CHIPOTLE MEXICAN GRILL INC

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

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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 2023 items and year-to-year comparisons of 2023 to 2022. Discussions of 2021 items and year-to-year comparisons of 2022 and 2021 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, 2022. 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.

Current wording

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 2024 items and year-to-year comparisons of 2024 to 2023. Discussions of 2022 items and year-to-year comparisons of 2023 and 2022 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, 2023. 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”, 7A. "Quantitative and Qualitative Disclosure About Market Risk", and elsewhere in this report.

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As of December 31, 2023, we operated 3,371 Chipotle restaurants throughout the United States, and 66 international Chipotle restaurants. We manage our U.S. operations based on eight regions and aggregate our operations to one reportable segment.

Current wording

As of December 31, 2024, we owned 3,644 Chipotle restaurants throughout the United States, and 82 international Chipotle restaurants. Additionally, we had three international licensed restaurants. We manage our U.S. operations based onten regions and aggregate our operations toone reportable segment.

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Restaurant operating costs as a percentage of total revenue

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•Other operating costs as a percentage of total revenue

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Sales Trends. Comparable restaurant sales increased 7.9% for the year ended December 31, 2023. The increase is primarily attributable to higher transactions and, to a lesser extent, an increase in average check. Comparable restaurant sales represent the change in period-over-period total revenue for restaurants in operation for at least 13 full calendar months. Digital sales represented 37.4% of total food and beverage revenue.

Current wording

Sales Trends. Comparable restaurant sales increased 7.4% for the year ended December 31, 2024. The increase is attributable to higher transactions of 5.3% and a 2.1% increase in average check. Comparable restaurant sales represent the change in period-over-period total revenue for restaurants in operation for at least 13 full calendar months. Digital sales represented 35.1% of total food and beverage revenue. For 2025, management is anticipating comparable restaurant sales growth in the low to mid-single digit range.

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Restaurant Development. During the year ended December 31, 2023, we opened 271 new restaurants, which included 238 restaurants with a Chipotlane. We expect to open approximately 285-315 new restaurants in 2024 (including 5 to 10 relocations), which assumes developer, permit, inspection, and utility delays do not worsen. We expect that at least 80% of our new restaurants will include a Chipotlane.

Current wording

Restaurant Development. During the year ended December 31, 2024, we opened 304 restaurants, which included 257 restaurants with a Chipotlane. We expect to open approximately 315 to 345 company-owned restaurants in 2025. We expect that at least 80% of our new company-owned restaurants will include a Chipotlane.

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Cultivate Next Fund. Our Cultivate Next Fund is a venture formed to make early-stage investments into strategically aligned companies that further our mission to Cultivate a Better World. The Fund has an initial size of $50.0 million, which is financed almost entirely by Chipotle. As of December 31, 2023, we have made $33.0 million in investments through this Fund. In December 2023, our Board approved an additional $50.0 million financial commitment to this Fund. As of December 31, 2023, none of this additional $50.0 million has been invested.

Current wording

Cultivate Next Fund. Our Cultivate Next Fund is a venture formed to make early-stage investments into strategically aligned companies that further our purpose to Cultivate a Better World. The Fund is authorized to invest up to $100.0 million, which is financed almost entirely by Chipotle. As of December 31, 2024, we have made $63.0 million in investments through this Fund.

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

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

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

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

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Food, beverage and packaging costs decreased 0.6% as a percentage of total revenue for the year ended December 31, 2023 compared to the year ended December 31, 2022, including 1.6% from menu price increases and 0.6% from lower avocado costs, partially offset by 1.6% due to inflation across several ingredient costs, primarily beef, tortillas and queso.

Current wording

Food, beverage and packaging costs increased 0.3% as a percentage of total revenue for the year ended December 31, 2024 compared to the year ended December 31, 2023. The increase was due to higher usage of ingredients as we focused on ensuring consistent and generous portions, inflation across several ingredient costs, primarily avocados, and a protein mix shift from the Smoked Brisket limited time offering and a Braised Beef Barbacoa marketing initiative. This increase was partially offset by a 1.0% benefit from menu price increases.

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Labor costs decreased 0.8% as a percentage of total revenue for the year ended December 31, 2023 compared to the year ended December 31, 2022, including 1.4% from sales leverage, partially offset by 0.8% due to restaurant wage inflation.

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Labor costs remained flat as a percentage of total revenue for the year ended December 31, 2024 compared to the year ended December 31, 2023. The 1.1% benefit from sales leverage was mostly offset by 0.9% due to restaurant wage inflation, of which 0.4% was due to minimum wage increases for our restaurants in California.

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Occupancy costs decreased 0.2% as a percentage of total revenue for the year ended December 31, 2023 compared to the year ended December 31, 2022, primarily due to sales leverage, partially offset by increased rent expense associated with new restaurants.

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Occupancy costs decreased 0.1% as a percentage of total revenue for the year ended December 31, 2024 compared to the year ended December 31, 2023, primarily due to 0.3% of sales leverage partially offset by 0.2% of increased occupancy expense, of which 0.1% was associated with existing restaurants and 0.1% was associated with new restaurants.

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Other operating costs decreased 0.7% as a percentage of total revenue for the year ended December 31, 2023 compared to the year ended December 31, 2022, including 0.6% of sales leverage and 0.2% of lower delivery expenses, partially offset by 0.1% of higher maintenance costs.

Current wording

Other operating costs decreased 0.6% as a percentage of total revenue for the year ended December 31, 2024 compared to the year ended December 31, 2023, primarily due to 0.5% of sales leverage and 0.2% of lower delivery expenses.

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Following is a summary of the change in General and administrative expense for the periods indicated:

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The following is a summary of the change in general and administrative expenses for the period indicated:

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Impairment, closure costs, and asset disposals increased in dollar terms for the year ended December 31, 2023 compared to the year ended December 31, 2022, primarily due to elevated impairment of operating lease assets and leasehold improvements and higher charges related to the replacement of certain leasehold improvements and, to a lesser extent, the replacement of certain kitchen equipment. These elevated impairments include the impact of closing all Pizzeria Locale restaurants.

Current wording

Impairment, closure costs, and asset disposals decreased in dollar terms for the year ended December 31, 2024 compared to the year ended December 31, 2023, primarily due to a gain on the sale of corporate equipment and higher charges related to the replacement of certain leasehold improvements in the comparable period.

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Interest and other income, net increased in dollar terms for the year ended December 31, 2023 compared to the year ended December 31, 2022, primarily due to increased interest income on our investments in U.S. Treasury securities, money market funds and time deposits, partially offset by a gain on our investments in Tractor Beverages, Inc. of $10.4 million recognized in the second quarter of 2022.

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Interest and other income, netincreased in dollar terms for the year ended December 31, 2024 compared to the year ended December 31, 2023, primarily due to increased interest income from higher investment balances in U.S. Treasury securities, money market funds and time deposits.

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The effective income tax rate increased 0.3% for the year ended December 31, 2023, compared to the year ended December 31, 2022, primarily due to a 0.4% decrease in excess tax benefits from equity vesting and exercises.

Current wording

The effective income tax rate decreased 0.5% for the year ended December 31, 2024 compared to the year ended December 31, 2023, primarily due to lower nondeductible expenses of 0.6% and income tax reserves of 0.4%. These decreases were partially offset by a 0.6% reduction in tax benefits related to option exercise and equity vesting.

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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, impact of inflation on consumer spending, 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 affectour results, although, on an overall annual basis, changes in trading days do not have a significant impact.

Current wording

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, disease outbreak, epidemic or endemic, the impact of inflation on consumer spending, 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.

Previous wording

Our quarterly results are also affected by other factors such as the amount and timing ofnon-cash stock-based compensation expense and related tax rate impacts, litigation, settlement costs and related legal expenses, impairment charges and non-operating costs, timing ofmarketing 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.

Current wording

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.

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As of December 31, 2023, we had a cash and marketable investments balance of $1.8 billion, non-marketable investments of $75.4 million, and $25.6 million of restricted cash. 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, 2023, $424.1 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 on December 14, 2023. Under the remaining repurchase authorizations, shares may be purchased from time to time in open market transactions, subject to market conditions.

Current wording

As of December 31, 2024, we had a cash and marketable investments balance of $2.2 billion, non-marketable investments of $85.2 million, and $29.8 million of restricted cash. 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, 2024, $1.0 billion remained available for repurchases of shares of our common stock, which includes the $300.0 million additional authorization approved by our Board of Directors on December 17, 2024. Under the remaining repurchase authorizations, shares may be purchased from time to time in open market transactions, subject to market conditions.

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We have not required significant working capital because customers generally pay using cash or credit and debit cards and because ouroperations 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, generally within ten days, thereby reducing the need for incremental working capital to support our growth.

Current wording

We have not required significant working capital because guests 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, generally within ten days, thereby reducing the need for incremental working capital to support our growth.

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Our total capital expenditures for 2023 were $560.7 million. In 2023, we spent on average about $1.4 million in development and construction costs per new restaurant, or about $1.2 million net of landlord reimbursements of $0.2 million. In 2024, we expect to incur about $635.0 million in total capital expenditures. We expect approximately $430.0 million in capital expenditures related to our construction of new restaurants, before any reductions for landlord reimbursements. For new restaurants to be opened in 2024, we anticipate average development costs will remain consistent with 2023. We expect approximately $130.0 million in capital expenditures related to investments in existing restaurants including remodeling and similar improvements, new equipment and hardware, technology to optimize efficiencies. Finally, we expect a portion of our incurred capital expenditures to be for additional corporate initiatives including investments in technology to boost innovation, enhance the guest experience, and improve operations.

Current wording

Our total capital expenditures for 2024 were $593.6 million. In 2024, we spent on average about $1.5 million in development and construction costs per new restaurant, or about $1.3 million net of landlord reimbursements of $0.2 million. In 2025, we expect to incur about $683.7 million in total capital expenditures. We expect approximately $502.7 million in capital expenditures related to our construction of new restaurants, before any reductions for landlord reimbursements. We expect the average investment cost for new restaurants opening in 2025 will be slightly higher than the average investment costs for those opened in 2024. We expect approximately $149.0 million in capital expenditures related to investments in existing restaurants including remodeling and similar improvements, new equipment and hardware, and technology to optimize efficiencies. Finally, we expect a portion of our incurred capital expenditures to be for additional corporate initiatives including investments in technology to boost innovation, enhance the guest experience, and improve operations.

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(1)See Note 9. “Leases” of our consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data.” This includes commitments related to reasonably certain renewal periods.

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(1)See Note 9. “Leases” of our consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data.” This includes commitments related to reasonably certain renewal periods for leases that have commenced and includes legally binding lease payments for leases signed but not yet commenced.

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(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 food, beverage and packaging, capital projects, information technology, marketing initiatives and corporate sponsorships, and other miscellaneous items.

Current wording

(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 cancellable without penalty. The majority of our purchase obligations relate to food, beverage and packaging, capital projects, information technology, marketing initiatives and corporate sponsorships, and other miscellaneous items.

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Cash provided by operating activities was $1.8 billion for the year ended December 31, 2023, compared to $1.3 billion for the year ended December 31, 2022. The increase was primarily due to higher net earnings and, to a lesser extent, net cash changes in non-tax operating assets and liabilities.

Current wording

Cash provided by operating activities was $2.1 billion for the year ended December 31, 2024, compared to $1.8 billion for the year ended December 31, 2023. The increase was primarily due to higher net earnings and, to a lesser extent, net cash changes in operating assets and liabilities.

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Cash used in investing activities was $946.0 million for the year ended December 31, 2023, compared to $830.0 million for the year ended December 31, 2022. The change was primarily associated with increased capital expenditures of $81.6 million primarily related to costs associated with new restaurant development and, to a lesser extent, a $34.4 million increase in investment purchases net of investment maturities.

Current wording

Cash used in investing activities was $837.5 million for the year ended December 31, 2024, compared to $946.0 million for the year ended December 31, 2023. The change was primarily associated with a $121.2 million decrease in investment purchases net of investment maturities. This was partially offset by increased capital expenditures of $32.9 million primarily related to costs associated with new restaurant development.

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Cash used in financing activities was $660.7 million for the year ended December 31, 2023, compared to $929.4 million for the year ended December 31, 2022. The change was primarily due to decreased treasury stock repurchases of $237.8 million and, to a lesser extent, $29.8 million of lower payments of tax withholdings related to stock-based compensation.

Current wording

Cash used in financing activities was $1.1 billion for the year ended December 31, 2024, compared to $660.7 million for the year ended December 31, 2023. The change was primarily due to increased repurchases of common stock of $409.2 million.

Previous wording

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 restaurant cash flow dollars, growth in comparable restaurant sales and average restaurant level operating 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. If we change our estimates of stock price volatility or expected lives of our SOSARs, or if we change 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 impacted.

Current wording

We recognize compensation expense for equity awards over the requisite service period based on the award’s fair value. Under our stock incentive plans, we issue stock-only stock appreciation rights ("SOSARs"), restricted stock units ("RSUs"), and performance stock units ("PSUs"). We use the Black-Scholes valuation model to determine the fair value of our SOSARs, and we use the Monte Carlo simulation model to determine the fair value of PSUs 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 are 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 restaurant cash flow dollars, average restaurant level operating margin, and growth in new restaurant openings, 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. If we change our estimates of stock price volatility or expected lives of our SOSARs, or if we change 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 impacted.

Previous wording

Our 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 U.S. 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.

Current wording

Our 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. The majority of our income tax liability is incurred in the U.S. 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.