Chipotle 2006 Annual Report Download - page 28

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 heading—Cautionary Note Regarding
Forward-Looking Statements, and elsewhere in 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, we’re working to change the way people think about
and eat fast food. We do this by avoiding a formulaic approach when creating our restaurant experience, looking
to fine-dining restaurants for inspiration. We use high-quality raw ingredients, classic cooking methods and a
distinctive interior design, and have friendly people to take care of each customer—features that are more
frequently found in the world of fine dining. Our approach is also guided by our belief in an idea we call “Food
With Integrity”—which to us means finding the best raw ingredients from the best sources to include in the food
we serve. Quite simply, we combine these ideas in a way that continues making Chipotle better all the time.
As of December 31, 2006, we had 581 restaurants in 26 states throughout the United States and in the
District of Columbia, including eight restaurants operated by franchisees. New restaurants have contributed
substantially to our restaurant sales growth in the last three years. We opened 94 company-operated restaurants
during 2006, including 14 restaurants in six new markets. We expect to open between 95 and 105 restaurants in
2007 with approximately 10% to 15% of those openings located in new markets. We define a new market as one
in which no restaurant was open as of the end of the prior year.
In addition to growing our number of restaurants, we have experienced increases in our average restaurant
sales of 11.9% in 2006 and 5.8% in 2005, driven primarily by strong comparable restaurant sales increases. We
define average restaurant sales as the average trailing 12-month sales for company-owned restaurants in
operation for at least 13 months. Comparable restaurant sales include company-owned restaurants only and
represent the change in period-over-period sales for restaurants beginning in their 13th full month of operation.
We expect our average restaurant sales to continue to increase in 2007, driven by comparable restaurant
sales increases in the low to mid single digits. Comparable restaurant sales reflect positive period-to-period
growth due to an increase in the number of transactions as well as menu price increases. However, as a result of
several years of double-digit comparable restaurant sales increases, we believe that comparable restaurant sales
will not continue to increase at the rates we have achieved over the past several years.
Highlights
Initial Public Offering. On January 25, 2006, we completed our initial public offering of our class A
common stock with net proceeds of $120.9 million. In conjunction with the offering, we issued a one-time broad
based grant of 774,150 stock options. The options vest on the third anniversary of the grant date. Compensation
expense is generally recognized equally over the three year vesting period.
McDonald’s Disposition. In October 2006, McDonald’s completed its disposition of its interest in us.
Historically our relationship with McDonald’s allowed us to obtain pricing benefits for some products and
services. As a result of our separation from McDonald’s, we have implemented new employee benefit plans, as
well as new insurance, accounting, information technology, payroll and internal audit arrangements. We estimate
the incremental costs of these new plans and arrangements, combined with additional supply costs as a result of
our separation from McDonald’s, to be between $1.0 million and $2.0 million in this first year of separation.
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