filings.toolsItem 1. FINANCIAL STATEMENTS
60K characters. Original on sec.gov · Markdown
Item 1. FINANCIAL STATEMENTS
CHIPOTLE MEXICAN GRILL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
| September 30, 2024 | December 31, 2023 | ||||||||||
| (unaudited) | |||||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 698,547 | $ | 560,609 | |||||||
| Accounts receivable, net | 93,202 | 115,535 | |||||||||
| Inventory | 49,848 | 39,309 | |||||||||
| Prepaid expenses and other current assets | 87,896 | 117,462 | |||||||||
| Income tax receivable | 82,087 | 52,960 | |||||||||
| Investments | 668,676 | 734,838 | |||||||||
| Total current assets | 1,680,256 | 1,620,713 | |||||||||
| Leasehold improvements, property and equipment, net | 2,320,395 | 2,170,038 | |||||||||
| Long-term investments | 892,487 | 564,488 | |||||||||
| Restricted cash | 27,969 | 25,554 | |||||||||
| Operating lease assets | 3,954,689 | 3,578,548 | |||||||||
| Other assets | 113,935 | 63,082 | |||||||||
| Goodwill | 21,939 | 21,939 | |||||||||
| Total assets | $ | 9,011,670 | $ | 8,044,362 | |||||||
| Liabilities and shareholders' equity | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | 221,301 | $ | 197,646 | |||||||
| Accrued payroll and benefits | 184,367 | 227,537 | |||||||||
| Accrued liabilities | 181,354 | 147,688 | |||||||||
| Unearned revenue | 180,288 | 209,680 | |||||||||
| Current operating lease liabilities | 270,574 | 248,074 | |||||||||
| Total current liabilities | 1,037,884 | 1,030,625 | |||||||||
| Commitments and contingencies (Note 11) | |||||||||||
| Long-term operating lease liabilities | 4,212,868 | 3,803,551 | |||||||||
| Deferred income tax liabilities | 79,519 | 89,109 | |||||||||
| Other liabilities | 67,501 | 58,870 | |||||||||
| Total liabilities | 5,397,772 | 4,982,155 | |||||||||
| Shareholders' equity: | |||||||||||
| Preferred stock, $0.01 par value, 600,000 shares authorized, no shares issued as of September 30, 2024 and December 31, 2023, respectively | - | - | |||||||||
| Common stock, $0.01 par value, 11,500,000 shares authorized, 1,363,639 and 1,874,139 shares issued as of September 30, 2024 and December 31, 2023, respectively | 13,635 | 18,741 | |||||||||
| Additional paid-in capital | 2,030,178 | 1,937,794 | |||||||||
| Treasury stock, at cost, 0 and 502,843 common shares as of September 30, 2024 and December 31, 2023, respectively | - | (4,944,656) | |||||||||
| Accumulated other comprehensive loss | (7,440) | (6,657) | |||||||||
| Retained earnings | 1,577,525 | 6,056,985 | |||||||||
| Total shareholders' equity | 3,613,898 | 3,062,207 | |||||||||
| Total liabilities and shareholders' equity | $ | 9,011,670 | $ | 8,044,362 |
See accompanying notes to condensed consolidated financial statements.
CHIPOTLE MEXICAN GRILL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(in thousands, except per share data)
(unaudited)
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Food and beverage revenue | $ | 2,778,034 | $ | 2,456,039 | $ | 8,417,396 | $ | 7,304,557 | |||||||||||||||
| Delivery service revenue | 15,542 | 15,909 | 51,147 | 50,772 | |||||||||||||||||||
| Total revenue | 2,793,576 | 2,471,948 | 8,468,543 | 7,355,329 | |||||||||||||||||||
| Restaurant operating costs (exclusive of depreciation and amortization shown separately below): | |||||||||||||||||||||||
| Food, beverage and packaging | 855,515 | 734,186 | 2,508,264 | 2,165,409 | |||||||||||||||||||
| Labor | 696,847 | 616,282 | 2,072,924 | 1,811,754 | |||||||||||||||||||
| Occupancy | 142,570 | 126,269 | 416,932 | 372,097 | |||||||||||||||||||
| Other operating costs | 386,463 | 345,368 | 1,156,992 | 1,058,281 | |||||||||||||||||||
| General and administrative expenses | 126,614 | 159,501 | 506,267 | 464,337 | |||||||||||||||||||
| Depreciation and amortization | 84,349 | 78,546 | 251,154 | 233,902 | |||||||||||||||||||
| Pre-opening costs | 12,786 | 9,605 | 28,992 | 23,341 | |||||||||||||||||||
| Impairment, closure costs, and asset disposals | 15,176 | 7,241 | 26,417 | 31,842 | |||||||||||||||||||
| Total operating expenses | 2,320,320 | 2,076,998 | 6,967,942 | 6,160,963 | |||||||||||||||||||
| Income from operations | 473,256 | 394,950 | 1,500,601 | 1,194,366 | |||||||||||||||||||
| Interest and other income, net | 29,307 | 18,392 | 70,532 | 43,787 | |||||||||||||||||||
| Income before income taxes | 502,563 | 413,342 | 1,571,133 | 1,238,153 | |||||||||||||||||||
| Provision for income taxes | 115,175 | 100,125 | 368,787 | 291,502 | |||||||||||||||||||
| Net income | $ | 387,388 | $ | 313,217 | $ | 1,202,346 | $ | 946,651 | |||||||||||||||
| Earnings per share: | |||||||||||||||||||||||
| Basic | $ | 0.28 | $ | 0.23 | $ | 0.88 | $ | 0.69 | |||||||||||||||
| Diluted | $ | 0.28 | $ | 0.23 | $ | 0.87 | $ | 0.68 | |||||||||||||||
| Weighted-average common shares outstanding: | |||||||||||||||||||||||
| Basic | 1,367,038 | 1,377,525 | 1,370,671 | 1,379,640 | |||||||||||||||||||
| Diluted | 1,374,605 | 1,384,062 | 1,379,099 | 1,386,934 | |||||||||||||||||||
| Other comprehensive income/(loss), net of income taxes: | |||||||||||||||||||||||
| Foreign currency translation adjustments | $ | 1,074 | $ | (1,128) | $ | (783) | $ | (192) | |||||||||||||||
| Comprehensive income | $ | 388,462 | $ | 312,089 | $ | 1,201,563 | $ | 946,459 |
See accompanying notes to condensed consolidated financial statements.
CHIPOTLE MEXICAN GRILL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(in thousands)
(unaudited)
| Common Stock | Treasury Stock | ||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Additional Paid-In Capital | Shares | Amount | Retained Earnings | Accumulated Other Comprehensive Loss | Total | ||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2022 | 1,865,992 | $ | 18,660 | $ | 1,811,017 | 484,651 | $ | (4,282,014) | $ | 4,828,248 | $ | (7,888) | $ | 2,368,023 | |||||||||||||||||||||||||||||||||
| Stock-based compensation | - | - | 20,670 | - | - | - | - | 20,670 | |||||||||||||||||||||||||||||||||||||||
| Stock plan transactions and other | 4,982 | 50 | (340) | - | - | - | - | (290) | |||||||||||||||||||||||||||||||||||||||
| Repurchase of common stock | - | - | - | 6,241 | (198,819) | - | - | (198,819) | |||||||||||||||||||||||||||||||||||||||
| Net income | - | - | - | - | - | 291,644 | - | 291,644 | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive income/(loss), net of income taxes | - | - | - | - | - | - | 457 | 457 | |||||||||||||||||||||||||||||||||||||||
| Balance, March 31, 2023 | 1,870,974 | $ | 18,710 | $ | 1,831,347 | 490,892 | $ | (4,480,833) | $ | 5,119,892 | $ | (7,431) | $ | 2,481,685 | |||||||||||||||||||||||||||||||||
| Stock-based compensation | - | - | 31,467 | - | - | - | - | 31,467 | |||||||||||||||||||||||||||||||||||||||
| Stock plan transactions and other | 1,993 | 20 | (236) | - | - | - | - | (216) | |||||||||||||||||||||||||||||||||||||||
| Repurchase of common stock | - | - | - | 2,271 | (88,319) | - | - | (88,319) | |||||||||||||||||||||||||||||||||||||||
| Net income | - | - | - | - | - | 341,790 | - | 341,790 | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive income/(loss), net of income taxes | - | - | - | - | - | - | 479 | 479 | |||||||||||||||||||||||||||||||||||||||
| Balance, June 30, 2023 | 1,872,967 | $ | 18,730 | $ | 1,862,578 | 493,163 | $ | (4,569,152) | $ | 5,461,682 | $ | (6,952) | $ | 2,766,886 | |||||||||||||||||||||||||||||||||
| Stock-based compensation | - | - | 36,614 | - | - | - | - | 36,614 | |||||||||||||||||||||||||||||||||||||||
| Stock plan transactions and other | 371 | 3 | 318 | - | - | - | - | 321 | |||||||||||||||||||||||||||||||||||||||
| Repurchase of common stock | - | - | - | 5,940 | (229,596) | - | - | (229,596) | |||||||||||||||||||||||||||||||||||||||
| Net income | - | - | - | - | - | 313,217 | - | 313,217 | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive income/(loss), net of income taxes | - | - | - | - | - | - | (1,128) | (1,128) | |||||||||||||||||||||||||||||||||||||||
| Balance, September 30, 2023 | 1,873,338 | $ | 18,733 | $ | 1,899,510 | 499,103 | $ | (4,798,748) | $ | 5,774,899 | $ | (8,080) | $ | 2,886,314 | |||||||||||||||||||||||||||||||||
| Balance, December 31, 2023 | 1,874,139 | $ | 18,741 | $ | 1,937,794 | 502,843 | $ | (4,944,656) | $ | 6,056,985 | $ | (6,657) | $ | 3,062,207 | |||||||||||||||||||||||||||||||||
| Stock-based compensation | - | - | 36,681 | - | - | - | - | 36,681 | |||||||||||||||||||||||||||||||||||||||
| Stock plan transactions and other | 4,002 | 40 | 2,070 | - | - | - | - | 2,110 | |||||||||||||||||||||||||||||||||||||||
| Repurchase of common stock | - | - | - | 1,935 | (97,663) | - | - | (97,663) | |||||||||||||||||||||||||||||||||||||||
| Net income | - | - | - | - | - | 359,287 | - | 359,287 | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive income/(loss), net of income taxes | - | - | - | - | - | - | (1,293) | (1,293) | |||||||||||||||||||||||||||||||||||||||
| Balance, March 31, 2024 | 1,878,141 | $ | 18,781 | $ | 1,976,545 | 504,778 | $ | (5,042,319) | $ | 6,416,272 | $ | (7,950) | $ | 3,361,329 | |||||||||||||||||||||||||||||||||
| Stock-based compensation | - | - | 46,160 | - | - | - | - | 46,160 | |||||||||||||||||||||||||||||||||||||||
| Stock plan transactions and other | 397 | 4 | 1,097 | - | - | - | - | 1,101 | |||||||||||||||||||||||||||||||||||||||
| Repurchase of common stock | - | - | - | 2,388 | (151,877) | - | - | (151,877) | |||||||||||||||||||||||||||||||||||||||
| Retirement of treasury stock | (507,166) | (5,072) | - | (507,166) | 5,194,196 | (5,189,124) | - | - | |||||||||||||||||||||||||||||||||||||||
| Net income | - | - | - | - | - | 455,671 | - | 455,671 | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive income/(loss), net of income taxes | - | - | - | - | - | - | (564) | (564) | |||||||||||||||||||||||||||||||||||||||
| Balance, June 30, 2024 | 1,371,372 | $ | 13,713 | $ | 2,023,802 | - | $ | - | $ | 1,682,819 | $ | (8,514) | $ | 3,711,820 | |||||||||||||||||||||||||||||||||
| Stock-based compensation | - | - | 5,262 | - | - | - | - | 5,262 | |||||||||||||||||||||||||||||||||||||||
| Stock plan transactions and other | 1,222 | 12 | 1,114 | - | - | - | - | 1,126 | |||||||||||||||||||||||||||||||||||||||
| Repurchase of common stock | (8,955) | (90) | - | - | - | (492,682) | - | (492,772) | |||||||||||||||||||||||||||||||||||||||
| Net income | - | - | - | - | - | 387,388 | - | 387,388 | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive income/(loss), net of income taxes | - | - | - | - | - | - | 1,074 | 1,074 | |||||||||||||||||||||||||||||||||||||||
| Balance, September 30, 2024 | 1,363,639 | $ | 13,635 | $ | 2,030,178 | - | $ | - | $ | 1,577,525 | $ | (7,440) | $ | 3,613,898 |
See accompanying notes to condensed consolidated financial statements.
CHIPOTLE MEXICAN GRILL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
| Nine months ended September 30, | |||||||||||
| 2024 | 2023 | ||||||||||
| Operating activities | |||||||||||
| Net income | $ | 1,202,346 | $ | 946,651 | |||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization | 251,154 | 233,902 | |||||||||
| Deferred income tax provision | (9,599) | 12,465 | |||||||||
| Impairment, closure costs, and asset disposals | 24,139 | 30,536 | |||||||||
| Provision for credit losses | (289) | 565 | |||||||||
| Stock-based compensation expense | 85,903 | 86,557 | |||||||||
| Other | 2,459 | (17,272) | |||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Accounts receivable | 22,069 | 33,666 | |||||||||
| Inventory | (10,540) | (4,508) | |||||||||
| Prepaid expenses and other current assets | 21,944 | (23,494) | |||||||||
| Operating lease assets | 211,172 | 185,056 | |||||||||
| Other assets | (17,990) | (6,939) | |||||||||
| Accounts payable | 22,290 | 4,886 | |||||||||
| Accrued payroll and benefits | (42,774) | (14,902) | |||||||||
| Accrued liabilities | 23,488 | 1,882 | |||||||||
| Unearned revenue | (22,745) | (21,190) | |||||||||
| Income tax payable/receivable | (29,100) | 220,427 | |||||||||
| Operating lease liabilities | (155,770) | (156,180) | |||||||||
| Other long-term liabilities | 149 | 5,910 | |||||||||
| Net cash provided by operating activities | 1,578,306 | 1,518,018 | |||||||||
| Investing activities | |||||||||||
| Purchases of leasehold improvements, property and equipment | (420,718) | (388,801) | |||||||||
| Purchases of investments | (828,846) | (845,981) | |||||||||
| Maturities of investments | 548,070 | 440,788 | |||||||||
| Net cash used in investing activities | (701,494) | (793,994) | |||||||||
| Financing activities | |||||||||||
| Repurchase of common stock | (662,605) | (437,305) | |||||||||
| Tax withholding on stock-based compensation awards | (73,349) | (68,613) | |||||||||
| Other financing activities | 990 | 546 | |||||||||
| Net cash used in financing activities | (734,964) | (505,372) | |||||||||
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | (1,495) | 4 | |||||||||
| Net change in cash, cash equivalents, and restricted cash | 140,353 | 218,656 | |||||||||
| Cash, cash equivalents, and restricted cash at beginning of period | 586,163 | 408,966 | |||||||||
| Cash, cash equivalents, and restricted cash at end of period | $ | 726,516 | $ | 627,622 | |||||||
| Supplemental disclosures of cash flow information | |||||||||||
| Income taxes paid | $ | 408,553 | $ | 54,615 | |||||||
| Purchases of leasehold improvements, property and equipment accrued in accounts payable and accrued liabilities | $ | 78,798 | $ | 81,724 | |||||||
| Repurchase of common stock accrued in accounts payable and accrued liabilities | $ | 12,000 | $ | 15,312 |
See accompanying notes to condensed consolidated financial statements.
CHIPOTLE MEXICAN GRILL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollar and share amounts in thousands, unless otherwise specified)
(unaudited)
1. Basis of Presentation and Update to Accounting Policies
In this quarterly report on Form 10-Q, Chipotle Mexican Grill, Inc., a Delaware corporation, together with its subsidiaries, is collectively referred to as “Chipotle,” “we,” “us,” or “our.”
We develop and operate restaurants that serve a relevant menu of burritos, burrito bowls, quesadillas, tacos, and salads, made using fresh, high-quality ingredients. As of September 30, 2024, we operated 3,615 restaurants including 3,540 Chipotle restaurants within the United States and 75 international Chipotle restaurants. Additionally, we had two international licensed restaurants. We manage our U.S. operations based on nine regions and aggregate our operations to one reportable segment.
On June 26, 2024, we effected a 50-for-1 stock split of our common stock and proportionately increased the number of authorized shares of common stock. All share and per share information, including share-based compensation, throughout this Quarterly Report on Form 10-Q has been retroactively adjusted to reflect the stock split. The shares of common stock retain a par value of $0.01 per share. Accordingly, an amount equal to the par value of the additional shares issued in the stock split was reclassified from capital in excess of par value to common stock. In the second quarter of 2024 we retired all treasury stock owned, which was recognized as a deduction from common stock for the shares' par value and the excess of cost over par as a deduction from retained earnings. All shares of common stock that we repurchase will be immediately retired and no longer held as treasury stock.
We have prepared the accompanying unaudited condensed consolidated financial statements in accordance with U.S. generally accepted accounting principles for interim financial statements and pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments consisting of normal recurring adjustments necessary for a fair presentation of our financial position and results of operations. Interim results of operations are not necessarily indicative of the results that may be achieved for the full year. The financial statements and related notes do not include all information and footnotes required by U.S. generally accepted accounting principles for annual reports. This quarterly report should be read in conjunction with the consolidated financial statements, footnotes and management’s discussion and analysis included in our annual report on Form 10-K for the year ended December 31, 2023.
2. Recently Issued Accounting Standards
In November 2023, the FASB issued ASU No. 2023-07, “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosure.” The ASU updates reportable segment disclosure requirements, primarily through requiring enhanced disclosures about significant segment expenses and information used to assess segment performance. The amendments do not change how segments are determined, aggregated, or how thresholds are applied to determine reportable segments. We expect to adopt the guidance in our annual report on Form 10-K for the year ending December 31, 2024 and thereafter. We are currently evaluating the impact of adopting this ASU on our disclosures and do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.
In December 2023, the FASB issued ASU No. 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures.” The ASU includes amendments requiring enhanced income tax disclosures, primarily related to standardization and disaggregation of rate reconciliation categories and income taxes paid by jurisdiction. The guidance is effective for fiscal years beginning after December 15, 2024, with early adoption permitted, and should be applied either prospectively or retrospectively. We are currently evaluating the impact of adopting this ASU on our disclosures.
In March 2024, the Securities and Exchange Commission ("SEC") issued its final climate disclosure rules. The rules require disclosure of climate-related information outside of the audited financial statements and disclosure in the footnotes addressing specified financial statement effects of severe weather events and other natural conditions above certain financial thresholds, certain carbon offsets and renewable energy credits or certificates, if material. Disclosure requirements will begin phasing in for fiscal years beginning on or after January 1, 2025. On April 4, 2024, the SEC determined to voluntarily stay the effective date of the final rules pending certain legal challenges. We are currently evaluating the impact of adopting the new rules and intend to include the updated climate-related disclosures in our filings when required.
We reviewed all other recently issued accounting pronouncements and concluded that they were either not applicable or not expected to have a significant impact to the condensed consolidated financial statements.
3. Revenue Recognition
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. Gift card liability balances are typically highest at the end of each calendar year following increased gift card sales during the holiday season; accordingly, revenue recognized from gift card liability balances is highest in the first quarter of each calendar year.
The gift card liability included in unearned revenue on the condensed consolidated balance sheets was as follows:
| September 30, 2024 | December 31, 2023 | ||||||||||
| Gift card liability | $ | 130,813 | $ | 164,930 |
Revenue recognized from the redemption of gift cards that was included in unearned revenue at the beginning of the year was as follows:
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Revenue recognized from gift card liability balance at the beginning of the year | $ | 6,906 | $ | 6,481 | $ | 64,104 | $ | 56,402 |
Chipotle Rewards
We have a loyalty program called Chipotle Rewards. Customers who enroll in the program generally earn points for every dollar spent. We may also periodically offer promotions, which typically provide the customer with the opportunity to earn bonus points or other rewards. Customers may redeem earned points for various rewards, which are primarily comprised of free food and beverage items. Earned rewards generally expire one month to two months after they are issued, and points generally expire if an account is inactive for a period of six months.
We defer revenue associated with the estimated selling price of points or rewards earned by customers as each point or reward is earned, net of points or rewards we do not expect to be redeemed. The estimated selling price of each point or reward earned is based on the estimated value of the product for which the reward is expected to be redeemed. Our estimate of points and rewards we expect to be redeemed is based on historical and other company specific data. The costs associated with rewards redeemed are primarily included in food, beverage, and packaging on our condensed consolidated statements of income and comprehensive income. We evaluate Chipotle Rewards point breakage annually, or more frequently as circumstances warrant.
We recognize revenue associated with Chipotle Rewards within food and beverage revenue on the condensed consolidated statements of income and comprehensive income when a customer redeems an earned reward. Deferred revenue associated with Chipotle Rewards is included in unearned revenue on our condensed consolidated balance sheets.
Changes in our Chipotle Rewards liability included in unearned revenue on the condensed consolidated balance sheets were as follows:
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Chipotle Rewards liability, beginning balance | $ | 49,183 | $ | 40,923 | $ | 44,750 | $ | 38,057 | |||||||||||||||
| Revenue deferred | 39,792 | 32,947 | 120,024 | 95,672 | |||||||||||||||||||
| Revenue recognized | (39,500) | (32,794) | (115,299) | (92,653) | |||||||||||||||||||
| Chipotle Rewards liability, ending balance | $ | 49,475 | $ | 41,076 | $ | 49,475 | $ | 41,076 |
4. Fair Value Measurements
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The carrying value of our cash and cash equivalents, restricted cash, accounts receivable and accounts payable approximate fair value because of their short-term nature.
Our held-to-maturity investments are comprised of U.S. Treasury securities and corporate debt securities, which are held at amortized cost. We also have investments in notes receivable. Convertible notes are held at fair-value. Additionally, we maintain a deferred compensation plan with related assets held in a rabbi trust.
The following tables show our cash, cash equivalents, and debt investments by significant investment category as of September 30, 2024 and December 31, 2023:
| September 30, 2024 | |||||||||||||||||||||||||||||||||||||||||
| Adjusted cost | Unrealized Gains | Unrealized Losses | Fair Value | Cash and Cash Equivalents | Current Investments | Long-term Investments | |||||||||||||||||||||||||||||||||||
| Cash | $ | 75,775 | $ | - | $ | - | $ | 75,775 | $ | 75,775 | $ | - | $ | - | |||||||||||||||||||||||||||
| Level 1 | |||||||||||||||||||||||||||||||||||||||||
| Money market funds | 545,215 | - | - | 545,215 | 545,215 | - | - | ||||||||||||||||||||||||||||||||||
| Time deposits | 77,557 | - | - | 77,557 | 77,557 | - | - | ||||||||||||||||||||||||||||||||||
| U.S. Treasury securities | 1,422,910 | 12,552 | 87 | 1,435,375 | - | 634,119 | 788,791 | ||||||||||||||||||||||||||||||||||
| Corporate debt securities | 48,127 | 355 | - | 48,482 | - | 29,851 | 18,276 | ||||||||||||||||||||||||||||||||||
| Subtotal | 2,093,809 | 12,907 | 87 | 2,106,629 | 622,772 | 663,970 | 807,067 | ||||||||||||||||||||||||||||||||||
| Level 3 | |||||||||||||||||||||||||||||||||||||||||
| Corporate debt security(1) | 16,801 | - | 17 | 16,784 | - | 1,600 | 15,201 | ||||||||||||||||||||||||||||||||||
| Notes receivable(2) | 4,593 | 233 | - | 4,826 | - | 3,106 | 1,720 | ||||||||||||||||||||||||||||||||||
| Subtotal | 21,394 | 233 | 17 | 21,610 | - | 4,706 | 16,921 | ||||||||||||||||||||||||||||||||||
| Total | $ | 2,190,978 | $ | 13,140 | $ | 104 | $ | 2,204,014 | $ | 698,547 | $ | 668,676 | $ | 823,988 |
| December 31, 2023 | |||||||||||||||||||||||||||||||||||||||||
| Adjusted cost | Unrealized Gains | Unrealized Losses | Fair Value | Cash and Cash Equivalents | Current Investments | Long-term Investments | |||||||||||||||||||||||||||||||||||
| Cash | $ | 128,458 | $ | - | $ | - | $ | 128,458 | $ | 128,458 | $ | - | $ | - | |||||||||||||||||||||||||||
| Level 1 | |||||||||||||||||||||||||||||||||||||||||
| Money market funds | 355,872 | - | - | 355,872 | 355,872 | - | - | ||||||||||||||||||||||||||||||||||
| Time deposits | 76,279 | - | - | 76,279 | 76,279 | - | - | ||||||||||||||||||||||||||||||||||
| U.S. Treasury securities | 1,200,658 | 4,352 | 4,083 | 1,200,927 | - | 731,339 | 469,319 | ||||||||||||||||||||||||||||||||||
| Corporate debt securities | 19,755 | 13 | 7 | 19,761 | - | - | 19,755 | ||||||||||||||||||||||||||||||||||
| Subtotal | 1,652,564 | 4,365 | 4,090 | 1,652,839 | 432,151 | 731,339 | 489,074 | ||||||||||||||||||||||||||||||||||
| Level 3 | |||||||||||||||||||||||||||||||||||||||||
| Corporate debt security(1) | 17,401 | - | 27 | 17,374 | - | 999 | 16,402 | ||||||||||||||||||||||||||||||||||
| Notes receivable(2) | 14,500 | 1,289 | 141 | 15,648 | - | 2,500 | 13,148 | ||||||||||||||||||||||||||||||||||
| Subtotal | 31,901 | 1,289 | 168 | 33,022 | - | 3,499 | 29,550 | ||||||||||||||||||||||||||||||||||
| Total | $ | 1,812,923 | $ | 5,654 | $ | 4,258 | $ | 1,814,319 | $ | 560,609 | $ | 734,838 | $ | 518,624 |
(1)The fair value of the corporate debt security is measured using Level 3 (unobservable) inputs. We determined the fair value for the corporate debt security using an internally-developed valuation model and unobservable inputs include credit and liquidity spreads and effective maturity.
(2)We have elected to measure our investment in convertible notes receivable of private companies at fair value under the fair value option. The fair value of the notes receivable are measured using Level 3 (unobservable) inputs. We determined the fair value for the notes receivable using an internally-developed valuation model and unobservable inputs include estimates of the equity value of the underlying business and the timing and probability of future financing events.
Rabbi Trust
We have elected to fund certain deferred compensation plan obligations through a rabbi trust, the assets of which are designated as trading securities. The rabbi trust is subject to creditor claims in the event of insolvency, but the assets held in the rabbi trust are not available for general corporate purposes. Amounts in the rabbi trust are invested in mutual funds, consistent with the investment choices selected by participants in their Deferred Plan accounts, which are designated as trading securities, carried at fair value and are included in other assets on the condensed consolidated balance sheets. We record trading gains and losses, along with the offsetting amount related to the increase or decrease in deferred compensation to reflect our exposure to liabilities for payment under the deferred plan in general and administrative expenses on the condensed consolidated statements of income and comprehensive income.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Assets recognized or disclosed at fair value on the condensed consolidated financial statements on a nonrecurring basis include items such as leasehold improvements, property and equipment, certain long-term investments, operating lease assets, other assets, and goodwill. These assets are measured at fair value whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable or if there has been an observable price change of a non-marketable equity security.
During the three months and nine months ended September 30, 2024 and 2023, nonrecurring fair value measurements resulting in asset impairments were not material.
5. Equity Investments
The following table summarizes our equity investments as of September 30, 2024, and December 31, 2023:
| September 30, 2024 | December 31, 2023 | ||||||||||
| Equity method investments | $ | 29,401 | $ | 8,896 | |||||||
| Other investments | 68,499 | 45,864 | |||||||||
| Total | $ | 97,900 | $ | 54,760 |
Equity Method Investments
As of September 30, 2024 and December 31, 2023, we owned 6,487 and 4,325 shares of common stock of Tractor Beverages, Inc. (“Tractor”). As of September 30, 2024, our investment represents ownership of approximately 13.8% of Tractor, and we have invested total cash consideration of $14,872. As we are a significant customer of Tractor and maintain board representation, we are accounting for our investment under the equity method. There were no impairment charges for the nine months ended September 30, 2024 or 2023, associated with this equity method investment. The investment in common stock is included within other assets on the condensed consolidated balance sheets with a carrying value of $19,401 and $8,896 as of September 30, 2024 and December 31, 2023, respectively. Refer to Note 13, "Related Party Transactions" for related party disclosures.
Other Investments
During the three months ended September 30, 2024, we invested $15,000 in exchange for 2,746 shares of the Series B Preferred Stock of Hyphen Technologies, Inc. ("Hyphen") through the Cultivate Next Fund. As a result of Hyphen's Series B financing, the convertible notes receivable which we held prior to the financing converted into 3,073 shares of the Series B Preferred Stock of Hyphen. During the three months ended September 30, 2024, we recognized a gain of $4,635 related to the conversion. As of September 30, 2024, we held 5,819 shares of the Series B Preferred Stock of Hyphen. Hyphen is a privately held company, and as such, the preferred shares comprising our investment are illiquid and fair value is not readily determinable. As of September 30, 2024, we have recognized a cumulative gain of $6,782 related to our investment in Hyphen. The investment is included within long-term investments on the condensed consolidated balance sheet with a carrying value of $31,782 as of September 30, 2024.
As of September 30, 2024, we owned 766 shares of the Series C Preferred Stock of Nuro, Inc. (“Nuro”). Our investment represents a minority interest and we have determined that we do not have significant influence over Nuro. Nuro is a privately held company, and as such, the preferred shares comprising our investment are illiquid and fair value is not readily determinable. As of September 30, 2024, we have recognized a cumulative gain of $5,968 related to our investment in Nuro due to observable transactions in prior periods. The investment is included within long-term investments on the condensed consolidated balance sheets with a carrying value of $15,968 as of September 30, 2024 and December 31, 2023, respectively.
As of September 30, 2024, we held additional investments in other entities through the Cultivate Next Fund. These additional investments are included within long-term investments on the condensed consolidated balance sheets with a carrying value of $20,749 and $21,221 as of September 30, 2024 and December 31, 2023, respectively.
6. Shareholders’ Equity
We have had a stock repurchase program in place since 2008. As of September 30, 2024, we had $1,059,595 authorized for repurchasing shares of our common stock, which includes $400,000 in additional authorizations approved by our Board of Directors on August 21, 2024 and $500,000 in additional authorizations approved by our Board of Directors on September 19, 2024. Prior to June 26, 2024, shares we repurchased were held in treasury stock until they are reissued or retired at the discretion of our Board of Directors. Beginning on June 26, 2024, all shares of common stock that we repurchase are immediately retired and not held as treasury stock.
During the second quarter of 2024, we retired 507,166 shares of its common stock that were being held as treasury stock. The retirement resulted in a reduction of $5,194,196 in treasury stock, $5,072 in the par value of common stock, and $5,189,124 in retained earnings.
During the nine months ended September 30, 2024, 1,724 shares of common stock at a total cost of $73,349 were netted and surrendered as payment for minimum statutory withholding obligations in connection with the vesting of outstanding stock awards. During the nine months ended September 30, 2023, 2,011 shares of common stock at a total cost of $67,474 were netted and surrendered as payment for minimum statutory withholding obligations in connection with the vesting of outstanding stock awards. Shares surrendered by the participants in accordance with the applicable award agreements and plan are deemed repurchased by us but are not part of publicly announced share repurchase programs.
7. Stock-Based Compensation
Pursuant to the 2022 Stock Incentive Plan, we grant stock-only stock appreciation rights ("SOSARs"), restricted stock units ("RSUs"), and performance stock units ("PSUs") to employees and non-employee directors. SOSARs and RSUs generally vest in two equal installments on the second and third anniversary of the grant date. PSUs are subject to service, market and performance vesting conditions, and the quantity of shares that vest will range from 0% to 300% of the targeted number of shares.
During the three months ended September 30, 2024, our now former CEO terminated employment with the company and forfeited all of his unvested equity awards. This resulted in a reversal of expense of $27,863 in the current quarter. In response to the CEO departure, we granted retention RSUs to key executives. These awards have various vesting terms, and will vest over one, two or three years. Total expense recognized for the retention RSUs in the current quarter was $5,134. The impact of the CEO forfeiture and employee retention awards are reflected in the tables below.
Total stock-based compensation expense was as follows:
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Stock-based compensation | $ | 5,262 | $ | 36,614 | $ | 88,103 | $ | 88,751 | |||||||||||||||
| Stock-based compensation, net of income taxes | $ | (1,058) | $ | 31,065 | $ | 69,160 | $ | 74,966 | |||||||||||||||
| Total capitalized stock-based compensation included in leasehold improvements, property and equipment, net on the condensed consolidated balance sheets | $ | 602 | $ | 813 | $ | 2,200 | $ | 2,194 | |||||||||||||||
| Excess tax benefit on stock-based compensation recognized in provision for income taxes on the condensed consolidated statements of income and comprehensive income | $ | 3,073 | $ | 994 | $ | 19,161 | $ | 23,004 |
.
SOSARs
A summary of SOSAR award activity was as follows (in thousands, except per share data):
| Shares | Weighted-Average Exercise Price per Share | Weighted-Average Remaining Contractual Life (Years) | Aggregate Intrinsic Value | ||||||||||||||||||||
| Outstanding, January 1, 2024 | 14,738 | $ | 26.05 | $ | 290,156 | ||||||||||||||||||
| Granted | 2,484 | 52.98 | |||||||||||||||||||||
| Exercised | (4,012) | 20.61 | |||||||||||||||||||||
| Forfeited | (1,733) | 38.49 | |||||||||||||||||||||
| Outstanding, September 30, 2024 | 11,477 | 31.90 | 4.10 | 295,564 | |||||||||||||||||||
| Exercisable, September 30, 2024 | 5,084 | 23.39 | 2.39 | 174,018 | |||||||||||||||||||
| Vested and expected to vest, September 30, 2024 | 10,911 | 31.41 | 4.02 | 286,376 |
RSUs
A summary of RSU award activity was as follows (in thousands, except per share data):
| Shares | Weighted-Average Grant Date Fair Value per Share | ||||||||||
| Outstanding, January 1, 2024 | 3,004 | $ | 32.08 | ||||||||
| Granted | 2,578 | 53.63 | |||||||||
| Vested | (906) | 31.95 | |||||||||
| Forfeited | (260) | 38.92 | |||||||||
| Outstanding, September 30, 2024 | 4,416 | 44.29 | |||||||||
| Vested and expected to vest, September 30, 2024 | 3,875 | 44.06 |
PSUs
A summary of PSU award activity was as follows (in thousands, except per share data):
| Shares | Weighted-Average Grant Date Fair Value per Share | ||||||||||
| Outstanding, January 1, 2024 | 2,794 | $ | 31.24 | ||||||||
| Granted | 849 | 52.77 | |||||||||
| Vested | (777) | 29.59 | |||||||||
| Forfeited | (838) | 37.88 | |||||||||
| Outstanding, September 30, 2024 | 2,028 | 38.15 | |||||||||
| Vested and expected to vest, September 30, 2024* | 3,580 | 37.91 |
*The vested and expected to vest total above represents outstanding base PSUs, adjusted for expected payout amounts in line with current and future estimated performance levels.
8. Income Taxes
The effective income tax rate for the three months ended September 30, 2024, was 22.9%, a decrease from an effective income tax rate of 24.2% for the three months ended September 30, 2023. The decrease was primarily driven by reductions to nondeductible expenses, the release of income tax reserves, and additional tax benefits related to option exercises and equity vesting, partially offset with a decrease in return to provision benefit in the comparable period.
The effective income tax rate for the nine months ended September 30, 2024 and 2023, was 23.5%, and primarily differed from the 21% U.S. federal statutory income tax rate due to the effects of state income taxes and nondeductible expenses, partially offset by the tax benefits on option exercises and equity vesting.
9. Leases
The majority of our operating leases consist of restaurant locations and office space. We determine if a contract contains a lease at inception. 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 non-cancelable period of the lease or the lease term inclusive of reasonably certain renewal periods up to a term of 20 years.
Supplemental disclosures of cash flow information related to leases were as follows:
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Cash paid for operating lease liabilities | $ | 117,424 | $ | 105,416 | $ | 344,725 | $ | 312,214 | |||||||||||||||
| Operating lease assets obtained in exchange for operating lease liabilities | $ | 247,977 | $ | 185,519 | $ | 570,775 | $ | 438,510 | |||||||||||||||
| Derecognition of operating lease assets due to terminations or impairment | $ | 110 | $ | 1,232 | $ | 1,535 | $ | 6,391 |
10. Earnings Per Share
The following table sets forth the computations of basic and diluted earnings per share (in thousands, except per share data):
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Net income | $ | 387,388 | $ | 313,217 | $ | 1,202,346 | $ | 946,651 | |||||||||||||||
| Shares: | |||||||||||||||||||||||
| Weighted-average number of common shares outstanding (for basic calculation) | 1,367,038 | 1,377,525 | 1,370,671 | 1,379,640 | |||||||||||||||||||
| Dilutive stock awards | 7,567 | 6,537 | 8,428 | 7,294 | |||||||||||||||||||
| Weighted-average number of common shares outstanding (for diluted calculation) | 1,374,605 | 1,384,062 | 1,379,099 | 1,386,934 | |||||||||||||||||||
| Basic earnings per share | $ | 0.28 | $ | 0.23 | $ | 0.88 | $ | 0.69 | |||||||||||||||
| Diluted earnings per share | $ | 0.28 | $ | 0.23 | $ | 0.87 | $ | 0.68 |
The following stock awards were excluded from the calculation of diluted earnings per share:
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Stock awards subject to performance conditions | 2,028 | 2,801 | 2,437 | 2,684 | |||||||||||||||||||
| Stock awards that were antidilutive | 2,346 | 3,032 | 2,390 | 4,674 | |||||||||||||||||||
| Total stock awards excluded from diluted earnings per share | 4,374 | 5,833 | 4,827 | 7,358 |
11. Commitments and Contingencies
Purchase Obligations
We enter into various purchase obligations in the ordinary course of business, generally of a short-term nature. Those that are binding primarily relate to commitments for food purchases and supplies, capital projects, corporate assets, information technology, marketing initiatives and corporate sponsorships, and other miscellaneous items.
Litigation
We are involved in various claims and legal actions, such as wage and hour, wrongful termination and other employment-related claims, slip and fall and other personal injury claims, advertising and consumer claims, privacy claims, and lease, construction and other commercial disputes, that arise in the ordinary course of business, some of which may be covered by insurance. The outcomes of these actions are not predictable, but we do not believe that the ultimate resolution of any pending or threatened actions of these types will have a material adverse effect on our financial position, results of operations, liquidity, or capital resources. However, if there is a significant increase in the number of these claims, or if we incur greater liabilities than we currently anticipate under one or more claims, it could materially and adversely affect our business, financial condition, results of operations and cash flows.
Accrual for Estimated Liability
In relation to various legal matters, we had an accrued legal liability balance of $14,958 and $7,640 included within accrued liabilities on the condensed consolidated balance sheets as of September 30, 2024 and December 31, 2023, respectively.
12. Debt
As of September 30, 2024, we had a $500,000 revolving credit facility with JPMorgan Chase Bank (“JPMorgan”) as administrative agent. Borrowings on the credit facility bear interest at a rate equal to the Secured Overnight Financing Rate (“SOFR”) plus 1.475%, which is subject to increase due to changes in our total leverage ratio as defined in the credit agreement. We are also obligated to pay a commitment fee of 0.175% per year for unused amounts under the credit facility, which also may increase due to changes in our total leverage ratio. Further, we are subject to certain covenants defined in the credit agreement, which include maintaining a total leverage ratio of less than 3.0x, maintaining a consolidated fixed charge coverage ratio of greater than 1.5x, and limiting us from incurring additional indebtedness in certain circumstances. We had no outstanding borrowings under the credit facility and were in compliance with all covenants as of September 30, 2024 and December 31, 2023, respectively.
13. Related Party Transactions
As of September 30, 2024, we owned approximately 13.8% of the common stock outstanding of Tractor. As we are a significant customer of Tractor and maintain board representation, we are accounting for our investment under the equity method. Accordingly, we have identified Tractor as a related party. We purchase product from the supplier for sale to customers in our restaurants. During the three months ended September 30, 2024 and 2023, purchases from the supplier were $13,788 and $12,509, respectively. During the nine months ended September 30, 2024 and 2023, purchases from the supplier were $38,754 and $32,682, respectively.
We are an investor in Vebu Inc. (“Vebu”), a developer of restaurant automation technology. As we are a significant customer of Vebu and maintain board representation, we have determined that Vebu is a related party. Our investment, which is comprised of preferred shares, is accounted for as a non-marketable equity investment and is included within long-term investments on the condensed consolidated balance sheet. During the three months ended September 30, 2024 and 2023, purchases from Vebu were $545 and $248, respectively. During the nine months ended September 30, 2024 and 2023, purchases from Vebu were $545 and $991, respectively.
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