! ! FOOD!WITH!INTEGRITY:!A!FINANCIAL!ANALYSIS!OF! CHIPOTLE!MEXICAN!GRILL! ! By!Kaylie!M!Rowell! ! A!thesis!submitted!to!the!Faculty!oF!The!University!oF!Mississippi!in!partial! FulFillment!oF!the!requirements!oF!the!Sally!McDonnell!Barksdale!Honors!College.! ! ! Oxford! May!2016! ! ! Approved!by!! ! ! ! ! ! Advisor:!Dr.!Vicki!Dickinson!! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ©2016! Kaylie!M!Rowell! ALL!RIGHTS!RESERVED! ! ! ! 2! ! ABSTRACT' ! ! ! !For! the! accounting! alternative! thesis,! we! were! to! pick! a! publicly! traded! company! domiciled! in! the! U.S! that! we! were! interested! in! and! research! their! Financials,! business,! and! industry.! I! chose! Chipotle! Mexican! Grill! due! to! their! unique!restaurant!brand.!Chipotle’s!Food!with!Integrity!campaign!makes!up!their! main!brand,!but!brings!the!issue!oF!Finding!enough!suppliers!to!meet!their!needs.! IF!Chipotle!has!to!use!processed!Food!to!FulFill!the!lack!oF!the!natural,!organic!Food! then!they!will!eventually!lose!their!customer’s!trust.!Chipotle!has!also!expanded! globally!so!there!are!always!issues!that!appear!when!dealing!with!a!new!market.!! ! ! The!majority!oF!the!numerical!values!that!relate!directly!to!Chipotle’s!operations! were!Found!in!their!annual!10ZK!Financial!statements.!! ! ! ! ! 3! ! Table'of'Contents' ! CHAPTER(1:(GENERAL(COMPANY(INFORMATION(.....................................................................(7! BUSINESS!HISTORY!...........................................................................................................................!7! COMPANY!OPERATIONS!..................................................................................................................!11! VALUE!CHAIN!................................................................................................................................!13! BOARD!OF!DIRECTORS!....................................................................................................................!16! CHAPTER(2:(INDUSTRY(AND(GEOGRAPHICAL(ANALYSIS;(STRATEGIC(ANALYSES(......................(22! BUSINESS!MISSION!AND!STRATEGY!...................................................................................................!22! SUPPLY!AND!DEMAND!....................................................................................................................!25! COMPETITORS!...............................................................................................................................!26! FOREIGN!RISKS!AND!REWARDS!.........................................................................................................!29! PORTER’S!FIVE!COMPETITIVE!FORCES!................................................................................................!31! CHAPTER(3:(FINANCIAL(STATEMENT(ANALYSIS(PART(1(...........................................................(33! ASSET!COMPOSITION!......................................................................................................................!33! SOURCE!OF!FINANCING!...................................................................................................................!38! CASH!FLOWS!.................................................................................................................................!39! LIQUIDITY!AND!SOLVENCY!...............................................................................................................!41! EARNINGS!PER!SHARE!.....................................................................................................................!42! CHAPTER(4:(FINANCIAL(STATEMENT(ANALYSIS(PART(2(...........................................................(44! RECEIVABLES!.................................................................................................................................!44! INVENTORIES!.................................................................................................................................!48! PROPERTY!PLANT!AND!EQUIPMENT!...................................................................................................!51! CHAPTER(5:(FINANCIAL(STATEMENT(ANALYSIS(PART(3(...........................................................(56! INTERCORPORATE!INVESTMENTS!......................................................................................................!56! RESTRUCTURING!............................................................................................................................!56! ! 4! ! FOREIGN!CURRENCY!.......................................................................................................................!57! SHARE!REPURCHASES,!STOCK!DIVIDENDS,!AND!STOCK!SPLITS!................................................................!59! PENSIONS!.....................................................................................................................................!60! CHAPTER(6:(FINANCIAL(STATEMENT(ANALYSIS(PART(4(...........................................................(63! OPERATING!VERSUS!NONMOPERATING!...............................................................................................!63! FINANCIAL!STATEMENT!ANALYSIS!.....................................................................................................!66! NONMOPERATING!RETURN:!FLEV!AND!SPREAD!...................................................................................!73! RATIO!LIMITATIONS!........................................................................................................................!74! CHAPTER(7:(ACCOUNTING(QUALITY(........................................................................................(75! MACROECONOMIC!TRENDS!.............................................................................................................!75! REVENUE!RECOGNITION!..................................................................................................................!79! EARNINGS!TARGETS!.......................................................................................................................!82! EARNINGS!MANAGEMENT!...............................................................................................................!83! CHAPTER(8:(EQUITY(VALUATION(............................................................................................(85! OPERATING!LEASES!........................................................................................................................!85! WEIGHTEDMAVERAGE!COST!OF!CAPITAL!.............................................................................................!90! GROWTH!PROJECTIONS!..................................................................................................................!91! STOCK!VALUE!................................................................................................................................!92! CHAPTER(9:(DEVELOPING(AUDIT(AND(TAX(RECOMMENDATIONS(...........................................(97! MANAGEMENT’S!ASSERTIONS!..........................................................................................................!97! AUDIT!RISKS!...............................................................................................................................!103! INTERNAL!CONTROLS!....................................................................................................................!105! EXTERNAL!PRESSURES!...................................................................................................................!107! CORPORATE!TAX!RATES!AND!THE!FEDERAL!STATUTORY!TAX!RATE!........................................................!107! TAX!CREDITS!...............................................................................................................................!108! TAX!RECOMMENDATION!...............................................................................................................!110! CHAPTER(10:(DEVELOPING(ADVISORY(RECOMMENDATIONS(................................................(111! ! 5! ! BALANCED!SCORECARD!.................................................................................................................!111! RECOMMENDATIONS!....................................................................................................................!114! WORKS(CITED(.......................................................................................................................(119! ! ' ! 6! ! ! Chapter'1:'General'Company'Information' ' Business'History' ! Chipotle!was!First!opened!by!Steve!Ells!in!1993!in!a!Former!Dolly!Madison! ice! cream! location! in! Denver,! Colorado.! Steve! graduated! From! the! Culinary! Institute!oF!America!in!1990!beFore!moving!to!San!Francisco!where!he!worked!as! a!sousZcheF!at!Stars.!He!grew!to!like!the!taquerias!in!San!Francisco!where!they! Foil!wrapped!their!burritos!and!you!could!pick!what!you!wanted!on!it.!He!wanted! to!open!this!similar!“fastZcasual”!restaurant!to!generate!some!cash!Flow!to!open!a! Full!scale!FineZdining!restaurant.!He!moved!back!to!Denver,!Colorado!to!open!this! burrito!shop!with!$80,000!that!his!dad!had!loaned!him.!The!ice!cream!shop!was! on!a!corner!near!the!University!oF!Denver!campus!but!it!wasn’t!a!high!traFFic!spot.! Steve!even!mentions!that!some!high!proFile!Fast!Food!chains!had!looked!at!the! property! but! had! passed! it! up! For! better! locations.! It! was! aFFordable! For! him,! though,!so!he!took!the!spot.!They!used!cheap!materials!(plywood,!barn!metal,! and! pipes)! For! the! design!