Chipotle 2008 Annual Report Download - page 27

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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” and elsewhere in this report.
Overview
Chipotle operates fresh Mexican food restaurants serving burritos, tacos, burrito bowls (a burrito without the
tortilla) 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, our vision is 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”. Our objective is to find the highest quality ingredients we can—
ingredients that are grown or raised with respect for the environment, animals and people who grow or raise the
food.
2008 Highlights and Trends
Restaurant Development. As of December 31, 2008, we operated 837 restaurants in 33 states throughout the
United States, the District of Columbia, and Toronto, Canada. New restaurants have contributed substantially to
our restaurant sales growth. We opened 136 restaurants in 2008. We expect to open between 120 and 130
restaurants in 2009, including one in London.
Sales Growth. In addition to growing our number of restaurants, we have experienced increases in our
average restaurant sales from $1.734 million as of December 31, 2007 to $1.763 million as of December 31,
2008 driven by comparable restaurant sales increases. Our comparable restaurant sales increases were 5.8% in
2008 and 10.8% in 2007. Comparable restaurant sales increases in 2008 were due mainly to menu price
increases. Our comparable restaurant sales increases decelerated during 2008, which we believe was due
primarily to the weakened economy. We define average restaurant sales as the average trailing 12-month sales
for company-operated restaurants in operation for at least 12 full calendar months. Comparable restaurant sales
include company-operated restaurants only and represent the change in period-over-period sales for restaurants
beginning in their 13th full month of operation.
We expect our comparable restaurant sales increases in 2009 to be in the low single digits driven primarily
by menu price increases implemented in the fourth quarter of 2008, partially or fully offset by a decrease in
customer visits. Due to fluctuations in consumer spending as a result of economic uncertainty, potential traffic
declines as a result of our recent menu price increases and variability in prior-year comparisons, we could
experience rapid and large changes in our comparable restaurant sales trends during the year.
Food Costs. The cost of many basic foods for humans and animals, including corn, wheat, rice and oil
increased over 2007 prices. This resulted in upward pricing pressures on almost all of our raw ingredients
including chicken, beef, tortillas and rice. In addition, freezes during 2007 in California and Chile put pricing
pressure on avocados during 2008. We experienced a significant increase in cheese prices throughout 2008 as a
result of the expiration of the pricing protocols under which we operated during 2007. We also experienced
significant increases in the cost of rice, soy oil and sweet corn in conjunction with the renewal of those pricing
protocols at the end of the third quarter of 2008. In response to the increasing raw ingredient prices, we instituted
menu price increases in the fourth quarter of 2008 for most of the country. This increase, combined with some
easing of commodity costs will likely result in flat food costs as a percentage of revenue for 2009.
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Annual Report