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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

______________________________

FORM 10-Q

______________________________

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2020

or

¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 1-32731

______________________________

CHIPOTLE MEXICAN GRILL, INC.

(Exact name of registrant as specified in its charter)

______________________________

Delaware | 84-1219301
(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.)
610 Newport Center Drive, Suite 1300 Newport Beach, CA | 92660
(Address of Principal Executive Offices) | (Zip Code)

Registrant’s telephone number, including area code: (949) 524-4000

______________________________

Securities registered pursuant to Section 12(b) of the Act:

Title of each class | Trading Symbol(s) | Name of each exchange on which registered
Common stock, par value $0.01 per share | CMG | New York Stock Exchange

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes  No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). x Yes ¨ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act (check one):

 Large accelerated filer |  Accelerated filer |  Non-accelerated filer |  Smaller reporting company |  Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes x No

As of July 24, 2020, there were 27,967,625 shares of the registrant’s common stock, par value of $0.01 per share outstanding.

Table of Contents

TABLE OF CONTENTS

| PART I |
Item 1. | Financial Statements | 1
| Notes to Condensed Consolidated Financial Statements | 5
| Note 1 - Basis of Presentation and Update to Accounting Policy | 5
| Note 2 - Recent Accounting Standards | 5
| Note 3 - Revenue Recognition | 6
| Note 4 - Fair Value of Financial Instruments | 7
| Note 5 - Shareholders' Equity | 7
| Note 6 - Stock-Based Compensation | 7
| Note 7 - Income Taxes | 8
| Note 8 - Leases | 8
| Note 9 - Earnings Per Share | 9
| Note 10 - Commitments and Contingencies | 10
| Note 11 - Debt | 10
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 11
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 16
Item 4. | Controls and Procedures | 17
| PART II |
Item 1. | Legal Proceedings | 17
Item 1A. | Risk Factors | 17
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 17
Item 6. | Exhibits | 18
| Signatures | 19

Table of Contents

PART I

ITEM 1. FINANCIAL STATEMENTS

CHIPOTLE MEXICAN GRILL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)

| June 30, |  | December 31,
| 2020 |  | 2019
| (unaudited) |  |
Assets |  |  |  |  |
Current assets: |  |  |  |  |
Cash and cash equivalents | $ | 605,622 |  | $ | 480,626
Accounts receivable, net |  | 68,006 |  |  | 80,545
Inventory |  | 24,178 |  |  | 26,096
Prepaid expenses and other current assets |  | 53,656 |  |  | 57,076
Income tax receivable |  | 97,840 |  |  | 27,705
Investments |  | 301,041 |  |  | 400,156
Total current assets |  | 1,150,343 |  |  | 1,072,204
Leasehold improvements, property and equipment, net |  | 1,498,048 |  |  | 1,458,690
Restricted cash |  | 27,979 |  |  | 27,855
Operating lease assets |  | 2,634,165 |  |  | 2,505,466
Other assets |  | 37,655 |  |  | 18,450
Goodwill |  | 21,939 |  |  | 21,939
Total assets | $ | 5,370,129 |  | $ | 5,104,604
Liabilities and shareholders' equity |  |  |  |  |
Current liabilities: |  |  |  |  |
Accounts payable | $ | 160,523 |  | $ | 115,816
Accrued payroll and benefits |  | 130,306 |  |  | 126,600
Accrued liabilities |  | 146,229 |  |  | 155,843
Unearned revenue |  | 88,924 |  |  | 95,195
Current operating lease liabilities |  | 197,196 |  |  | 173,139
Total current liabilities |  | 723,178 |  |  | 666,593
Commitments and contingencies (Note 10) |  |  |  |  |
Long-term operating lease liabilities |  | 2,809,178 |  |  | 2,678,374
Deferred income tax liabilities |  | 96,502 |  |  | 37,814
Other liabilities |  | 36,775 |  |  | 38,797
Total liabilities |  | 3,665,633 |  |  | 3,421,578
Shareholders' equity: |  |  |  |  |
Preferred stock, $0.01 par value, 600,000 shares authorized, no shares issued as of June 30, 2020 and December 31, 2019, respectively |  | - |  |  | -
Common stock, $0.01 par value, 230,000 shares authorized, 36,667 and 36,323 shares issued as of June 30, 2020 and December 31, 2019, respectively |  | 367 |  |  | 363
Additional paid-in capital |  | 1,506,785 |  |  | 1,465,697
Treasury stock, at cost, 8,703 and 8,568 common shares as of June 30, 2020 and December 31, 2019, respectively |  | (2,801,467) |  |  | (2,699,119)
Accumulated other comprehensive loss |  | (6,149) |  |  | (5,363)
Retained earnings |  | 3,004,960 |  |  | 2,921,448
Total shareholders' equity |  | 1,704,496 |  |  | 1,683,026
Total liabilities and shareholders' equity | $ | 5,370,129 |  | $ | 5,104,604

See accompanying notes to condensed consolidated financial statements.

1

Table of Contents

CHIPOTLE MEXICAN GRILL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share data)

(unaudited)

| Three months ended |  | Six months ended
| June 30, |  | June 30,
| 2020 |  | 2019 |  | 2020 |  | 2019
Revenue | $ | 1,364,738 |  | $ | 1,434,231 |  | $ | 2,775,510 |  | $ | 2,742,448
Restaurant operating costs (exclusive of depreciation and amortization shown separately below): |  |  |  |  |  |  |  |  |  |  |
Food, beverage and packaging |  | 454,756 |  |  | 483,284 |  |  | 917,055 |  |  | 904,651
Labor |  | 385,266 |  |  | 368,053 |  |  | 778,831 |  |  | 716,895
Occupancy |  | 95,576 |  |  | 89,923 |  |  | 190,855 |  |  | 178,693
Other operating costs |  | 262,378 |  |  | 193,309 |  |  | 473,140 |  |  | 368,052
General and administrative expenses |  | 102,647 |  |  | 121,395 |  |  | 209,117 |  |  | 224,066
Depreciation and amortization |  | 60,024 |  |  | 51,642 |  |  | 118,398 |  |  | 105,423
Pre-opening costs |  | 3,644 |  |  | 2,118 |  |  | 7,210 |  |  | 3,058
Impairment, closure costs, and asset disposals |  | 5,386 |  |  | 4,487 |  |  | 14,722 |  |  | 11,429
Total operating expenses |  | 1,369,677 |  |  | 1,314,211 |  |  | 2,709,328 |  |  | 2,512,267
Income (loss) from operations |  | (4,939) |  |  | 120,020 |  |  | 66,182 |  |  | 230,181
Interest and other income, net |  | 623 |  |  | 3,947 |  |  | 3,366 |  |  | 7,076
Income (loss) before income taxes |  | (4,316) |  |  | 123,967 |  |  | 69,548 |  |  | 237,257
Benefit (provision) for income taxes |  | 12,491 |  |  | (32,939) |  |  | 15,015 |  |  | (58,097)
Net income | $ | 8,175 |  | $ | 91,028 |  | $ | 84,563 |  | $ | 179,160
Earnings per share: |  |  |  |  |  |  |  |  |  |  |
Basic | $ | 0.29 |  | $ | 3.28 |  | $ | 3.04 |  | $ | 6.47
Diluted | $ | 0.29 |  | $ | 3.22 |  | $ | 2.99 |  | $ | 6.35
Weighted-average common shares outstanding: |  |  |  |  |  |  |  |  |  |  |
Basic |  | 27,911 |  |  | 27,720 |  |  | 27,851 |  |  | 27,708
Diluted |  | 28,333 |  |  | 28,300 |  |  | 28,328 |  |  | 28,209

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(unaudited)

| Three months ended |  | Six months ended
| June 30, |  | June 30,
| 2020 |  | 2019 |  | 2020 |  | 2019
Net income | $ | 8,175 |  | $ | 91,028 |  | $ | 84,563 |  | $ | 179,160
Other comprehensive income (loss), net of income taxes: |  |  |  |  |  |  |  |  |  |  |
Foreign currency translation adjustments |  | 1,055 |  |  | 555 |  |  | (786) |  |  | 833
Unrealized gain on available-for-sale securities, net of income taxes |  | - |  |  | 42 |  |  | - |  |  | 142
Other comprehensive income (loss), net of income taxes |  | 1,055 |  |  | 597 |  |  | (786) |  |  | 975
Comprehensive income | $ | 9,230 |  | $ | 91,625 |  | $ | 83,777 |  | $ | 180,135

See accompanying notes to condensed consolidated financial statements.

2

Table of Contents

CHIPOTLE MEXICAN GRILL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(in thousands)

(unaudited)

| Common Stock |  |  |  | Treasury Stock |  |  |  | Accumulated Other Comprehensive Income (Loss) |  |  |
| Shares |  | Amount |  | Additional ‎Paid-In ‎Capital |  | Shares |  | Amount |  | Retained ‎Earnings |  | Available-for-Sale Securities |  |  | Foreign Currency Translation |  | Total
Balance, December 31, 2018 | 35,973 |  | $ | 360 |  | $ | 1,374,154 |  | 8,276 |  | $ | (2,500,556) |  | $ | 2,573,617 |  | $ | (147) |  | $ | (6,089) |  | $ | 1,441,339
Adoption of ASU No. 2016-02, Leases (Topic 842) | - |  |  | - |  |  | - |  | - |  |  | - |  |  | (2,327) |  |  | - |  |  | - |  |  | (2,327)
Stock-based compensation | - |  |  | - |  |  | 19,342 |  | - |  |  | - |  |  | - |  |  | - |  |  | - |  |  | 19,342
Stock plan transactions and other | 135 |  |  | 1 |  |  | (212) |  | - |  |  | - |  |  | - |  |  | - |  |  | - |  |  | (211)
Acquisition of treasury stock | - |  |  | - |  |  | - |  | 110 |  |  | (62,854) |  |  | - |  |  | - |  |  | - |  |  | (62,854)
Net income | - |  |  | - |  |  | - |  | - |  |  | - |  |  | 88,132 |  |  | - |  |  | - |  |  | 88,132
Other comprehensive income (loss), net of income tax | - |  |  | - |  |  | - |  | - |  |  | - |  |  | - |  |  | 100 |  |  | 278 |  |  | 378
Balance, March 31, 2019 | 36,108 |  | $ | 361 |  | $ | 1,393,284 |  | 8,386 |  | $ | (2,563,410) |  | $ | 2,659,422 |  | $ | (47) |  | $ | (5,811) |  | $ | 1,483,799
Stock-based compensation | - |  |  | - |  |  | 21,322 |  | - |  |  | - |  |  | - |  |  | - |  |  | - |  |  | 21,322
Stock plan transactions and other | 85 |  |  | 1 |  |  | (186) |  | - |  |  | - |  |  | - |  |  | - |  |  | - |  |  | (185)
Acquisition of treasury stock | - |  |  | - |  |  | - |  | 83 |  |  | (58,512) |  |  | - |  |  | - |  |  | - |  |  | (58,512)
Net income | - |  |  | - |  |  | - |  | - |  |  | - |  |  | 91,028 |  |  | - |  |  | - |  |  | 91,028
Other comprehensive income (loss), net of income tax | - |  |  | - |  |  | - |  | - |  |  | - |  |  | - |  |  | 42 |  |  | 555 |  |  | 597
Balance, June 30, 2019 | 36,193 |  | $ | 362 |  | $ | 1,414,420 |  | 8,469 |  | $ | (2,621,922) |  | $ | 2,750,450 |  | $ | (5) |  | $ | (5,256) |  | $ | 1,538,049
Balance, December 31, 2019 | 36,323 |  | $ | 363 |  | $ | 1,465,697 |  | 8,568 |  | $ | (2,699,119) |  | $ | 2,921,448 |  | $ | - |  | $ | (5,363) |  | $ | 1,683,026
Adoption of ASU No. 2016-13, Financial Instrument-Credit Losses (Topic 326) | - |  |  | - |  |  | - |  | - |  |  | - |  |  | (1,051) |  |  | - |  |  | - |  |  | (1,051)
Stock-based compensation | - |  |  | - |  |  | 17,708 |  | - |  |  | - |  |  | - |  |  | - |  |  | - |  |  | 17,708
Stock plan transactions and other | 194 |  |  | 2 |  |  | (181) |  | - |  |  | - |  |  | - |  |  | - |  |  | - |  |  | (179)
Acquisition of treasury stock | - |  |  | - |  |  | - |  | 134 |  |  | (102,031) |  |  | - |  |  | - |  |  | - |  |  | (102,031)
Net income | - |  |  | - |  |  | - |  | - |  |  | - |  |  | 76,388 |  |  | - |  |  | - |  |  | 76,388
Other comprehensive income (loss), net of income tax | - |  |  | - |  |  | - |  | - |  |  | - |  |  | - |  |  | - |  |  | (1,841) |  |  | (1,841)
Balance, March 31, 2020 | 36,517 |  | $ | 365 |  | $ | 1,483,224 |  | 8,702 |  | $ | (2,801,150) |  | $ | 2,996,785 |  | $ | - |  | $ | (7,204) |  | $ | 1,672,020
Stock-based compensation | - |  |  | - |  |  | 23,676 |  | - |  |  | - |  |  | - |  |  | - |  |  | - |  |  | 23,676
Stock plan transactions and other | 150 |  |  | 2 |  |  | (115) |  | - |  |  | - |  |  | - |  |  | - |  |  | - |  |  | (113)
Acquisition of treasury stock | - |  |  | - |  |  | - |  | 1 |  |  | (317) |  |  | - |  |  | - |  |  | - |  |  | (317)
Net income | - |  |  | - |  |  | - |  | - |  |  | - |  |  | 8,175 |  |  | - |  |  | - |  |  | 8,175
Other comprehensive income (loss), net of income tax | - |  |  | - |  |  | - |  | - |  |  | - |  |  | - |  |  | - |  |  | 1,055 |  |  | 1,055
Balance, June 30, 2020 | 36,667 |  | $ | 367 |  | $ | 1,506,785 |  | 8,703 |  | $ | (2,801,467) |  | $ | 3,004,960 |  | $ | - |  | $ | (6,149) |  | $ | 1,704,496

See accompanying notes to condensed consolidated financial statements.

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CHIPOTLE MEXICAN GRILL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

| Six months ended
| June 30,
| 2020 |  | 2019
Operating activities |  |  |  |  |
Net income | $ | 84,563 |  | $ | 179,160
Adjustments to reconcile net income to net cash provided by operating activities: |  |  |  |  |
Depreciation and amortization |  | 118,398 |  |  | 105,423
Amortization of operating lease assets |  | 88,139 |  |  | 77,438
Deferred income tax provision |  | 55,122 |  |  | (6,349)
Impairment, closure costs, and asset disposals |  | 13,747 |  |  | 4,944
Provision for credit losses |  | 82 |  |  | 85
Stock-based compensation expense |  | 40,762 |  |  | 40,321
Other |  | 1,670 |  |  | (2,588)
Changes in operating assets and liabilities: |  |  |  |  |
Accounts receivable |  | 22,598 |  |  | 18,275
Inventory |  | 2,029 |  |  | 421
Prepaid expenses and other current assets |  | (6,250) |  |  | (13,617)
Other assets |  | (8,574) |  |  | 2,907
Accounts payable |  | 40,530 |  |  | (10,319)
Accrued payroll and benefits |  | 3,264 |  |  | (16,526)
Accrued liabilities |  | (8,120) |  |  | 7,659
Unearned revenue |  | (4,027) |  |  | (8,681)
Income tax payable/receivable |  | (70,119) |  |  | (4,593)
Operating lease liabilities |  | (69,468) |  |  | (74,346)
Other long-term liabilities |  | 587 |  |  | 901
Net cash provided by operating activities |  | 304,933 |  |  | 300,515
Investing activities |  |  |  |  |
Purchases of leasehold improvements, property and equipment |  | (165,455) |  |  | (142,002)
Purchases of investments |  | (101,104) |  |  | (208,253)
Maturities of investments |  | 198,578 |  |  | 220,000
Acquisitions of equity method investments |  | (7,525) |  |  | -
Net cash used in investing activities |  | (75,506) |  |  | (130,255)
Financing activities |  |  |  |  |
Acquisition of treasury stock |  | (54,401) |  |  | (111,542)
Tax withholding on stock-based compensation awards |  | (47,947) |  |  | (10,398)
Other financing activities |  | (1,855) |  |  | (510)
Net cash used in financing activities |  | (104,203) |  |  | (122,450)
Effect of exchange rate changes on cash, cash equivalents and restricted cash |  | (104) |  |  | 494
Net change in cash, cash equivalents, and restricted cash |  | 125,120 |  |  | 48,304
Cash, cash equivalents, and restricted cash at beginning of period |  | 508,481 |  |  | 280,152
Cash, cash equivalents, and restricted cash at end of period | $ | 633,601 |  | $ | 328,456
Supplemental disclosures of cash flow information |  |  |  |  |
Income taxes paid | $ | 657 |  | $ | 69,075
Purchases of leasehold improvements, property, and equipment accrued in accounts payable and accrued liabilities | $ | 41,504 |  | $ | 27,119
Acquisition of treasury stock accrued in accounts payable and accrued liabilities | $ | - |  | $ | 1,900

See accompanying notes to condensed consolidated financial statements.

‎

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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 Policy

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, tacos, and salads, made using fresh, high-quality ingredients. As of June 30, 2020, we operated 2,626 Chipotle restaurants throughout the United States as well as 40 international Chipotle restaurants. We are also an investor in a consolidated entity that owns and operates three Pizzeria Locale restaurants, a fast-casual pizza concept. We manage our operations based on eight regions and have aggregated our operations to one reportable segment.

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 included in our annual report on Form 10-K for the year ended December 31, 2019.

Updates to Significant Accounting Policies

O n January 1, 2020 we adopted Accounting Standards Update (“ASU”) 2016-13, “Financial Instruments – Credit Losses (Topic 326)”, along with related clarifications and improvements. As a result, we updated our significant accounting policies for the measurement of credit losses below. Refer to Note 2. “Recent Accounting Standards” for information related to the impact of the adoption of Topic 326 on our condensed consolidated financial statements.

Allowance for Credit Losses

We closely monitor accounts receivable and held to maturity investment balances and estimate the allowance for credit losses. Our estimate is based on historical collection experience, external market data and other factors, including those related to current market conditions and events. Our credit losses associated with accounts receivable and held to maturity investments have not historically been material.

2. Recent Accounting Standards

Recently Issued Accounting Standards

In December 2019, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2019-12, “Simplifying the Accounting for Income Taxes (Topic 740)”, which modifies certain technical guidelines for accounting for income taxes. ASU 2019-12 is effective for reporting periods beginning after December 15, 2020, and early adoption is permitted. We are currently evaluating the impact this guidance will have on our consolidated financial statements, but do not expect the adoption of ASU 2019-12 will result in a material change to our consolidated financial statements.

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.

Recently Adopted Accounting Standards

On January 1, 2020 we adopted ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326)”, along with related clarifications and improvements. This pronouncement requires companies to measure credit losses utilizing a methodology that reflects expected credit losses and requires a consideration of a broader range of reasonable and supportable information to inform credit loss estimates. We adopted the standard using the modified-retrospective approach as of the effective date and therefore, we have not applied the standard to the comparative periods presented in our condensed consolidated financial statements. The modified-retrospective approach requires an entity to recognize a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which this guidance is effective. As of January 1, 2020, the adoption of this standard resulted in a net increase to the allowance for credit losses of $1,414, a decrease to our deferred income tax liability of $363, and a decrease to retained earnings of $1,051.

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On January 1, 2020 we adopted ASU 2018-15, “Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40)”: Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (“ASU 2018-15”), which clarifies the accounting for implementation costs in cloud computing arrangements. We adopted the standard prospectively on January 1, 2020. Prior to the adoption of ASU 2018-15, we capitalized implementation costs incurred during the application development phase of cloud computing arrangements to leasehold improvements, property and equipment, net on our consolidated balance sheets and have recognized expense over the useful life of the related asset within depreciation and amortization on our condensed consolidated statements of income. Subsequent to the adoption of ASU 2018-15, we capitalize such costs within prepaid expenses and other current assets or other assets on our condensed consolidated balance sheets and recognize expense over the expected contract term within general and administrative expenses or other operating costs on our condensed consolidated statements of income, consistent with where the expense associated with the hosting element of the arrangement are presented. The adoption of ASU 2018-15 did not result in a material change to our condensed consolidated financial statements.

3. Revenue Rec ognition

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, based on historical redemption rates, 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. The breakage rates are 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 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:

| June 30, |  | December 31,
| 2020 |  | 2019
Gift card liability | $ | 68,912 |  | $ | 84,611

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 |  | Six months ended
| June 30, |  | June 30,
| 2020 |  | 2019 |  | 2020 |  | 2019
Revenue recognized from gift card liability balance at the beginning of the year | $ | 4,064 |  | $ | 6,615 |  | $ | 32,134 |  | $ | 31,318

Chipotle Rewards

During the first quarter of 2019, we launched a national loyalty program called Chipotle Rewards. Eligible customers who enroll in the program generally earn points for every dollar spent. After accumulating a certain number of points, the customer earns a reward that can be redeemed for a free entrée. We may also periodically offer promotions, which provide the customer with the opportunity to earn bonus points or free food vouchers (“Bonus Vouchers”). Earned rewards generally expire one 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 Bonus Vouchers earned by customers as each point or Bonus Voucher is earned, net of points we do not expect to be redeemed. The estimated selling price of each point or Bonus Voucher earned is based on the estimated value of product for which the reward is expected to be redeemed. Our estimate of points and Bonus Vouchers we expect to be redeemed is based on historical company specific data. The cost associated with rewards and Bonus Vouchers redeemed are included in food, beverage, and packaging expense on our condensed consolidated statements of income.

We recognize loyalty revenue on the condensed consolidated statements of 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.

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Changes in our Chipotle Rewards liability included in unearned revenue on the condensed consolidated balance sheets were as follows:

| Three months ended |  | Six months ended
| June 30, |  | June 30,
| 2020 |  | 2019 |  | 2020 |  | 2019
Chipotle Rewards liability, beginning balance | $ | 13,484 |  | $ | 3,466 |  | $ | 10,584 |  | $ | -
Revenue deferred |  | 25,226 |  |  | 13,984 |  |  | 40,443 |  |  | 19,727
Revenue recognized |  | (18,698) |  |  | (8,873) |  |  | (31,015) |  |  | (11,150)
Chipotle Rewards liability, ending balance | $ | 20,012 |  | $ | 8,577 |  | $ | 20,012 |  | $ | 8,577

4. Fair Value of Financial Instruments

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The carrying value of our cash and cash equivalents, accounts receivable and accounts payable approximate fair value because of their short-term nature.

Our investments consist of U.S. treasury notes with maturities of less than one year. Fair value of investments is measured using Level 1 inputs (quoted prices for identical assets in active markets). We designate the appropriate classification of our investments at the time of purchase based upon the intended holding period.

Investments, all of which are classified as held-to-maturity, are carried at amortized cost. The fair value of these investments exceeded the amortized cost by $1,374 as of June 30, 2020. We recognize a reserve for expected credit losses when lifetime credit losses are expected by management. As of June 30, 2020, our investment portfolio consisted entirely of U.S. Treasury securities for which management has concluded that there is no risk of non-payment. No impairment charges were recognized on our investments for the three and six months ended June 30, 2020 and 2019.

We also maintain a rabbi trust to fund obligations under a deferred compensation plan. Amounts in the rabbi trust are invested in mutual funds, which are designated as trading securities carried at fair value and are included in other assets on the condensed consolidated balance sheets. Fair value of rabbi trust investments in mutual funds is measured using Level 1 inputs. The fair value of the investments in the rabbi trust was $14,253 and $12,811 as of June 30, 2020, and December 31, 2019, respectively. We record trading gains and losses in general and administrative expenses on the condensed consolidated statements of income, 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.

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, operating lease assets, other assets, goodwill, and other intangible assets. These assets are measured at fair value if determined to be impaired.

Equity Method Investment

On April 16, 2020, we acquired approximately 10% of the common stock of a supplier in exchange for cash consideration of $7,500. As we are a significant customer of the supplier and maintain board representation, we are accounting for our investment under the equity method. The investment is included within other assets on the condensed consolidated balance sheet as of June 30, 2020.

5. Shareholders’ Equity

Through June 30, 2020, we had announced authorizations by our Board of Directors of repurchases of shares of common stock, which in the aggregate, authorized expenditures of up to $2,800,000. As of June 30, 2020, $115,018 was available to be repurchased under announced repurchase authorizations. Shares repurchased are being held in treasury stock until they are reissued or retired at the discretion of the Board of Directors.

During the six months ended June 30, 2020, 58 shares of common stock at a total cost of $47,947 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.

6. Stock-Based Compensation

For the six months ended June 30, 2020, we granted stock only stock appreciation rights (“SOSARs”) on 109 shares of our common stock to eligible employees. The weighted-average grant date fair value of the SOSARs was $225.06 per share with a weighted-average exercise price

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of $852.68 per share. The SOSARs vest in two equal installments on the second and third anniversary of the grant date. For the six months ended June 30, 2020, 413 SOSARs were exercised, and 20 SOSARs were forfeited.

For the six months ended June 30, 2020, we granted restricted stock units (“RSUs”) on 35 shares of our common stock to eligible employees. The weighted-average grant date fair value of the RSUs was $860.88 per share. The RSUs vest in two equal installments on the second and third anniversary of the grant date. For the six months ended June 30, 2020, 58 RSUs vested and 6 RSUs were forfeited.

For the six months ended June 30, 2020, we awarded a total of 27 performance shares (“PSUs”) that are subject to service, market and performance vesting conditions. The weighted-average grant date fair value of the PSUs was $853.03 per share, and the quantity of shares that will vest range from 0% to 300% of the targeted number of shares. If the defined minimum targets are not met, then no shares will vest. Further, in no event may more than 100% of the target number of PSUs vest if our 3 year total shareholder return is below the 25 th percentile of the constituent companies comprising the S&P 500 on the day of grant. For the six months ended June 30, 2020, 71 PSUs vested, and 2 PSUs were forfeited.

The following table sets forth total stock-based compensation expense:

| Three months ended |  | Six months ended
| June 30, |  | June 30,
| 2020 |  | 2019 |  | 2020 |  | 2019
Stock-based compensation | $ | 23,676 |  | $ | 21,322 |  | $ | 41,384 |  | $ | 40,664
Stock-based compensation, net of income taxes | $ | 20,007 |  | $ | 15,689 |  | $ | 34,512 |  | $ | 30,091
Total capitalized stock-based compensation included in net leasehold improvements, property and equipment on the condensed consolidated balance sheets | $ | 309 |  | $ | 155 |  | $ | 622 |  | $ | 343
Excess tax benefit on stock-based compensation recognized in benefit (provision) for income taxes | $ | 15,708 |  | $ | 5,264 |  | $ | 39,339 |  | $ | 10,698

.

7. Income Taxes

On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”). Intended to provide economic relief to those impacted by the coronavirus (COVID-19) pandemic, the CARES Act includes provisions, among others, addressing the carryback of net operating losses for specific periods, refunds of alternative minimum tax credits, temporary modifications to the limitations placed on the tax deductibility of net interest expenses, and technical amendments for qualified improvement property (“QIP”). Additionally, the CARES Act, in efforts to enhance business’ liquidity, provides for refundable employee retention tax credits and the deferral of the employer-paid portion of social security taxes.

As of June 30, 2020, we have elected to defer the employer-paid portion of social security taxes. Additionally, because of the technical amendments made by the CARES Act to QIP, we have refined our estimation of the acceleration of depreciation expenses. These accelerated tax depreciation expenses of $31,754, in addition to the deferral of employer-paid social security taxes of $6,214, represent temporary book-to-tax timing differences (i.e., no effective tax rate impact) for income tax purposes and are recorded as components within our deferred income tax liabilities and income tax receivable on the condensed consolidated balance sheets.

We intend to claim the refundable employee retention tax credits provided under the CARES Act, which can be used to partially offset payroll tax liabilities. As of June 30, 2020, we estimated the benefit of the employee retention tax credit to be $2,294. We are continuing to examine additional impacts that the CARES Act may have on our U.S. business, and we are currently evaluating the potential tax-related incentives offered in Canada, France, Germany and the United Kingdom, where our operations have also been impacted by COVID-19.

8. Leases

We determine if a contract contains a lease at inception. Our material operating leases consist of restaurant locations and office space. 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 noncancelable period of the lease or the lease term inclusive of reasonably certain renewal periods up to a term of 20 years.

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The components of lease cost were as follows:

|  | Three months ended |  | Six months ended
|  | June 30, |  | June 30,
| Classification | 2020 |  | 2019 |  | 2020 |  | 2019
Operating lease cost | Occupancy, Other operating costs, General and administrative expenses and Pre-opening costs | $ | 82,706 |  | $ | 74,701 |  | $ | 163,802 |  | $ | 151,506
Short-term lease cost | Other operating costs |  | - |  |  | 737 |  |  | 36 |  |  | 1,474
Variable lease cost | Occupancy |  | 8,780 |  |  | 9,276 |  |  | 17,936 |  |  | 18,380
Sublease income | General and administrative expenses |  | (812) |  |  | (909) |  |  | (1,649) |  |  | (1,675)
Total lease cost |  | $ | 90,674 |  | $ | 83,805 |  | $ | 180,125 |  | $ | 169,685

Supplemental disclosures of cash flow information related to leases were as follows:

| Three months ended |  | Six months ended
| June 30, |  | June 30,
| 2020 |  | 2019 |  | 2020 |  | 2019
Cash paid for operating lease liabilities | $ | 66,595 |  | $ | 73,572 |  | $ | 144,484 |  | $ | 145,404
Operating lease assets obtained in exchange for operating lease liabilities(1) | $ | 102,113 |  | $ | 64,807 |  | $ | 239,079 |  | $ | 2,466,046
Derecognition of operating lease assets due to terminations or impairment | $ | 12,410 |  | $ | 3,103 |  | $ | 14,417 |  | $ | 13,859

(1) Amounts for the six months ended June 30, 2019 include the transition adjustment for the adoption of Topic 842 discussed in our annual report on Form 10-K for the year ended December 31, 2019.

In April 2020, the FASB issued guidance allowing entities to make a policy election whether to account for lease concessions related to the COVID-19 pandemic as lease modifications. The election applies to any lessor-provided lease concession related to the impact of the COVID-19 pandemic, provided the concession does not result in a substantial increase in the rights of the lessor or in the obligations of the lessee. During the three months ended June 30, 2020, we have received non-substantial concessions from certain landlords in the form of rent deferrals and abatements. We have elected to not account for these rent concessions as lease modifications. The recognition of rent concessions did not have a material impact on our condensed consolidated financial statements as of June 30, 2020.

9. Earnings Per Share

The following table sets forth the computations of basic and diluted earnings per share:

| Three months ended |  | Six months ended
| June 30, |  | June 30,
| 2020 |  | 2019 |  | 2020 |  | 2019
Net income | $ | 8,175 |  | $ | 91,028 |  | $ | 84,563 |  | $ | 179,160
Shares: |  |  |  |  |  |  |  |  |  |  |
Weighted-average number of common shares outstanding (for basic calculation) |  | 27,911 |  |  | 27,720 |  |  | 27,851 |  |  | 27,708
Dilutive stock awards |  | 422 |  |  | 580 |  |  | 477 |  |  | 501
Weighted-average number of common shares outstanding (for diluted calculation) |  | 28,333 |  |  | 28,300 |  |  | 28,328 |  |  | 28,209
Basic earnings per share | $ | 0.29 |  | $ | 3.28 |  | $ | 3.04 |  | $ | 6.47
Diluted earnings per share | $ | 0.29 |  | $ | 3.22 |  | $ | 2.99 |  | $ | 6.35

The following stock awards were excluded from the calculation of diluted earnings per share:

| Three months ended |  | Six months ended
| June 30, |  | June 30,
| 2020 |  | 2019 |  | 2020 |  | 2019
Stock awards subject to performance conditions |  | 100 |  |  | 84 |  |  | 95 |  |  | 83
Stock awards that were antidilutive |  | 117 |  |  | 175 |  |  | 110 |  |  | 259
Total stock awards excluded from diluted earnings per share |  | 217 |  |  | 259 |  |  | 205 |  |  | 342

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10. 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, amounts owed under contractor and subcontractor agreements, orders submitted for equipment for restaurants under construction, and marketing initiatives and corporate sponsorships.

Litigation

Settlement of DOJ Investigation

On January 28, 2016, we were served with a Federal Grand Jury Subpoena from the U.S. District of California relating to an official criminal investigation being conducted by the U.S. Attorney’s Office for the Central District of California, in conjunction with the U.S. Food and Drug Administration’s Office of Criminal Investigations (collectively, the “DOJ”). The subpoena required the production of documents and information related to company-wide food safety matters dating back to January 1, 2013. On April 21, 2020, we announced that we have signed a Deferred Prosecution Agreement to resolve this investigation. Pursuant to the Agreement, the DOJ has agreed to take no legal action relating to these past incidents for three years provided that Chipotle complies with its obligations under the Agreement, which include payment a $25,000 fine (consisting of a $10,000 payment that was made on June 1, 2020, followed by three separate payments of $5,000 each to be paid every 30 days after the first payment) and enhancing and maintaining our existing comprehensive compliance program which is designed to ensure that it complies with all applicable federal and state food safety laws.

Shareholder Class Action

On January 8, 2016, Susie Ong filed a complaint in the U.S. District Court for the Southern District of New York on behalf of a purported class of purchasers of shares of our common stock between February 4, 2015 and January 5, 2016. The complaint purports to state claims against us, each of the co-Chief Executive Officers serving during the claimed class period and the Chief Financial Officer under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and related rules, based on our alleged failure during the claimed class period to disclose material information about our quality controls and safeguards in relation to consumer and employee health. The complaint asserts that those failures and related public statements were false and misleading and that, as a result, the market price of our stock was artificially inflated during the claimed class period. The complaint seeks damages on behalf of the purported class in an unspecified amount, interest, and an award of reasonable attorneys’ fees, expert fees, and other costs. On March 22, 2018, the court granted our motion to dismiss, with prejudice. On April 20, 2018, the plaintiffs filed a motion for relief from the judgment and seeking leave to file a third amended complaint, and on November 20, 2018, the court denied the motion. On December 20, 2018, the plaintiff initiated an appeal to the U.S. Court of Appeals for the Second Circuit. We intend to continue vigorously defending the case, but it is not possible at this time to reasonably estimate the outcome of or any potential liability from the case.

Miscellaneous

We are involved in various other claims and legal actions that arise in the ordinary course of business. We do not believe that the ultimate resolution of these actions will have a material adverse effect on our financial position, results of operations, liquidity, or capital resources. However, a significant increase in the number of these claims, or one or more successful claims under which we incur greater liabilities than we currently anticipate, could materially and adversely affect our business, financial condition, results of operations and cash flows.

Accrual for Estimated Liability

As of June 30, 2020, we had a balance of $31,385 included within accrued liabilities on the condensed consolidated balance sheets. We ultimately may be subject to liabilities greater or less than the amount accrued.

11. Debt

On May 8, 2020, we entered into a $600,000 revolving credit facility with JPMorgan Chase Bank as administrative agent, which expires on May 7, 2021. We pay a commitment fee of 0.625% per year for unused amounts under the credit facility. Interest on borrowings currently bear interest at a rate equal to the London Interbank Offered Rate (LIBOR) plus 1.50%, which may increase due to changes in our total leverage ratio as defined in the credit agreement. Further, we are subject to certain covenants, which include (i) maintaining a total leverage ratio of less than 3.0 x, (ii) maintaining a consolidated fixed charge coverage ratio of greater than 1.5 x and (iii) limiting us from making investments and capital expenditures in certain circumstances. We had no outstanding borrowings under the credit facility as of June 30, 2020.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Cautionary Note Regarding Forward-Looking Statements

Certain statements in this report, including the potential future impact of COVID-19 on our results of operations or liquidity, the potential impact of actions we have taken to mitigate the impact of COVID-19, the expected benefit of the CARES Act on our liquidity and the period of time during which our cash and short-term investment will fund our operations are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. We use words such as “anticipate,” “believe,” “could,” “should,” “estimate,” “expect,” “intend,” “may,” “predict,” “project,” “target,” and similar terms and phrases, including references to assumptions, to identify forward-looking statements. These forward-looking statements are based on information available to us as of the date any such statements are made, and we assume no obligation to update these forward-looking statements. These statements are subject to risks and uncertainties that could cause actual results to differ materially from those described in the statements. These risks and uncertainties include, but are not limited to, the risk factors described in our annual report on Form 10-K for the year ended December 31, 2019, as updated in our Form 10-Q for the quarter ended March 31, 2020 and in other reports filed subsequently with the SEC.

Overview of the Impact of COVID-19

The COVID-19 pandemic has adversely affected, and will continue to adversely affect, our operations and financial results for the foreseeable future. In response to COVID-19, we temporarily closed some restaurants and dining rooms in our restaurants. We continue to follow guidance from health officials in determining the appropriate restrictions to put in place for each restaurant. As of June 30, 2020, the majority of our restaurants have been reopened for dine-in with restrictions, such as social distancing, to ensure the health and safety of our guests and employees. Certain restaurants only offer take-out, digital order ahead and delivery services in accordance with local guidance and regulations. About 30 restaurants remain temporarily closed, mainly inside malls and shopping centers.

We remain in regular contact with our major suppliers and while to date we have not experienced significant disruptions in our supply chain, we could see future disruptions should the impacts of COVID-19 extend for a considerable amount of time. Within our restaurants, we have taken a number of steps to enhance our robust food safety protocols including the creation of the steward role which is focused on sanitization in high-touch and high-traffic areas, providing masks for all employees, and having a tamper evident packaging seal for all digital orders. To support our employees, we have eliminated non-essential travel, implemented work from home for our support centers, and significantly expanded employee benefits. We remain focused on reducing non-essential controllable costs and judiciously spending on return generating projects to preserve liquidity. We did not make any stock buybacks during the second quarter and do not expect to do so until the economic environment stabilizes. Refer to the “Liquidity and Capital Resources” for further detail.

Given the on-going uncertainty surrounding the future impact of COVID-19 on the broader US economy and any specific impact to our company, we are not providing fiscal 2020 guidance related to comparable restaurant sales growth, new restaurant openings, and effective full year tax rate.

Second Quarter 2020 Financial Highlights, which incorporate the impact of COVID-19, year over year:

Revenue decreased 4.8% to $1.4 billion

Comparable restaurant sales declined 9.8%

Diluted earnings per share was $0.29, which included the after-tax impact of restaurant asset impairment and closure costs and corporate restructuring charges of $0.11

Sales Trends. With changes in consumer behavior resulting from COVID-19, we have seen an increase in entrees per transaction, due in part to a shift towards digital group orders. Comparable restaurant sales decreased 9.8% with a 13.7% decrease in comparable entrees and a 3.9% increase in average comparable check. The decrease in comparable restaurant sales was most severe in April 2020, with a 24.4% decrease in year over year comparable restaurant sales. Sales trends improved meaningfully in May and June 2020, with a 7.0% decrease and a 2.0% increase in year over year comparable restaurant sales, respectively.

Digital sales grew 216.3% to $829.3 million for the three months ended June 30, 2020 as compared to the three months ended June 30, 2019 and represented 60.7% of sales. Contributing to this result was increased digital awareness via advertising, new delivery partnerships with Uber Eats, growth in Chipotle Rewards, as well as the expansion of our digital capabilities into Canada. These initiatives are attracting new customers and increasing convenient access. Notably, partnering with the major third-party delivery aggregators has led to an increase in orders, a reduction in delivery time and cancellations, and an improvement in overall customer ratings.

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Restaurant Operating Costs. Our restaurant operating costs (food, beverage and packaging; labor; occupancy; and other operating costs) as a percentage of revenue increased 870 basis points to 87.8% for the three months ended June 30, 2020, as compared to 79.1% for the three months ended June 30, 2019. The increase in restaurant operating costs as a percentage of revenue was driven primarily by higher delivery expense associated with increased delivery sales, sales deleverage, several temporary investments in our business as a result of COVID-19 including assistance pay, and increased delivery promotions. These increases in expenses were partially offset by lower avocado prices and the benefit from menu price increases in late 2019.

Restaurant Development. We opened 37 new restaurants, including three relocations, and closed three restaurants during the three months ended June 30, 2020. Of the 37 new restaurants, 21 included a drive through format which we call a “Chipotlane.” We recently announced a milestone with the opening of our 100th Chipotlane. The Chipotlane format continues to perform very well and is helping enhance guest access and convenience, as well as increase new restaurant sales, margins, and returns. We remain confident in the long-term opportunity to more than double the number of Chipotle restaurants in the U.S. We believe our strong financial position will allow us to build a robust new unit development pipeline. As a result, we expect to see an acceleration in the number of units opened in 2021.

Restaurant Activity

The following table details restaurant unit data for the periods indicated:

| Three months ended |  | Six months ended
| June 30, |  | June 30,
| 2020 |  | 2019 |  | 2020 |  | 2019
Beginning of period | 2,638 |  | 2,504 |  | 2,622 |  | 2,491
Chipotle openings | 37 |  | 20 |  | 56 |  | 35
Chipotle permanent closures | (3) |  | (1) |  | (5) |  | (3)
Chipotle relocations | (3) |  | - |  | (4) |  | -
Total restaurants at end of period | 2,669 |  | 2,523 |  | 2,669 |  | 2,523

Results of Operations

Our results of operations as a percentage of revenue and period-over-period change are discussed in the following section.

Revenue

| Three months ended |  |  |  | Six months ended |  |
| June 30, |  | Percentage |  | June 30, |  | Percentage
| 2020 |  | 2019 |  | change |  | 2020 |  | 2019 |  | change
| (dollars in millions) |  |  |  | (dollars in millions) |  |
Revenue | $ | 1,364.7 |  | $ | 1,434.2 |  | (4.8%) |  | $ | 2,775.5 |  | $ | 2,742.4 |  | 1.2%
Average restaurant sales (1) | $ | 2.2 |  | $ | 2.1 |  | 5.6% |  | $ | 2.2 |  | $ | 2.1 |  | 5.6%
Comparable restaurant sales increase (decrease) |  | (9.8%) |  |  | 10.0% |  |  |  |  | (3.5%) |  |  | 10.0% |  |
(1) Average restaurant sales refer to the average trailing 12-month sales for restaurants in operation for at least 12 full calendar months.

Revenue decreased for the three months ended June 30, 2020, compared to June 30, 2019, primarily due to comparable restaurant sales decreases of $144.4 million, partially offset by increases in revenue from restaurants not yet in the comparable base of $74.9 million, of which $57.1 million is due to restaurants opened in 2019.

Revenue increased for the six months ended June 30, 2020, compared to June 30, 2019, primarily due to revenue from restaurants not yet in the comparable base of $137.1 million, of which $117.6 million is due to restaurants opened in 2019, and was partially offset by comparable restaurant sales decreases of $104.0 million.

COVID-19 negatively impacted comparable restaurant sales for the three and six months ended June 30, 2020, due to restrictions put in place for restaurants. Comparable restaurant sales for the months ended April 30, 2020, May 31, 2020, and June 30, 2020 were a 24.4% decrease, a 7.0% decrease, and a 2.0% increase, respectively.

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Food, Beverage and Packaging Costs

| Three months ended |  |  |  | Six months ended |  |
| June 30, |  | Percentage |  | June 30, |  | Percentage
| 2020 |  | 2019 |  | change |  | 2020 |  | 2019 |  | change
| (dollars in millions) |  |  |  | (dollars in millions) |  |
Food, beverage and packaging | $ | 454.8 |  | $ | 483.3 |  | (5.9%) |  | $ | 917.1 |  | $ | 904.7 |  | 1.4%
As a percentage of revenue |  | 33.3% |  |  | 33.7% |  | (0.4%) |  |  | 33.0% |  |  | 33.0% |  | 0.0%

Food, beverage and packaging costs decreased as a percentage of revenue for the three months ended June 30, 2020 compared to June 30, 2019, primarily due to lower avocado costs, the benefit of menu price increases in late 2019, and to a lesser extent, lower waste, freight, and paper costs. These decreases were partially offset by elevated beef prices and increased incidence of steak, bottled beverages, and burritos.

Food, beverage and packaging costs remained flat as a percentage of revenue for the six months ended June 30, 2020 compared to June 30, 2019, primarily due to the benefit of menu price increases in late 2019, lower avocado costs, and, to a lesser extent, lower paper costs. These decreases were offset by higher costs of several ingredients including beef and dairy; and increased incidence of steak ,bottled beverages, and burritos; as well as free food costs associated with Chipotle Rewards and digital ordering incentives.

COVID-19 increased food, beverage and packaging costs as a percentage of revenue for the three and six months ended June 30, 2020 compared to June 30, 2019, as beef prices were elevated due to COVID-19 related shut down of processing plants, increased incidence of bottled beverages and burritos, and to a lesser extent, increased spoilage due to right sizing food purchases to align with the new sales level.

Labor Costs

| Three months ended |  |  |  | Six months ended |  |
| June 30, |  | Percentage |  | June 30, |  | Percentage
| 2020 |  | 2019 |  | change |  | 2020 |  | 2019 |  | change
| (dollars in millions) |  |  |  | (dollars in millions) |  |
Labor costs | $ | 385.3 |  | $ | 368.1 |  | 4.7% |  | $ | 778.8 |  | $ | 716.9 |  | 8.6%
As a percentage of revenue |  | 28.2% |  |  | 25.7% |  | 2.5% |  |  | 28.1% |  |  | 26.1% |  | 2.0%

Labor costs increased as a percentage of revenue for the three and six months ended June 30, 2020 compared to June 30, 2019, primarily due to increased crew wages including temporary assistance pay for our crew working during COVID-19, lower sales, and more managers per store, partially offset by labor efficiencies with the digital make line and closed dining rooms.

COVID-19 increased labor costs as a percentage of revenue for the three and six months ended June 30, 2020 compared to June 30, 2019, by 1.4% and 0.8%, respectively, as we made additional employee investments in the form of assistance pay and expanded our emergency leave benefits to accommodate those directly affected by COVID-19. Our assistance pay program ended June 7, 2020.

Occupancy Costs

| Three months ended |  |  |  | Six months ended |  |
| June 30, |  | Percentage |  | June 30, |  | Percentage
| 2020 |  | 2019 |  | change |  | 2020 |  | 2019 |  | change
| (dollars in millions) |  |  |  | (dollars in millions) |  |
Occupancy costs | $ | 95.6 |  | $ | 89.9 |  | 6.3% |  | $ | 190.9 |  | $ | 178.7 |  | 6.8%
As a percentage of revenue |  | 7.0% |  |  | 6.3% |  | 0.7% |  |  | 6.9% |  |  | 6.5% |  | 0.4%

Occupancy costs increased as a percentage of revenue for the three and six months ended June 30, 2020 compared to June 30, 2019, primarily due to increased rent expense associated with new restaurants and to a lesser extent the impact by change in revenue.

COVID-19 had an immaterial impact on occupancy costs for the three and six months ended June 30, 2020.

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Other Operating Costs

| Three months ended |  |  |  | Six months ended |  |
| June 30, |  | Percentage |  | June 30, |  | Percentage
| 2020 |  | 2019 |  | change |  | 2020 |  | 2019 |  | change
| (dollars in millions) |  |  |  | (dollars in millions) |  |
Other operating costs | $ | 262.4 |  | $ | 193.3 |  | 35.7% |  | $ | 473.1 |  | $ | 368.1 |  | 28.6%
As a percentage of revenue |  | 19.2% |  |  | 13.5% |  | 5.7% |  |  | 17.0% |  |  | 13.4% |  | 3.6%

Other operating costs include, among other items, marketing and promotional costs, delivery expense, bank and credit card processing fees, restaurant utilities, and maintenance costs. Other operating costs increased as a percentage of revenue for the three and six months ended June 30, 2020 compared to June 30, 2019, primarily due to higher delivery expenses associated with increased delivery sales and increased delivery promotions which decreased revenue.

As a result of COVID-19, we are adapting our restaurant operations to the changing environment and are reducing non-essential controllable costs. Sales shifted towards delivery after we temporarily closed our dining rooms to help control the spread of COVID-19. We reprioritized marketing efforts by offering free delivery from March 15, 2020 through May 10, 2020, and discounted delivery beginning May 11, 2020.

General and Administrative Expenses

| Three months ended |  |  |  | Six months ended |  |
| June 30, |  | Percentage |  | June 30, |  | Percentage
| 2020 |  | 2019 |  | change |  | 2020 |  | 2019 |  | change
| (dollars in millions) |  |  |  | (dollars in millions) |  |
General and administrative expense | $ | 102.6 |  | $ | 121.4 |  | (15.4%) |  | $ | 209.1 |  | $ | 224.1 |  | (6.7%)
As a percentage of revenue |  | 7.5% |  |  | 8.5% |  | (1.0%) |  |  | 7.5% |  |  | 8.2% |  | (0.7%)

General and administrative expenses decreased in dollar terms for the three months ended June 30, 2020 compared to June 30, 2019, primarily due to a reduction in the following: $19.2 million in estimated loss contingencies related to a number of legal matters and legal expense s, $2.4 million in travel expense, and $2.1 million in expense associated with the corporate restructuring. These decreases were partially offset by increases of $2.8 million in outside service expense related to company initiatives to support restaurant growth, including digitizing our restaurant experience and $2.1 million in other expenses.

General and administrative expenses decreased in dollar terms for the six months ended June 30, 2020 compared to June 30, 2019, primarily due to a reduction in the following: $25.8 million in estimated loss contingencies related to a number of legal matters and legal expenses, $5.0 million in expense associated with the corporate restructuring, and $2.0 million in travel expense. These decreases were partially offset by increases of $7.0 million in outside service expense related to company initiatives to support restaurant growth, including digitizing our restaurant experience, $5.2 million due to severance and stock modification charges associated with the departure of our former Executive Chairman, and $1.0 million in other expenses. In addition, the prior period included a $4.6 million reduction to an estimated liability associated with the data security incident, which is inflating general and administrative expenses in the current year as compared to the prior year.

COVID-19 had a minimal impact on general and administrative expenses for the three and six months ended June 30, 2020. We will continue to assess additional planned general and administrative investments as we better understand the length and severity of the COVID-19 impacts.

Depreciation and Amortization

| Three months ended |  |  |  | Six months ended |  |
| June 30, |  | Percentage |  | June 30, |  | Percentage
| 2020 |  | 2019 |  | change |  | 2020 |  | 2019 |  | change
| (dollars in millions) |  |  |  | (dollars in millions) |  |
Depreciation and amortization | $ | 60.0 |  | $ | 51.6 |  | 16.2% |  | $ | 118.4 |  | $ | 105.4 |  | 12.3%
As a percentage of revenue |  | 4.4% |  |  | 3.6% |  | 0.8% |  |  | 4.3% |  |  | 3.8% |  | 0.5%

Depreciation and amortization increased as a percentage of revenue for the three and six months ended June 30, 2020 compared to June 30, 2019, due to an increase in depreciation expense associated with new restaurants, upgrading equipment in our restaurants primarily to support the growth in our digital business, and depreciation associated with our website and mobile app.

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Impairment, Closure Costs, and Asset Disposals

| Three months ended |  |  |  | Six months ended |  |
| June 30, |  | Percentage |  | June 30, |  | Percentage
| 2020 |  | 2019 |  | change |  | 2020 |  | 2019 |  | change
| (dollars in millions) |  |  |  | (dollars in millions) |  |
Impairment, closure costs, and asset disposals | $ | 5.4 |  | $ | 4.5 |  | 20.0% |  | $ | 14.7 |  | $ | 11.4 |  | 28.8%
As a percentage of revenue |  | 0.4% |  |  | 0.3% |  | 0.1% |  |  | 0.5% |  |  | 0.4% |  | 0.1%

Impairment, closure costs, and asset disposals increased in dollar terms for the three months ended June 30, 2020 compared to June 30, 2019, primarily due to charges related to the replacement of certain kitchen equipment and leasehold improvements, and, to a lesser extent, impairments on restaurants and equipment.

Impairment, closure costs, and asset disposals increased in dollar terms for the six months ended June 30, 2020 compared to June 30, 2019, primarily due to impairments on restaurants and equipment, and to a lesser extent charges related to the replacement of certain kitchen equipment and leasehold improvements.

COVID-19 had a negative impact on our assumptions for future restaurant level cash flows. These changes in assumptions resulted in elevated impairment charges for the three and six months ended June 30, 2020.

Benefit (Provision) for Income Taxes

| Three months ended |  |  |  | Six months ended |  |
| June 30, |  | Percentage |  | June 30, |  | Percentage
| 2020 |  | 2019 |  | change |  | 2020 |  | 2019 |  | change
| (dollars in millions) |  |  |  | (dollars in millions) |  |
Benefit (provision) for income taxes | $ | 12.5 |  | $ | (32.9) |  | (137.9%) |  | $ | 15.0 |  | $ | (58.1) |  | (125.8%)
Effective tax rate |  | 289.4% |  |  | 26.6% |  |  |  |  | (21.6%) |  |  | 24.5% |  |

The effective tax rate for the three months ended June 30, 2020, was a benefit of 289.4%, a change from an effective income tax provision of 26.6% for the three months ended June 30, 2019, primarily due to excess tax benefits related to option exercises in the quarter, along with a decrease in income before tax.

The effective tax rate for the six months ended June 30, 2020, was a benefit of -21.6%, a change from an effective income tax provision of 24.5% for the six months ended June 30, 2019, primarily due to excess tax benefits related to option exercises and equity vesting, along with a decrease in income before tax.

The CARES Act did not have a material impact on our tax rate for the three or six months ended June 30, 2020.

Seasonality

Seasonal factors cause our profitability to fluctuate from quarter to quarter. Historically, our average daily restaurant sales and net income are lower in the first and fourth quarters due, in part, to the holiday season and because fewer people eat out during periods of inclement weather (the winter months) than during periods of mild or warm weather (the spring, summer and fall months). Other factors also have a seasonal effect on our results. For example, restaurants located near colleges and universities generally do more business during the academic year. Seasonal factors, however, might be moderated or outweighed by other factors that may influence our quarterly results, such as unexpected publicity impacting our business in a positive or negative way, worldwide health pandemics, fluctuations in food or packaging costs, or the timing of menu price increases or promotional activities and other marketing initiatives. The number of trading days in a quarter can also affect our results, although, on an overall annual basis, changes in trading days do not have a significant impact.

Our quarterly results are also affected by other factors such as the amount and timing of non-cash stock-based compensation expense and related tax rate impacts, litigation, settlement costs and related legal expenses, impairment charges and non-operating costs, timing of marketing or promotional expenses, the number and timing of new restaurants opened in a quarter, and closure of restaurants. New restaurants typically have lower margins following opening because of the expenses associated with their opening and operating inefficiencies in the months immediately following opening. Accordingly, results for a particular quarter are not necessarily indicative of results to be expected for any other quarter or for any year.

Liquidity and Capital Resources

Historically, our primary liquidity and capital requirements are for new restaurant construction, initiatives to improve the guest experience in our restaurants, working capital and general corporate needs. As of June 30, 2020, we had a cash and short-term investment balance of

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$906.6 million, excluding restricted cash of $28.0 million. We also expect to see a liquidity benefit of about $100 million primarily from deferring social security tax payments and accelerating tax depreciation in previous income tax returns as allowed by the CARES Act. We expect to utilize this, along with cash flow from operations to continue investments in new store construction, remodels for restaurants that do not have a digital make line or Chipotlane and technology. Additionally, as of June 30, 2020, we had $600.0 million of undrawn borrowing capacity under a line of credit facility with JPMorgan Chase bank.

As sales fell quickly from the impact of COVID-19, we proactively implemented several actions to reduce cash outlays and expenses. As part of our cash preservation strategy, in March 2020 we temporarily suspended our stock buyback program. In our restaurants, we are working to minimize waste, effectively schedule labor hours, and reduce non-essential controllable costs. We halted all non-essential travel and expenses. We are delaying non-essential reinvestments, including deferring all remodels except for those that involve a digital make line or the addition of a Chipotlane. We believe that cash from operations, together with our cash and investment balances, will be sufficient to meet ongoing capital expenditures, working capital requirements and other cash needs for the foreseeable future. Assuming our comparable restaurant sales improvement continues, we expect that we may be able to generate positive cash flow through the balance of the year. Should our business take longer to recover than we currently anticipate, there are other actions we can take to further conserve liquidity.

We have not required significant working capital because customers pay in full at the time of purchase and because our operations do not require significant receivables, nor do they require significant inventories due, in part, to our use of various fresh ingredients. In addition, we generally have the right to pay for the purchase of food, beverages and supplies sometime after the receipt of those items, generally within ten days, thereby reducing the need for incremental working capital to support our growth.

Off-Balance Sheet Arrangements

As of June 30, 2020 and December 31, 2019, we had no material off-balance sheet arrangements or obligations.

Critical Accounting Estimates

Critical accounting estimates are those that we believe are both significant and that require us to make difficult, subjective or complex judgments, often because we need to estimate the effect of inherently uncertain matters. We base our estimates and judgments on historical experiences and various other factors that we believe to be appropriate under the circumstances. Actual results may differ from these estimates, and we might obtain different estimates if we used different assumptions or factors. We had no significant changes to our critical accounting estimates as described in our annual report on Form 10-K for the year ended December 31, 2019.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Commodity Price Risks

We are exposed to commodity price risks. Many of the ingredients we use to prepare our food, as well as our packaging materials and utilities to run our restaurants, are ingredients or commodities that are affected by the price of other commodities, exchange rates, foreign demand, weather, seasonality, production, availability and other factors outside our control. We work closely with our suppliers and use a mix of forward pricing protocols under which we agree with our supplier on fixed prices for deliveries at some time in the future, fixed pricing protocols under which we agree on a fixed price with our supplier for the duration of that protocol, formula pricing protocols under which the prices we pay are based on a specified formula related to the prices of the goods, such as spot prices, and range forward protocols under which we agree on a price range for the duration of that protocol. Generally, our pricing protocols with suppliers can remain in effect for periods ranging from one to 36 months, depending on the outlook for prices of the particular ingredient. In several cases, we have minimum purchase obligations. We have tried to increase, where practical, the number of suppliers for our ingredients, which we believe can help mitigate pricing volatility, and we follow industry news, trade issues, exchange rates, foreign demand, weather, crises and other world events that may affect our ingredient prices. Increases in ingredient prices could adversely affect our results if we choose for competitive or other reasons not to increase menu prices at the same rate at which ingredient costs increase, or if menu price increases result in customer resistance. We also could experience shortages of key ingredients if our suppliers need to close or restrict operations due to the impact of the COVID-19 outbreak.

Changing Interest Rates

We are exposed to interest rate risk through fluctuations of interest rates on our investments. Changes in interest rates affect the interest income we earn, and therefore impact our cash flows and results of operations. As of June 30, 2020, we had $827.7 million in investments and interest-bearing cash accounts, including insurance-related restricted trust accounts classified in restricted cash, and $87.7 million in accounts with an earnings credit we classify as interest and other income, which combined earned a weighted-average interest rate of 0.66%.

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Foreign Currency Exchange Risk

A portion of our operations consist of activities outside of the U.S. and we have currency risk on the transactions in other currencies and translation adjustments resulting from the conversion of our international financial results into the U.S. dollar. However, a substantial majority of our operations and investment activities are transacted in the U.S., and therefore our foreign currency risk is not material at this date.

ITEM 4. CONTROLS AND PROCEDURES

We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) that are designed to ensure that information required to be disclosed in Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

As of June 30, 2020, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

There were no changes for the three months ended June 30, 2020, in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

PART II

ITEM 1. LEGAL PROCEEDINGS

For information regarding legal proceedings, see Note 10. “Commitments and Contingencies” our condensed consolidated financial statements included in Item 1. “Financial Statements.”

ITEM 1A. RISK FACTORS

There have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019 and our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Purchases of Equity Securities by the Issuer

On March 20, 2020, we temporarily suspended our stock repurchase program. The total remaining dollar value of shares that may yet be purchased under our stock repurchase program is $115,018 as of June 30, 2020.

‎

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ITEM 6. EXHIBITS

EXHIBIT INDEX

|  | Description of Exhibit Incorporated Herein by Reference
Exhibit Number | Exhibit Description | Form | File No. | Filing Date | Exhibit Number | Filed Herewith
31.1 | Certification of Chief Executive Office of Chipotle Mexican Grill, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | - | - | - | - | X
31.2 | Certificate of Chief Financial Officer of Chipotle Mexican Grill, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | - | - | - | - | X
32.1 | Certification of Chief Executive Officer and Chief Financial Officer of Chipotle Mexican Grill, Inc. pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | - | - | - | - | X
101.INS | Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document) | - | - | - | - | X
101.SCH | Inline XBRL Taxonomy Extension Schema Document | - | - | - | - | X
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | - | - | - | - | X
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | - | - | - | - | X
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | - | - | - | - | X
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | - | - | - | - | X
104 | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) | - | - | - | - | X

Test

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

CHIPOTLE MEXICAN GRILL, INC.
By: | /S/ J OHN R. H ARTUNG
Name: | John R. Hartung
Title: | Chief Financial Officer (principal financial officer and duly authorized signatory for the registrant)

Date: July 28, 2020

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