Deleverage Leads to Decline of Chipotle’s EBITDA Margins



Chipotle’s 4Q15 EBITDA margins

With Chipotle Mexican Grill’s (CMG) deleverage and same-store sales growth in negative territory, its EBITDA margin fell to 14.4% of total revenue compared to 20.5% in 4Q14. Negative same-store sales growth leads to deleverage as fixed costs get divided among lower customer count. This would negatively affect EBITDA margins.

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Costs and expenses

Although food costs to total sales decreased by 1.2% compared to 4Q14 values, deleverage from negative same-store sales growth decreased 4Q15 EBITDA (earnings before interest, taxes, depreciation, and amortization) margins by 6.2% compared to 4Q14. Food waste and costs related to testing negatively affected company margins by 1.6%.

The implementation of food safety protocols cost Chipotle 1.5% of its total revenue. In 4Q15, the extensive testing of food products related to investigations cost an additional 0.7%. New food safety kitchen equipment cost 0.6% of total sales. The company predicts that going forward, the enhanced food safety programs will cost an additional 2% of total sales.

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Outlook for 2016

To bring back its customers, Chipotle management has been planning several marketing and promotional programs. To support these programs, the company has increased its budget, with marketing and promotional costs at around 6% of total sales.

Same-store sales growth is expected to decline further in 1Q16. The company expects an increase in costs related to an enhanced food safety program and marketing programs. Analysts thus expect Chipotle’s EBITDA margin to decline further before showing a semblance of revival in 2Q16 and 3Q16.

We’ve already looked at Chipotle’s (CMG) revenue, revenue drivers, and EBITDA margins. In the next part of this series, we’ll look at its valuation multiple.


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