CHIPOTLE MEXICAN GRILL INC (CMG) FY 2021 MD&A

ITEM 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion together with our consolidated financial statements and related notes included in Item 8. “Financial Statements and Supplementary Data.” This section of the Form 10-K generally discusses 2021 and 2020 items and year-to-year comparisons of 2021 to 2020. Discussions of 2019 items and year-to-year comparisons of 2020 and 2019 that are not included in this Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 on our Annual Report on Form 10-K for the year ended December 31, 2020. The discussion contains forward-looking statements involving risks, uncertainties and assumptions that could cause our results to differ materially from expectations. See “Cautionary Note Regarding Forward-Looking Statements.” Factors that might cause such differences include those described in Item 1A. “Risk Factors” and elsewhere in this report.

Overview

As of December 31, 2021, we operated 2,918 Chipotle restaurants throughout the United States, 44 international Chipotle restaurants, and four non-Chipotle restaurants. We manage our U.S. operations based on eight regions and have aggregated our operations to one reportable segment.

Throughout “Management’s Discussion and Analysis of Financial Condition and Results of Operations” we commonly discuss the following key operating metrics which we believe will drive our financial results and long-term growth model. We believe these metrics are useful to investors because management uses these metrics to assess the growth of our business and the effectiveness of our marketing and operational strategies:

Comparable restaurant sales

Restaurant operating costs as a percentage of total revenue

New restaurant openings

The COVID-19 pandemic has adversely affected, and may continue to adversely affect, our operations and financial results for the foreseeable future. We continue to follow guidance from health officials in determining the appropriate restrictions to put in place for each restaurant. Our restaurant operations have been and could continue to be disrupted by COVID-19 related employee absences or due to changes in the availability and cost of labor. We remain in regular contact with our major suppliers and to date we have not experienced significant disruptions in our supply chain; however, we have experienced inflationary pressures in freight and the costs of some of our ingredients and temporary shortages in equipment and other goods, which could increase and/or spread to more categories as the impacts of COVID-19 continue across the global supply chain. We anticipate the restaurant wage increases implemented in June 2021 and any future wage increases in the U.S. along with increased supply chain costs, primarily related to inflationary pressures that began in the latter half of 2021 will have an impact on restaurant operating costs in 2022. However, these should be offset to some extent by benefits from pricing actions, leverage from revenue growth and supply chain initiatives.

2021 Financial Highlights

Sales Trends. Average restaurant sales were $2.641 million for the year ended December 31, 2021, an increase from $2.223 million for the year ended December 31, 2020. We define average restaurant sales as the average trailing 12-month food and beverage sales for restaurants in operation for at least 12 full calendar months.

Total revenue was $7.5 billion for the year ended December 31, 2021, an increase of 26.1% from $6.0 billion for the year ended December 31, 2020. The increase was attributable to comparable restaurant sales and, to a lesser extent, new restaurant openings. Comparable restaurant sales increased 19.3% for the year ended December 31, 2021, primarily due to a 10.3% increase in transactions and an 8.5% benefit from menu price increases implemented in late 2020 and during 2021. Comparable restaurant sales represent the change in period-over-period sales or transactions for restaurants in operation for at least 13 full calendar months.

Digital sales, which includes delivery and customer pick-up, were $3.4 billion for the year ended December 31, 2021, and represented 45.6% of total revenue compared to 46.2% of total revenue for the year ended December 31, 2020. Higher volumes of in-store transactions in 2021 contributed to the decrease in digital sales as a percentage of total revenue. Order ahead sales were 50.9% and 49.9% of digital sales for the years ended December 31, 2021, and 2020, respectively.

During 2021, we completed several company initiatives which we believe contributed to sales growth. These initiatives included the launch of cauliflower rice in January 2021, digital launch of quesadillas in March 2021 and smoked brisket in September 2021. Additionally, in June 2021, we enhanced our loyalty program, Chipotle Rewards, by introducing new redemption options and personalized offers primarily targeted at new and at-risk customers.

21

Table of Contents

Restaurant Operating Costs. During the year ended December 31, 2021, our restaurant operating costs (food, beverage and packaging; labor; occupancy; and other operating costs) were 77.4% of total revenue, a decrease from 82.6% during the year ended December 31, 2020. The decrease was driven primarily by higher comparable restaurant sales, partially offset by wage inflation, higher commodity inflation primarily from freight and beef and, to a lesser extent, increased delivery fees.

Diluted Earnings Per Share. During the year ended December 31, 2021, our diluted earnings per share were $22.90, an 82.9% increase from $12.52 in 2020.

Restaurant Development. For the full year 2021, we opened 215 new restaurants, which included 174 restaurants with a Chipotlane. We expect to open approximately 235-250 new restaurants in 2022, including five to 10 relocations, of which we are targeting 80% with a Chipotlane.

Restaurant Activity

The following table details restaurant unit data for the years indicated.

Results of Operations

Our results of operations as a percentage of total revenue and period-over-period change are discussed in the following section.

Revenue

The significant factors contributing to the total revenue increase for the year ended December 31, 2021 compared to the year ended December 31, 2020, were comparable restaurant sales increases and new restaurant openings. Comparable restaurant sales increased $1,128.2 million and total revenue from restaurants not yet in the comparable base contributed $434.1 million to the total revenue increase, of which $201.9 million was due to restaurants opened in 2021.

Food, Beverage and Packaging Costs

Food, beverage and packaging costs decreased as a percentage of total revenue for the year ended December 31, 2021 compared to the year ended December 31, 2020, primarily due to sales leverage from menu price increases. This decrease was partially offset by higher costs for freight and beef and, to a lesser extent, higher costs for avocados.

22

Table of Contents

Labor Costs

Labor costs decreased as a percentage of total revenue for the year ended December 31, 2021 compared to the year ended December 31, 2020, primarily due to sales leverage and, to a lesser extent, lower COVID-19 related pay for restaurant employees. This decrease was partially offset primarily by wage inflation from increasing restaurant wages to a $15.00 national average hourly wage for our restaurant employees implemented across all restaurants by June 30, 2021.

Occupancy Costs

Occupancy costs decreased as a percentage of total revenue for the year ended December 31, 2021 compared to the year ended December 31, 2020, primarily due to sales leverage, partially offset by increased rent expense associated with new restaurants.

Other Operating Costs

Other operating costs include, among other items, marketing and promotional costs, delivery expense, bank and credit card processing fees, restaurant utilities, and maintenance costs. Other operating costs decreased as a percentage of total revenue for the year ended December 31, 2021 compared to the year ended December 31, 2020, primarily due to sales leverage and, to a lesser extent, lower marketing and promotional expense. These decreases were partially offset by higher delivery and technology expense.

General and Administrative Expenses

General and administrative expenses increased in dollar terms for the year ended December 31, 2021 compared to the year ended December 31, 2020, primarily due to the following: a $92.8 million increase in stock-based compensation, primarily attributable to the December 2020 modification of 2018 performance awards related to COVID-19; a $23.2 million increase in outside services expense related to corporate initiatives; an $11.8 million increase in performance bonuses; and a $9.6 million increase in employee wages primarily due to headcount growth. These increases were partially offset by a $17.1 million decrease in estimated loss contingencies related to legal matters in 2021 compared to 2020.

23

Table of Contents

Depreciation and Amortization

Depreciation and amortization decreased as a percentage of total revenue for the year ended December 31, 2021 compared to the year ended December 31, 2020, primarily due to sales leverage.

Impairment, Closure Costs, and Asset Disposals

Impairment, closure costs, and asset disposals decreased in dollar terms for the year ended December 31, 2021 compared to the year ended December 31, 2020, primarily due to a comparison against elevated impairments of operating lease assets and leasehold improvements in 2020. These elevated impairments in 2020 were primarily the result of the COVID-19 pandemic negatively impacting our near-term restaurant level cash flow forecasts.

Benefit/(Provision) for Income Taxes

The effective income tax rate for the year ended December 31, 2021, was higher than the effective income tax rate for the year ended December 31, 2020, primarily due to comparing against the federal net operating loss for tax year 2020, which had a statutory federal income tax rate of 21%, that was carried back to tax years 2015-2017, which had a statutory federal income tax rate of 35%. There is a further increase in the effective income tax rate due to the proportionality of the excess tax benefits from equity vesting and exercises relative to profit before tax in each respective year. This was partially offset by a net reduction in the 2021 effective income tax rate primarily related to the write-off of uncertain tax positions reserves for the year ended December 31, 2021.

Quarterly Financial Data/Seasonality

Seasonal factors cause our profitability to fluctuate from quarter to quarter. Historically, our average daily restaurant sales and net income are lower in the first and fourth quarters due, in part, to the holiday season and because fewer people eat out during periods of inclement weather (the winter months) than during periods of mild or warm weather (the spring, summer and fall months). Other factors also have a seasonal effect on our results. For example, restaurants located near colleges and universities generally do more business during the academic year. Seasonal factors, however, might be moderated or outweighed by other factors that may influence our quarterly results, such as unexpected publicity impacting our business in a positive or negative way, worldwide health pandemics, fluctuations in food or packaging costs, or the timing of menu price increases or promotional activities and other marketing initiatives. The number of trading days in a quarter can also affect our results, although, on an overall annual basis, changes in trading days do not have a significant impact.

Our quarterly results are also affected by other factors such as the amount and timing of non-cash stock-based compensation expense and related tax rate impacts, litigation, settlement costs and related legal expenses, impairment charges and non-operating costs, timing of marketing or promotional expenses, the number and timing of new restaurants opened in a quarter, and closure of restaurants. New restaurants typically have higher operating costs following opening because of the expenses associated with their opening and operating inefficiencies in the months immediately following opening. Accordingly, results for a particular quarter are not necessarily indicative of results to be expected for any other quarter or for any year.

24

Table of Contents

Liquidity and Capital Resources

As of December 31, 2021, we had a cash and marketable investments balance of $1.3 billion, excluding restricted cash of $30.9 million and non-marketable investments of $43.2 million. After funding the current operations in our restaurants and support centers, the first planned use of our cash flow from operations is to provide capital for the continued investment in new restaurant construction. In addition to continuing to invest in our restaurant expansion, we expect to utilize cash flow from operations to: repurchase additional shares of our common stock subject to market conditions; invest in, maintain, and refurbish our existing restaurants; and for general corporate purposes. As of December 31, 2021, $240.9 million remained available for repurchases of shares of our common stock, which includes the $200.0 million additional authorization approved by our Board of Directors and announced on February 8, 2022. Under the remaining repurchase authorizations, shares may be purchased in open market transactions, subject to market conditions. Additionally, as of December 31, 2021, we had $500.0 million of undrawn borrowing capacity under a line of credit facility.

We believe that cash from operations, together with our cash and investment balances, will be sufficient to meet ongoing capital expenditures, working capital requirements and other cash needs for the foreseeable future. Assuming no significant declines in comparable restaurant sales, we expect we will generate positive cash flow for the foreseeable future. Should our business deteriorate due to changing conditions, there are actions we can take to further conserve liquidity.

We have not required significant working capital because customers generally pay using cash or credit and debit cards and because our operations do not require significant receivables, nor do they require significant inventories due, in part, to our use of various fresh ingredients. In addition, we generally have the right to pay for the purchase of food, beverages and supplies sometime after the receipt of those items, within ten days, thereby reducing the need for incremental working capital to support our growth.

Our total capital expenditures for 2021 were $442.5 million. In 2021, we spent on average about $1.1 million in development and construction costs per new restaurant, or about $1.0 million net of landlord reimbursements of $0.1 million. In 2022, we expect to incur about $450 million in total capital expenditures. We expect approximately $260 million in capital expenditures related to our construction of new restaurants, before any reductions for landlord reimbursements. For new restaurants to be opened in 2022, we anticipate average development costs will remain consistent with 2021 due to a significant portion including Chipotlanes. We expect approximately $150 million in capital expenditures related to investments in existing restaurants including new equipment and hardware, technology to optimize efficiencies, remodeling and similar improvements. Finally, we expect a portion of our incurred capital expenditures to be for additional corporate initiatives including investments in technology for support centers to boost innovation, enhance the customer experience, and improve operations.

The following table summarizes current and long-term material cash requirements as of December 31, 2021, which we expect to fund primarily with operating cash flows:

(1)See Note 10. “Leases” of our consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data.” This includes commitments related to reasonably certain renewal periods.

(2)Purchase obligations include agreements to purchase goods or services that are enforceable and legally binding on us and that specify all significant terms. We have excluded agreements that are cancelable without penalty. The majority of our purchase obligations relate to amounts owed for produce and other ingredients and supplies, orders submitted for equipment for restaurants under construction and planned remodels, information technology, and marketing initiatives and corporate sponsorships.

The above table does not include income tax liabilities for uncertain tax positions for which we are not able to make a reasonably reliable estimate of the amount and period of related future payments. Additionally, we have excluded our estimated loss contingencies, due to uncertainty regarding the timing and amount of payment. See Note 12. “Commitments and Contingencies” of our consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data.”

25

Table of Contents

Critical Accounting Estimates

We describe our significant accounting policies in Note 1. “Description of Business and Summary of Significant Accounting Policies” of our consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data.” Critical accounting estimates are those that we believe are both significant and that require us to make difficult, subjective or complex judgments, often because we need to estimate the effect of inherently uncertain matters. We base our estimates and judgments on historical experiences and various other factors that we believe to be appropriate under the circumstances. Actual results may differ from these estimates, and we might obtain different estimates if we used different assumptions or factors.

Leases

We determine if a contract contains a lease at inception. Our material operating leases consist of restaurant locations and office space. Our leases generally have remaining terms of 1-20 years and most include options to extend the leases for additional 5-year periods. Generally, the lease term is the minimum of the noncancelable period of the lease or the lease term inclusive of reasonably certain renewal periods up to a term of 20 years. If the estimate of our reasonably certain lease term was changed, our depreciation and rent expense could differ materially.

Operating lease assets and liabilities are recognized at time of lease inception. Operating lease liabilities represent the present value of lease payments not yet paid. We made the policy election to combine lease and non-lease components, we also consider fixed common area maintenance (“CAM”) part of our fixed future lease payments. Fixed CAM is also included in our operating lease liability. Operating lease assets represent our right to use an underlying asset and are based upon the operating lease liabilities adjusted for prepayments, initial direct costs, lease incentives, and impairment of operating lease assets. To determine the present value of lease payments not yet paid, we estimate incremental borrowing rates corresponding to the reasonably certain lease term. As we have no outstanding debt nor committed credit facilities, secured or otherwise, we estimate this rate based on prevailing financial market conditions, comparable company and credit analysis, and management judgment. If the estimate of our incremental borrowing rate was changed, our operating lease assets and liabilities could differ materially.

Chipotle Rewards

Eligible customers who enroll in the Chipotle Rewards loyalty program generally earn points for every dollar spent. After accumulating the required number of points, the customer may select a reward. Earned rewards generally expire one to two months after they are issued, and points generally expire if an account is inactive for a period of six months.

The estimation of the standalone selling price of points and other rewards issued to customers involves several assumptions, primarily the estimated value of product for which the reward is expected to be redeemed and the probability that the points or reward will expire. Our estimate of points and other rewards we expect to be redeemed is based on historical company specific data. These inputs are subject to change over time due to factors such as menu price increases, changes in point redemption options and changes in customer behavior. Increasing our estimated ultimate redemption rate for estimated future redemptions by 100 basis points would have resulted in a reduction of food and beverage revenue on our consolidated statement of income of approximately $0.4 million for the year ended December 31, 2021.

Gift Cards

We sell gift cards, which do not have expiration dates, and we do not deduct non-usage fees from outstanding gift card balances. Gift card balances are initially recorded as unearned revenue. We recognize revenue from gift cards when the gift card is redeemed by the customer. Historically, the majority of gift cards are redeemed within one year. In addition, a portion of gift cards are not expected to be redeemed and will be recognized as breakage over time in proportion to gift card redemptions (“gift card breakage rate”). The gift card breakage rate is based on company and program specific information, including historical redemption patterns, and expected remittance to government agencies under unclaimed property laws, if applicable. We evaluate our gift card breakage rate estimate annually, or more frequently as circumstances warrant, and apply that rate to gift card redemptions. Decreasing our gift card breakage rate by 50 basis points would have resulted in a reduction of food and beverage revenue on our consolidated statement of income of approximately $5.1 million for the year ended December 31, 2021.

Impairment of Long-Lived Assets

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. For the purpose of reviewing restaurant assets to be held and used for potential impairment, assets are grouped together at the market level, or in the case of a potential relocation or closure, at the restaurant level. We manage our restaurants as a group with significant common costs and promotional activities; as such, an individual restaurant’s cash flows are not generally independent of the cash flows of others in a market.

26

Table of Contents

The fair value measurement for asset impairment is based on Level 3 inputs. We first compare the carrying value of the asset (or asset group, referred interchangeably throughout as asset) to the asset’s estimated future undiscounted cash flows. If the estimated undiscounted future cash flows are less than the carrying value of the asset, we determine if we have an impairment loss by comparing the carrying value of the asset to the asset's estimated fair value. The estimated fair value of the asset is generally determined using the income approach to measure the fair value, which is based on the present value of estimated future cash flows. Key inputs to the income approach for restaurant assets include the discount rate, projected revenue and expenses, and sublease income if we are closing the restaurant. In certain cases, management uses other market information, when available, to estimate the fair value of an asset. The impairment charges represent the excess of each asset’s carrying amount over its estimated fair value and are allocated among the long-lived asset or assets of the group.

Our estimates of future revenues and expenses are highly subjective judgments based on internal projections and knowledge of our operations, historical performance, and trends in sales and restaurant operating costs, and can be significantly impacted by changes in our business or economic conditions. The determination of asset fair value is also subject to significant judgment and utilizes valuation techniques including discounting estimated future cash flows and market-based analyses to determine fair value. If our estimates or underlying assumptions, including discount rate and sublease income change in the future, our operating results may be materially impacted.

Stock-based Compensation

We recognize compensation expense for equity awards over the requisite service period based on the award’s fair value. We use the Black-Scholes valuation model to determine the fair value of our stock-only stock appreciation rights (“SOSARs”), and we use the Monte Carlo simulation model to determine the fair value of stock awards that contain market conditions. Both of these models require assumptions to be made regarding our stock price volatility, the expected life of the award and expected dividend rates. The volatility and the expected life assumptions were based on our historical data. Similarly, the compensation expense of performance share awards is based in part on the estimated probability of achieving levels of performance associated with particular levels of payout for performance shares. We determine the probability of achievement of future levels of performance by comparing the relevant performance level with our internal estimates of future performance. Those estimates are based on a number of assumptions, including but not limited to growth in comparable restaurant sales and average restaurant level margin, and different assumptions may have resulted in different conclusions regarding the probability of achieving future levels of performance relevant to the payout levels for the awards. Had we arrived at different assumptions of stock price volatility or expected lives of our SOSARs, or if we changed our assumptions regarding the probability of achieving future levels of performance with respect to performance share awards, our stock-based compensation expense and results of operations may be materially different. As a result of changing our assumptions for the estimated payout of our various performance base awards during the year ended December 31, 2021 relative to these estimated payouts as of December 31, 2020, we incurred an additional $21.1 million of stock-based compensation expense during the year ended December 31, 2021.

Insurance Liability

We are self-insured for a significant portion of our employee health benefits programs. We carry significant retentions for risks and associated liabilities with respect to workers’ compensation, general liability, property and auto damage, employment practices liability, cyber liability and directors’ and officers’ liability. Predetermined loss limits have been arranged with third-party insurance companies to limit exposure to these claims. We record a liability that represents our estimated cost of claims incurred and unpaid as of the balance sheet date. Our estimated liability is not discounted and is based on a number of assumptions and factors, including historical trends, actuarial assumptions and economic conditions, and is closely monitored and adjusted when warranted by changing circumstances. If a greater amount of claims occurs compared to what we have estimated, or if medical costs increase beyond what we expected, our accrued liabilities might not be sufficient. Actual claims experience could also be more favorable than estimated. Unanticipated changes may produce materially different amounts of expense than that reported under these programs.

Reserves/Contingencies for Litigation and Other Matters

We are involved in various claims and legal actions that arise in the ordinary course of business. We record an accrual for legal contingencies when we determine that it is probable that we have incurred a liability and we can reasonably estimate the amount of the loss. Although we have recorded liabilities related to a number of legal actions, our estimates used to determine the amount of these liabilities may not be accurate, and there are other legal actions for which we have not recorded a liability. As a result, in the event legal actions for which we have not accrued a liability or for which our accrued liabilities are not accurate are resolved, such resolution may affect our operating results and cash flows.

27

Table of Contents

Income Taxes

Our benefit/(provision) for income taxes, deferred tax assets and liabilities and any related valuation allowance requires the use of estimates based on our management’s interpretation and application of complex tax laws and accounting guidance. We are primarily subject to income taxes in the United States. We establish reserves for uncertain tax positions for material, known tax exposures relating to deductions, transactions and other matters involving some uncertainty as to the measurement and recognition of the item. We may adjust these reserves when our judgment changes as a result of the evaluation of new information not previously available and will be reflected in the period in which the new information is available, or due to the expiration of any applicable statute of limitations. While we believe that our reserves are adequate, issues raised by a tax authority may be resolved at an amount different than the related reserve and could materially increase or decrease our income tax provision in future periods.

‎

28

Table of Contents