Executive Summary

Chipotle Mexican Grill (CMG) and Taco Bell are two major companies in the Mexican

fast-food restaurant industry. This paper studies specifically the Mexican fast-food restaurant

industry by comparing both of these competitors. This paper also does an analysis on the financ ia l

statements of both of these companies to show their marketplace value, business operations, and

overall performance. A detailed calculation of ratios and other financial analysis is done to show

which company holds a better position in the market. It looks like Taco Bell is the market leader

when it comes to fast food Mexican food in terms of revenue, production, expansion, and

profitability. It continues to be a strong force in the restaurant industry and has YUM! Brands

backing its every move leaving Chipotle to fend for itself and suffer because it simply can’t

compete with the size of the Taco Bell chain. Based on the results of the ratio and financ ia l

analysis, it can be seen that Taco Bell would be a better investment over Chipotle.

Introduction

Chipotle Mexican Grill, Inc, also known as “Chipotle” incorporated on January 30, 1993

and is based out of Denver, Colorado. It was founded by Steve Ells, who serves as Chairman of

the Board, and Co-Chief Executive Officer of Chipotle Mexican Grill Inc. Chipotle Mexican Grill

restaurants serve items such as burritos, tacos, burrito bowls, and salads. The company provides a

variety of extras such as tortilla chips, guacamole, salsa, in addition with margaritas and beer

(www.reuters.com/finance/stocks). As of May 2015, this publicly traded company owns and

operates more than 1,650 restaurants in the fast casual dining space. The Company uses

ingredients, which include chicken, and steak that is marinated and grilled in its restaurants,

carnitas (seasoned and braised pork), barbacoa (spicy shredded beef) and vegetarian pinto and

black beans. The Company adds its rice, which is tossed with lime juice and freshly chopped

cilantro, as well as freshly shredded cheese, sour cream, lettuce, peppers and onions, depending

on each customer's request. It also uses various herbs, spices and seasonings to prepare its meats

and vegetables. The Company's restaurants serve only meats that were raised without the use of

non-therapeutic antibiotics or added hormones which are branded as responsibly raised

(www.reuters.com/finance/stocks). Ells’s vision is that food served fast doesn’t have to be low

quality and that delicious food doesn’t have to be expensive, which is the foundation on which

Chipotle is based. This visionary thinking has led Chipotle to extraordinary accomplishments, such

as growing from a single restaurant to over 2,000 and serving more responsibly-raised meat than

any other restaurant company. This thinking has also resulted in Mr. Ells remaining a principa l

driving force behind making Chipotle innovative and striving for constant improvement, as he

continues to provide important leadership to our executive officers, management team, and Board.

He is also one of the largest individual shareholders of our company

(www.wikiinvest.com/stock/chipotle).

Chipotle has approximately over 5,000 employees and over 1,000 shareholders as of this

year (mergentonline.com). Chipotle is the market leader in the Mexican-style fast casual dining

sector with restaurants not only in the U.S. but also in Canada. U.K. France, and Germany. This

company also operates nine ShopHouse Southeast Asian Kitchen restaurants, serving casual, Asian

cuisine, and is an investor in a consolidated entity that owns and operates two Pizzeria Locale

restaurants, a fast casual pizza concept. However, for this project we are looking at Chipotle

Mexican Grill solely and not its other entities. The goal of this project is to conduct a financ ia l

analysis on Chipotle and its major competitor (s).

Management discussion

One of the first things we want to focus on is the size of this particular industry. Some of

the major companies in this industry include McDonalds Corporation, Panera Bread, and Yum!

Brands Inc., which operates through Pizza Hut, KFC, and Taco Bell Corporation. This industry

focuses specifically on quick service fast food dining. While other restaurant chains can be a part

of this industry, we want to look directly at those who pose a major threat to Chipotle by being

direct competitors. (www.investopedia.com).

Another aspect of running a successful business in the restaurant industry is food safety

and cleanliness. Chipotle has had to ensure that it has followed all safety protocols making sure

their food is properly contained after food-borne illness, E.coli surfaced in their restaurants early

in 2015. They have suffered recent market share loss due to their restaurants making headlines for

illnesses caused by E. Coli in their food, initially in Washington and Oregon, but then spreading

to 12 other states. This has caused a negative impact for shareholders because profits declined

quickly and loyal customers also quickly left the chain. Negative publicity did not aid in bringing

customers into the stores and company stakeholders knew they would have to do damage control

quick. Chipotle had to spend more money than it lost to ensure all food safety measures were up

to par after their sudden E. Coli exposure and had to develop a marketing plan to bring back their

customers. Chipotle Mexican Grill (CMG) posted a decline in its same-store sales growth of

29.7%. It was lower than analysts' estimate of 28.6%. The decline in same-store sales growth was

mainly due to a decline in traffic. It was down by 21.1%. After the poor performance of -36.4% in

January, the company showed some improvement. In February, its same-store sales growth was -

26.1%. In March 2016, four of its employees in Boston were sick. Following Chipotle’s protocol,

the employees didn’t report for work. According to its enhanced food safety procedures, the

company temporarily closed. The incident circulated in the news as another outbreak. In March,

the same-store sales growth was -26.4%. To win back its customers, the company implemented

several enhanced food safety measures and conducted aggressive marketing and promotiona l

campaigns. Under the “Rain Check mobile promotion,” customers redeemed over 6 million free

burritos in February and March. The mobile offer was followed by direct mail promotions. More

than 20 million households were contacted. It’s important to note that 17.5% of the mail

promotions were redeemed. Despite all of these efforts, the first three weeks of April showed

mixed results. The same-store sales growth was -26%. In 1Q16, Panera Bread and Brinker

International recorded same-store sales growth of 4.7% and -3.6% (Nathan, R. (2016, May 1).

Chipotle reported its 1Q16 results on April 26, 2016, after the Market closed. The company’s

revenues were at $834.5 million—a decline of 23.4% from 1Q15. Its EPS (earnings per share)

declined by 122.2% to $0.88 (Nathan, R. (2016, April 28). Since the E. coli outbreak in October

2015, Chipotle’s share price has been falling. Year-to-date, Chipotle’s share price is down by

13.1%. During the same period, the share prices of Chipotle’s peers Panera Bread, Shake Shack,

and Brinker International have returned 9.5%, -5.3%, and -4.3%.

Since the E. coli outbreak, the traffic at its restaurants fell. Customers are skeptical about

the quality of Chipotle’s food. Being in a brick-and-mortar business, restaurants lose revenue when

they close locations, even temporarily. Chipotle closed all of its restaurants on February 8, 2016.

It held a national all-company meeting. This also reduced Chipotle’s revenue. Although Chipotle

implemented enhanced food safety measures, analysts expect the recovery to take time. In 2016,

they estimate that Chipotle will post revenue of $4.3 billion. This represents a decline of 5.3%

from $4.5 billion in 2015 (Nathan, R. (2016, April 28).

From 2011 through 2014, the company grew its annual sales consecutively at an average

rate of 22%. In 2015, revenue continued to rise quarterly for the first three quarters. Even with the

food contamination news breaking out in August, Chipotle still finished that quarter with more

sales, though at a much slower growth rate. Chipotle's 22% sales growth rate dwarfs the 1.84%

rate for its peers and the 4.18% average rate for the industry. Even as it tries to reassure customers

of its food safety, Chipotle can still expect some growth, however small it may be (Wei, J. (2015).

2015 was the most challenging year in Chipotle’s history . The events of the year impacted their

performance in terms of market share, market price, profits, losses, and their reputation. Prior to

the challenges encountered in 2015, Chipotle was on track for another year of growth. Through

the third quarter, they had seen healthy growth in virtually every measure, with revenue up 15.3%

on the opening of 150 new restaurants and comparable restaurant sales increases of 5.5%. This led

to a 25.6% increase in diluted earnings per share through the first nine months of 2015.

Unfortunately, the fourth quarter weighed heavily on the full year results, and overall sales for the

year were up only 9.6%, and Earnings per Share increased 6.9% to $15.10 (Chipotle Investor

Relations. (2016, February 05).

Taco Bell as a competitor to Chipotle Mexican Grill

Taco Bell is the number one Mexican fast food chain in the U.S. with over 6,400 locations.

Taco Bell also has international locations in over 20 countries including 7 units in India. Parent

YUM! Brands also operates KFC and Pizza Hut. The restaurant features a wide range of Mexican

style menu items including tacos, burritos, nachos, quesadillas, etc. YUM! Brands Inc., through

its subsidiaries operates quick service restaurants. The first Taco Bell restaurant was opened in

1962 by Glen Bell in Downey, California. In 1964, the first Taco Bell franchise was sold. Taco

Bell delivered a fantastic 2015 surpassing $9 billion in system sales. Taco bell is setting an industry

standard with product development, brand positioning, social engagement and advertising. One of

their most exciting products, the Quesalupa, was launched this year during the infamous Super

Bowl 50. They also introduced a loyalty program in November to increase brand awareness, which

rewards social behavior. They are also focused on core value messaging to drive transactions.

There has been tremendous sales growth for Taco Bell over the last 3 years. There has been

8% sales growth in 2015 when compared to 4% for both 2013 and 2014. Although YUM! Brands

did not do as well as they would have liked to in 2013 with a decline in their EPS of 9% and

worldwide operating profit decline of 10%, Taco Bell still led the way by delivering restaurant

margins of 19% over their other concepts, Pizza Hut and KFC. Taco Bell was also named marketer

of the year and had the highest overall operating results in the company. Taco bell contributed to

two-thirds, or approximately $451 million of Yum’s 2013 operating profit (Wong, V. (2014,

February 6). Making a Run Inside the Border: Taco Bell’s Huge U.S. Growth Plans).

In 2014, system sales and operating profit increased by 4% and 5%. Same-store sales

increased 3% and the Division opened 236 new units. In 2014, the decrease in Company sales and

Restaurant profit associated with store portfolio actions was driven by refranchising, partially

offset by net new unit growth. Significant other factors impacting Company sales and/or

Restaurant profit were commodity inflation and higher food and labor costs due to the launch of

breakfast. A major reason operating profit increased was due in part for their breakfast roll out.

The chain took a high-stakes gamble in the spring when it rolled out the breakfast menu nationa lly.

Instead of conventional fast-food breakfast sandwiches, it rolled out items such as Breakfast Tacos

and Breakfast Burritos. It ran humorous ads featuring dozens of men appropriately named Ronald

McDonald, who said they preferred Taco Bell's breakfast. Taco Bell's U.S. and global same-store

sales grew 2% in the quarter and were expected to increase in the upcoming year as the chain

discussed launching mobile ordering. (Horovitz, Bruce. "Yum: Pizza Hut Off; Taco Bell up."

Usatoday.com).

In 2015, they continued to build their day-part breakfast where sales are growing at twice

the rate of businesses as a whole. They grew their breakfast transactions by 6% in the fourth

quarter. They had a record number of U.S. openings in 2015 and expect even more growth in

2016). Taco Bell’s same store sales jumped 6% year-over- year, while its operating margin

climbed to 29.5% from 24.8% (Ramer, L. (2015, July 15). Yum Stock: Earnings Show Slow-But-

Steady Improvement). Taco Bell Division system sales increased 7%, driven by 3% unit growth

and 4% same-store sales growth. Taco Bell Division also opened 62 new restaurants; 81% of these

new units were opened by franchisees. Company sales also rose from $344 million in 2014 to $366

million in 2015. Taco Bell is also planning on opening 300 global new restaurants in 2016 paving

the way for higher earnings, market share, and definitely higher sales growth

(yum.com/annualreport).

Analysis of the Financial Statements- Chipotle Mexican Grill

Typically, Chipotle ends its fiscal year on December 31 of each year. The company also

does quarterly reporting along with annual reporting to keep stockholders and investors aware of

the company’s performance, areas of weakness and strength. Both forms of reporting make it

easier for problems to be addressed should a decline in profits or EPS become apparent due to

market place inflation, market demand, seasonality, marketing, or any other operating function.

Balance Sheet

By analyzing the balance sheet, we noticed that current assets for Chipotle increased from

2013 from $653,095 to $859,511 2014. Unfortunately, they did decrease by 2015 to $814,647.

This could be a result of the negative publicity from the E.coli outbreak, which led to declining

sales. It also appears as though total assets have increased from 2013 into 2015. Assets and

liabilities have a cause and effect relationship as such total current liabilities and total liabilit ies

also increased due to assets increasing. This was because more stores have opened since 2013,

causing Chipotle to borrow more to alleviate operating costs. Shareholders equity has also grown

since 2013, with a significant jump from 2013 to 2014, but a light increase for 2015 as the negative

publicity, and temporary restaurant closings surrounding Chipotle during this time did not help it

gain any traction in positive sales/ market place value (Ref. Page 48 10K Report 2015)

Taco Bell’s balance sheet was consolidated with YUM! Brands to show a more simplif ied

picture of the earnings. Both current assets, current liabilities and total liabilities increased from

2014 to 2015. This was due in part to the growth YUM! Brands achieved with Pizza Hut, KFC,

and Taco Bell. They opened new stores not only in the U.S., but expanded their restaurant chains

to different countries, thereby borrowing more and becoming a more valuable brand (Ref. Item 6

Proxy).

Income Statement

Chipotle’s net income has increased from 2013 to 2015 from $327,438 to $475, 602. Their

earnings per share have also increased by almost $5.00 as in 2013 it was $10.58 to 2015 $15.30.

Their food, beverage, and labor costs have all risen, but this is all attributed to inflation and rising

costs in the marketplace. Their total operating expenses and income from operations have also

increased due to more locations opening, more marketing efforts. In 2015, increased revenue was

primarily driven by new restaurant openings. Revenue from restaurants not yet in the comparable

base contributed $390.4 million of the increase in sales in 2015, of which $183.6 million was

attributable to restaurants opened during the year. Revenue in 2015 was $4,501,223 when

compared to $3,214,591 in 2013. In 2014, the significant factors contributing to our increases in

revenue were comparable restaurant sales and new restaurant openings. Food, beverage and

packaging costs decreased as a percentage of revenue in 2015 primarily due to the benefit of the

nation-wide menu price increases taken in the second quarter of 2014 and relief in dairy and

avocado costs. The decrease was partially offset by inflation on beef costs. Food, beverage and

packaging costs increased as a percentage of revenue in 2014 due to inflation on many food items,

primarily beef, avocados, and dairy. The increase was partially offset by the impact of menu price

increases. Labor costs as a percentage of revenue increased in 2015 due primarily to wage infla t ion

and an increased number of crew and managers in each of our restaurants caused by scheduling

inefficiencies occurring earlier in the year. Based on expected lower average restaurant sales, we

expect labor costs as a percentage of revenue to increase for 2016. Labor costs as a percentage of

revenue decreased in 2014 due primarily to the benefit of higher average restaurant sales, includ ing

the impact of menu price increases, partially offset by an increased number of managers and crew

in our restaurants and normal wage inflation (Ref. Page 49 10K Report 2015)

We have to focus yet again on a consolidated income statement for Taco Bell under YUM!

Brands. Net income has increased for this brand as a whole over the course of three years, which

can be attributed to Taco Bell doing so well not only locally but worldwide as well. Earnings per

share have also risen from $2.41 to 2.97 in 2015. Their total revenues have not been as steady with

an increase from 2013 to 2014, but a slight drop in 2015. This was mainly due to Pizza Hut not

doing as well as they had hoped. Their operating profit has increased over the last three years,

while their total costs/expenses rose from 2013 to 2014, but declined heavily in 2015. This is a

good thing because they must have learned how to manage their expenses adequately, while still

ensuring that they gained operating profit (Ref. Item 6 Proxy).

Statement of Cash Flow

The overall cash flow for Chipotle Mexican Grill has increased from 2013 to 2015 as net

income increased from $327,438 to $475,602. Net cash provided by operating activities has also

increased slightly from 2014 to 2015 from $682,067 to $683,316. Net cash used in financ ing

activities decreased heavily from 2013 to 2014, but managed to increase from 2014 to 2015. This

may have been a result of expansion and additional costs associated with market place growth. Net

cash used in investing activities increased from 2013 to 2014, but decreased in 2015. Chipotle may

have pulled back some investing efforts over the course of three years due to budget restraints,

market demand and possibly labor costs (Ref Page 52 10K Report 2015).

YUM! Brands has seen increasing cash flow in the last three years, which is a positive sign

for the company as it continues to expand globally and roll out new marketing plans for each of

its concepts. Net income increased from $1,064 to 1,298 (in millions). Surprisingly, net cash from

operating activities was $2,139 in 2013 but decreased in 2014. However, it was back at $2,139 in

2015. This may have been a result of the company understanding and analyzing why the decline

occurred in the first place. Pizza Hut and KFC were not performing so well outside of the U.S. and

were bringing the overall profit down. Once the company was able to see where it needed to invest,

they began to keep their efforts focused on Taco Bell by launching new marketing strategies. As

such, they launched their breakfast menu and slowly began to see profits rise, which led to the

2015 overall net cash increase. Net cash used in investing activities saw a sharp rise in 2014 but

declined in 2015. This may be due in part to the loss they suffered in 2014 with below than

expectations performance. Net cash used in financing activities increased from 2014 to 2015

slightly, which means YUM did not want to invest too much and put too much at stake and be at

a loss so they strategically invested this time around as opposed to 2013 where they suffered by

investing so much (Ref. Item 6 Proxy)

Statement of Shareholders’ Equity

Chipotle has increased its value over the last three years with shareholders’ equity rising

from 35,245 shares of stock to 35,790 in 2015. More people have invested into the Chipotle name

and have caused share prices to rise. Each share also went from $352 in 2013 to $358 in 2015.

While this increase may be minimal, it still adds up to a larger number when combined with the

number of shareholders. Chipotle built a name for itself and was at the top of the food chain in

2014-2015 before the E. coli outbreak enticing investors to come and invest. (Ref. Page 51 10K

Report 2015)

Taco Bell was consolidated with YUM! Brands for this as well. It appears as though for

the brand as a whole shares have decreased since 2013. Total shareholders’ equity has also declined

with $1,604 in 2014 and $969 in 2015. This may be because YUM! Brands did not do as well with

Pizza Hut in 2013 and 2014, which caused the company as a whole to have lower shares. Their

shares will possibly be higher this year as their marketing for all three concepts has been top notch

and they have done exceptionally well so far this quarter according to their quarterly reports. (Page

57 10K Report 2015)

References

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Decline? Retrieved May 2, 2016, from https://sg.finance.yahoo.com/news/why-

did-chipotle-1q16-same-050635199.html

III. Nathan, R. (2016, April 28). Chipotle Reported a Loss for the First Time in Its

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reported-loss-first-time

history/?utm_source=yahoo&utm_medium=feed&utm_content=toc-

1&utm_campaign=chipotles-1q16-store-sales-growth-decline

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