equal installments on the second and third anniversary of the date of grant. No shares of restricted stock...

  • Page 63
    ... Trading Policy, is intended to facilitate the diversification of Mr. Ells's personal assets. The plan provides for sales from time to time of shares of class B common stock owned by Mr. Ells, with the timing of and number of shares to be sold in each transaction dependent upon the market price...

  • Page 64
    ... 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: Name: Title: /s/ JOHN R. HARTUNG John R. Hartung Chief Finance and Development Officer Date: February 22...

  • Page 65
    ... 1 to Chipotle 2006 Stock Incentive Plan. Form of Stock Option Agreement. Form of Restricted Stock Agreement. Restricted Stock Award Agreement between Chipotle Mexican Grill, Inc. and Montgomery F. Moran. (4) Services Agreement dated January 31, 2006 between Chipotle Mexican Grill, Inc. and McDonald...

  • Page 66
    †- denotes management contract or compensatory plan or arrangement. (1) Incorporated by reference to Chipotle Mexican Grill, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2005, filed with the Securities and Exchange Commission on March 17, 2006 (File No. 001-32731). (2) ...

  • Page 67
    ... Denver, Colorado STOCK TRANSFER AGENT By mail: Computershare Investor Services, LLC. 2 North LaSalle Street Chicago, IL 60602 By phone: 1-312-360-5496 Online: www.computershare.com SEC Form 10-K Stockholders may obtain copies of Chipotle's annual report on Form 10-K for the year ended December...

  • Page 68