Chipotle’s Financial Management

Chipotle Mexican Grill, Inc. is a fast-casual American chain of restaurants founded by Steve Ells in Denver, Colorado in 1993. Over the past 25 years, Chipotle’s goal has been to offer a focused menu of burritos, tacos, burrito bowls, and salads made from fresh, high-quality raw ingredients, classic cooking techniques, and distinctive interior design to the realm of fast-food restaurants. Chipotle seeks to serve the very best ingredients while respecting animals, farmers, and the environment – this is the core of their commitment to Food With Integrity (Chipotle, 2018).

Chipotle Mexican Grill main fast-casual dining sector competitor is Panera Bread Company. Qdoba Restaurant Corporation is also a competitor; however, according to Business Insider, Panera Bread is Chipotle’s leading competitor in the fast-casual restaurant industry (Business Insider, 2017). Chipotle’s unique aesthetics and higher-quality food can be attributed to its fast growth. According to Chipotle’s last full fiscal year 2017, they operate 2,363 restaurants throughout the United States, as well as 37 international Chipotle restaurants and eight non-Chipotle restaurants (Chipotle, 2018).

Comparing this to Panera Bread, however, it operated and franchised eateries in over 2096 locations in the United States in 2017 (Panera Bread, 2018).

While liquidity is important for the company to thrive, a company must be able to meet its long-term obligations to continue its operations into the foreseeable future. Therefore, a company’s solvency is essential for long term financial health (Investopedia, 2018). One important solvency ratio is the debt to total assets ratio. A higher debt to total assets ratio indicates higher risk, because debt holders have more claims on the assets of the company.

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Currently, Panera Bread has not released it’s 2017 financial information. So, comparing 2014, 2015, and 2016 fiscal years, Chipotle’s debt to total assets ratios were 0.20, 0.22 and 0.31 (in millions), respectively; whereas Panera Bread’s debt to total assets ratios for 2014, 2015, and 2016 were 0.47, 0.83, and 0.78 (in millions), respectively (Investing, 2018). A company is solvent if its debt to total assets ratio less than 1.0. Looking at both Chipotle and Panera Bread, they were both solvent for all three fiscal years. Chipotle’s debt to total assets ratio increased over the three years because their assets decreased, and debt increased, however, they remained more solvent than their main competitor, Panera Bread.

Profitability is another important aspect to the company’s finical health. Profitability ratios are used to assess a business’s ability to generate earnings relative to its associated expenses. One of the most common profitability ratios is the profit margin ratio. The profit margin ratio is used to measure how effectively a company can convert sales into net income. A company might need to limit expenses and budget if it has an extremely low profit margin ratio (My Accounting Course, 2018). For Chipotle, looking at its income statement, its profit margin ratio was 0.12 in 2014, 0.11 in 2015, and 0.006 in 2016 (in millions). Chipotle’s profit margin ratio dropped significantly in 2016 because their net income fell 95% from the previous year (Investing, 2018). Comparing this to Panera Bread, its profit margin ratio was 0.07 in 2014, 0.06 in 2015, and 0.05 in 2016 (in millions) (Investing, 2018). Chipotle was out performing its competitor in 2014 and 2015, however, because its net income fell drastically in 2016, Chipotle’s profit margin ratio fell below Panera Bread’s ratio.

Efficiency of a company is also vital for long-term sustainability. Efficiency ratios are used to measure the company’s ability to use its assets and liabilities to generate sales. Inventory turnover ratio is one of the most common and useful efficiency ratios (Accounting Tools, 2018). Inventory turnover ratio signifies the number of times inventory is sold and restocked each year. If the ratio is high, you may be in danger of stockouts. If it is low, obsolete inventory might be an issue (Peavler, 2018). Looking at Chipotle’s income statement and balance sheet, its inventory turnover ratio for 2014, 2015, and 2016 were 267.99, 299.28, and 259.95 (in millions), respectively (Investing, 2018). Panera Bread’s inventory turnover ratio for 2014, 2015, and 2016 were 110.88, 119.29, and 117.60 (in millions), respectively (Investing, 2018). Chipotle’s inventory turnover decreased in 2016, but this shows that it generates more sales per dollar of inventory than Panera Bread (Block, Hirt, & Danielsen, 2017).

In my opinion, the effectiveness of Chipotle’s financial management is a positive one, and I believe this company has many strengths. One of the leading issues Chipotle has dealt with recently is the E. coli and norovirus that was liked to its food. For the full year 2016, its net income plunged 95%, from $476 million in 2015 to $22.9 million. However, management handled this situation well. They hired food-safety experts, gave away free food, and paid for full-page newspaper ads to draw customers back into their restaurants (Business Insider, 2017). One of their many strengths has been to overcome hardships. Although their net income dropped to 22.9 million in 2016, Chipotle was able to open 240 new locations and bring their net income to 176.25 in 2017 (Investing, 2018). I believe this speaks well of Chipotle’s financial management.

Chipotle’s stock has been both high and low in resent years. Early on, this company’s stock has done very well. In 2010, Chipotle’s stock was trading for under $100 a share and had a P/E ratio of around 25. However, in a little over 5 years, the stock was trading up to over $700 a share. From an investor’s perspective, one might be cautious to invest their monies at this point because the company was increasing revenues and earnings at an equal pace to the price and the P/E ratio actually began to decline as the earnings rose (Christensen, 2017). For those who were cautious, this was beneficial because as mentioned previously, the E. coli and norovirus in late 2015 and early 2016 greatly affect this company and its stock’s value. The stock went from highs of over $750 a share in October of 2015 to below $360 a year later, a 52 percent decrease in value (Christensen, 2017). However, from an investor’s perspective, Chipotle has made great strides to recover from this financial low. Those investing in 2015 when the stock prices were low have benefited today. Currently, Chipotle’s stock value has increased over 28% and its P/E ratio increasing to 69.37. Looking at the industry average P/E ratio of 27.88, this shows that Chipotles stock is doing very well (Investing, 2018).

Wealth maximization is increasing the value of a business in order to increase the value of the shares held by stockholders. This requires the company’s management team to search for the highest returns on every investment, while limiting any related risk of loss. This requires the management team to do an analysis of each prospective investment and the cash flows associated with it, while following the strategic direction of the organization (Accounting Tools, 2018). Chipotle has gone through many resent changes in hopes to fully recover from its low point of 2015-2016. One of the most drastic changes has been to place a new CEO in charge of this 25-year-old company. Brian Niccol, Taco Bell’s current CEO, is the newest executive to Chipotle’s management. Brian Niccol has approved many recent planned investments using more than one-third of the company’s anticipated tax savings including training programs and bonuses for workers. Also, Chipotle will make upgrades to equipment and other restaurant redesigns and continued digital improvements. $300,000 million has been allotted in capital expenses, up from $217 million the previous year. In doing so, Chipotle hopes to bring up their numbers, and thus increase the value of the shares held by stockholders (Garcia, 2018).

Corporations can grow and expand further by rising new capital using five primary methods: issuing bonds, sales of common stock, issuing preferred stock, borrowing, and using profits (University of Groningen, 2018). Chipotle has been able to raise capital using a number of these primary methods. In1993, the year Ells founded Chipotle, he launched this new business with an $85,000 loan form his father. This initial loan and investment was prosperous because two year later he opened a second restaurant using its cash flow. Still in its start-up years, Chipotle then opened a third store in 1996 with the use of an SBA loan. This same year, Ell’s father invested an additional $1.5 million. Then Ells created a board of directors and raised an additional $1.8 million. Two years later, McDonald’s noticed this small but fast-growing company and invested $360 million into Chipotle, which allowed for rapid expansion – By 2001, McDonald’s was Chipotle’s largest investor. Finally, in 2006, Chipotle went public and its stock rose 100% in the first day (Fundable, 2018). Today, if you look at Chipotle’s balance sheet, you will see there are no long-term bond issues Chipotle is liable for, nor have any high payables because of the nature of its inventory. Chipotle has the availability to pay within ten days after receiving the ingredients and can quickly turn over these ingredients and receive cash from its customers (Jones, 2018).

I believe Chipotle’s shrewd marketing campaigns and unique menu has created a very positive brand with high appeal among consumers. However, this corporation could make some adjustments to improve its financial position and work towards a full recovery from its low point of 2015-2016. For example, Chipotle could offer additional markdowns or create new marketing techniques. Additional markdowns could bring in more sales and would also appeal to its current customer base. New marketing techniques does not have to increase expenses. With the use of the internet and social media, this could also help bring in additional sales.

Although Chipotle has dealt with a few lows since it was founded 25 years ago, it has overcome these struggles and continues to grow today. In the third quarter of 2018, Chipotle had nine-month revenue growth of 9% with comparable store growth of 3.3%. For the trailing twelve months (TTM) through November 2018, one-year revenue growth was 14.65% and three-year annualized revenue growth was 2.90% (Investopedia, 2018). Competing restaurants have not experienced such high growth rates. This demonstrates Chipotle’s market share demand, ability to generate consistent repeat sales, and strong brand equity. However, Chipotle’s margins show there is still room for this company to grow. It is raked last among some of its larger competitors for some margins such as a TTM gross margin of 18%, TTM operating margin of 7% and TTM net margin of 4% (Investopedia, 2018). Although Chipotle had reported some of the lowed margins in the fast-casual industry, its net income is ranked as one of the highest. For the TTM, Chipotle has operating income of $339 million with a one-year increase of over 300%. Its TTM net income is $334 million with a one-year growth rate of 668%. Earnings per share for the TTM were $6.72 for a one-year increase of 701% (Investopedia, 2018). Overall, from where is has been, this company is in a good financial position. I believe it will continue to expand and provide its consumers with the its unique brand, simple organic menu, and high quality food for years to come.