krause fund research spring 2018 chipotle mexican grill ... · restaurants. the fast‐casual...
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Krause Fund Research Spring 2018
Consumer Discretionary
Andrea Palazzo Ryan Williams Andrea-palazzo@uiowa.edu Ryan-williams-1@uiowa.edu
Katherine Phillips Katherine-m-phillips@uiowa.edu
Investment Thesis
April 10, 2019 Recommendation: HOLD Current Price $718.85 DCF & EP Intrinsic Value $689.95 Target Price Range $670‐710
52 week high $721.21 52 week low $318.11 Beta 1.05
Market Cap (M) $19,753 Shares outstanding (M) 28 EPS (2019E) $13.02 P/E Forward 55.20
ROA 7.79% ROE 12.94%
Current Ratio 1.81 Debt to Equity 0.57 Fixed Asset Turnover 3.53 Gross Margin 18.73%
Financial Ratios
Analysts
Stock Performance Highlights
Share Highlights We recommend a hold rating for Chipotle Mexican Grill, Inc. As Chipotle benefits from increasing returns to scale, its profit margin grows and shareholders are rewarded with positive returns. However, it is difficult to justify the premium share price from a value investors’ perspective given Chipotle’s high P/E ratio relative to competitors. Drivers of Thesis
We predict that an increase in same store profit will be generated by increasing ticket prices and decreasing restaurant operating expenses resulting in an increase in gross margins from 18.73% to 22.94% by 2022.
Following the 2015 E. coli crisis, the stock price became severely undervalued and has more than doubled since the 52 week low. The rapid increase in the stock price as it returns to pre‐2015 levels is unsustainable long‐term.
Chipotle has committed to opening roughly 200 new stores each year and increasing consumer foot traffic with innovative marketing strategies that cater to health conscious consumers.
Risks to Thesis
Because Chipotle’s sales are highly dependent on the United States market conditions, a slower growth rate in the US economy will have a larger impact on Chipotle than other, more internationally diversified restaurants
Since there is already precedence for a health scare, the success of Chipotle is highly reliant on maintaining an image of above‐average health standards. Failure to meet these standards will result in diminishing returns and losses for shareholders.
Company Performance Highlights
Financial Ratios
Company Description
Chipotle Mexican Grill, Inc. operates as a fast‐casual restaurant serving a relevant menu of burritos, burrito bowl, tacos and salads. In an attempt to bring the realm of fine dining to the world of quick‐service, Chipotle utilizes the use of high quality, real ingredients and distinctive interior design.
Chipotle Mexican Grill, Inc. (NYSE: CMG)
12 Month Performance
Relative Financial Performance
Earnings Estimate
Source: Yahoo Finance
Source: Yahoo Finance
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Economic Outlook
U.S. Real Gross Domestic Product (GDP) In the time since the U.S. economy began its recovery from the financial crisis of 2007, U.S. real Gross Domestic Product (GDP) has continued to grow at a consistent, albeit slow rate. Real GDP is one of the broadest economic indicators as it attempts to value all goods and services produced within the U.S. on an annual basis; consequently, it is impacted by the successes or failures of every sector contributing to the U.S. economy. Since 2009, real GDP has grown at an average rate of 2.2% per year, including 2.9% growth in 2018. There are two primary reasons why we feel the real GDP growth numbers for 2019 will not exceed those from a year ago. First off, it is simple regression to the mean. Since 2009, a real GDP growth rate of 2.9% or higher has occurred only one other time; in 2015 real GDP grew by approximately 2.9%. In 2016 and 2017 real GDP grew by 1.6% and 2.1% respectively, for an average real GDP growth rate from 2015‐2017 of 2.2%.1
The second reason to we expect a slight decline in GDP growth is the lagging effects of the 35‐day government shutdown. 2019 GDP is expected to be 0.02% lower (about $3 billion) as a result of the shutdown. First quarter results showed the impact to be considerably larger at 0.2% (annualized), though nearly all that spending will be distributed across the remainder of the year resulting in a 0.02% decrease in GDP2. We predict GDP to continue growing at a steady rate of 2.2% per year moving forward.2
Source: www.thebalance.com/us‐gdp‐by‐year1
Consumer Confidence Index (CCI) Strong Consumer Confidence numbers indicate that the short‐term outlook for Nike and the consumer discretionary sector shows strong growth. The Consumer Confidence Index (CCI) is a leading indicator for the US economy and is of
import to the consumer discretionary sector as it reflects whether consumers are optimistic about the direction the economy is headed, or pessimistic. Optimistic consumers tend to feel more secure in their occupations and investments and are thus more inclined to increase spending, while pessimistic consumers feel the need to safeguard their savings to hedge against financial uncertainty. Although the CCI fell from 131.4 in February 2019 to 124.1 in March, the number is still strong. This is only slightly worse than the 127.0 figure from a year ago in March 2018. Moving forward we expect the CCI to remain strong with only a slight decrease of 2.0 as the economy continues to fully recover from the month‐long government shutdown.3
Unemployment Rate & Labor Force Participation Rate The combined impact of an extremely low unemployment rate with a labor force participation rate which has stayed steady since 2013 means that a larger percentage of the U.S. workforce is employed, which is a very good indicator for the consumer discretionary sector as a whole. Due to the non‐essential nature of sector, firms within it such as Chipotle sees a larger boon from strong labor market numbers than other more inelastic sectors might. The unemployment rate is a measure of the percentage of unemployed people relative to the number of workers participating in the labor force. The labor force participation rate measures what portion of the eligible labor force is actively working or seeking work.
Source: Bureau of Labor Statistics4
While the unemployment rate from December 2012 to December 2015 fell from 7.9% to 5.0%, the labor force participation rate similarly fell from 63.7% to 62.7% during that same time. So, despite a much lower unemployment rate, there were not nearly as many people returning to work as that number alone implies. From January 2016 through March 2019, that trend has reversed. Labor force participation is up 1% during that period, while the unemployment rate has continued to drop from 5.0% to 3.8%. We expect both the unemployment rate and the labor force participation rate to increase by about .2% by the end
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of the year. This is a good sign as previously disgruntled workers continue reentering the workforce.45
Source: Bureau of Labor Statistics5
Corporate Costs of Capital The Federal Funds Rate is the rate at which banks borrow from other banks. The Federal Reserve has adjusted their short‐term goals for the Federal Funds Rate and are not expected to make any additional rate increases throughout the remainder of 2019. This is an important economic indicator as it influences the cost of borrowing for firms. We expect the Federal Funds rate to remain between 2.25% and 2.5% in the short‐term, and to be at 2.25% by the end of the year.6 Another key indicator of the corporate costs of capital is the 10‐year U.S. treasury rate. Since the beginning of 2019, 10‐year treasury yield curve rates have declined from 2.66% to 2.55% as of April 12, 2019. The U.S. treasury Yield Curve has inverted from the 1‐year through 7‐year treasuries, which often signifies economic trouble on the horizon. The inversion of the yield curve in combination with the Federal Reserve’s decision to halt their rate increases signifies that the corporate costs of capital moving forward should stay low. While a low cost of capital is typically good, if the reason rates are low is because the Federal Reserve has dropped rates in order to jolt a sputtering economy that is a bad sign which could be even worse for more elastic companies within the consumer discretionary sector.67
Source: U.S. Department of Treasury6
Consumer Price Index (CPI) The Consumer Price Index (CPI) is a cost of living driver which takes the weighted average of many goods and services in order to measure the change in costs over time. This is one of the most commonly used measurements for inflation. The change in the CPI can be used to predict other economic indicators as well; when inflation gets too high, the Federal Reserve tends to decrease the reserve requirements allowing banks to lend to other banks at a lower rate, encouraging investment. When inflation is very low (or potentially negative), the opposite action is taken. Since 2012, the CPI has increased at an average annual rate of 1.54%. The rate has been a slightly higher 2.03% looking back only to 2016. This is on the low side historically but is not yet a cause for concern. In the short‐run, a slowly increasing CPI is fine for the consumer discretionary sector so long as real wages continue to increase at their current pace. We expect the CPI to remain at 1.9% moving forward.8
While the slowly increasing CPI does not indicate that firms across all industries have been able to pass on increased input costs related to U.S. trade tariffs, this is not universally true for industry leaders whose brands are as dominant as Chipotle. Chipotle has been able to retain most of their profit margin.
Source: U.S. Inflation Calculator8
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Restaurant Industry Analysis
Industry Description The restaurant industry is composed of two operating segments: a full service and quick service segment, which includes the fast‐casual subcategory. The restaurant industry as a whole relies heavily on positive market conditions and consumer spending. The quick‐service segment, in which Chipotle operates, is in a strategic position within the volatile industry to benefit from consumer downgrades from full‐service options in times of economic decline.9
Full‐Service This segment includes the traditional line of restaurants, offering table seating and payment at the table, with prices ranging from moderately low to high. This segment is highly fragments, with Darden holding 5.8% of this segments market share and several smaller competitors making up the majority of market share. The popularity of this segment is declining and forecasted to grow only .2% more than 2017 growth of 2.6%, to just 2.8% in 2018.10
Quick‐Service (Fast Food)
Source: Statista 11
The fast‐food segment is defined by quick meals at a low price point. This segment saw nominal sales growth of 4.4% in 2017, more than double the growth seen in the full‐service segment. The fast‐casual subcategory, in which Chipotle operates, shows the greatest potential for growth in this industry.9 This segment promotes higher quality food than traditional fast food, at a lower price point than full‐service restaurants. The fast‐casual segment grew 8.9% in sales in 2017, outpacing all other players in the restaurant industry.10
Developments and Industry Trends Growing Health Concerns As consumers’ health awareness grows, healthy menu options will drive growth in this industry.9 Customers are becoming more health conscious as obesity rates and health care costs rise, especially in children with nearly 20% of American kids labeled as obese. 70% of consumers also name healthy options as an important factor in choosing a quick service option. Recent lawsuits related to obesity and foodborne illnesses have also diminished returns for several players in the industry, including Chipotle who saw a 13% decrease in revenue after an illness scare.10 Industry leaders in the fast food segment have adapted by offering healthier menu options and marketing the high quality and the nutritional value of their food. McDonalds and Wendy’s led this initiative by offering salads and publicizing nutritional facts. Fast‐casual players, like Chipotle, have also started offering options that specifically target individuals on diet trends with the Keto and Whole 30 lifestyle bowls. Digitizing the Market The use of digital ordering in fast service restaurants is becoming increasingly common.10 Chains across the industry are utilizing smart phone apps for in‐store pick‐up and delivery. The use of digital in‐store kiosks, as seen in McDonalds across the globe, are also on the rise. Mobile payments are increasing by 50% each year, outpacing restaurant foot traffic. The rise of digital ordering is going to boost same store sales as customers enjoy a more convenient ordering process. The food delivery market also consists of over half of all deliveries made, and growth in third‐party ordering services compliment this food delivery growth. Third party food delivery services, like GrubHub and UberEats, are projected to grow on a 5‐year CAGR of 10.3%.10 As the use of technology grows in this industry, players must remain cautious of security breaches to mitigate negative impacts on brand image and loyalty.
Major Players Quick service conglomerates dominate the industry, but the fast‐casual segment is seeing high growth and cutting into market share. Main players in the fast‐casual segment are Chipotle, Panera, and Five Guys. While this segment is growing in popularity, fast‐casual restaurants must remain innovative in order to steal market share from prominent quick service chains with relatively high brand equity.
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Source: CFRA Industry Survey10
Porter 5 Forces Threat of Competition, High and Increasing: The industry is highly fragmented, with several chains as well as independent local shops competing for consumer foot traffic and overall market share. Fast food and casual restaurants compete primarily based on the quality of their location and food quality. Franchises represent a small number of total competitors, but they harness in a substantial amount of total industry revenue, with 38.96 billion in economic output in 2018.12 Companies that have adapted to the franchise model disperse their overall risk and enjoy rapid growth. Companies operating in this model threaten the success of corporate run companies, like Chipotle, who are limited to corporate expansion. Threat of New Entrants: High and Increasing: It is fairly easy to enter the market, with low initial capital outlay and little need for an established customer base. There is an oversaturation of big name chains but owner‐operator businesses are able to conduct business in local areas without being demolished by big name chains.9 The increasing trend towards the franchise model, with 2% increase from 2017 to 2018, also make it easy for new entrants who enter through franchise.12 Threat of Substitutes: Moderate and Increasing It is not difficult for consumers to find substitutes in the diversified food industry. Consumers can choose from any number of restaurant choices, ranging from pizza to chicken, or even resort to cooking at home. Meal kit delivery service options entering the market are also a threat by substituting the high‐quality meals that most fast‐casual restaurants promote. This niche segment is outpacing industry averages and predicted to grow from 1 billion in sales in 2015 to over 10 billion in sales by 2022.13
Bargaining Power of Suppliers: Moderate and Steady Suppliers for the industry include wholesale food suppliers, as well as the farms food supplies directly come from. The
abundant number of local farms and food distributors in the US have saturated the supplier market, decreasing their ability to negotiate prices. Chipotle utilizes personal relationships with around 30 distributors and continues to expand this number to mitigate the power of each individual supplier. Suppliers that maintain a higher reputation and serve higher quality products are able to negotiate at a higher price point, maintaining some negotiating power in the industry.9 Bargaining Power of Buyers: Moderate and Steady Consumers, as a collective whole, control the success of each operator in the industry but one consumer does not make or break the company’s success. While the abundance of substitutes in the market make it is relatively easy for consumers to switch their preference in the case of price fluctuations or shifts in taste, minor buyer fluctuations won’t alter company sales.
Catalysts for Growth International Expansion Most players in the industry are pursuing organic growth in the international markets, with some expansion complimented by joint ventures with local food providers. We witness the market leader, McDonalds retracting store openings in the US market by 1% and continuing expansion abroad. The Asian market promises high returns, with changing consumer preference and an increase in the working population and purchasing power of the market.10 India is also a lucrative market with changing consumer preferences and opportunity for profit with a total 49.6 billion foodservice market value. Chipotle has a relatively small presence abroad, with only 37 stores open predominately in Europe in 2018. Their competitors in the quick service sector have tapped this opportunity while most other fast‐casual remain domestic in the US. Chipotle could be a market leader in the fast‐casual segment by following the progress of fast food chains in these growing markets.10 Tech Based Players A shift to electronic operations is key for future success in this industry with roughly 20% of consumers reporting that technology options are important when they are choosing a restaurant.10 Consumers value a quick and easy ordering process and technology must now be integrated in the food ordering process in order to meet customer expectations. Major fast food chain, like McDonalds, have implemented digital ordering kiosks and utilized apps for easy ordering.
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Key Investment Considerations Positives As a whole, the sector is outperforming the market. As of October of 2018, the Consumer Discretionary Index was up 12.1% compared to S&P 500 returns of a 5.1% increase.10 Due to recent economic growth and increases in consumer spending the restaurant sector has seen steady increase in sales and overall return for investors. Negatives Due to the industry’s reliance on market fluctuations and consumer spending, it makes investment vulnerable to visible economic slowdown. Chipotle’s sales are volatile to any fluctuation in consumer income, making the success of any investment unsteady.
Company Analysis
General Information Chipotle offers a menu of burritos, burrito bowls, tacos, and salads in a restaurant setting that combines the feel of fine dining with convenience of quick service dining. Chipotle earns most of their revenue from the 2,452 domestic Chipotle restaurants but is actively developing an international presence with 37 international restaurants currently in operation. All restaurants are corporately owned, and none are franchised. We think the opening of new site locations for Chipotle will be a constant long‐term goal and growth strategy for the company. Restaurants are categorized as end‐caps (at the end of a line of retail outlets), in‐lines (in line of retail outlets), free‐standing or other. As of December 31, 2018 Chipotle operated 1,605 end‐cap locations, 368 free‐standing, 348 in‐line, and 140 other locations.14 Among the four different categories, we see Chipotle opening more end‐cap locations because they are located near the end of a strip center or shopping mall, where the restaurant is more accessible, visible from more than one intersection, and offers more parking spaces. Chipotle Stores Across the U.S.
Source: Red Lion Data27
There is a corporate wide emphasis on innovation with the development of digital mobile ordering platforms and digital order pick up shelves and lanes. For the year end December 31, 2018, 10.9% of sales came from digital ordering. We think this percentage will grow as consumers become more aware of this feature and choose digital platforms first to streamline the ordering process.14 Chipotle plans to develop 140 to 155 new restaurants in 2019, a lower number per year than previous years because of the difficulty they are experiencing in staffing in training new restaurants.14 We do not see this as a negative for the Chipotle business because it is the goal of the company to hire and train top performing employees in order to sustain high quality and consistency in all restaurants. In Q2 reporting, Chipotle had a 3.3% increase in same‐store sales, which was primarily tied to increases in menu prices and queso being added to the menu.23 Same‐store sales growth accounts for growth in existing locations and the opening of new stores.
Corporate Strategy In 2018, there was a push to promote the use of delivery services in the food ordering process. Chipotle relied heavily on third party delivery services for this initiative, which is more efficient than a dedicated driver for the company. It is difficult to predict sales of this new initiative, although we estimate that same store sales growth will be 4% to 5% the next five years but given consumer trends this push to streamline the ordering process will positively impact sales and revenue for the company in 2019. The restaurant industry is highly competitive, and Chipotle combats competitive pressure with a new centralized marketing strategy to differentiate their services and build a stronger customer base. In October 2018, Chipotle launches the “For Real” campaign demonstrating the difference Chipotle has as a leader in healthy, authentic and quick service meal options.14 The prominent marketing initiative encourages customers to question where ingredients come from, and ultimately suppliers legitimacy, may lead to litigation with suppliers.14 We know this whole initiative is a counter to the food‐safety scare back in 2015, after an E.coli breakout in certain locations. So far, this initiative has led to an increase in sales, given Chipotle’s position as a healthy food supplier in the quick service sector, but positive gains may be combated by a correlated rise in legal fees. It is our prediction that this new marketing strategies by the company will bring them back to revenues and growth they saw before
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the health scare, estimating revenues will increase and average of 12% in the next 5 years.
Recent Earning Analysis On February 8, 2019, Chipotle released their annual filing report for fiscal year 2018. Revenues increase 8.7% to $4.9 billion for FY18 and digital sales grew 42.4%.14 Digital sales are driving new growth by generating customer loyalty and brand recognition and will support high return, like we predicted, in upcoming years. We forecast that revenues will increase 12.6% in FY19, driving an increase in Economic Profit and ultimately providing a 12.00% ROIC for the year end. Operating margins increase to 18.7% as a result of menu price increases and relief in avocado prices. Margins should remain relatively steady as price competition from competing restaurants challenge rising menu prices. EPS rose in total 2.3% in FY18 to 6.35, but decreased 25.8% in Q4 as a result of corporate restructuring and restaurant closure at year end.14 Our forecast shows EPS to be 13.02, which highly correlates with other analysts’ predictions. This forecast is increasing so much because of our high revenue estimates and decreasing shares. Chipotle Forecasted EPS:
Source: Chipotle 2019 Annual Report14
Suppliers and Distribution The Food Safety Advisory Council (FSAC) oversees the 24 independently owned regional distribution centers. These distributors purchase supplies from pre‐approved supplier that fit within pricing guidelines set by corporate headquarters.14 Food, beverage, and packaging costs were 32.9% of revenue, up around 60 points, primarily due to the benefit of food price increases taken in restaurants in 2017 and 2018.14 Labor cost trend for 2018 were 27.3% of revenue and 26.9% in 2017. Labor cost increased as a percent of revenue mostly because of an increase in wage inflation. The increase was offset by sales leverage as revenues increase 8.7% in 2018, which ultimately was a benefit from menu price increases.14 We project these number to continue to increase for food, beverage, and packing and labor cost to correlate with our prediction in inflation and menu prices increases.
Competition Chipotle is in competition with other fast‐casual companies such as Qdoba Restaurant Corporation (owned by Jack in the Box, Inc.), and Taco Bell (owned by Yum Brands), the market leader in Mexican‐style fast‐food according to Investopedia.20 Chipotle has considerably more locations than Qdoba, at more than 2,400 compared to more than 700 respectively but has approximately 60% fewer locations than Taco Bell.20
Source: Statista28 Chipotle’s stock suffered from October 2015 through April 2018. This extreme drop came after the E.coli breakout and food safety concern in specific Chipotle locations. Those concerns dropped share prices from $748 on August 10th 2015 down to $255 on February 5th 2018. In the past year the stock has more than doubled to nearly $600 a share according to Yahoo! Finance. In comparison Jack in the Box Inc., owners of Qdoba, have seen prices fall nearly 10% over that same span.21,22 Other competitors to Chipotle that have had food safety concerns in the past are Taco Bell, as they had multiple outbreaks of salmonella, E. coli and hepatitis A. In 2011, Taco Bell was faced with a beef quality lawsuit because of a Salmonella outbreak that cause illnesses to 68 people in 10 states.24 Taco Bell, which is known to be Yum Brand most profitable fast‐food brand, same‐store sales dropped 5% in the year the lawsuit was publicized.25 Since this incident Taco Bell has recovered in terms of sales and same‐store growth, and this is where we predict Chipotle to be in the next few years. History shows that restaurants are able to recover from lawsuits and scares like these, with attention to marketing and customer loyalty.
Catalyst for Growth and Change One area in which Chipotle is seizing on the shift in consumer preferences is in the company’s ability to provide a healthier alternative to traditional fast‐food in less time than a sit‐
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down restaurant. A 2018 study released by the International Food Information Council Foundation used survey data to graph which nutrition facts consumers found most important to healthy eating habits, as well as which nutrition facts were considered the least healthy.17
Source: International Food Information Council Foundation17 Two of the three most sought‐after nutrition facts according to the survey are foods which contain high amounts of protein and are rich in vitamins and minerals. Chipotle compares favorably to other industry leaders by both these metrics. In comparison to a McDonalds “Big Mac”, one basic Chipotle burrito contains 54g of protein verses 25g for the Big Mac.18,19 By these metrics, we believe Chipotle compares favorably against most of the top products of other industry giants including Burger King, Wendy’s and Taco Bell.
SWOT Analysis Strengths Growing Expansion and Recognition Chipotle was first opened in 1993 as one single restaurant in Denver, Colorado and now in 2018, they reported having 2,452 restaurants in the United States and 37 international restaurants.14 The expansion of new Chipotle restaurants opening can increase the brand recognition for the company. In fiscal year 2018, Chipotle reported revenues increased by 8.7%, mainly from comparable restaurant sales increases and new restaurant openings.14 Chipotle has a goal to make their brand more than just food and as a lifestyle brand that is visible, engaging and relevant in culture.14 We believe that with more new restaurant openings, they will be able to continue to see growth in revenue and sales. Same store‐sales have fluctuated but also recovered since 2016, with the most recent report of 3.3% in Q2 2018, which beat expectations.26 High same‐store sales shows that more customers came into a particular location, purchased more items per order, paid more for a menu item or all three combinations. We estimated same‐store growth to increase in estimated years and this can be a large strength for the company’s future.
Source: https://www.fool.com/investing/26 Marketing Initiatives Chipotle has focused investments on marketing and media strategies that can show the brand with being more than just what are normal TV campaigns and commercials. In October 2018, they launch their biggest brand campaign called the “For Real” launch, which is focused on encompassing their use of real ingredients, fresh cooking and relevance in culture.14 The campaign highlighted the 51 ingredients used daily in the restaurant, that can be recognized and pronounce by consumers, in order to be transparent with customers about the brand of Chipotle. Chipotle focuses their branding on being more unique that their competitor and showing the “real” side of the business. In most recent news, they launched the “Behind the Foil” campaign on February 11, that features employees and farming partners to showcase what really happens within the business. The testimonials from the employees are unfiltered and emotional, showing the true impact Chipotle has on cultural lives, showing footage on the job, in the kitchen, and preparing food.15 We believe that if Chipotle continues to show consumers the raw image and brand of the business, they will be able to connect with consumer in a stronger way than competitors. This is what consumers are wanting to see instead of the unrealistic branding. Weaknesses Higher Price Points Chipotle specializes in burritos and tacos that are higher in quality with in return makes them higher priced. A large portion of the success of this company, is to persuade consumers to buy their food over other competitors. Being in such a large industry like quick service restaurants, having a competitive advantage over other makes all the difference. With the abundance of fast‐food, cheap option now‐a‐days, Chipotle has to inform customers about the benefits of fresh, prepared quality food over the others. A new tactic Chipotle
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must tackle is justifying paying higher prices for their quality food. We recommend that within Chipotle’s new marketing tactics, they should educate consumers on the benefits of fresh ingredients for their health and wellness.
Source: Statista28 Dependence on Limited Small Farmers As Chipotle's brand is all about fresh and quality ingredients, they get much of their supply from local farms to insure this notion. They communicate to the world that the business spends time on the farms where the food comes from and in the field to know the quality and origins.14 Relying farms as the main supply for food can be a weakness for the company as it exposes them to risk of food safety and localized illnesses, but this is also the only source able to be used for fresh ingredients. During October and November of 2015, Chipotle broke the media because of the E. coli bacteria in their food that traced back to Chipotle’s dependence on small, independent farmers.14 This media coverage surfaced the world and decreased sales, gave negative publicity and impacted people perception of the brand. Chipotle understands a fresh menu is more susceptible to health issues, but it is on Chipotle’s radar to be more involved in the process with the local farms in order to maintain quality control. We believe Chipotle should put a large focus on food safety in order to prevent future legal issues. Opportunities Digital Marketing Chipotle is prioritizing the development of their digital marketing platform and highlighted this in the recent Q4 2019 report. The first opportunity that they are heavily applying is “Chipotlane.” This new idea leverages the idea of convenience for consumers. Chipotlanes are a spin‐off on drive‐thru’s as it allows the customer to pre‐order their food through the Chipotle app and pick up your order through the “Chipotlanes”. There are ten initial restaurants testing the mobile ordering pick up lane and is showing promising results with a higher mix of digital and total sales16. At fiscal year‐end of 2018, 10.9% of Chipotle’s revenue came from digital
orders, with a growth from 8.9% in Q1 to 12.9% in Q414. The digital impression of the brand is increasing year over year and is showing positive financial results. We believe that if Chipotle continues to expand the Chipotlanes to more of their locations, their growth will continue. This new initiative is giving consumers more access and convenience to Chipotle, which is a strong asset. International Expansion Chipotle has 37 locations outside of the United States including 23 in Canada, 7 in the UK, 6 in France and 1 in Germany.14 There is substantial room for growth in international expansion and Chipotle has the potential. Many of the top competitors within the restaurant industry, highlighting McDonalds and Starbucks, are well known brands in places outside of the United States. Chipotle has realized that the markets outside the US have different competitive conditions, consumer tastes, and discretionary spending patterns.14 The idea of fast‐casual Mexican food is a new concept for individuals abroad and Chipotle has not reported on the success or failure they have seen yet with this market segments. As there still is experience that Chipotle needs to gain in the international segment, the potential of brand recognitions and revenue growth is there. Chipotle has the opportunity to capitalize on this investment and expand their brand to more. Threats Food Regulation and Safety Concerns A large threat that lies heavily on the brand of Chipotle is the well‐known public media coverage about bacteria found in their meat and vegetables, specifically salmonella, E. coli, hepatitis A and listeria. Chipotle saw a large decrease in guest traffic after the most widely known case in fiscal year 2015 of E. coli in restaurants. This threat of diseases could have potentially tampered the likelihood of those consumers ever returning even after the case was solved. The overall concern of the food regulation and safety within the restaurant industry has increased in recent years. This negatively affects the consumers’ perceptions of the brand, brings down the availability of ingredients able to be used and adversely impacts the overall sales of the company. Fast‐Food and Fast‐Casual Competition Chipotle faces intense competition by being in the restaurant industry among some of the most well‐known, multinational restaurants. Having so many chain restaurants to eat at, it makes it challenge to have consistent guest trafficking, especially when Chipotle is one of the newer brands within the industry as it is only 25 years old. The main threat that is targeting Chipotle is competition having cheaper prices and value menu items, which is a marketing strategy that Chipotle does not have. We believe that although competition has
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cheaper prices for consumers, their products show limited health benefits. Chipotle’s edge can be their take on fresh ingredients that are known and prepared daily. In January 2019, they launched lifestyle bowls to attract consumer hoping to achieve their New Year's resolutions. Within the first money, they earned 1.3 million dollars in media impressions.16
Valuation Analysis
Revenue Decomposition Chipotle's total revenue growth is driven primarily by the opening of new stores and increases in same store revenue growth. The vast majority of Chipotle restaurants operate in the US, with less than 2% of total stores located abroad in 2018. Chipotle still benefits from the growing popularity of the fast‐casual industry in the US, leading us to forecasted growth estimate in US store openings to 9% in FY19. Chipotle cannot sustain this 9% growth given the vast competitive landscape and uncertain economic future, resulting in positive but declining growth estimates until leveling off at 5% in 2025. As international markets remain a more lucrative opportunity for growth, we predict Chipotle to utilize this potential by growing their international operations by 20% in 2019, with 44 international store openings. This high growth level abroad is also not sustainable and will decrease until leveling off at 7.5% in 2025. With increasing ticket prices and an increase in consumer foot traffic, Chipotle will also be able to increase same store sales. In FY18, Chipotle saw a 3.30% increase in same store growth and this growth should continue for the next several years until returning to a steady 3% growth in 2025. Growth in same store sales and rapid restaurant expansion will result in total revenue growth to $10,760 by 2025.
Operating Expenses Operating expenses consist primarily of food, beverage & packaging costs, labor costs and occupancy costs. Food, beverage and packaging costs have historically been 34.06% of total revenue. Due to the fresh nature of Chipotle’s ingredients, their proclivity to buy from local sources, and the extremely high percentage of total sales based in the U.S., we project this cost to continue growing with total revenue. Labor costs are the second largest operating expense, historically accounting for 27.50% of total revenue. We forecast this number to decrease slightly to 26.00% until 2021, and then remain at 25.00% of total sales from 2022 through perpetuity. The main driver of this relative decrease
in labor costs as a percent of sales is innovations in automation within the food service industry. We expect that the company’s demand for labor will decrease as workers are slowly replaced by machines. Finally, we project the increase in same‐store sales to outpace the increase in occupancy costs, leading to a slight decrease in occupancy costs as a percent of sales from 7.32% to an eventual CV rate of 6.00%.
Margins Chipotle will be able to widen margins, as they increase total revenue and decrease proportional growth of several operating costs. We expect food, beverage and packaging costs to remain a constant percentage of sales, as these costs should correlate directly with consumer traffic and consumption. However, Chipotle can minimize labor costs with increased efficiency from digital assistance in operations. We forecasted a 1.5% decrease in labor costs to 26% of sales in 2019 and forecasted only another 1% decrease in 2022. Occupancy costs and other operating costs will also slightly decrease as a percent of sales, to account for increased efficiencies and return to pre‐2015 norms.
CV Growth After combining all our estimated values for each specific segment, we projected that Chipotle’s continuing growth for steady state will be 3.5% for 2025 and beyond. In our industry analysis, we estimated that the GDP growth will be expected at 2.2%. Our CV growth estimate was projected by using our economic outlook forecast for GDP. We projected CV growth for Chipotle to be higher than GDP because the fast‐casual restaurant industry is growing the highest rate among fast food chains and we see Chipotle’s continuing value moving with this growth.
Capital Expenditures Chipotle outsources a majority of their food and product lines from manufacturers and suppliers in the United States. There is limited requirement for machinery, or any heavy equipment used by the company. In order to forecast out the capital expenditures of Chipotle, we utilized the inflation rate of 1.9% as a replacement rate. We believe that the inflation rate is a correct replacement because it serves as a cost for replacing the limited equipment and machinery used in order to operate the stores. Our capital expenditures are estimated to increase 4 points each year from 2019 to CV of 2025.
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Weighted Average Cost of Capital To discount the unlevered future free cash flows in our Discounted Cash Flow and Economic Profit models we utilized the Weighted Average Cost of Capital. Cost of Debt Chipotle’s debt is not publicly traded, so in order to approximate their pre‐tax cost of debt we used YUM Brands 2026 YTM bond at 4.81%. YUM brands is a comparable company and one of Chipotle’s main competitors. Approximating Chipotle’s cost of debt despite their lack of debt is necessary to properly value their operating leases. Multiplied by one minus the marginal tax rate of 27.84%, the after‐tax cost of debt for Chipotle came out to 3.47%. Cost of Equity The cost of equity was computed using the Capital Asset Pricing Model (CAPM). Chipotle has a raw beta of 1.05 sourced from Bloomberg, and the 5‐year treasury bond rate of 2.28% was pulled from the Department of the Treasury to estimate the risk‐free rate. An equity risk premium of 5.08% was taken from Damodaran’s industry estimates, resulting in a cost of equity equaling 7.61%.
Valuation Models For the DCF, we utilized the key value drivers, NOPLAT and change in Invested Capital (IC), to calculate free cash flow and discounted them back to the WACC estimate. In our EP analysis we forecasted beginning Invested capital, divided it by NOPLAT, and multiplied it by the difference between the forecasted ROIC and WACC to get the EP for each year along the forecasted horizon. After discounting the continuing value, we summed the present value of free cash flows to find the value of operating assets. We added back non‐operating assets and subtracted non‐operating liabilities to reach the value of equity. Finally, we divided the value of equity by shares outstanding and did a partial year adjustment to come to the final intrinsic value of stock. Our DCF and EP valuation models estimated an intrinsic value of stock price of $689.95. We believe that the DCF and EP valuation models provides the most accurate price for Chipotle’s intrinsic value. Chipotle does not have dividends and their P/E ratio is incomparable to competitors with such a premium stock price, making both the DDM and relative valuation two insufficient models to value the company. For the relative valuation model, we utilized the fundamental P/E ratio for our calculation of the implied relative value,
which computed to $429.77. To choose comparable companies we included competitors of Chipotle who are similar in size, and who do a large portion of their sales in the U.S. Under this criterion, we included: Yum Brands Inc., Jack in the Box Inc., Darden Restaurants Inc., Dunkin’ Brands Group Inc., Potbelly Corporation, and Wingstop Inc. We feel that the relative valuation model does a worse job of valuing Chipotle than does the DCF and EP models because of Chipotle’s relatively high forward P/E ratio. Chipotle’s forward P/E ratio is more than twice that of all other competitors lists aside from Wingstop Inc and Potbelly Corporation, resulting in an extremely deflated implied relative value under the relative valuation model. Similarly, Chipotle’s EPS is more than twice as large as any competitor included on the list due to the low number of shares outstanding. Chipotle is being valued as a growth company despite being just as established as many of the industries larger players. This resulted in a poor estimation when using the relative valuation model. The DCF and EP models better encapsulate Chipotle’s higher growth potential, and thus the relative valuation model was not weighted as heavily in determining Chipotle’s target price. The Dividend Discount Model provides insufficient guidance in valuing Chipotle's stock. Chipotle does not currently distribute dividends to its shareholders, resulting in 0 discounted cash flows in the DDM. Given this flaw, we do not believe the $1,333 intrinsic value estimated in this model is a valuable outlook on Chipotle’s stock price.
Sensitivity Analysis We used a variety of data tables to compare two independent variables and their impact on Chipotle’s estimated stock price.
Beta to Equity Risk Premium The risk premium is a key assumption which impacts Chipotle more so than many other companies because Chipotle is so heavily financed by equity rather than debt. Our assumed risk premium of 5.08% was taken from the Damodaran industry risk premiums to provide a standard rate for firms comparable to Chipotle. The risk premium has an inverse relationship with the stock price, so as it decreases the stock’s price increases and vice versa. Measuring its effects against beta is particularly interesting for Chipotle because their beta is only slightly more volatile than the market.
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Pre‐Tax Cost of Debt to Marginal Tax Rate We analyzed the relationship of the pre‐tax cost of debt to the marginal tax rate because these numbers directly impact our DCF and EP analysis and price estimation. The marginal tax rate directly impacts net income, while the pre‐tax cost of debt impacts the WACC calculation. A .10% increase in the marginal tax rate only decreases the price by 26 cents and a .1% increase in the pre‐tax cost of debt results in a 66‐cent increase in price.
Average Sales Per Store to Total Number of Stores Testing the relationship between average sales per store and total number of stores offers insights as to how quickly the stock price grows when both variables are increasing. It also provides one of the most relevant projections as the probability of both sales and the total number of stores increasing given our projections for Chipotle is extremely likely. Therefore, this sensitivity analysis provides somewhat of an analogue ranging from worst to best case scenarios based primarily on the success or failure of their product.
Food Costs to Labor Costs We examined the relationship between food and labor costs since they combine for over half of the total operating costs, ultimately impacting net income. A 0.1% increase in food
costs decreases the price by $5, while a 0.5% increase in labor costs results in a $5 decrease in price.
Risk‐Free Rate to Inflation We looked at the relationship between the risk‐free rate and inflation because it shows the relationship and effect of two economic factors on the price of Chipotle. The risk‐free rate used was the 5‐year treasury yield and we estimate inflation to be at 1.90%. An increase or decrease of 0.1% in the risk‐free rate has an inverse relationship with the stock price, increasing or decreasing it by about $20.00. A 0.1% increase in inflation causes the stock to decrease about $1.00. This shows that if the economy were to have a higher inflation, Chipotle’s stock would decrease a fair amount.
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Important Disclaimer Important Disclaimer This report was created by students enrolled in the Security Analysis (6F:112) class at the University of Iowa. The report was originally created to offer an internal investment recommendation for the University of Iowa Krause Fund and its advisory board. The report also provides potential employers and other interested parties an example of the students’ skills, knowledge and abilities. Members of the Krause Fund are not registered investment advisors, brokers or officially licensed financial professionals. The investment advice contained in this report does not represent an offer or solicitation to buy or sell any of the securities mentioned. Unless otherwise noted, facts and figures included in this report are from publicly available sources. This report is not a complete compilation of data, and its accuracy is not guaranteed. From time to time, the University of Iowa, its faculty, staff, students, or the Krause Fund may hold a financial interest in the companies mentioned in this report.
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References 1Amadeo, K. (2019). US GDP by Year Compared to Recessions and Events. Retrieved from https://www.thebalance.com/us‐gdp‐by‐year‐3305543 2Congressional Budget Office. (2019). The Effects of Partial Shutdown Ending January 2019. Retrieved from https://www.cbo.gov/system/files?file=2019‐01/54937‐PartialShutdownEffects.pdf 3The Conference Board. (2019). Consumer Confidence Survey. Retrieved from https://www.conference‐board.org/data/consumerconfidence.cfm 4Bureau of Labor Statistics. (2019). Labor Force Statistics from the Current Population Survey. Retrieved from https://data.bls.gov/timeseries/lns14000000 5Bureau of Labor Statistics. (2019). Civilian labor force participation rate. Retrieved from https://www.bls.gov/charts/employment‐situation/civilian‐labor‐force‐participation‐rate.htm 6U.S. Department Of The Treasury. (2019). Daily Treasury Yield Curve Rates. Retrieved from https://www.treasury.gov/resource‐center/data‐chart‐center/interest‐rates/pages/TextView.aspx?data=yieldYear&year=2019 7Trading Economics. (2019). United States Fed Funds Rate. Retrieved from https://tradingeconomics.com/united‐states/interest‐rate 8U.S. Inflation Calculator. (2019). Consumer Price Index Data from 1913 to 2019. Retrieved from https://www.usinflationcalculator.com/inflation/consumer‐price‐index‐and‐annual‐percent‐changes‐from‐1913‐to‐2008/ 9 IBISWorld. (2019). Global Industry Reports. Retrieved from http://clients1.ibisworld.com/reports/gl/industry/home.aspx 10 Amobi, Tuna and Xiong Goon Jun, Xiong. (2018). CFRA Industry Survey: Hotels, Restaurants & Leisure. Retrieved from NetAdvantage 11 Statista. (2019). Consumer Spending in the QSR sector in the US from 2004 to 2018. Retreived from https://www.statista.com/statistics/259148/consumer‐spending‐us‐qsr‐sector/ 12 Statista. (2019). Output of the Retail Food Franchise Industry in the US from 2007 to 2018. Retrieved from https://www.statista.com/statistics/252159/estimated‐output‐of‐the‐us‐retail‐food‐franchise‐industry/ 13 Statista. (2019). Direct‐to‐door meal kit service market revenue worldwide in 2015 and 2020. Retrieved from https://www.statista.com/statistics/655037/global‐direct‐to‐door‐meal‐kit‐service‐market‐revenue 14 Chipotle Mexican Grill, Inc. (2019), “Form 10K 2019”, Retrieved from www.ir.chipotle.com
15Schalow, L. (2019). Behind The Foil: Chipotle Unwraps The Brand's Commitment To Real Food And Transparency. Retrieved from https://ir.chipotle.com/2019‐02‐11‐Behind‐The‐Foil‐Chipotle‐Unwraps‐The‐Brands‐Commitment‐To‐Real‐Food‐And‐Transparency 16CMG. (2019). Chipotle Mexican Grill, Inc. (CMG) CEO Brian Niccol on Q4 2018 Results ‐ Earnings Call Transcript. Retrieved from https://seekingalpha.com/article/4238850‐chipotle‐mexican‐grill‐inc‐cmg‐ceo‐brian‐niccol‐q4‐2018‐results‐earnings‐call‐transcript?page=3 17International Food Information Council Foundation. (2018). 2018 Food & Health Survey. Retrieved from https://foodinsight.org/wp‐content/uploads/2018/05/2018‐FHS‐Report‐FINAL.pdf 18Nutritionix. (2018). Chipotle Nutrition Calculator. Retrieved from https://www.nutritionix.com/chipotle/nutrition‐calculator 19Nuritionix. (2018). Big Mac. Retrieved from https://www.nutritionix.com/chipotle/nutrition‐calculator 20Segal, Troy. (2018). Who are Chipotle’s main competitors? Retrieved from https://www.investopedia.com/ask/answers/052015/who‐are‐chipotles‐cmg‐main‐competitors.asp 21Yahoo! Finance. (2019). Chipotle Mexican Grill, Inc. (CMG). Retrieved from https://finance.yahoo.com/quote/CMG/ 22Yahoo! Finance. (2019). Jack in the Box Inc. (JACK). Retrieved from https://finance.yahoo.com/quote/jack?ltr=1 23Luna, N. (2018). Chipotle same‐store sales up on higher checks, digital sales gains. Retrieved from https://www.nrn.com 24Spruce, H. (2018). The Importance of Restaurant Food Safety: 3 Alarming Case Studies. Retrieved from https://pos.toasttab.com/ 25Taco Bell still hurting from beef quality lawsuit. (2011). Retrieved from https://www.reuters.com 26Maxfield, J. (2017). The Most Important Chart for Chipotle Mexican Grill. Retrieved from https://www.fool.com/investing/ 27Red Lion Data. (2018). Chipotle Stores Map. Retrieved from https://www.redliondata.com/chipotle‐stores‐map/ 28Statista. (2017). Number of Qdoba Restaurants from 2011 to 2017. Retrieved from www.statista.com
Chipotle Mexican Grill, Inc.
Revenue Decomposition
Fiscal Years Ending Dec. 31 2016 2017 2018 2019E 2020E 2021E 2022E 2023E 2024E 2025CV
Revenue 3904 4476 4865 5,479 6,279 7,130 8,017 8,930 9,944 10,760
Average Sales Per Store 1.87 1.94 2.00 2.08 2.19 2.30 2.39 2.49 2.58 2.66
Same Store Growth ‐22.94% 3.85% 3.30% 4.00% 5.00% 5.00% 4.00% 4.00% 4.00% 3.00%
Total US Stores 1,987 2,221 2,371 2,584 2,817 3,042 3,286 3,516 3,762 3,950
Total International Stores 23 29 37 44 52 61 69 78 85 92
Total Stores 2,010 2,250 2,408 2,629 2,869 3,103 3,355 3,593 3,847 4,042
Average Sq Ft per Store 2,530 2,500 2,500 2,500 2,500 2,500 2,500 2,500 2,500 2,500
Total Sq Ft of Retail 5,085,300 5,625,000 6,020,000 6,571,975 7,173,443 7,757,797 8,387,537 8,983,324 9,617,977 10,104,211
Sales per Sq Ft (in dollars) $ 768 $ 796 $ 808 $ 834 $ 875 $ 919 $ 956 $ 994 $ 1,034 $ 1,065
Chipotle Mexican Grill, Inc.
Income Statement
Fiscal Years Ending Dec. 31 2016 2017 2018 2019E 2020E 2021E 2022E 2023E 2024E 2025CV
Revenue 3,904 4,476 4,865 5,479 6,279 7,130 8,017 8,930 9,944 10,760
Restaurant operating costs (exclusive of depreciation and amortization shown seperately below:
Food, beverage and packaging costs 1,366 1,535 1,601 1,866 2,139 2,429 2,731 3,042 3,387 3,665
Labor costs 1,105 1,206 1,326 1,424 1,633 1,854 2,004 2,233 2,486 2,690
Occupancy costs 294 327 347 384 440 428 481 536 597 646
Other operating costs 642 652 680 740 816 927 962 1,072 1,193 1,291
General and administrative expenses 276 296 375 391 448 509 572 637 710 768
Depreciation and amortization 146 163 202 170 173 177 180 183 187 190
Pre‐opening costs 17 12 9 10 10 10 10 11 11 11
Total operating expense 3,870 4,206 4,607 4,985 5,659 6,333 6,941 7,713 8,570 9,261
Gain (loss) on disposal & impairment of assets 24 13 67 ‐ ‐ ‐ ‐ ‐ ‐ ‐
Total non‐operating expense 24 13 67 ‐ ‐ ‐ ‐ ‐ ‐ ‐
Income from operations 35 271 258 494 621 797 1,077 1,217 1,374 1,499
Interest and other income, net 4 5 10 12 12 12 12 13 13 13
Income before income taxes 39 276 268 506 632 809 1,089 1,230 1,386 1,512
Provisions for income taxes 16 99 92 141 176 225 303 342 386 421
Net income 23 176 177 365 456 584 786 887 1,000 1,091
Weighed Average Shares Outstanding‐Basic 29.27 28.49 27.82 28.02 28.22 28.41 28.48 28.09 27.70 27.31
Basic EPS 0.78 6.19 6.35 13.02 16.17 20.56 27.59 31.59 36.11 39.96
Dividends per share - - - - - - - - - -
Chipotle Mexican Grill, Inc.
Balance Sheet
Fiscal Years Ending Dec. 31 2016 2017 2018 2019E 2020E 2021E 2022E 2023E 2024E2025 CV
Assets
Current Assets:
Cash & cash equivalents 88 185 250 286 535 886 1,403 1,966 2,610 3,277
Accounts receivable, net 40 40 62 59 67 77 86 96 107 116
Inventory 15 20 22 22 25 28 32 36 40 43
Current deferred tax assets ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐
Prepaid expenses & other current assets 44 51 54 56 64 73 82 92 102 110
Income tax receivable 5 9 ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐
Investments 330 324 427 435 443 452 460 469 478 487
Total Current Assets 522 630 815 858 1,135 1,516 2,064 2,658 3,337 4,033
Leasehold improvements, property & equipment, net 1,304 1,338 1,379 1,405 1,432 1,459 1,487 1,515 1,544 1,573
Long‐term investments 125 ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐
Restricted cash & cash equivalents ‐ ‐ 30 ‐ ‐ ‐ ‐ ‐ ‐ ‐
Goodwill 22 22 22 22 22 22 22 22 22 22
Other assets 53 56 19 45 46 46 47 48 49 50 Total Assets 2,026 2,046 2,266 2,330 2,635 3,044 3,620 4,243 4,952 5,678
Liabilities & Shareholder's Equity
Current Liabilities
Accounts payable 78 82 113 108 123 140 157 175 195 211
Accrued payroll & benefits 76 83 113 110 126 144 161 180 200 217
Accrued liabilities 127 159 148 153 175 199 224 249 278 300
Unearned revenue ‐ ‐ 70 ‐ ‐ ‐ ‐ ‐ ‐ ‐
Income tax payable ‐ ‐ 5 ‐ ‐ ‐ ‐ ‐ ‐ ‐ Total Current Liabilities 282 324 450 371 425 483 543 604 673 728
Deferred rent 289 316 331 347 398 451 508 565 630 681
Deferred income tax liability 19 1 12 2 3 5 6 7 8 10
Other liabilities 34 40 32 40 46 53 59 66 73 79 Total Liabilities 624 681 824 760 872 991 1,115 1,243 1,385 1,499
Shareholder's Equity
Common stock and Additional paid‐in capital 1,239 1,305 1,375 1,401 1,428 1,455 1,476 1,476 1,476 1,476
Treasury stock, at cost 2,049 2,334 2,501 2,763 3,054 3,375 3,730 4,122 4,555 5,034
Accumulated other comprehensive income (loss) (8) (4) (6) (6) (6) (6) (6) (6) (6) (6)
Retained earnings (accumulated deficit) 2,221 2,397 2,574 2,939 3,395 3,979 4,765 5,652 6,652 7,743
Total Shareholder's Equity 1,402 1,364 1,441 1,570 1,763 2,052 2,505 3,000 3,567 4,179 Total Liabilities & Shareholder's Equity 2,026 2,046 2,266 2,330 2,635 3,044 3,620 4,243 4,952 5,678
Chipotle Mexican Grill, Inc.
Cash Flow Statement
Fiscal Years Ending Dec. 31 2016 2017 2018
Net Cash Provided by Operating Activities
Net income (loss) 23 176 177
Adjustments to reconcile net income to net cash provided by operating: Depreciation & amortization 146 163 202
Deferred income tax provision (benefit) ‐14 ‐18 11
Loss on disposal & impairment of assets 24 13 62
Bad debt allowance 0 0 0
Stock-based compensation expense 64 65 69
Excess tax benefit on stock-based compensation ‐1 ‐ ‐
Other adjustments ‐1 0 ‐3
Changes in operating assets and liabilities:Accounts receivable ‐2 0 ‐8
Inventory 0 ‐5 ‐2
Prepaid expenses & other current assets ‐4 ‐7 ‐4
Other assets ‐5 ‐3 ‐2
Accounts payable ‐7 11 32
Accrued payroll & benefits ‐ ‐ 30
Accrued liabilities 33 39 15
Unearned revenue ‐ ‐ 7
Income tax payable/receivable 54 ‐4 14
Deferred rent 37 30 21
Other long-term liabilities 1 6 1
Net Cash Provided by Operating Activities 349 467 622
Net Cash Provided (Used) by Investing ActivitiesPurchases of leasehold improvements, property & equipment ‐259 ‐217 ‐287
Purchases of investments ‐ ‐200 ‐485
Maturities of investments 45 330 385
Proceeds from sale of investments 541 ‐ ‐
Net Cash Provided (Used) by Investing Activities 327 ‐87 ‐388
Net Cash Provided (Used) by Financing ActivitiesAcquisition of treasury stock ‐838 ‐286 ‐161
Proceeds from employee stock plan transactions ‐ ‐ ‐
Excess tax benefit on stock-based compensation 1 ‐ ‐5
Stock plan transactions & other financing activities 0 0 0
Payments on deemed landlord financing ‐ ‐ ‐
Other financing payments ‐ ‐ ‐
Net Cash Provided (Used) by Financing Activities ‐836 ‐286 ‐167
Effect of exchange rate changes on cash & cash equivalents & restricted ca 0 2 ‐1
Net change in cash & cash equivalents & restricted cash ‐160 97 66
Cash & cash equivalents at beginning of year 248 88 214
Cash & cash equivalents at end of year 88 185 280
Chipotle Mexican Grill, Inc.
Statement of Cashflows Forecast
Fiscal Years Ending Dec. 31 2019E 2020E 2021E 2022E 2023E 2024E 2025CV
Net Cash Provided by Operating Activities
Net Income 365 456 584 786 887 1000 1091
Depreciation and Amortization 170 173 177 180 183 187 190
Deferred Income Taxes -9 1 1 1 1 1 1
Changes in Working Capital:Account Receivables 3 -9 -9 -10 -10 -11 -9
Inventory 0 -3 -3 -4 -4 -4 -3
Prepaid expenses & other current assets -2 -8 -9 -9 -9 -10 -8
Income tax receivable 0 0 0 0 0 0 0
Accounts Payable -5 16 17 17 18 20 16
Accrued payroll & benefits -3 16 17 18 18 20 16
Accrued liabilites 5 22 24 25 25 28 23
Deferred Rent 16 51 54 56 58 64 52
Unearned Revenue -70 0 0 0 0 0 0
Income tax payable -5 0 0 0 0 0 0
Other liabilities 9 6 6 7 7 7 6
Net Cash Provided by Operating Activities 472 722 858 1068 1176 1304 1375
Net Cash Provided (Used) by Investing ActivitiesChange in Investments -8 -8 -8 -9 -9 -9 -9
Restricted Cash 30 0 0 0 0 0 0
Capital Expenditures -196 -200 -204 -208 -212 -216 -220
Change in Goodwill 0 0 0 0 0 0 0
Change in other assets -25 -1 -1 -1 -1 -1 -1
Net Cash Provided (Used) by Investing Activities -200 -209 -213 -217 -221 -225 -230
Net Cash Provided (Used) by Financing ActivitiesProceeds from issuance of common stock 26 27 27 21 0 0 0
Repurchase of common stock -263 -291 -321 -355 -392 -433 -479
Changes in Long term debt 0 0 0 0 0 0 0
Changes in accumulated other comprehensive incom 0 0 0 0 0 0 0
Net Cash Provided (Used) by Financing Activities -236 -264 -294 -333 -392 -433 -479
Change in cash 36 249 351 517 562 645 667
Cash in beginning of the year 250 286 535 886 1403 1966 2610
Cash at end of the year 286 535 886 1403 1966 2610 3277
Chipotle Mexican Grill, Inc.
Common Size Income Statement
Fiscal Years Ending Dec. 31 2016 2017 2018 2019E 2020E 2021E 2022E 2023E 2024E 2025CV
Revenue 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
Restaurant operating costs (exclusive of depreciation and amortization shown seperately below:
Food, beverage and packaging costs 34.98% 34.30% 32.90% 34.06% 34.06% 34.06% 34.06% 34.06% 34.06% 34.06%
Labor costs 28.30% 26.94% 27.26% 26.00% 26.00% 26.00% 25.00% 25.00% 25.00% 25.00%
Occupancy costs 7.52% 7.31% 7.14% 7.00% 7.00% 6.00% 6.00% 6.00% 6.00% 6.00%
Other opera ng costs 16.44% 14.56% 13.98% 13.50% 13.00% 13.00% 12.00% 12.00% 12.00% 12.00%
General and administrative expenses 7.08% 6.62% 7.72% 7.14% 7.14% 7.14% 7.14% 7.14% 7.14% 7.14%
Depreciation and amortization 3.75% 3.65% 4.15% 3.10% 2.76% 2.48% 2.24% 2.05% 1.88% 1.77%
Pre‐opening costs 0.44% 0.28% 0.18% 0.18% 0.16% 0.14% 0.13% 0.12% 0.11% 0.10%
Total opera ng expenses 99.11% 93.95% 94.69% 90.98% 90.12% 88.82% 86.57% 86.37% 86.19% 86.07%
Gain (loss) on disposal & impairment of assets 0.61% 0.30% 1.37% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Total non‐operating expense 0.61% 0.30% 1.37% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Income from operations 1.27% 9.91% 9.46% 15.37% 15.10% 17.71% 27.57% 27.19% 28.24% 27.36%
Interest and other income, net 0.15% 0.18% 0.37% 0.36% 0.29% 0.27% 0.31% 0.28% 0.26% 0.24%
Income before income taxes 1.42% 10.10% 9.83% 15.73% 15.39% 17.98% 27.89% 27.47% 28.50% 27.59%
Provisions for income taxes 0.58% 3.64% 3.36% 4.38% 4.28% 5.01% 7.76% 7.65% 7.93% 7.68%
Net income 0.84% 6.45% 6.46% 11.35% 11.11% 12.98% 20.12% 19.82% 20.56% 19.91%
Chipotle Mexican Grill, Inc.
Common Size Balance Sheet
Fiscal Years Ending Dec. 31 2016 2017 2018 2019E 2020E 2021E 2022E 2023E 2024E 2025CV
Assets
Current Assets
Cash & cash equivalents 2.25% 4.12% 5.14% 5.23% 8.52% 12.43% 17.50% 22.01% 26.25% 30.46%
Accounts receivable, net 1.04% 0.90% 1.28% 1.07% 1.07% 1.07% 1.07% 1.07% 1.07% 1.07%
Inventory 0.38% 0.44% 0.44% 0.40% 0.40% 0.40% 0.40% 0.40% 0.40% 0.40%
Prepaid expenses & other current assets 1.13% 1.14% 1.11% 1.03% 1.03% 1.03% 1.03% 1.03% 1.03% 1.03%
Income tax receivable 0.13% 0.21% ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐
Investments 8.45% 7.25% 8.77% 7.94% 7.06% 6.33% 5.74% 5.25% 4.81% 4.53%
Total Current Assets 13.38% 14.06% 16.75% 15.66% 18.08% 21.26% 25.74% 29.76% 33.56% 37.48%
Leasehold improvements & buildings 33.39% 29.90% 28.35% 25.65% 22.81% 20.47% 18.55% 16.97% 15.53% 14.62%
Restricted cash & cash equivalents ‐ ‐ 0.62% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Goodwill 0.56% 0.49% 0.45% 0.40% 0.35% 0.31% 0.27% 0.25% 0.22% 0.20%
Other assets 1.36% 1.25% 0.40% 0.82% 0.73% 0.65% 0.59% 0.54% 0.49% 0.47%
Total Assets 51.89% 45.70% 46.57% 42.53% 41.96% 42.69% 45.15% 47.51% 49.80% 52.77%
Liabilities & Shareholder's Equity
Current Liabilities
Accounts payable 2.01% 1.83% 2.32% 1.96% 1.96% 1.96% 1.96% 1.96% 1.96% 1.96%
Accrued payroll & benefits 1.95% 1.84% 2.33% 2.01% 2.01% 2.01% 2.01% 2.01% 2.01% 2.01%
Accrued liabilities 3.26% 3.56% 3.04% 2.79% 2.79% 2.79% 2.79% 2.79% 2.79% 2.79%
Unearned revenue ‐ ‐ 1.45% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Income tax payable ‐ ‐ 0.11% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Total Current Liabilities 7.22% 7.24% 9.25% 6.77% 6.77% 6.77% 6.77% 6.77% 6.77% 6.77%
Deferred rent 7.40% 7.07% 6.80% 6.33% 6.33% 6.33% 6.33% 6.33% 6.33% 6.33%
Deferred income tax liability 0.49% 0.02% 0.24% 0.04% 0.05% 0.06% 0.07% 0.08% 0.08% 0.09%
Other liabilities 0.87% 0.89% 0.65% 0.74% 0.74% 0.74% 0.74% 0.74% 0.74% 0.74%
Total Liabilities 15.97% 15.22% 16.94% 13.88% 13.89% 13.90% 13.91% 13.92% 13.92% 13.93%
Shareholder's Equity
Additional paid‐in capital 31.73% 29.15% 28.25% 25.57% 22.74% 20.40% 18.41% 16.53% 14.85% 13.72%
Treasury stock, at cost 52.49% 52.15% 51.40% 50.44% 48.64% 47.33% 46.52% 46.16% 45.81% 46.78%
Accumulated other comprehensive income (loss) ‐0.21% ‐0.08% ‐0.13% ‐0.11% ‐0.10% ‐0.09% ‐0.08% ‐0.07% ‐0.06% ‐0.06%
Retained earnings (accumulated deficit) 56.88% 53.55% 52.90% 53.63% 54.06% 55.80% 59.43% 63.29% 66.90% 71.97%
Total Shareholder's Equity 35.92% 30.48% 29.63% 28.65% 28.07% 28.78% 31.24% 33.59% 35.87% 38.84%
Chipotle Mexican Grill, Inc.
Value Driver Estimation
Fiscal Years Ending Dec. 31 2016 2017 2018 2019E 2020E 2021E 2022E 2023E 2024E 2025CV
NOPLAT
Revenue 3,904 4,476 4,865 5,479 6,279 7,130 8,017 8,930 9,944 10,760
Restaurant operating costs (exclusive of depreciation and amortization shown seperately below:
Food, beverage and packaging costs 1,366 1,535 1,601 1,866 2,139 2,429 2,731 3,042 3,387 3,665
Labor costs 1,105 1,206 1,326 1,424 1,633 1,854 2,004 2,233 2,486 2,690
Occupancy costs 294 327 347 384 440 428 481 536 597 646
Other opera ng costs 642 652 680 740 816 927 962 1,072 1,193 1,291
General and administrative expenses 276 296 375 391 448 509 572 637 710 768
Depreciation and amortization 146 163 202 170 173 177 180 183 187 190
Pre‐ordering costs 17 12 9 10 10 10 10 11 11 11
Plus: Implied Interest on Operating Leases 118 127 135 137 150 164 177 191 205 220
EBITDA 177 411 460 632 771 961 1,254 1,409 1,579 1,718
Adjusted Taxes:
Provison for income taxes 16 99 92 141 176 225 303 342 386 421
Add: Tax shield on operating leases 59 50 37 38 42 46 49 53 57 61
Add: Tax sheild on interest expense 2 2 3 3 3 3 3 3 4 4
Less: Tax from gain on operating assets 12 5 19 ‐ ‐ ‐ ‐ ‐ ‐ ‐
Less: Adjusted Taxes 65 146 114 182 221 274 356 399 447 486
Change in Deferred Tax Liabilities:
Deferred Tax Liability 19 1 12 2 3 5 6 7 8 10
Less: Previous year deferred tax liability 32 19 1 12 2 3 5 6 7 8
Plus: Deferred Tax Liabilities (13) (18) 11 (9) 1 1 1 1 1 1
NOPLAT 99 246 357 440 551 688 899 1,011 1,133 1,234
Invested Capital
Operating Current Assets:
Normal Cash 39 45 49 55 63 71 80 89 99 108
Accounts Receivables 40 40 62 59 67 77 86 96 107 116
Inventories 15 20 22 22 25 28 32 36 40 43
Prepaid Expenses & Other Current Assets 44 51 54 56 64 73 82 92 102 110
Income Tax Receivable 5 9 ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐
Total Operating Current Assets 144 165 187 192 220 249 280 312 348 376
Operating Current Liabilities:
Accounts Payable 78 82 113 108 123 140 157 175 195 211
Income Taxes Payable ‐ ‐ 5 ‐ ‐ ‐ ‐ ‐ ‐ ‐
Accrued Liabilities 127 159 148 153 175 199 224 249 278 300
Accrued Payroll 76 83 113 110 126 144 161 180 200 217
Unearned revenue ‐ ‐ 70 ‐ ‐ ‐ ‐ ‐ ‐ ‐
Net Operating Working Capital (138) (159) (263) (179) (205) (233) (262) (292) (325) (352)
Plus: Leasehold improvements, property & equipment net 1,304 1,338 1,379 1,405 1,432 1,459 1,487 1,515 1,544 1,573
Plus: Net Other Operating Assets 53 56 19 45 46 46 47 48 49 50
PV of Operating Leases 2,634 2,802 2,860 3,122 3,408 3,685 3,984 4,267 4,569 4,800
Less: Deferred Rent 289 316 331 347 398 451 508 565 630 681
Invested Capital (IC) 3,564 3,721 3,664 4,046 4,282 4,506 4,749 4,973 5,207 5,390
FCF
NOPLAT 99 246 357 440 551 688 899 1,011 1,133 1,234
Less: Change in Invested Capital 170 157 (57) 382 236 224 243 224 234 183
Free Cash Flow (FCF) (72) 89 414 58 314 464 657 786 900 1,051
ROIC
NOPLAT 99 246 357 440 551 688 899 1,011 1,133 1,234
Beginning Invested Capital 3,393 3,564 3,721 3,664 4,046 4,282 4,506 4,749 4,973 5,207
Return on Invested Capital (ROIC) 3% 7% 10% 12% 14% 16% 20% 21% 23% 24%
EP
NOPLAT 99 246 357 440 551 688 899 1,011 1,133 1,234
Beginning Invested Capital 3,393 3,564 3,721 3,664 4,046 4,282 4,506 4,749 4,973 5,207
ROIC 2.91% 6.91% 9.59% 12.00% 13.61% 16.07% 19.95% 21.29% 22.79% 23.70%
WACC 7.10% 7.10% 7.10% 7.10% 7.10% 7.10% 7.10% 7.10% 7.10% 7.10%
Economic Profit (EP) (142) (7) 93 180 263 384 579 674 780 865
Chipotle Mexican Grill, Inc.
Weighted Average Cost of Capital (WACC) Estimation
Risk Free Rate 2.28%
Risk Premium 5.08%
Beta 1.05
Cost of Equity 7.61%
Cost of Debt
Pre‐tax Cost of Debt 4.81%
Marginal Tax Rate 27.84%
After‐tax Cost of debt 3.47%
Value of Equity
Share Price $718.85
Shares Outstanding 28
Value of Equity 20,145
Value of Debt
BV of Short‐term Debt 0
BV of Long‐term Debt 0
PV of Operating Leases 2,860
Value of Debt 2,860
Weights
Equity 87.57%
Debt 12.43%
WACC Calculation
Cost of Equity 7.61%
Weight of Equity 87.57%
After‐tax Cost of Debt 3.47%
Weight of Debt 12.43%
WACC 7.10%
Chipotle Mexican Grill, Inc.
Discounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models
Key Inputs:
CV Growth 3.50%
CV ROIC 23.70%
WACC 7.10%
Cost of Equity 7.61%
Fiscal Years Ending Dec. 31 2019E 2020E 2021E 2022E 2023E 2024E 2025CV
DCF Model
NOPLAT 440 551 688 899 1,011 1,133 1,234
Less: Change in Invested Capital 382 236 224 243 224 234 183
Free Cash Flow 58 314 464 657 786 900 1,051
Continuing Value (CV) 29,232
PV of FCF 54 274 378 499 558 596 19,371
Value of Operating Asset 21,730
Add: Excess Cash 201
Add: Short‐term Investments 427
Add: Long‐term Investments ‐
Less: Debt ‐
Less: PV of Operating Leases (2,860)
Less: ESOP (651)
Value of Equity 18,848
Shares Outstanding 28
Price 677
Partial Year Adjustment 1
Intrinsic Value of Stock 689.95
EP ModelFiscal Years Ending Dec. 31 2019E 2020E 2021E 2022E 2023E 2024E 2025CV
NOPLAT 440 551 688 899 1,011 1,133 1,234
Beginning Invested Capital 3,664 4,046 4,282 4,506 4,749 4,973 5,207
ROIC 12.00% 13.61% 16.07% 19.95% 21.29% 22.79% 23.70%
WACC 7.10% 7.10% 7.10% 7.10% 7.10% 7.10% 7.10%
EP 180 263 384 579 674 780 865
Continuing Value (CV) 24,025
PV of EP 168 230 313 440 478 517 15,921
PV (Economic Profit) 18,067
Beginning Invested Capital 3,664
Value of Operating Asset 21,730
Add: Excess Cash 201
Add: Short‐term Investments 427
Add: Long‐term Investments ‐
Less: Debt ‐
Less: PV of Operating Leases (2,860)
Less: ESOP (651)
Value of Equity 18,848
Shares Outstanding 28
Price 677
Partial Year Adjustment 1
Intrinsic Value of Stock 689.95
Chipotle Mexican Grill, Inc.
Dividend Discount Model (DDM) or Fundamental P/E Valuation Model
Fiscal Year Ending Dec. 31 2019E 2020E 2021E 2022E 2023E 2024E 2025E
EPS 13.02$ 16.17$ 20.56$ 27.59$ 31.59$ 36.11$ 39.96$
Key Assumptions CV growth 3.50%
CV ROE 30.58%
Cost of Equity 7.61%
Future Cash Flows P/E Multiple (CV Year) 55.20
EPS (CV Year) 39.96$
Future Stock Price 2,206$
Dividends Per Share 0 0 0 0 0 0 ‐$
Future Cash Flows 0 0 0 0 0 0 2,206$
Discounted Cash Flows 0 0 0 0 0 0 1,320$
Partial Year Adjust 1.02
Intrinsic Value 1,344$
Chipotle Mexican Grill, Inc.
Relative Valuation Models
EPS EPS
Ticker Company Price 2019E 2020E P/E 19 P/E 20
YUM Yum Brands Inc. $100.18 $3.81 $4.24 26.29 23.63
JACK Jack in the Box Inc $80.92 $4.27 $4.76 18.95 17.00
DRI Darden Restaurants Inc $119.18 $5.70 $6.35 20.91 18.77
DNKN Dunkin' Brands Group Inc $75.29 $2.98 $3.23 25.27 23.31
PBPB Potbelly Corporation $9.21 $0.24 $0.33 38.38 27.91 WING Wingstop Inc $72.56 $0.77 $0.96 94.23 75.58
Average 33.00 27.44
CMG Chipotle Mexican Grill, Inc. $718.85 13.02 16.17 55.2 44.5
Implied Relative Value:
P/E (EPS1) $ 429.77
P/E (EPS20) 443.75$
Chipotle Mexican Grill, Inc. Key Management Ratios
Fiscal Years Ending 2016 2017 2018 2019E 2020E 2021E 2022E 2023E 2024E 2025CV
Liquidity RatiosCurrent Ratio 1.85 1.94 1.81 2.31 2.67 3.14 3.80 4.40 4.96 5.54Quick Ratio 0.46 0.69 0.69 0.93 1.42 1.99 2.74 3.41 4.04 4.66Cash Ratio 0.31 0.57 0.56 0.77 1.26 1.84 2.59 3.25 3.88 4.50
Activity or Asset‐Management RatiosFixed Asset Turnover 3.00 3.34 3.53 3.90 4.38 4.89 5.39 5.89 6.44 6.84Inventory Turnover 90.85 88.04 77.30 86.00 91.25 90.85 90.43 90.03 90.02 88.80
Financial Leverage RatiosDebt Ratio 0.31 0.33 0.36 0.33 0.33 0.33 0.31 0.29 0.28 0.26Debt to Equity Ratio 0.44 0.50 0.57 0.48 0.49 0.48 0.45 0.41 0.39 0.36Equity Ratio 0.69 0.67 0.64 0.67 0.67 0.67 0.69 0.71 0.72 0.74
Profitability RatiosGross Margin 12.76% 16.89% 18.73% 19.44% 19.94% 20.94% 22.94% 22.94% 22.94% 22.94%Profit Margin 0.59% 3.94% 3.63% 6.66% 7.27% 8.19% 9.80% 9.94% 10.06% 10.14%Return on Asset 1.13% 8.62% 7.79% 15.66% 17.32% 19.19% 21.70% 20.91% 20.20% 19.21%Return on Equity 1.08% 12.57% 12.94% 25.32% 29.07% 33.14% 38.28% 35.43% 33.35% 30.58%
Payout Policy RatiosDividend Payout Ratio ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐
Definitions Current Ratio = Total Assets / Total LiabilitiesQuick Ratio = Sum of Cash and Accounts Receivable / Total Current LiabilitiesCash Ratio = Cash / Total Current LiabilitiesFixed Asset Turnover = Total Revenue / PPEInventory Turnover = COGS / Average Inventory Debt Ratio = Total Liabilities / Total AssetsDebt to Equity Ratio = Total Liabilities / Total EquityEquity Ratio = Total Equity / Total AssetsGross Margin = (Revenue ‐ Restaurant Operating Costs) / RevenueProfit Margin = Net income / Total RevenueReturn on Asset = Net Income / Total AssetsReturn on Equity = Net Income / Total Equity Dividend Payout Ratio = N/A
Chipotle Mexican Grill, Inc.
Operating Leases
Present Value of Operating Lease Obligations (2018) Present Value of Operating Lease Obligations (2017) Present Value of Operating Lease Obligations (2016)
Operating Operating Operating
Fiscal Yaers Ending Dec. 31 Leases Fiscal Years Ending Dec. 31 Leases Fiscal Years Ending Dec. 31 Leases
2019 294,191 2018 281,461 2017 264,911
2020 296,579 2019 285,264 2018 268,862
2021 294,941 2020 283,934 2019 269,133
2022 295,290 2021 279,816 2020 263,732
2023 290,980 2022 278,615 2021 257,400
Thereafter 2,478,397 Thereafter 2497163 Thereafter 2,358,941
Total Minimum Payments 3950378 Total Minimum Payments 3906253 Total Minimum Payments 3682979
Less: Interest 1090736 Less: Interest 1104685 Less: Interest 1048775
PV of Minimum Payments 2859642 PV of Minimum Payments 2801568 PV of Minimum Payments 2634204
Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases
Pre‐Tax Cost of Debt 4.81% Pre‐Tax Cost of Debt 4.81% Pre‐Tax Cost of Debt 4.81%
Number Years Implied by Year 6 Payment 8.5 Number Years Implied by Year 6 Payment 9.0 Number Years Implied by Year 6 Payment 9.2
Lease PV Lease Lease PV Lease Lease PV Lease
Year Commitment Payment Year Commitment Payment Year Commitment Payment
1 294191 280700.5 1 281461 268554.3 1 264911 252763.2
2 296579 270002.7 2 285264 259701.6 2 268862 244769.4
3 294941 256198.6 3 283934 246637.4 3 269133 233780.6
4 295290 244739.5 4 279816 231914.5 4 263732 218583.9
5 290980 230108.4 5 278615 220330.1 5 257400 203553.1
6 & beyond 290980 1577892.3 6 & beyond 278615 1574429.9 6 & beyond 257400 1480753.3
PV of Minimum Payments 2859642.0 PV of Minimum Payments 2801567.8 PV of Minimum Payments 2634203.6
Chipotle Mexican Grill, Inc.
Effects of ESOP Exercise and Share Repurchases on Common Stock Balance Sheet Account and Number of Shares Outstanding
Number of Options Outstanding (shares): 2
Average Time to Maturity (years): 3.80
Expected Annual Number of Options Exercised: 1
Current Average Strike Price: 474.51$
Cost of Equity: 9.00%
Current Stock Price: $718.85
2019E 2020E 2021E 2022E 2023E 2024E 2025CV
Increase in Shares Outstanding: 1 1 1 0.45
Average Strike Price: 474.51$ 474.51$ 474.51$ 474.51$
Increase in Common Stock Account: 26.9 26.9 26.9 21.5 ‐ ‐ ‐
Change in Treasury Stock 263 291 321 355 392 433 479
Expected Price of Repurchased Shares: 718.85$ 783.55$ 854.07$ 930.93$ 1,014.72$ 1,106.04$ 1,205.58$
Number of Shares Repurchased: 0.3657 0.3708 0.3759 0.3811 0.3864 0.3918 0.3972
Shares Outstanding (beginning of the year) 27.8 28 28 28 28 28 28
Plus: Shares Issued Through ESOP 1 1 1 0 0 0 0
Less: Shares Repurchased in Treasury 0 0 0 0 0 0 0
Shares Outstanding (end of the year) 28 28 28 28 28 28 27
Chipotle Mexican Grill, Inc.
Valuations of Options Granted in ESOP
Ticker Symbol CMG
Current Stock Price $718.85
Risk Free Rate 2.28%
Current Dividend Yield 0.00%
Annualized St. Dev. of Stock Returns 24.21%
Average Average B‐S Value
Range of Number Exercise Remaining Option of Options
Outstanding Options of Shares Price Life (yrs) Price Granted
Range 1 2.15 474.51 3.80 302.82$ 651$
Total 2 474.51$ 3.80 302.82$ 651$
Chipotle Mexican Grill, Inc.
Sensitivity Analysis
Beta
689.95 0.90 0.95 1.00 1.05 1.10 1.15 1.20
4.78% 977.98 895.27 823.71 761.20 706.12 657.23 613.54
4.88% 945.36 865.62 796.56 736.16 682.91 635.61 593.31
4.98% 914.56 837.58 770.85 712.45 660.91 615.10 574.11
Risk Premuim 5.08% 885.41 811.03 746.49 689.95 640.02 595.62 555.86
5.18% 857.79 785.85 723.36 668.58 620.17 577.09 538.50
5.28% 831.59 761.93 701.38 648.25 601.27 559.44 521.95
5.38% 806.70 739.19 680.45 628.89 583.27 542.62 506.17
Pre‐Tax Cost of Debt
689.95 4.51% 4.61% 4.71% 4.81% 4.91% 5.01% 5.11%
27.54% 691.59 692.27 692.94 693.60 694.25 694.89 695.51
Marginal Tax Rate 27.64% 690.36 691.04 691.72 692.38 693.03 693.67 694.30
27.74% 689.13 689.82 690.49 691.16 691.82 692.46 693.09
27.84% 687.93 688.62 689.31 689.98 690.64 691.28 691.92
27.94% 686.66 687.36 688.05 688.72 689.38 690.03 690.68
28.04% 685.43 686.13 686.82 687.50 688.16 688.82 689.46
28.14% 684.19 684.90 685.59 686.28 686.95 687.61 688.25
Avg Sales per store
689.95 2.33 2.44 2.55 2.66 2.77 2.88 2.99
3982 576.04 609.71 643.38 677.05 710.72 744.39 778.06
4002 579.62 613.46 647.30 681.14 714.98 748.82 782.66
4022 583.21 617.21 651.22 685.23 719.24 753.25 787.26
# of Stores 4042 586.79 620.96 655.14 689.32 723.50 757.68 791.85
4062 590.37 624.72 659.06 693.41 727.76 762.10 796.45
4082 593.95 628.47 662.98 697.50 732.02 766.53 801.05
4102 597.53 632.22 666.90 701.59 736.27 770.96 805.64
Food Costs
689.95 33.76% 33.86% 33.96% 34.06% 34.16% 34.26% 34.36%
24% 786.966 780.796 774.626 768.456 762.287 756.117 749.94732
24.00% 760.795 754.625 748.455 742.286 736.116 729.946 723.77658
24.50% 734.624 728.454 722.285 716.115 709.945 703.776 697.60583
Labor Cost 25% 708.453 702.284 696.114 689.94 683.775 677.605 671.43509
25.50% 682.283 676.113 669.943 663.774 657.604 651.434 645.26435
26% 656.112 649.942 643.772 637.603 631.433 625.263 619.09361
26.50% 629.941 623.771 617.602 611.432 605.262 599.093 592.92287
Risk Free Rate
689.95 1.98% 2.08% 2.18% 2.28% 2.38% 2.48% 2.58%
1.60% 761.52 737.64 714.96 693.38 672.83 653.23 634.51
Inflation 1.70% 760.30 736.45 713.80 692.24 671.71 652.13 633.44
1.80% 759.08 735.26 712.63 691.10 670.59 651.04 632.37
1.90% 757.85 734.06 711.45 689.95 669.47 649.94 631.29
2.00% 756.61 732.85 710.27 688.80 668.34 648.83 630.21
2.10% 755.37 731.64 709.09 687.64 667.20 647.72 629.12
2.20% 754.12 730.42 707.90 686.47 666.06 646.60 628.02
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