Chipotle Franchise Revenue was over $2 million per store
Can you open a Chipotle FranchiseA franchise is when a business (franchisor) allows a party (franchisee) to acquire its know-how, procedures, processes, trademarks, intellectual property, use of its business model, brand and rights to sell its products and services. The franchisee signs a contract (franchise agreement) with the franchisor to acquire the franchise and generally has a territory granted to operate….?
Have you ever thought about running your own Chipotle franchise? In recent years, Chipotle has emerged as a beacon of “healthier” alternatives to fast food, serving Mexican dishes like burritos, tacos, salads, and bowls under a customizable, build your own plate model. Chipotle is labeled as a fast casual restaurant — a blend of both the fast food and casual dining business model.
They are more upscale and refined than traditional fast food establishments such as McDonalds, but offer less seating and a more moderate prep time than casual dining. As the health and wellness movement grows in the U.S. and more consumers become increasingly aware of their diet, there is likely to be a bright future ahead for restaurants like Chipotle, which offer a choice for consumers who want the convenience of fast food but a healthier alternative.
One important thing to take note of is that Chipotle is currently NOT available for franchising. Almost all of their units are company owned, with a few exceptions. This means that the money stays within the company and does not go to outside franchise operators. Oftentimes, upper level management is in charge of overseeing the units, and ownership is internal as a result. The following article analyzes Chipotle’s most recent annual report, their 10-K, and examines the financial health and viability of the Chipotle business, their strengths, weaknesses, and their future in the ever changing Food and Beverage industry.
Chipotle Background Information
Chipotle Mexican Grill Inc. was founded in 1993 by Steve Ells as a single restaurant in Denver, Colorado. After an initial minority investment from McDonalds in 1998, Chipotle was able to rapidly expand, and in January of 2006, they became a publicly traded company. The current CEO of Chipotle is Brian Niccol, who has been serving in his position since 2018. As of December 31rst, 2020, there are 2,768 Chipotle restaurants, with 2,724 restaurants operating in the United States, 40 international restaurants, and four non-Chipotle restaurants. Although Chipotle operates in eight distinct segments, they consolidated reports to one segment. Their reported revenue comes from company owned restaurant salesThe total amount in dollars made in the business before expenses are deducted. See also Gross Revenue…..
2020 FY Annual Report (10-K): Revenue, Costs, and Number of Units
1. Number of Chipotle Restaurants
As mentioned above, Chipotle Inc. has a total of 2,768 restaurants, and only four of them are not under the Chipotle name. These subsidiaries, as listed above, are Pizzeria Locale and TastyMade. In the year 2020, they opened 160 Chipotle restaurants, 1 Pizzeria Locale restaurant, permanently closed 9 Chipotle restaurants, and relocated 6 Chipotle restaurants. There were no closures of Pizzeria Locale or TastyMade during this time. In total, this amounts to a net gain of +146 restaurants under the Chipotle brand and subsidiaries.
Chipotle Units
| Year Ended December 31 | |||
|---|---|---|---|
| 2020 | 2019 | 2018 | |
| Beginning of period | 2,622 | 2,491 | 2,408 |
| Chipotle openings | 160 | 139 | 137 |
| Pizzeria Locale Openings | 1 | 1 | —- |
| Chipotle permanent closures | (9) | (7) | (43) |
| Chipotle relocations | (6) | (2) | (5) |
| Pizzeria Locale closures | —- | —- | (5) |
| TastyMade closures | —- | —- | (1) |
| Total Restaurants at end of period | 2,768 | 2,622 | 2,491 |
2. Risk Factors
Chipotle lists their business risks in extensive detail in their 10-K report, dividing it into 7 major categories. Not all of the risks mentioned in the report are expanded upon in the below analysis, but it does include the ones that were the most pertinent to Chipotle.
2.1 Risks Related to Operating in the Restaurant Industry
The following are risks that come with all business operations in the Food and Beverage industry, although there are some that are more pertinent to Chipotle than others.
Food Safety and Food-borne illnesses: Although Chipotle claims to have food safety as their number one priority, like many other restaurants, they are still susceptible to falling short of proper health and safety and general FDA regulations. Food related controversies are particularly pertinent to Chipotle because from 2015 to 2017, E. coli and the norovirus were connected to a number of Chipotle restaurants, and in 2018, illnesses caused by the c. perfringens bacteria, which is linked to food poisoning, was linked to one of the Chipotle restaurants. This severely impacted their reputation, which in turn had a damaging effect on their restaurant salesThe total amount in dollars made in the business before expenses are deducted. See also Gross Revenue…. and profitability from the years of 2016 to 2018. As a result, even minor infractions that might pass for other restaurants will likely have a larger effect on Chipotle.
Highly competitive industry
Risks of operating a digital business: Digital salesThe total amount in dollars made in the business before expenses are deducted. See also Gross Revenue…. (orders made through their website and mobile app) account for nearly half of their total revenue in 2020, compared to less than 20% in the previous year. As at-home delivery becomes an increasingly popular option for consumers, problems with third party delivery apps pose a risk to Chipotle business operations.
Inability to keep up with accelerated growth of social media
Higher prices than other competitors: One of Chipotle’s trademarks is “Food with Integrity”, meaning that they only sourceBased on Business Listings, Vetted Biz requires Businesses for Sale to share financial information on sales and earnings through credible sources, including but not limited to Tax Returns, Accounting Software, Point of Sale Software, etc…. ingredients from farms and animals that were responsibly raised. However, this also means that the cost of products is higher than their competitors in the fast casual industry, putting them at a disadvantage unless they are able to continue to successfully market their higher prices as being associated with a higher quality of food.
2.2 Risks Related to the COVID-19 pandemic
Like many other restaurants, Chipotle was adversely affected by the COVID-19 pandemic in a number of ways, including forced shutdowns in accordance with lockdown procedures, modified service hours and customer capacity, and a loss in workers due to their unwillingness and inability to work due to the health risks of COVID-19. Their suppliers were also affected by the pandemic, which in turn had a negative impact on their operations.
2.3 Risks Related to Labor and Supply Chains
Like many other restaurants, Chipotle was adversely affected by the COVID-19 pandemic in a number of ways, including forced shutdowns in accordance with lockdown procedures, modified service hours and customer capacity, and a loss in workers due to their unwillingness and inability to work due to the health risks of COVID-19. Their suppliers were also affected by the pandemic, which in turn had a negative impact on their operations.
Increase in ingredients and other operating costs: The markets for beef, chicken, and pork, a key component of most of their menu items, are particularly vulnerable to increased prices as their markets are heavily affected by changing global weather and climate patterns.
Shortages in ingredients: Chipotle is limited in suppliers for their ingredients due to their “Food with Integrity” principle. This leaves them particularly subject to delays, interruptions, and other disruptions to their ingredient supply, which would then impact their financial results.
Failure to adhere to labor laws and regulations
Potential inability to hire qualified workers: COVID-19 and outside economic pressures has made the labor market for food service workers very competitive, a challenge as the high quality of Chipotle service is dependent on the quality of their labor. However, Chipotle recently announced that they were raising their wage to $15 per hour, and even proposed a path to 6 figure compensation in three or more years. These higher wages will likely give them an edge over their competitors in hiring talent for their restaurants.
2.4 Risks Related to IT Systems, Cybersecurity, and Data Privacy
Like many other businesses in the food service industry, Chipotle is heavily reliant on computer systems for everyday business operations, especially with the launch and subsequent success of their mobile app. As a result, Chipotle is susceptible to data breaches, and there currently stands two known data breaches where consumer information was stolen, once in 2004 and another time in 2017. Data breaches remain a significant risk for Chipotle restaurants, and if they happen again they will likely impact the reputation of the Chipotle brand.
2.5 Legal and Regulatory Risks
Besides the typical legal procedures and regulations that all U.S. based companies are subject to, Chipotle signed a deferred prosecution agreement (DPA) in April of 2020 in order to settle an official criminal investigation conducted by the Central District of California and the FDA’s Office of Criminal Investigations into food safety violations dating back to January 2013. Violations of this agreement would bring serious legal consequences to the Chipotle brand, hurting their brand and reputation.
2.6 Risks Related to Growth and Business Strategy
One key takeaway is that a substantial number of Chipotle restaurants operate on leased properties, which means that they are subject to contracts with third party leasing companies and securing a favorable lease contract. This is different from their competitors like McDonald’s, who own the land that their businesses operate on. It also means that an inability to secure a favorable lease contract could hurt their profitability and potentially even close or transfer restaurants.
2.7 General Risk Factors
The main point of this risk category is the unpredictability of consumer behavior. In general, consumer dining is dependent on discretionary income, but continued health scares with COVID-19 could impact the future of Chipotle’s casual dining model. This would in turn affect profitability, although increased vaccination rates are likely to mitigate this risk.
3. Chipotle SalesThe total amount in dollars made in the business before expenses are deducted. See also Gross Revenue…., Profits and More
Income Statement (thousands of dollars)
| Year ended Decmeber 31 | |||
|---|---|---|---|
| 2020 | 2019 | 2018 | |
| Food and beverage revenue | $ 5,920,545 | $ 5,561,036 | $ 4,860,626 |
| Delivery service revenue | 64,089 | 25,333 | 4,359 |
| Restaurant operating costs (exclusive of depreciationA reduction in the value of an asset over time, due to wear and tear…. and amortization show separately below): | |||
| Food, beverage and packaging | 1,932,766 | 1,847,916 | 1,600,760 |
| Labor | 1,593,013 | 1,472,060 | 1,326,079 |
| Occupancy | 387,762 | 363,072 | 347,123 |
| Other operating costs | 1,030,012 | 760,831 | 680,031 |
| General and administrative expenses | 466,291 | 451,552 | 375,460 |
| Depreciation and amortization | 238,534 | 212,778 | 201,979 |
| Pre-opening costs | 15,515 | 11,108 | 8,546 |
| Impairment, closure costs, and asset disposals | 30,577 | 23,094 | 66,639 |
| Total operating expenses | 5,694,470 | 5,142,411 | 4,606,617 |
| Income from operations | 290,164 | 443,958 | 258,368 |
| Income and other income, net | 3,617 | 14,327 | 10,068 |
| Income before income taxes | 293,781 | 458,285 | 268,436 |
| Benefit/(provision) for income taxes | 61,985 | (108,127) | (91,883) |
| Net income | $ 355,766 | $ 350,158 | $ 176,553 |
| EarningsTotal earnings received by a business based on the U.S. Income Tax Return. The financial numbers of these earnings depend on the type of business, but can include income, guaranteed payments, compensation, interest, depreciation, elective deferrals, and contributions.For further details on how to calculate earnings and where to find financial numbers on tax return forms based on the type of… per share | |||
| Basic | $ 12.74 | $ 12.62 | $ 6.35 |
| Diluted | $ 12.52 | $ 12.38 | $ 6.31 |
| Weighted-average common shares outstanding | |||
| Basic | 27,917 | 27,740 | 27,823 |
| Diluted | 28,416 | 28,295 | 27,962 |
| Net income | $355,766 | $350,158 | $176,553 |
| Other comprehensive income (loss), net of income taxes | |||
| Foreign currency translation adjustments | 1,134 | 726 | (2,736) |
| Unrealized gain on available for sale securities, net of income taxes | —- | 147 | 159 |
| Other comprehensive income (loss), net of income taxes | 1,134 | 873 | (2,577) |
| Comprehensive income | $356,900 | $351,031 | $173,976 |
Cash Flows Statement (thousands of dollars)
| Year ended December 31 | |||
|---|---|---|---|
| 2020 | 2019 | 2018 | |
| Operating activities | |||
| Net income | $ 355,766 | $ 350,158 | $ 176,553 |
| Adjustments to reconcile net income to net cash provided by operating activities | |||
| Depreciation and amortization | 238,534 | 212,778 | 201,979 |
| Amortization of operating lease assets | 184,538 | 163,952 | —- |
| Deferred income tax provision | 108,350 | 29,962 | 10,585 |
| Impairment, closure costs, and asset disposals | 28,874 | 15,402 | 61,987 |
| Provision for credit losses | 164 | 33 | 125 |
| Stock based compensation expense | 82,626 | 91,396 | 69,164 |
| Other | 3,643 | (10,592) | (2,918) |
| Changes in operating assets and liabilities | |||
| Accounts receivable | 3,010 | (2,630) | (8,298) |
| InventoryThe value of the total finished and unfinished goods and materials the business holds for future sale…. | (394) | (4,530) | (1,722) |
| Prepaid expenses and other current assets | (11,442) | (23,066) | (3,811) |
| Other assets | (26,577) | 2,818 | (2,005) |
| Accounts payable | (3,859) | (973) | 32,080 |
| Accrued payroll and benefits | 76,683 | 11,759 | 29,568 |
| Accrued liabilities | 5,596 | 36,543 | 14,831 |
| Unearned revenue | 36,958 | 30,400 | 6,829 |
| Income tax payable/receivable | (255,251) | (32,083) | 14,439 |
| Deferred rent | —- | —- | 21,297 |
| Operating lease liabilities | (165,154) | (151,557) | —- |
| Other long term liabilities | 1,782 | 1,862 | 869 |
| Net cash provided by operating activities | 663,847 | 721,632 | 621,552 |
| Investing activities | |||
| Purchases of leasehold improvements, property and equipment | (373,352) | (333,912) | (287,390) |
| Purchases of investments | (468,418) | (448,754) | (485,188) |
| Maturities of investments | 419,078 | 476,723 | 385,000 |
| Proceeds from sale of equipment | —- | 13,969 | —- |
| Acquisitions of equity method investments | (10,025) | —- | —- |
| Net cash used in investing activities | (432,717) | (291,974) | (387,578) |
| Financing activities | |||
| Acquisition of treasury stock | (54,401) | (190,617) | (160,937) |
| Tax withholding on stock based compensation awards | (48,555) | (10,420) | (5,411) |
| Other financing activities | (1,895) | (698) | (187) |
| Net cash used in financing activities | (104,851) | (201,735) | (166,535) |
| Effect of exchange rate changes on cash, cash equivalents, and restricted cash | 1,076 | 406 | (1,457) |
| Net change in cash, cash equivalents, and restricted cash | 127,355 | 228,329 | 65,982 |
| Cash, cash equivalents, and restricted cash at beginning of year | 508,481 | 280,152 | 214,170 |
| Cash, cash equivalents, and restricted cash at end of year | $ 635,836 | $ 508,481 | $ 280,152 |
| Supplemental disclosures of cash flowThe net profit before taxes plus payments to the owner(s), interest, and depreciation of assets…. information | |||
| Income taxes paid | $ 85,010 | $ 109,571 | $ 67,053 |
| Purchases of leasehold improvements, property, and equipment accrued in accounts payable and accrued liabilities | $ 46,975 | $ 36,866 | $ 30,870 |
| Acquisition of treasury stock accrued in accounts payable and accrued liabilities | —- | —- | $ 2,474 |
| Payments on finance lease liabilities | (1,617) | (2,170) | (1,811) |
| Proceeds from lease financing obligations | —- | —- | 2,692 |
| Costs associated with financing long-term debt | (3,303) | (11,516) | (154) |
| Purchase of treasury shares | (10,053) | (4,017) | (—-) |
| Net cash provided by financing activities | 5,902 | 168,297 | 727 |
| Net increase (decrease) in cash and cash equivalents | 61,990 | (1,040) | (25,398) |
| Cash and cash equivalents, beginning of period | $ 2,974 | $ 4,014 | $ 29,412 |
| Cash and cash equivalents, end of period | $ 64,964 | $ 2,974 | $ 4,014 |
| Supplemental disclosures | |||
| InterestA payment from a borrower or deposit-taking financial institution to a lender or depositor of an amount above repayment of the principal sum, at a particular rate. In Vetted Biz, it is typically the additional rate of a loan a business buyer would pay off over time to borrow in purchasing a business…. paid on long-term debt | $ 24,714 | $ 29,055 | $ 23,098 |
| Interest paid on lease financing obligations | $ 104 | $ 104 | $ 105 |
| Accruals for capital expenditures | $ 1,241 | $ 15,062 | $ 7,605 |
| Common stock issued for consideration in acquisition | (—-) | ($ 145,333) | (—-) |
| Non-cash reduction of lease financing obligations | —- | —- | $ 2,538 |
| Income taxes paid (refunded) net | $ 153 | $ 144 | $270 |
Chipotle Restaurant Key Takeaways from Income StatementOne of the major financial statements focused on a business’s revenues and expenses in a particular period. It is also known as the profit and loss statement. The income statement includes the gross profit, earnings before tax, and net profit.Tax Returns: The forms a business makes on an annual statement of income and personal circumstances sent to the IRS to…
Surprisingly, the net income for 2020 actually increased from the previous year, despite the economic hardships brought about by the COVID-19 pandemic, increasing by about $5 million from $350,158,000 in 2019 to $355,766,000 in 2020. The majority of their revenue comes from sale of food and beverage products, but they also experienced a large increase in revenue from delivery service revenue, making more than double from this avenue than in 2019.
Chipotle Cash FlowThe net profit before taxes plus payments to the owner(s), interest, and depreciation of assets…. Statement Insights
The cash flow statement is considered the most important document out of the three financial statements because it is supposed to give the most accurate overview of a company’s financial health. Companies can go to great lengths to manipulate their earningsTotal earnings received by a business based on the U.S. Income Tax Return. The financial numbers of these earnings depend on the type of business, but can include income, guaranteed payments, compensation, interest, depreciation, elective deferrals, and contributions.For further details on how to calculate earnings and where to find financial numbers on tax return forms based on the type of…, but the amount of cash it has demonstrates its true ability to meet expenses and repay investors. Chipotle holds a significant amount of cash, which increased from the previous fiscal year (2019). By the end of 2020, they held over $600 million in cash, about a $100 million increase from the previous year.
Chipotle Quarterly Earnings (Q1 2021)
Quarterly Earnings (dollars in millions)
| For the three months ended | |||||
|---|---|---|---|---|---|
| March 31, 2021 | December 31, 2020 | September 30, 2020 | June 30, 2020 | March 31, 2020 | |
| Number of restaurants opened | 40 | 61 | 44 | 37 | 19 |
| Restaurant closures | (5) | (1) | (3) | (3) | (2) |
| Restaurant relocations | —- | (2) | —- | (3) | (1) |
| Number of restaurants at end of period | 2,803 | 2,768 | 2,710 | 2,669 | 2,638 |
| Average restaurant salesThe total amount in dollars made in the business before expenses are deducted. See also Gross Revenue…. | $ 2,313 | $ 2,223 | $ 2,199 | $ 2,161 | $ 2,217 |
| Average restaurant sales, excluding delivery MPI | $ 2,273 | $ 2,200 | $ 2,192 | $ 2,161 | $ 2,217 |
| Comparable restaurant sales increase (decrease) | 17.2% | 5.7% | 8.3% | (9.8%) | 3.3% |
| Restaurant Rent Expense | $ 118,444 | $ 107,147 | $ 81,409 | ||
