Chipotle Mexican Grill

Chipotle Mexican Grill
Investment Summary
Chipotle is expected to keep a stable growth over 5 to 10 years. With
Ticker: CMG
a target price of $388.81, we recommend to buy the stock in the
NYSE
higher than the current market price, we recommend to hold in the
short-term. However, considering the fact the target is only 6.9%
long run.
May 1, 2013
The ROE of Chipotle has been increasing in the past few years and is
Recommendation:
expected to grow in the future. ROE in the past was driven by the
Short-term Buy
profit margin. However, according to our understanding, it is likely
to be driven by the Asset Turnover in the future.
Long-term Hold
Moreover, the company appears to have unused debt capacity
Large Cap Growth
compared with its close competitors. We believe that if the company
Price: $362.18
in the future takes on more debt, it can grow at an even more
aggressive pace and generate higher ROE for shareholders.
Target: $388.01
Finally, the company primarily operates right now in the US market
where opportunity to grow at a fast pace is limited. Therefore the
Xi Hu
Han Ma
Nausherwan Saleem
Jingwen Sun
Meiyu Zhang
company management should explore growth opportunities in the
international market. This could have positive implications for the
return on equity generated for shareholders and drive the value in the
future.
Key Statistics
Day's Range: 358.50 - 364.83
52wk Range: 233.82 - 424.41
Volume:
278,269
Avg Vol (3m):
558,744
Market Cap:
11.19B
P/E (ttm):
39.25
EPS (ttm):
9.23
Div & Yield:
N/A (N/A)
Table of Contents
Industry.............................................................................................................................................................................................2
Macroeconomic Effects on Mexican Restaurants ........................................................................................................................3
Porter’s five forces analysis ..........................................................................................................................................................4
Company Strategy ............................................................................................................................................................................5
Quality of Earnings ...........................................................................................................................................................................6
Accounting Analysis ..........................................................................................................................................................................8
Stock Performance ...........................................................................................................................................................................9
Explanation of Key Forecasts ......................................................................................................................................................... 10
Analysis of Profitability .............................................................................................................................................................. 11
Liquidity and Solvency Analysis ................................................................................................................................................. 12
Cash flow analysis ...................................................................................................................................................................... 12
Valuation ....................................................................................................................................................................................... 13
Sensitivity Analysis..................................................................................................................................................................... 14
Recommendation .......................................................................................................................................................................... 15
Why buy now? ........................................................................................................................................................................... 15
Risk ............................................................................................................................................................................................ 15
Valuation ................................................................................................................................................................................... 15
1
Company Profile
Chipotle Mexican Grill, Inc. and its subsidiaries operate Chipotle Mexican
Grill restaurants which serve a focused menu of burritos, tacos, burrito
bowls (a burrito without the tortilla) and salads, is one of the largest chain
of Mexican restaurant in United States. As of December 31, 2012, it
operated 1,410 restaurants, including Chipotle restaurants throughout the
United States, as well as five in Canada, five in London, England, and one
in Paris, France, and also one Shop House Southeast Asian Kitchen, a
restaurant in Washington, D.C. serving Asian-inspired cuisine1.
Chipotle is a rapid
growing product
differentiator.
Chipotle is competing in a
growing industry.
Consumer Spending is
expected to increase slowly
during 2013, providing a
potential opportunity for
the industry.
Chipotle was founded in 1993 in Denver, CO and currently employs 30,940
individuals. From its beginning, Chipotle has experienced rapid growth in
concurrence with health-related trends and changes in consumer
preferences towards Mexican food2. Chipotle aims to serve high-quality
raw ingredients, and uses this style of preparation as a differentiator in the
highly competitive Mexican Restaurant Industry. McDonalds became one
of Chipotle's largest investors in 2001, and its investment allowed the
company to quickly expand from 16 restaurants in 1998 to more than 500
by 2006 (the time McDonald's fully divested from Chipotle). Since
McDonald's divested from Chipotle, the company has experienced robust
growth during one of the worst recessions in American history. In 2012,
Chipotle's global operations generated $2.7 billion in revenue.
Chipotle focuses on trying to find the highest quality ingredients it can to
make great tasting food; on recruiting and retaining top performing people
to ensure that the restaurant experience it provide is exceptional; on
building restaurants that are operationally efficient and aesthetically
pleasing; and on doing all of this with increasing awareness and respect for
the environment 3 . With the approach guided by the idea of “Food with
Integrity”, Chipotle’s objective is to find the highest quality ingredients
they can—ingredients that are grown or raised naturally. It has grown
substantially over the past five years, and expects to open between 165 and
180 additional restaurants in 2013.
Industry
Chipotle belongs to the Mexican Restaurant Industry, which has been
growing rapidly with a positive growth rate in recent years. Mexican
restaurant industry refers to the industry composed of restaurants that
primarily serve Mexican-style (including Tex-Mex) food to patrons 4 . It
encompasses single-location, chain and franchised enterprises, as well as
full-service and fast-food operators. However, street and food-truck
vendors are excluded from the industry. There are several key external
drivers of the industry:
Consumer spending: Factors that influence the growth of personal
consumption expenditure influence the industry. During a recession, any
spike in unemployment generally leads to declining consumption.
1
From 2012 Chipotle Annual Report
See Ibis World Industry Report
3
According to 2012 Chipotle Annual Report
4
See IBIS world Industry Report
2
2
Conversely, when personal consumption expenditure is high,
consumers will be more likely to spend money on eating at restaurants.
Number of immigrants is
projected to increase in 2013.
Number of immigrants: The number of immigrants represents the
number of people who obtain legal permanent resident status in a
given year. As immigrant populations have been a determining factor
in the growing popularity of Mexican food, the number of immigrants
in the United States is positively correlated with domestic demand for
Mexican restaurants. This driver is projected to increase in 2013.
The number of immigrants in the United States is positively correlated
with domestic demand for Mexican restaurants.
Agricultural price index is
expected to increase during
2013, which represents a
potential threat to the industry.
While external competition is
expected to increase in 2013,
the popularization of Mexicanstyle food by mainstream
establishments continues to
contribute to industry success.
Macroeconomic factors are
likely to provide slightly
positive effect on Restaurant
Industry.
GDP growth is likely to have a
moderate effect on revenue
growth:
Agricultural price index: The agricultural price index represents
nominal prices received by farmers for all US agricultural products
(both livestock and crops) and is also a strong indicator of the prices
Mexican restaurants can expect to pay for their purchases and
ingredients that go into preparing meals. When the price of meal
ingredients increases, operating costs typically increase and result in
lower profit margins. These increases cannot always be passed on to
consumers, especially during times of low disposable income, like
during the past five years.
External competition: Apart from competition within the industry
itself, competition from other food-service providers, including
accommodation establishments, Mexican-food retailers and different
restaurants, threatens operators. Competition from other food-service
providers generally increases during a recession as these operators vie
for their share of limited household expenditure on food.
Chipotle is currently the second largest operator in the Mexican
Restaurants industry and it currently holds a market share of 9%.
The two main competitors of chipotle are Yum! Brands Inc. (Brand
name: Taco Bell), who has the largest market share of 23.8% in the
industry, and Brinker International Inc. (Brand name: Chili’s) with
8.9% market share.
Macroeconomic Effects on Mexican Restaurants
The economy expanded modestly in 2012, continuing the slow growth
seen since the recession ended in June 2009, while the unemployment
rate continued to decline. According to the Bureau of Economic
Analysis, the GDP growth rate was 0.4 percent in the fourth quarter
of 2012. And in the third quarter, real GDP increased 3.1 percent. Data
shows that the US economy is recovering from the financial crisis.
Based on the Congressional Budget Office’s projection, the projected
real GDP growth rate is about 1.80%. Restaurant industry is generally
3
believed to positively relate to the GDP growth rate. Therefore it is
likely to see a slight increase in restaurant revenue.
Personal Income may
prevent Chipotle’s Income
Growth.
Although personal income decreased 3.7 percent in January 2013, it
increased 1.1 percent in February. The real disposable personal
income increased 0.7 percent in February. The increase in personal
income is not significant and there is no sign of potential significant
increase in personal income in 2013. As a result, the restaurant
industry growth driven by increasing personal income is unlikely to
happen.
Ever since the Financial Crisis, the interest rate of US has been staying
at the historical low level. The 3 month US treasury rate stayed at the
level from 0.06% to 0.08%. This low interest rate is likely to continue
throughout the year 2013 and US is not likely to go through a further
decrease in interest rate. Current level and future movement of interest
rate do not seem to guarantee an increase in the restaurant industry.
Stable and low Interest Rate
may increase the revenue of
Chipotle.
Porter’s five forces analysis
Medium and increasing
competition
Chipotle: Product differentiator
High supplier
power
High threat of
Substitutes
Medium threat of
entrants
Rivalry among existing firms:
Medium.
Low consumer
power
Rivalry among existing firms: Although there are indications of
price-based competition within the industry, Mexican restaurants also
compete on the basis of location, food quality, style and presentation,
food range and variety, ambience, hospitality and service in all other
regards. Restaurants are involved in marketing the meal experience,
and, therefore, it is important that the owner-operator understands the
positioning of the restaurant in the marketplace, the clientele they are
attracting (or wanting to attract) and the meal experience. Chipotle
4
provides consumers a unique eating experience therefore, the price
pressure from its competitors is medium5.
Threat of New Entrants: High
Threat of substitutes:
Medium.
Buyer Power (relative to
the firm): Low.
Supplier Power (relative
to the firm): High.
Threat of New Entrants: With the franchise component of the
Mexican Restaurant industry, the barriers are typically low, given that
an operator can both lease premises and equipment, furniture and
fittings from the franchisor, which lowers the initial capital costs,
outlays and borrowings. Also, franchisors provide training, food and
beverages and some financial and accounting functions for a
proportional share of revenue from their franchisees. These provisions
lower operational costs and can also minimize some risks, especially
for inexperienced hospitality industry persons entering the industry.
Moreover, Industry concentration is medium, with the top four
players expected to garner more than 40.0% of available market share
in 2012. This is an indication that there are relatively few dominant
players in the industry; therefore, it is not extremely difficult for an
operator to enter the industry with a new or existing food concept.
Threat of substitutes: Competition to this industry arises from
consumers deciding to cook more in-home meals, particularly during
gloomy economic times. In addition, the Mexican Restaurants
industry competes with restaurants that cater to different consumer
tastes, such as those that serve American or Asian cuisine.
Buyer Power: As offering a standard menu, the price that customers
have to pay is stable. The number of consumers of Mexican food is
increasing as the number of immigrations increases. More importantly,
as a product differentiator, the shifting costs for consumers to find a
similar product is relatively high.
Supplier Power: Chipotle’s aim is to find the highest quality
ingredients it can—ingredients that are grown or raised with respect
for the environment, animals and people who grow or raise the food.
Chipotle relies on its suppliers so the price increase in the ingredients
will result in increase of cost of goods sold.
Company Strategy
Chipotle follows a product
differentiation strategy.
Using high quality ingredients
5
6
Chipotle aims to serve high-quality raw ingredients, and uses this
style of preparation as a differentiator in the highly competitive
Mexican Restaurant Industry. Chipotle currently operates at a profit
margin of 10.3%. Customer loyalty, heavy involvement in product
procurement and higher-than-average prices have allowed Chipotle to
maintain, and even increase, margins as they expand at the same time.
According to the company itself, its product has three characteristics6:
Food with Integrity: Chipotle serves high quality food while still
charging reasonable prices. The company takes the freshness of
ingredients as their priority. For example, in all of the Chipotle
restaurants, they endeavor to serve only meats that were raised
without the use of subtherapeutic antibiotics or added hormones, and
in accordance with criteria the company has established in an effort to
improve sustainability and promote animal welfare. However, this
From IBIS World Industry report
The characteristics are from the 10-k of the company
5
Focused products
Value services and dining
experience
Value quality of products
characteristic brings the company challenges such as higher costs and
other risks associated with purchasing ingredients grown or raised
with an emphasis on quality, sustainability and other responsible
practices.
A Few Things, Thousands of Ways: Chipotle restaurants serve only
a few things: burritos, burrito bowls, tacos and salads. But because
customers can choose from four different meats, two types of beans
and a variety of extras such as salsas, guacamole, cheese and lettuce,
there’s enough variety to extend its menu to provide countless choices.
This relatively constrained product line enables Chipotle to maintain
an advantage in controlling cost while serving a large variety of
products.
Food Served Fast … So That Customers Can Enjoy It Slowly: The
employees spend hours preparing food on-site, but each customer
order can be ready in seconds. Customers select exactly what they
want and how they want it by speaking directly to the employees that
prepared the food and are assembling the order. Compared with other
fast food service, Chipotle is able to provide a faster and more
standardized service.
Quality Assurance and Food Safety: The company committed to
serving safe, high quality food to its customers. Quality and food
safety is integrated throughout its supply chain and everything it does;
from the farms that supply its food all the way through to its front line.
Quality of Earnings
Chipotle does not constantly
beat the benchmarks.
Incentives of Earnings Management
Recent earnings announcement history shows Chipotle did not
constantly beat the earnings forecast, so it does not seem like Chipotle
is trying to manage earnings to beat the benchmarks.
Management Compensation (Salary, Stock and Options)
Incentive for earning
management is high because
management has a large
portion of compensation
coming from equity awards.
Salary is negatively associated with the intensity of earnings
management, and stock options are positively associated with the
intensity of earning management. In order to find out whether
Chipotle has a high incentive to manage earnings, we checked the
compensation information in the SEC filing, DCF 14-A. In the recent
3 years, Chipotle implemented an aggressive incentive plan. All the
management team has relatively low salaries, but huge stock and
option awards. The Chairman, Steve Ells, and the Co-chief Executive
officer, Monty Moran, only have around 6% of total compensation
coming from salary. In terms of compensation, the management has a
big incentive of earnings management.
6
M-Score & TATA ratio
M-Score
The TATA ratio and M-scores
are a little high in 2011 and
2012, but we believe the
changes are reasonable for
Chipotle.
DSRI (Days sales in receivables)
GMI (Gross margin index)
AQI (Asset quality index)
SGI (Sales growth index)
DEPI (Depreciation index)
SGAI (SG&A index)
TATA (Total accreals to total assets)
LVGI (Leverage)
M-Score (8-variable model)
2008
2009
2010
2011
2012
0.553
1.018
0.968
1.227
0.980
0.969
-0.094
1.107
1.147
0.929
0.847
1.140
0.940
0.976
-0.094
1.094
0.982
0.966
1.194
1.209
0.951
0.989
-0.065
1.032
1.199
1.018
3.495
1.236
1.032
1.019
-0.094
0.959
1.664
0.985
1.262
1.203
1.009
1.020
-0.041
0.944
-3.16323 -2.79459
-2.567 -1.4941 -1.76596
M = -4.84 + .920 DSRI + .528 GMI + .404 AQI + .892 SGI + .115 DEPI
-.172 SGAI + 4.679 TATA - .327 Leverage
We calculated the recent five years’ M-scores Total Accrual to Total
Assets ratios and found out that the overall earnings quality of
Chipotle is acceptable. The TATA ratio is consistently negative in the
five years, and the M-scores are much lower than – 1.78 through the
fiscal year 2008 to 2010.
The TATA ratio in year 2008, 2009 and 2010 are near -10%, which
means the quality of earnings in those three years are high. However,
the TATA ratio increased to -4.1% in year 2012, so the quality of
earnings dropped from 2011 to 2012. The main reason why accruals
increased relative to cash in 2012 is the large increase in account
receivables from 2011 to 2012.
The M-scores increased to above the -1.78 in 2011, and decreased
back to around -1.78 in 2012. The general M-scores show that the
Chipotle shared a characteristic with manipulators in 2011 and 2012.
The main drivers of high M-scores are Asset Quality Index and Days
Sales in Receivables in year 2011 and 2012 respectively. The reason
of high Asset Quality Index in 2011 is that Chipotle did not have any
long-term investment before 2011, but they invested $190 million in
U.S. treasury notes and certificate of deposit products with maturities
of 12 month to approximately 2 years. The investment is reasonable
because they believe that cash from operations, together with their
cash balance, will be enough to meet ongoing capital expenditures,
working capital requirements and other cash needs for the foreseeable
future (see MD&A). In 2012, the balance of long-term investment
kept in the same level with 2011, so the Asset Quality Index dropped
back to 1.2 in 2012. The reason of high Days Sales in Receivable
Index is that the accounts receivable increased from 8.6 to 16.8
million in 2012. Our team believes this should not be a big concern
because Chipotle’s accounts receivable is only about 0.6% of sales,
and this small amount of accounts receivable mainly consists of tenant
improvement receivables, payroll-related tax receivables, receivables
7
from third party gift card distributors, and vendor rebates. The
receivables arising from the normal course of business is small
because their customers generally pay using cash or credit and debit
cards.
Accounting Analysis
Revenue recognition
Gift card breakage
12/31/2012 12/31/2011
Breakage revenue
Percentage of annual
gift card sells revenue
$2,070,000
$1,524,000
4%
5%
One potential concern with respect to CMG’s accounting policies
was with their revenue recognition. We saw that CMG sell gift cards
and determine gift cards that are redeemed as gift card breakage. The
breakage rate is revised subjectively by CMG. Gift card breakage is
included in revenue in the consolidated statement of income and
comprehensive income. Therefore, potential risk for CMG’s
management to inflate or deflate revenue exists.
Leasehold Improvements, Property and Equipment
Leasehold Improvements
Cost of leasehold
Percentage of sales
12/31/2012
10,038,000
0.37%
12/31/2011
9,616,000
0.42%
Impairment of Long-Lived
Assets
12/31/2012 12/31/2011
Aggregate
impairment charge
Percentage of longlived assets
0
380,000
0.00%
0.05%
Advertising and Marketing
Costs
12/31/2012 12/31/2011
Advertising and
34,999,000 31,902,000
Marketing Cost
Percentage of sales
1.28%
1.41%
Leasehold improvements, property and equipment are recorded at
cost. Internal costs directly associated with the acquisition,
development and construction of a restaurant are capitalized and
were $10,038, $9,616 and $8,167 for the years ended December 31,
2012, 2011 and 2010, respectively. Expenditures for major renewals
and improvements are capitalized while expenditures for minor
replacements, maintenance and repairs are expensed as incurred. On
the liability side, the company had very few operating leases (we
found the PV of minimum lease payment to be $1.4 million). We
think these do not constitute a large enough amount for us to think
differently about the company.
Impairment of Long-Lived Assets
CMG applies the accounting method that long-lived assets are
reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets are to be compared to the
estimated undiscounted future cash flows expected to be generated
by the asset. If the carrying amount of an asset exceeds its estimated
future cash flows, an impairment charge is recognized as the amount
by which the carrying amount of the asset exceeds the fair value of
the asset. Therefore, it gives CMG the flexibility to inflate or deflate
the book value of long-lived assets.
Advertising and Marketing Costs
CMG’s accounting policy categorizes adverting and marketing costs
as other operating costs in the consolidated statement of income and
comprehensive income. Therefore it may be better capitalize
adverting and marketing costs.
8
Stock Performance
Stock Price Trend (Yahoo!
Finance)
The overall trend of Chipotle’s stock is growing with the peak in 2012
April. The historical lowest over the five years is in October 2008
when the U.S. economy was going through a tough financial crisis.
Right after the peak, the company faced a major decline in stock price
from 2012 April to 2012 October followed by a decent growing trend
for recent few months.
Growing Trend
Here are some facts behind the overall growing trend. According to
the company report, over the past five years, its earnings are growing
at a clip of 31% annually. Moreover, over the past three years,
Chipotle's store growth has been approximately 13% annually. In the
company’s 4th quarter 2012 report, Chipotle opened 48 new
restaurants during the three months ended March 31, 2013, bringing
the total to 1,458 restaurants worldwide. For the year of 2013, their
management team expects to see 165 to 180 new restaurant openings.
Momentum
From those ambitious numbers, the growing potential of Chipotle is
obvious to us. However, we can’t ignore the little wave down from
2012 April to 2012 October. We have to admit that the tremendous
climb in the first half of 2012 has been affected by momentum. As we
know, all momentum stocks that go up must come down and Chipotle
can’t become an exception. In the second quarter 2012 report, total
revenue “only” increased 21% to $690.9 million versus a forecast of
$704.8 million. The lower than expected revenue growth led to a
decline in the stock price. Although the company went through the
decline in the second half of 2012, we believe the company will still
be growing forward. Compared to first three months of 2012, the
revenue of this year’s first three years is 86.2 million dollars higher,
which is primarily due to the opening of new restaurants. The number
of restaurant increased by 15.5% and the revenue went up by 13.4%.
Ownership
Institutional investors and mutual funds hold the majority shares
outstanding of Chipotle. Three largest institutional shareholders
include Price (T.Rowe) Associates Inc (11.61% outstanding shares),
FMR LLC (10.02% outstanding shares), and Sands Capital
Management, Inc (7.64% outstanding shares). The largest mutual
fund holder is Fidelity Contrafund Inc, which holds 5.95% of
outstanding shares. Major direct holders include Ells Steve, Moran
Montgomery F, Baldocchi Albert S. The Chairman Ells Steve holds
246,802 shares of Chipotle stocks. The Co-Chief Executive Officer,
Moran Montgomery, holds 133,837 shares of Chipotle stocks. Total
number of shares held by insiders is 507,850, which is 1.5% of total
shares outstanding.
9
Explanation of Key Forecasts
Revenue Growth
Revenue growth for Chipotle has two main drivers: sales per average
store and number of average stores open during the year. The average
stores open during the year is calculated as the average of stores open
at start and close of the year. The number of stores open at close of
year, in turn, is found by adding the stores at open of the year and the
net stores added during the year. The management expects to open
between 165 and 180 stores during 2013 (see MD&A). Therefore, net
stores added during 2013 are taken to be 172.5 (average of 165 and
180). Moreover, in the future years, the number of stores opened
during the year is assumed to be 170 for the first few years, 120 from
2016 to 2017, and 60 from 2018 to 2020. The other driver, sales per
average store, is assumed to decrease linearly from the 5.1% growth
in 2012 to the long-term growth rate of sales per average store in
Mexican restaurant industry which is expected to be 2.8%. The trend
of revenue growth with time is shown in the graph on the side.
Cost of Goods Sold
Cost of goods sold has remained between 62% and 66% of sales for
the past 5 years. In 2013, it is assumed to be 63% of sales but is
expected to increase by 0.5% every year based on expectations of
management that inflation in food, occupancy and labor costs is likely
to accelerate in the future (see MD&A).
Depreciation Expense
Depreciation Expense is forecasted based assuming straight line
depreciation for existing PP&E in place (depreciated throughout the
forecast horizon) and the depreciation on any additions to PP&E
(which are calculated by forecasting CAPEX – see below). We
believe that depreciation expense is fairly reasonable going forward.
Other Expenses
General and Administrative Expenses (assumed to be 6.5% of sales),
Pre-opening costs (0.4% of sales) and Other Operating Expenses
(11.0% of sales) are also estimated. Since the company has no debt,
and expects not to hold debt in its capital structure in the future, the
interest expense is assumed to be zero while interest income assumed
to be a minimal 0.1% of sales. Moreover, the corporate tax rate is
assumed to be 38% going forward. Other items on the income
statement are assumed to be transitory.
Current Assets
Cash and Cash Equivalents are expected to decrease over the forecast
horizon to 10% of sales in the terminal year. This is because the
company expects to finance part of its CAPEX through cash. For the
same reason, short-term investments are also expected to reduce to
5% of sales in the long run. Chipotle’s stores keep very few
inventories and generate most of its sales on cash. Therefore,
inventory and accounts receivable are kept at a constant ratio of 0.5%
to sales, while prepaid expenses and current deferred tax asset are kept
10
at 1.0% and 0.2% of sales respectively. Lastly, income tax receivable
is assumed to be zero.
Long Term Assets
The PP&E is the gross PP&E (sum of opening PP&E and CAPEX
added during the year) minus accumulated depreciation. It is also
assumed that long-term investments, goodwill and other long-term
assets remain a constant percentage of sales (7.0%, 1.0% and 2.0%
respectively) over the forecast horizon.
Current Liabilities
For Chipotle, Accounts Payable and Accrued Expenses are assumed
to be a constant percentage of sales (2.0% and 4.0% of sales
respectively) over the forecast horizon. The valuation also assumed
that current portion of long-term debt, current income taxes payable
and current portion of capital leases will remain 0% of sales while
unearned revenue will remain 1.0% of sales.
Long-Term Liabilities
Since the management of Chipotle does not want to introduce debt in
the capital structure, long-term debt remains 0% of sales. However,
capital leases will be entered into at a rate of 0.1% per year, while
deferred tax liabilities and other non-current liabilities will be 2.0%
and 6.5% respectively of sales.
CAPEX
There are two main capital expenditures that are expected to arise for
Chipotle in the future. First of all, in order to meet its growth targets,
the company needs to invest in new stores. And secondly, in order to
continue the efficient operation of its current stores, it needs to invest
in leasehold improvements. The management expects to spend $210
million in CAPEX in 2013, with $160 million for new stores and the
remaining in leasehold improvements. Based on this, the CAPEX per
new store and CAPEX per existing store are estimated for 2013 and
are assumed to increase with an inflation rate of 2% in the future. The
CAPEX for new stores, therefore, is simply the product of CAPEX per
new store and the number of stores opened during the year. Similarly,
CAPEX for existing stores is the product of CAPEX per existing store
and the number of existing stores in operation during the year. Figure
on the side shows a steady increase in total CAPEX in the initial years
(with aggressive growth) but as lesser stores are opened deep in the
forecast period, the dominant portion of CAPEX is on existing stores.
Analysis of Profitability
Chipotle has generated an increasing return on equity for its
shareholders over the past few years, driven by an increase in return
on assets, which in turn is driven by better profit margins. However,
the increase in ROE has been less dramatic in more recent times.
Compared to close competitors, Yum Brands and Brinker
International who have ROEs well in excess of 50% historically,
Chipotle’s ROE is significantly less. However, on close analysis of
competitors, we find that the high ROE for competitor firms is due to
11
Return on Equity has experienced
a positive trend in the past and is
expected to grow moderately in the
future.
ROE was driven by profit margin
in previous years but will be driven
by asset turnover in the future.
their high degree of financial leverage. We are confident that ROA
represents economic reality in the Mexican restaurant industry in a
much better fashion and find that Chipotle has been able to generate
much better ROAs than its close competitors, Brinker International
and Yum Brands (who currently have ROAs close to 11% and 15%
respectively). However, in the future, the profit margins for Chipotle
are expected to reduce as the market matures and therefore, we feel
the main driver of ROE will be asset turnover due to realizable
economies of scale. In the RONA decomposition, the main driver of
ROE is again the asset turnover for RONA. Therefore, it is important
to understand the decomposition of ATO to understand how the
company is likely to perform in the future. Since the company has
little inventory and accounts receivable, the main driver of ATO is
Fixed Assets Turnover which in our opinion makes sense based on
our assumptions for sales growth and CAPEX in the future. The
increase in FATO in turn, results in higher ROAs and RONAs, and
eventually to higher ROEs. The increase in ATO is partially offset,
however, by shrinking profit margins in the future.
Liquidity and Solvency Analysis
No hanging liquidity and solvency
problems.
As far as liquidity is concerned, the company appears to have no
hanging problems. The current ratio, the quick ratio and the adjusted
quick ratio have all been above one and based on the forecasts, will
continue to remain above one during the forecast horizon. The only
concern is that these ratios reduce over time. Moreover, since the
company has little accounts receivable and inventory, and favorable
payment terms with suppliers (accounts payable), the cash conversion
cycle is actually negative, which is ideal. On the solvency side, the
company has little debt in the capital structure. Since the management
does not expect to have debt in the capital structure in the future, there
should be no problems for the company. Lastly, the company
generates enough cash flows from operating activities in order to
finance its CAPEX.
Solid Cash flow
Cash flow analysis
High quality earnings
In the cash flow analysis, the first thing to point out is that Chipotle
has solid cash flow. Although its cash flow from operations suffers a
slightly decline of -0.7% from 2011 to 2012, it rose from
155.47(thousands) to 347.29 from 2008 to 2012, a 123.4% increase.
Secondly, the total accruals to assets remains negative in all the five
years from 2008 to 2011, which indicates Chipotle achieved high
quality earnings in this period. Thirdly, the company mainly uses its
cash in investing activities, among which PPE takes the largest
portion followed by short-term and long-term investments. In addition,
the company has distributed cash increasingly in recent 5 years except
the year of 2011. Finally, Chipotle’s source of cash mainly comes
from operations in recent five years. It retired all its long-term debt in
2009, and does not have constant net cash inflow from its shareholders.
The cash flow analysis clearly reveals that the company is in a period
of growth.
Main use of cash-PPE
Main source of cash-Operation
12
Valuation
We employ two Discounted Cash Flow 7 models and two Residual
Income models 8 in the valuation of stock price. All of the four
methods indicate the price be $388.01 per share, slightly higher than
the closing price of $363.19 on April 30th.
Current Stock Price$363.19 per share, April
30th
In both DCF and RIM, we first use pro forma financial statements to
get future cash flows or residual incomes on the numerator, and then
employ CAPM to estimate the cost of equity as the discount rate. The
 used in CAPM for Chipotle is 0.87, adjusted for mean reversion
from 0.81(Google Finance). In the calculation of the terminal value in
both DCF and RIM, we employ a long term constant growth rate of
4.4%9, slightly higher than the long-term 2% Inflation rate. Finally,
we include the impact of partial year in the valuation. All the four
models indicate a stock price of $388.01 per share, 6.9% higher than
the current price traded on NYSE.
Stock Price from DCF and
RIM- $388.01 per share
Stock price from P/E
multiples- $200 per share
by Yum and $165.31 per
share by Brinker
Stock price from P/B
multiples- $556.73 per share
by Yum and $469.70 per
share by Brinker
FCFE 1
Net Income
Less: Increase in Equity
FCFE
Perpetuity w ith grow th
Payoffs
PV Factor
PV of Payoffs
2013
338.74
2014
2015
2016
2017
In addition to the DCF and RIM models, we also employ the P/E and
P/ B multiples of Yum and Brinker, Chipotle’s two major competitors,
to estimate its stock price. By using P/E and P/B of Yum, Chipotle is
worth $200.00 and $556.73 respectively on per share basis, compared
to $165.31 and $ 469.70 by using Brinker’s P/E and P/B ratios. A
relatively low P/B and high P/E indicates that Chipotle has higher
growth rate but lower profitability (ROE) compared to the major
competitors. However, the low ROE can be explained by the fact that
Chipotle’s has zero debt. Its profit margin of 10.36% is similar to that
of Yum and 80% higher than that of Brinker. Therefore, Chipotle is
both rapidly growing and profitable.
2018
383.71 428.28 466.28 496.99 518.65
(191.8)
146.9
(176.0)
207.7
(171.5)
256.8
(110.8)
355.5
(96.8)
400.2
146.9
0.9338
137.2
207.7
0.8720
181.1
256.8
0.8142
209.1
355.5
0.7603
270.3
400.2
0.7100
284.1
2019
2020 FCFE 2
2013
CFO
494.0
CFI
(315.6)
(88.8)
Increase (Decrease) in Net Debt
30.9
465.4 (Increase) Decrease in WC Cash (62.3)
FCFE
146.9
Perpetuity w ith grow th
Payoffs
146.9
PV Factor
0.9338
PV of Payoffs
137.2
530.82 554.18
(20.7)
498.0
(3.6)
527.2
17,302.0
498.0 17,829.3
0.6630
0.6191
330.1 11,038.0
Calculation of Equity Value
Equity Value at B/S Date
12,450.0
Partial Year Adjustment
102.2%
Equity Value at Valuation Date 12,728.7
Shares Outstanding
32.8
Value per Share
$388.01
Calculation of Equity Value
PV FCFE
Partial Year Adjustment
Equity Value at Valuation Date
Shares Outstanding
Value per Share
2014
520.6
(293.9)
36.9
(55.9)
207.7
2015
574.9
(300.2)
38.9
(56.8)
256.8
2016
618.4
(249.0)
36.8
(50.6)
355.5
2017
653.9
(244.0)
34.0
(43.6)
400.2
2018
678.7
(176.0)
29.6
(34.4)
498.0
207.7
0.8720
181.1
256.8
0.8142
209.1
355.5
0.7603
270.3
400.2
0.7100
284.1
498.0
0.6630
330.1
FCFE = Net Income − Increase in Common Equity
8
FCFE = CFO − CFI − Net debt payments − increase in cash + Other financing cash flows
𝑁𝐼𝑡 −𝑟𝑒 𝐵𝑉𝐸𝑡−1
𝑁𝐼𝑡 −𝑟𝑒 𝐵𝑉𝐸𝑡−1
Equity Value = BVE0 + ∑𝑇−1
+ (𝑟 −𝑔)(1+𝑟
𝑡=1
(1+𝑟 )𝑡
)𝑇−1
𝑒
𝑒
𝑅𝑂𝐸𝑡 −𝑟𝑒
𝐵𝑉𝐸𝑡−1
(1+𝑟𝑒 )𝑡
2020
718.0
(242.4)
18.5
(28.6)
465.4
12,450.0
102.2%
12,728.7
32.8
$388.01
7
Equity Value = BVE0 + ∑𝑇−1
𝑡=1
2019
693.2
(166.1)
24.5
(24.5)
527.2
17,302.0
17,829.3
0.6191
11,038.0
𝑒
𝑁𝐼 −𝑟 𝐵𝑉𝐸
𝑡 𝑒
𝑡−1
+ (𝑟 −𝑔)(1+𝑟
)𝑇−1
𝑒
𝑒
13
RIM 1
Beg. Book Value of Equity (BE)
Cost of Equity - r
r x BE
Net Income
r x BE
Residual Income (RI)
Perpetuity w ith grow th
Payoffs
PV Factor
PV of Payoffs
Calculation of Equity Value
Beg BE
PV RI
Equity Value - B/S Date
Partial Year Adjustment
Equity Value at Valuation Date
Shares Outstanding
Value per Share
RIM 2
Net Income
Beg. BE
ROE
Cost of Equity
AROE
Weight: BE
Residual Income
Perpetuity w ith grow th
Payof f s
PV Factor
PV of Payof f s
Calculation of Equity Value
Beg BE
PV RIM
Equity Value - B/S Date
Partial Year Adjustment
Equity Value at Valuation Date
Shares Outstanding
Value per Share
2013
1,245.9
7.09%
88.3
2014
1,437.8
7.09%
101.9
2015
1,613.8
7.09%
114.4
2016
1,785.3
7.09%
126.6
2017
1,896.0
7.09%
134.4
2018
1,992.8
7.09%
141.3
2019
2,013.5
7.09%
142.8
2020
2,017.1
7.09%
143.0
338.7
(88.3)
250.4
383.7
(101.9)
281.8
428.3
(114.4)
313.9
466.3
(126.6)
339.7
497.0
(134.4)
362.6
518.6
(141.3)
377.4
554.2
(143.0)
411.2
250.4
0.9338
233.8
281.8
0.8720
245.7
313.9
0.8142
255.6
339.7
0.7603
258.3
362.6
0.7100
257.4
377.4
0.6630
250.2
530.8
(142.8)
388.1
15,284.9
15,673.0
0.6191
9,703.1
2019
530.8
2,013.5
26.36%
7.09%
19.27%
2,013.5
388.1
15,284.9
15,673.0
0.6191
9,703.1
2020
554.2
2,017.1
27.47%
7.09%
20.38%
2,017.1
411.2
1,245.9
11,204.0
12,450.0
102.2%
12,728.7
32.8
$388.01
2013
338.7
1,245.9
27.19%
7.09%
20.10%
1,245.9
250.4
2014
383.7
1,437.8
26.69%
7.09%
19.60%
1,437.8
281.8
2015
428.3
1,613.8
26.54%
7.09%
19.45%
1,613.8
313.9
2016
466.3
1,785.3
26.12%
7.09%
19.03%
1,785.3
339.7
2017
497.0
1,896.0
26.21%
7.09%
19.12%
1,896.0
362.6
2018
518.6
1,992.8
26.03%
7.09%
18.94%
1,992.8
377.4
250.4
0.9338
233.8
281.8
0.8720
245.7
313.9
0.8142
255.6
339.7
0.7603
258.3
362.6
0.7100
257.4
377.4
0.6630
250.2
1,245.9
11,204.0
12,450.0
102.2%
12,728.7
32.8
$388.01
Sensitivity Analysis
Our valuation of Chipotle’s stock value is based on the assumptions
of 4.4% terminal growth rate and 7.09% opportunity cost of capital.
Our final estimate of value is quite sensitive to these two assumptions.
As the data table shows, if the opportunity cost of capital is held
constant, the estimate of value will drop below the current stock price
($362), when the terminal growth rate drops below 3.8%. The value
is very sensitive to the terminal growth rate is because we only
forecast income statement and balance sheet up to year 2020, which
only contribute about 14% of value to the total value estimate. Around
86% of stock value comes from the infinite year after 2020. Therefore,
when the terminal growth rate changes a little, the total stock value
changes a lot. If the terminal growth rate keeps constant, the stock
Cost of Equity
The values estimated are very
sensitive to the assumptions
about the terminal growth rate
and the cost of equity.
$387.09
5.50%
3.50%
576.99
3.80%
664.55
Terminal Growth
4.10% 4.40% 4.70% 5.00% 5.30%
790.46 986.98 1,336.63 2,132.64 5,738.09
6.00%
457.86
509.08
576.72
670.22
6.50%
378.87
411.85
453.19
506.5
577.88
678.4
830.47
7.00%
7.50%
8.00%
8.50%
322.67
280.64
248.03
221.99
345.32
296.93
260.15
231.27
372.7
316.11
274.16
241.81
406.48
339.05
290.51
253.91
449.19
366.96
309.87
267.93
504.91
401.64
333.14
284.38
580.64
445.92
361.64
303.94
807.9 1,030.73 1,453.11
14
value will drop below price when the cost of equity increases to 7.5%. At 4.4% terminal growth rate, the estimate of stock
value will only be $253.91 when the cost of equity equals 8.5%. The future cost of equity can easily increase to or above
8.5% because it only requires the beta to go above 1.1. The current beta we are using is 0.87, but the historical beta,
calculated with the recent 1-year daily stock prices, is 1.41, which will make the cost of equity equal to 10.3% and make
the stock value estimate equal to $172.
Recommendation
Short-Term Buy, Long-Term Hold
Current Price: $368.18 Target Price: $388.01 Horizon: ST-1m, LT-6m
Why buy now?
1.
Chipotle has exhibited a strong trend of revenue growth in the recent 5 years. The average revenue growth rate in the
past 3 years is about 20% per year. The number of restaurants will still be increasing fast for several years in the future because
they have started to expand into the international market.
2.
The business model of Chipotle is pretty straightforward. They conduct business with customers on a cash basis.
3.
According to our earnings quality analysis, the risk of Chipotle being a manipulator is low. Chipotle’s TATA ratio has
been negative for the recent 5 years, which means that they have enough cash flows from operations backing up their earnings.
4.
According to our research, the demand of Mexico food will keep increasing in the future because of the increase in
immigration.
5.
Chipotle’s capital structure, currently, is 100% equity. There is a great potential that Chipotle will issue some debt in
the future. The financial leverage will increase the equity value by decreasing the weighted average cost of capital.
6.
According to our forecast, Chipotle’s Asset Turnover ratio is high now, and it will get higher in the future, which
means that Chipotle’s fixed cost is low. Therefore, the risk from operational leverage is low.
7.
Chipotle has a large cash balance and a strong anticipated operational cash stream in the future, so they will be able
to expand their business through acquisitions or by investing more in advertising.
Risk
1.
One of the major risks of business that Chipotle may possibly face in the future is inflation. The cost of good sold is
around 63% now. The management forecasts the ratio will be likely to increase in the future due to the inflation. However, the
management is not planning to increase the menu price to keep the profit margin stable.
2.
Since Chipotle has been advertising the food they offer as healthy food with good quality ingredients, the quality
control of the ingredients becomes another potential risk that will have an effect on the revenue.
Valuation
•
8 yr DCF and RIM models estimate a valuation for Chipotle’s share of $388.01. We employed a cost of equity of
7.09% and a terminal year growth rate of 4.4%.
•
Our multiple based valuation using price to earnings is in the range of $165-$200 per share. And multiple based
valuation using price to book value is in the range of $469-$557 per share.
•
Our price target of $388.01 per share and the above analysis indicates that the current stock price will keep rising in
the short-run.
15
Balance Sheet
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Cash and Cash Equivalents
225
401
323
385
441
498
548
592
626
651
679
Short Term Investments
125
55
150
181
209
238
264
288
307
322
336
Accounts Receivable
6
8
17
17
19
22
25
28
30
32
33
Inventory
7
9
11
17
19
22
25
28
30
32
33
Prepaid Expenses
16
21
27
33
39
45
50
55
60
64
66
Current Deferred Tax Asset
4
6
9
7
8
9
10
11
12
13
13
Income Tax Receivable
24
-
10
-
-
-
-
-
-
-
-
Total Current Assets
406
501
547
639
735
834
923
1,001
1,065
1,113
1,162
Gross Property, Plant & Equipment
982
1,122
1,312
1,522
1,740
1,968
2,159
2,358
2,504
2,655
2,772
Accumulated Depreciation
(305)
(370)
(445)
(537)
(643)
(766)
(904)
(1,056)
(1,220)
(1,395)
(1,456)
Net Property, Plant & Equipment
677
752
867
985
1,096
1,202
1,255
1,302
1,284
1,261
1,316
-
128
191
233
272
313
352
388
419
445
465
ASSETS
Current Assets
Non-Current Assets
Long-term Investments
Goodwill
-
Other Long-term Assets
22
22
22
33
39
45
50
55
60
64
66
Total Non-Current Assets
715
924
1,124
1,317
1,484
1,649
1,757
1,856
1,883
1,897
1,980
1,122
1,425
1,669
1,956
2,219
2,483
2,680
2,857
2,948
3,010
3,142
Accounts Payable
34
46
59
66
78
89
101
111
120
127
133
Accrued Exp.
76
89
105
133
155
179
201
222
240
255
266
Curr. Port. Of Long Term Debt
-
-
-
-
-
-
-
-
-
-
-
Curr. Port. of Cap. Leases
0
0
0
-
-
-
-
-
-
-
-
Curr. Income Taxes Payable
-
4
-
-
-
-
-
-
-
-
-
Total Assets
LIABILITIES
Current Liabilities
Unearned Revenue, Current
13
18
23
33
39
45
50
55
60
64
66
Total Current Liabilities
123
157
187
233
272
313
352
388
419
445
465
Non-Current Liabilities
Long Term Debt
-
-
-
-
-
-
-
-
-
-
-
Capital Leases
4
4
3
3
4
4
5
6
6
6
7
Def. Tax Liability, Non-Curr.
51
64
49
66
78
89
101
111
120
127
133
Other Non-Current Liabilities
133
156
184
216
252
291
327
360
389
414
432
Total Non-Current Liabilities
188
224
236
286
334
384
432
477
515
547
571
Total Liabilities
311
381
423
518
605
697
784
865
935
993
1,036
811
1,044
1,246
1,438
1,614
1,785
1,896
1,993
2,014
2,017
2,106
1,122
1,425
1,669
1,956
2,219
2,483
2,680
2,857
2,948
3,010
3,142
2012
2013
2014
2015
2016
2017
SHAREHOLDER'S EQUITY
Total Equity
Total Liabilities + Shareholder's Equity
Income Statement
2010
2011
2018
2019
2020
1,836
2,270
2,731
3,323
3,881
4,471
5,028
5,543
5,992
6,363
6,643
(1,144)
(1,429)
(1,704)
(2,093)
(2,465)
(2,861)
(3,243)
(3,603)
(3,925)
(4,200)
(4,385)
General and Administrative Expenses
(119)
(149)
(183)
(216)
(252)
(291)
(327)
(360)
(389)
(414)
(432)
Depreciation and Amortization
(69)
(75)
(84)
(92)
(107)
(123)
(138)
(152)
(164)
(175)
(182)
Pre-opening Costs
(8)
(8)
(12)
(13)
(16)
(18)
(20)
(22)
(24)
(25)
(27)
Other Operating Costs
(203)
(251)
(287)
(366)
(427)
(492)
(553)
(610)
(659)
(700)
(731)
Operating Income (EBIT)
294
356
461
543
615
686
747
796
831
850
887
Gain (loss) on sale and disposal of assets
(6)
(6)
(5)
-
-
-
-
-
-
-
-
1
-
2
3
4
4
5
6
6
6
7
Revenues
Total Cost of Goods Sold
Interest Income
Interest Expense
-
(1)
-
-
-
-
-
-
-
-
-
Earnings before Taxes (EBT)
289
350
458
546
619
691
752
802
837
856
894
Provision for Income Taxes
(110)
(135)
(180)
(208)
(235)
(262)
(286)
(305)
(318)
(325)
(340)
Net income
179
215
278
339
384
428
466
497
519
531
554
16
Cash Flow Statement
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Operating Section
Net Income
179
215
278
339
384
428
466
497
519
531
554
Depreciation and Amortization
69
75
84
91
99
107
114
122
129
137
145
Accounts Receivable
(1)
(3)
(8)
0
(3)
(3)
(3)
(3)
(2)
(2)
(1)
Inventories
(1)
(2)
(2)
(6)
(3)
(3)
(3)
(3)
(2)
(2)
(1)
Deferred Income Taxes
10
12
(18)
20
10
11
10
9
8
7
5
Prepaid Expenses
(2)
(5)
(6)
(6)
(6)
(6)
(6)
(5)
(4)
(4)
(3)
Income Tax Receivable
(24)
24
(10)
10
-
-
-
-
-
-
-
Accounts Payable
8
13
12
8
11
12
11
10
9
7
6
Accrued Expenses
12
13
17
28
22
24
22
21
18
15
11
Unearned Revenue
4
5
5
10
6
6
6
5
4
4
3
Curr. Port. of Cap. Leases
0
0
0
(0)
-
-
-
-
-
-
-
Curr. Income Taxes Payable
Cash Flow From Operations
(4)
4
(4)
-
-
-
-
-
-
-
-
252
350
347
494
521
575
618
654
679
693
718
Investing Section
Short Term Investments
(75)
70
(95)
(30)
(28)
(29)
(26)
(24)
(20)
(15)
(14)
Long-Term Investments
-
(128)
(63)
(42)
(39)
(41)
(39)
(36)
(31)
(26)
(20)
(109)
(150)
(199)
(210)
(210)
(212)
(167)
(169)
(112)
(114)
(200)
-
-
-
(11)
(6)
(6)
(6)
(5)
(4)
(4)
(3)
Property, Plant and Equipment (net)
Goodwill
Other Long-term Assets
(11)
(5)
(21)
(24)
(11)
(12)
(11)
(10)
(9)
(7)
(6)
(195)
(214)
(377)
(317)
(294)
(300)
(249)
(244)
(176)
(166)
(242)
(0)
(0)
(0)
(0)
1
1
1
1
0
0
0
Other non-current liabilities
20
22
28
32
36
38
36
33
29
24
18
Shareholder's Equity
(72)
18
(76)
(147)
(208)
(257)
(356)
(400)
(498)
(527)
(465)
(51)
41
(49)
(115)
(171)
(218)
(319)
(366)
(468)
(503)
(447)
Cash Flow From Investing Activities
Financing Section
Capital Leases
Cash Flow From Financing Activities
Net Change
5
176
(79)
62
56
57
51
44
34
24
29
Beginning Cash
220
225
401
323
385
441
498
548
592
626
651
Ending Cash, per Cash Flow Statement
225
401
323
385
441
498
548
592
626
651
679
Ending Cash, per Balance Sheet
225
401
323
385
441
498
548
592
626
651
679
ROE #1
2008
2009
2010
2011
2012
2013
2014
2016
2017
2018
2019
2020
ROE = CEL x CSL x ROA
13%
19%
24%
23%
24%
25%
25%
25%
2015
25%
26%
26%
26%
27%
CEL
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00
CSL
1.31
1.35
1.38
1.37
1.35
1.35
1.37
1.38
1.40
1.42
1.45
1.48
1.49
ROA = PM x ATO
10%
14%
17%
17%
18%
19%
18%
18%
18%
18%
18%
18%
18%
PM
6%
8%
10%
9%
10%
10%
10%
10%
9%
9%
9%
8%
8%
ATO
1.7
1.7
1.8
1.8
1.8
1.8
1.9
1.9
1.9
2.0
2.1
2.1
2.2
ROE #2
2008
2009
2010
2011
2012
2013
2014
2016
2017
2018
2019
2020
ROE = RONA + D/E x SPREAD
13%
19%
24%
23%
24%
25%
25%
25%
2015
25%
26%
26%
26%
27%
RONA = PM x ATO
13%
19%
24%
23%
24%
25%
25%
25%
25%
25%
26%
26%
27%
PM
6%
8%
10%
9%
10%
10%
10%
10%
9%
9%
9%
8%
8%
ATO for RONA
2.2
2.3
2.4
2.4
2.4
2.5
2.5
2.6
2.7
2.8
3.0
3.1
3.2
FLEV (D/E)
0.01
0.01
0.01
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
SPREAD = RONA - EIR
9%
13%
24%
9%
24%
25%
25%
25%
25%
25%
26%
26%
27%
RONA
13%
19%
24%
23%
24%
25%
25%
25%
25%
25%
26%
26%
27%
EIR
0.0
0.1
-
0.1
-
-
-
-
-
-
-
-
-
17
PM Decomposition
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Revenues
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
Total Cost of Goods Sold
-62%
-63%
-62%
-63%
-64%
-64%
-65%
-65%
-66%
-66%
-66%
General and Administrative Expenses
-6%
-7%
-7%
-7%
-7%
-7%
-7%
-7%
-7%
-7%
-7%
Depreciation and Amortization
-4%
-3%
-3%
-3%
-3%
-3%
-3%
-3%
-3%
-3%
-3%
Pre-opening Costs
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
-11%
-11%
-10%
-11%
-11%
-11%
-11%
-11%
-11%
-11%
-11%
Gain (loss) on sale and disposal of assets
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
Interest Income
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
Provision for Income Taxes
-6%
-6%
-7%
-6%
-6%
-6%
-6%
-5%
-5%
-5%
-5%
Profit Margin
10%
9%
10%
10%
10%
10%
9%
9%
9%
8%
8%
Other Operating Costs
ATO Decomposition
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Accounts Receivable Turnover
352.4
323.1
216.9
198.9
215.5
214.1
211.7
209.7
207.8
206.0
204.3
Days Receivables Outstanding
1.0
1.1
1.7
1.8
1.7
1.7
1.7
1.7
1.8
1.8
1.8
Inventory Turnover - Sales
288.8
283.5
273.0
239.8
215.5
214.1
211.7
209.7
207.8
206.0
204.3
Inventory Turnover - COGS
179.9
178.5
170.4
151.1
136.8
137.0
136.6
136.3
136.1
136.0
134.8
Days Inventory on Hand
2.0
2.0
2.1
2.4
2.7
2.7
2.7
2.7
2.7
2.7
2.7
Fixed Assets Turnover - Total Sales
2.8
3.2
3.4
3.6
3.7
3.9
4.1
4.3
4.6
5.0
5.2
Total Asset Turnover
1.8
1.8
1.8
1.8
1.9
1.9
1.9
2.0
2.1
2.1
2.2
Liquidity Analysis
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Current Ratio
3.3
3.2
2.9
2.7
2.7
2.7
2.6
2.6
2.5
2.5
2.5
Quick Ratio
2.9
3.0
2.6
2.5
2.5
2.4
2.4
2.3
2.3
2.3
2.3
Adjusted Quick Ratio
2.0
2.2
1.9
2.1
1.9
1.8
1.8
1.7
1.6
1.6
1.5
Days to Sell Inventory
2.0
2.0
2.1
2.4
2.7
2.7
2.7
2.7
2.7
2.7
2.7
Days to Collect Accounts Receivable
1.0
1.1
1.7
1.8
1.7
1.7
1.7
1.7
1.8
1.8
1.8
Days to Pay Accounts Payable
9.4
10.2
11.2
10.9
10.7
10.6
10.7
10.7
10.7
10.7
10.8
Cash Conversion Cycle
-6.3
-7.0
-7.4
-6.6
-6.3
-6.3
-6.3
-6.3
-6.3
-6.3
-6.3
Solvency Analysis
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Debt/Equity
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
Interest Coverage Ratio - Income
2891
409
4577
5464
6189
6908
7521
8016
8365
8562
8938
Interest Coverage Ratio - CFO
3618
566
5270
7016
7558
8374
9042
9585
9966
10186
10576
2.3
2.3
1.7
2.4
2.5
2.7
3.7
3.9
6.1
6.1
3.6
CFO/CAPEX
Valuation Assumptions
Risk-free Rate
1.85%
Equity Risk Premium
6.00%
Beta (Adjusted)
0.87
Cost of Equity
7.09%
Terminal Growth
4.40%
Capitalization Rate
Valuation Date
B/S Date
Days Since
2.69%
4/30/2013
12/31/2012
118
Portion of year elapsed
0.3233
Partial Year Adjustment
102.24%
Shares Outstanding
32.81
18