Chipotle Analysis 2.0

CHIPOTLE ANALYSIS

Peterson Partners Case CompetitionKellon Furber, Erik Paustenbaugh, Nick Larson, Michael Edis

March 25th, 2016

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2

I. Executive Summary

II. Chipotle Overview

III. Industry Overview

IV. Valuation

i. LBO Analysis

ii. DCF Analysis

iii. Comparable Company Analysis

iv. Precedent Transactions Summary

V. Conclusion Summary

Agenda

3

I. Executive Summary

Sources: IBIS World, CapIQ 4

• Chipotle is a leading fast-casual restaurant chain

that established the dining sector offering various

Mexican dishes

• Unique branding and marketing strategy have

enabled company to experience strong growth

• Recent E. Coli, Norovirus and Salmonella outbreaks

have brought greater scrutiny and dented share

price

• Healthy Eating & Food Preparation Awareness

• Increasing health conscious population

• Consumer Spending

• Strong markets over the past 5 years have

contributed to a rise in restaurant sales

• Agricultural Price Index

• Greater sensitivity to commodity price

changes than industry norm due to organic

and high cost ingredients

Overview Key Drivers

Valuation Conclusion

• We recognize that Chipotle has experienced high

growth and has been a leader in the fast casual

dining space

• However due to recent health scares, and the

development of many close substitutes we feel that

Chipotle is still being over valued by the market

• We feel that in the coming years Chipotle will lose

its valuable market share to competitors who do not

face the same threats.

Executive Summary

$12.6 Billion at 13.9x EV/EBITDA

5

II. Chipotle Overview


Background

• Founded 1993 in Denver, Colorado; IPO—2006

Product

• Simple 4 item menu; Natural Ingredients

Geography

• 2000+ Locations

• 59,000+ employees

• US, Canada, UK, Germany & France

Steve Ells — Co-Chief Executive Officer & Chairman

• 2014 Compensation: 28million

Montgomery Moran — Co-Chief Executive Officer

• 2014 Compensation: 28million

John Hartung — Chief Financial Officer

Mark Crumpacker — Chief Creative & Development

Officer

Company Overview Management Team

TTM EV/EBITDAR & EV/EBITDA of Comparables Revenue v. Revenue Growth ($mm)

Chipotle Overview

$-

$1,000.0

$2,000.0

$3,000.0

$4,000.0

$5,000.0

2009 2010 2011 2012 2013 2014 20150%

5%

10%

15%

20%

25%

30%

Revenue Revenue Growth YoY

Revenue Revenue Growth YoY

0.0x

5.0x

10.0x

15.0x

20.0x

25.0x

30.0x

35.0x

40.0x

45.0x

Chipotle PaneraBread

Jack inthe Box

Zoe'sKitchen

ShakeShack

Noodles& Co.

Potbelly HabitBurger

EV/EBITDAR

EV/EBITDA


• Simple menu

• Natural ingredients

• Restaurant design and layout

• Performance based culture

• Strong brand; Loyal customers

• Higher cost ingredients

• Limited menu

• Dependency on word of mouth

Strengths Weaknesses

Opportunities Threats

• Health conscious trend

• Global markets

• Franchise model

• Domestic growth

• Supply chain constraints

• Increased competition

• Close substitutes

• Economic downturn

• Virus outbreaks

SWOT Analysis

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III. Industry Overview


• $782.7 Billion Restaurant Industry Sales

• 1 Million+ Restaurant locations in the US

• 10% Restaurant workforce of total US jobs

• 1.7 Million new jobs created by 2026

Restaurant Sales Growth

2016: 5%2026: 1.9%GDP: 2.2%Chipotle: 6%

Facts at a Glance Market Growth

Market Characteristics Market Size

• Restaurant industry is in its mature phase

• Industry growth for next 10 years forecasted at

1.9%, GDP at 2.2% • Smartphone allow faster delivery and reduced costs

• Restaurant industry is cyclical with demand tied to

income, unemployment rates and agricultural

prices

• Health trends are major determinants of higher than

average growth

Industry Overview

*Projected Restaurant Employment


Restaurant Types

Market Trends

• Healthy Eating

• Food Preparation Awareness

• Social Farming

Practices

• Animal Welfare

• Accountability

Industry Overview

Restaurant Type Avg. Check Size Description

Quick Service $5-6Emphasize speed of service, no table-service, often have drive through

service

Fast Casual $7-8 No table service, generally fast serving time yet food is higher than QSR

Casual Dining $13-14 Table service, casual atmosphere, full bar

Mexican Fast Casual Fast Food

Qdoba Panera Bread Co. McDonald's Corp.

Fresh Enterprises Jack in the Box Inc. Yum! Brands, Inc.

Mswg, LLCZoe's Kitchen, Inc. Restaurant Brands

Rubio's GrillShake Shack Inc. Domino's Pizza

Costa Vida Noodles & Company Wendy’s

Café Rio Potbelly Corporation Sonic Corp.

The Habit Restaurant Popeyes

Cosi Inc. Bojangles' Inc.

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IV. Valuation


Valuation Overview

• Through a comprehensive analysis involving Discounted Cash Flow Analysis, LBO Analysis,

Comparable Company Analysis, and Precedent Transaction Analysis, we computed a valuation for

the Company at $12.6 Billion with a Enterprise Value/EBITDA multiple of 13.8x

$12.6 Billion

13.8x EV/EBITDA


Comparable Company Analysis


Company

Enterprise

Value

LTM

Revenue

LTM

EBITDAR LTM EBITDA EV/Revenue EV/EBITDAR EV/EBITDA

Chipotle Mexican Grill, Inc. $13,018.0 $4,501.2 $1,137.4 $907.2 2.9x 11.4x 14.4x

Tier I: Fast Casual Peers

Panera Bread Company 5,359.7 2,681.6 527.4 380.8 2.0x 10.2x 14.1x

Jack in the Box Inc. 3,028.4 1,542.5 N/A 299.0 2.0x N/A 10.1x

Zoe's Kitchen, Inc. 782.6 226.6 32.8 19.7 3.5x 23.9x 39.7x

Shake Shack Inc. 467.3 190.6 31.7 16.5 2.5x 14.8x 28.4x

Noodles & Company 420.1 455.5 78.2 36.4 0.9x 5.4x 11.6x

Potbelly Corporation 320.3 372.8 73.2 34.5 0.9x 4.4x 9.3x

The Habit Restaurants, Inc. 279.7 230.6 37.2 24.9 1.2x 7.5x 11.2x

25th 0.9x 5.1x 10.1x

Median 2.0x 8.8x 11.6x

75th 2.5x 17.0x 28.4x

Tier II: Fast Food Peers

McDonald's Corp. $128,311.5 $25,413.0 $10,749.6 $8,910.6 5.0x 11.9x 14.4x

Yum! Brands, Inc. 35,310.2 13,105.0 3,933.0 2,902.0 2.7x 9.0x 12.2x

Restaurant Brands International Inc. 21,945.5 4,052.2 1,578.6 1,562.9 5.4x 13.9x 14.0x

The Wendy's Company 4,901.6 1,870.3 479.1 383.2 2.6x 10.2x 12.8x

Sonic Corp. 2,040.5 612.0 0.0 166.6 3.3x N/A 12.2x

Popeyes Lousiana Kitchen, Inc. 1,262.6 259.0 91.9 84.0 4.9x 13.7x 15.0x

Bojangles' Inc. 820.0 488.2 101.8 67.6 1.7x 8.1x 12.1x

25th 2.6x 8.7x 12.2x

Median 3.3x 11.1x 12.8x

75th 5.0x 13.8x 14.4x



Fast Casual – Earnings Growth vs. EV/EBITDAR Fast Food – EBITDA Margins vs. EV/Revenue

• “Fast Casual” peers are being valued based on growth

• “Fast Food” peers are being valued based on operating margins


Precedent Transaction Analysis

Precedent Transaction Analysis

Implied Enterprise Value Range of $6.4 - $8.4 billion

Transaction Target

($ in millions) Value EBITDA EV / Revenue EV / EBITDA

Average 2,054.1 149.2 1.4x 11.7x

Minimum 113.0 11.1 0.4x 7.0x

25th Percentile 215.2 27.3 0.7x 8.7x

Median 466.8 45.0 0.8x 9.2x

75th Percentile 1,611.2 176.7 1.7x 16.2x

Maximum 13,373.9 785.6 4.4x 20.2x

Implied

($ in millions) EV

Average $10,655.0

Minimum $6,359.1

25th Percentile $7,924.0

Median $8,373.0

75th Percentile $14,714.0

Maximum $18,288.2

($ in millions) Transaction TargetDate Target Acquirer Value EBITDA EV / EV / EBITDA

06/04/2015 Biglari Holdings Inc. Biglari Capital 258.9 54.3 1.2x 20.2x

09/29/2014 Einstein Noah Restaurant Group BDT Capital 466.8 45.0 1.1x 10.3x

08/26/2014 Tim Hortons Inc. Restaurant 13,373.9 785.6 4.4x 17.4x

05/15/2014 Red Lobster Seafood Co., LLC Golden Gate 2,113.0 229.0 0.8x 9.2x

07/12/2012 Yard House USA, Inc. Darden 585.0 39.0 2.2x 15.0x

06/25/2012 J. Alexander's Holdings, Inc. American Blue 113.0 11.1 0.6x 9.0x

05/22/2012 Benihana Inc. Angelo, Gordon 295.7 30.2 0.8x 9.1x

05/01/2012 P.F. Chang's China Bistro, Inc. Centerbridge 1,109.3 124.3 0.8x 8.5x

02/07/2012 Real Mex Restaurants, Inc. Tennenbaum 171.6 24.5 0.4x 7.0x


Discounted Cash Flow Model

Assumptions and Multiples WACC Calculations

Discounted Cash Flow

($ millions) 1 2 3 4 5

2013 2014 2015 2016E 2017E 2018E 2019E 2020E Terminal

Revenue $3,214.59 $4,108.27 $4,501.22 $4,861.32 $5,250.23 $5,670.24 $6,123.86 $6,613.77 WACC

EBITDAR 814.9 1031.6 1137.4 1118.1 1307.3 1377.9 1482.0 1593.9

EBITDA 635.5 828.3 907.2 879.9 1055.3 1111.4 1200.3 1296.3

EBIT 543.1 627.4 776.4 676.7 840.1 882.4 955.6 1033.9

Tax 38% 38% 38% 38% 38% 38% 38% 38%

EBIT*(1-t) 336.7 389.0 481.4 419.6 520.9 547.1 592.5 641.0

+Depr. 96.1 110.5 130.4 159.4 167.9 177.9 189.5 202.8

-CAPEX 257.4 267.4 288.8 311.9 336.8 363.8

-ΔNWC 15.8 (1.9) (10.4) (11.3) (12.2) (13.1)

FCFF 313.5 410.5 424.4 457.4 493.3 12,522.9

PV 288.0 346.5 329.2 325.9 322.9 8,199.0

E/V 100.00% D/V 0.00%

Ke 8.84% Kd 0

Rf 1.88% T 38.00%

Rp 6.00%

Beta 1.16

WACC 8.84%

Terminal Growth 1%

Revenue Multiple 2.9x

EBITDA Multiple 15.0x

EBIT Multiple 16.8x

EBITDAR Multiple 12.0x


EV/EBIT vs. WACC Sensitivity EV/Revenue vs. WACC Sensitivity

Discounted Cash Flows - Sensitivities

EV/EBITDA vs. WACC Sensitivity EV/EBITDAR vs. WACC Sensitivity

WACC

$9,811.6 7.00% 7.50% 8.00% 8.50% 9.00% 9.50%

12x 9,606 9,222 8,856 8,508 8,176 7,860

13x 10,265 9,851 9,457 9,081 8,724 8,383

14x 10,924 10,480 10,057 9,655 9,271 8,906

15x 11,583 11,109 10,658 10,228 9,819 9,430

16x 12,242 11,738 11,258 10,801 10,367 9,953

17x 12,901 12,367 11,858 11,375 10,914 10,476

18x 13,560 12,996 12,459 11,948 11,462 10,999

19x 14,219 13,625 13,059 12,521 12,009 11,522

20x 14,878 14,254 13,660 13,095 12,557 12,045

WACC

$9,811.6 7.00% 7.50% 8.00% 8.50% 9.00% 9.50%

6.0x 6,560 6,315 6,081 5,858 5,645 5,442

7.0x 7,370 7,088 6,819 6,563 6,318 6,086

8.0x 8,181 7,861 7,557 7,268 6,992 6,729

9.0x 8,991 8,635 8,296 7,973 7,665 7,372

10.0x 9,801 9,408 9,034 8,678 8,338 8,015

11.0x 10,612 10,181 9,772 9,383 9,012 8,658

12.0x 11,422 10,955 10,511 10,088 9,685 9,301

13.0x 12,232 11,728 11,249 10,793 10,358 9,945

14.0x 13,042 12,502 11,987 11,498 11,031 10,588

15.0x 13,853 13,275 12,725 12,202 11,705 11,231

WACC

$9,811.6 7.00% 7.50% 8.00% 8.50% 9.00% 9.50%

13.0x 8,531 8,196 7,877 7,573 7,283 7,007

14.0x 9,057 8,698 8,356 8,030 7,720 7,424

15.0x 9,583 9,199 8,835 8,487 8,157 7,842

16.0x 10,108 9,701 9,314 8,945 8,593 8,259

17.0x 10,634 10,203 9,793 9,402 9,030 8,676

18.0x 11,159 10,704 10,271 9,859 9,467 9,093

19.0x 11,685 11,206 10,750 10,317 9,904 9,510

WACC

$9,811.6 7.00% 7.50% 8.00% 8.50% 9.00% 9.50%

1.0x 5,061 4,883 4,714 4,553 4,399 4,252

1.5x 6,742 6,488 6,246 6,016 5,796 5,586

2.0x 8,423 8,092 7,778 7,478 7,193 6,921

2.5x 10,104 9,697 9,310 8,941 8,590 8,255

3.0x 11,785 11,301 10,841 10,403 9,987 9,590


Leveraged Buyout

Required Purchase Prices with 4-year EBITDA Exit

Multiples

Required Purchase Prices with 5-year EBITDA Exit

Multiples

Leveraged Buyout

IRR 15x 16x 17x 18x 19x 20x

25% 12,896 13,429 13,937 14,468 14,997 15,551

26% 12,700 13,214 13,728 14,242 14,756 15,258

27% 12,510 13,008 13,506 14,004 14,502 15,000

28% 12,327 12,810 13,292 13,775 14,258 14,740

29% 12,159 12,620 13,087 13,555 14,023 14,491

30% 11,983 12,437 12,890 13,344 13,797 14,251

IRR 15x 16x 17x 18x 19x 20x

25% 11,836 12,265 12,672 13,093 13,537 13,962

26% 11,633 12,041 12,449 12,857 13,264 13,672

27% 11,438 11,830 12,222 12,614 13,006 13,398

28% 11,252 11,629 12,006 12,382 12,759 13,136

29% 11,074 11,437 11,799 12,162 12,524 12,887

30% 10,905 11,254 11,602 11,951 12,300 12,649

Debt Level 7x EBITDA = 6,350

• 1st Lien Term Loan 4.5x EBITDA, 5.75% = 4,082

• Senior Notes 2.5x EBITDA, 8.5% = 2,268

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V. Conclusion


• Perform a full valuation of Chipotle Mexican Grill, Inc.

Objective

Valuation

• We recognize that Chipotle has experienced high growth and has been a leader in the

fast casual dining space

• However due to recent health scares, and the development of many close substitutes we

feel that despite the recent correction, Chipotle is still being over valued by the market

• We feel that in the coming years Chipotle will lose its valuable market share to

competitors who do not face the same threats

Conclusion

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VI. Appendix


Regression Analysis

Chipotle Analysis 2.0

Documents

Transcript of Chipotle Analysis 2.0