Chipotle Mexican Grill (CMG):

Case study set up

Ellen Carr

The Art of Forecasting

March 2018
 Why Chipotle (CMG)?

● High-flying restaurant stock—more recently brought to earth with food safety issues—but in the
base year (2011), CMG was firing on all cylinders.

● Illustrates some cash flow aspects of high growth companies:

– High quality problem of throwing off too much cash to invest economically/quickly enough

– Same store/comparable tailwind (two-year ramp-up contributes to same store sales)

– Deferred rent—non cash until the store base stops growing

● Illustrates the power of unit economics

– Tremendous growth runway; 3x store base growth possible

– Our guest speaker on the case will spend some time walking through how he looks at unit economics

● Other good learning aspects:

– Input costs (sharp food inflation in 2011, MSD predicted in 2012—only ~1/2 passed on in 2011)

– Better-than-average disclosure on individual line items/margin contributors (if only all companies provided

this level of detail)

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Why CMG?
Stock performance

2009 - 2011

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CMG: Learning objectives

● Focus on the growth trajectory

– Management guidance seems to balance conservatism (recognizing the difficult
comparisons) with a robust growth forecast driven by same store sales and new stores. Is
management too conservative or too aggressive?

● Consider margin headwinds and tailwinds

– Food inflation

– Deleveraging fixed costs with new stores/same store sales growth

● Take a longer view (5-year forecast)

– Since this is an equity story and equity forecast, a longer view is appropriate

● Consider capex (after 2012)

– To sustain growth, new stores will have to be opened in larger numbers over the next five
years—how difficult will it be to find good locations?

– Is there any such thing as “maintenance” capex for a retailer in this phase of its lifecycle?

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 CMG: Unique aspects of cash flow for growth companies

Deferred rent:
• Term of the lease begins before rent payments are due  non-cash component of rent

- As CMG growth slows, this non-cash component decreases

• Tenant incentives used to fund leasehold improvements recorded in deferred rent  non-cash
component of rent

- As CMG growth slows, tenant improvements will decrease for two reasons: it’s a less
attractive tenant so fewer incentives are offered, and there are fewer new stores
• Contingent rent accruals  timing difference—and counter-cyclical cash flow

- If CMG sales/store decreases and/or new stores don’t meet targets, contingent rent will
decrease
Stock compensation expense:
• Non-cash component of wages/benefits (8% in 2011)

- If CMG stock suffers a setback, employees may not accept stock comp

- Stock buybacks needed to prevent dilution  cash outlay

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CMG: Deliverable (1): Model

● Create your own!

– Start with the HUN template and enhance as needed, or

– Build a new model more accommodating of growth

companies/retailers/etc.

● I will post my model (which looks at the company from a fixed

income perspective) after your homework has been submitted. I
expect your models will be vastly superior to and more detailed than
mine!

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 CMG: Deliverable (2): Narrative (with supporting
numbers)

● Assumptions— ● Where could we be ● Confidence ● Comparison to mgmt.

narrative/numbers wrong? level guidance
– Revenue – Narrative – Narrative – Narrative
– Margin – Impact on – Impact on – Impact on
– Cash flow inputs: numbers numbers numbers

• Capex

– Anything else

Up to 2 pages of text + model (if not presenting)

Up to 5 PPT slides + model (if presenting)