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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, 2021

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 1400 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 20, 2021, there were 28,094,868 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 (Unaudited) | 1
| Condensed Consolidated Balance Sheets | 1
| Condensed Consolidated Statements of Income and Comprehensive Income | 2
| Condensed Consolidated Statements of Shareholders’ Equity | 3
| Condensed Consolidated Statements of Cash Flows | 4
| Notes to Condensed Consolidated Financial Statements | 5
| Note 1 - Basis of Presentation and Update to Accounting Policy | 5
| Note 2 - Recently Issued Accounting Standards | 5
| Note 3 - Revenue Recognition | 5
| Note 4 - Fair Value of Financial Instruments | 6
| Note 5 - Shareholders' Equity | 8
| Note 6 - Stock-Based Compensation | 8
| Note 7 - Income Taxes | 9
| Note 8 - Leases | 9
| Note 9 - Earnings Per Share | 9
| Note 10 - Commitments and Contingencies | 10
| Note 11 - Debt | 10
| Note 12 - Related Party Transactions | 11
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 12
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 17
Item 4. | Controls and Procedures | 18
| PART II |
Item 1. | Legal Proceedings | 18
Item 1A. | Risk Factors | 19
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 19
Item 6. | Exhibits | 20
| Signatures | 21

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,
| 2021 |  | 2020
| (unaudited) |  |
Assets |  |  |  |  |
Current assets: |  |  |  |  |
Cash and cash equivalents | $ | 668,269 |  | $ | 607,987
Accounts receivable, net |  | 75,697 |  |  | 104,500
Inventory |  | 25,159 |  |  | 26,445
Prepaid expenses and other current assets |  | 71,613 |  |  | 54,906
Income tax receivable |  | 284,612 |  |  | 282,783
Investments |  | 322,460 |  |  | 343,616
Total current assets |  | 1,447,810 |  |  | 1,420,237
Leasehold improvements, property and equipment, net |  | 1,666,184 |  |  | 1,584,311
Long-term investments |  | 150,814 |  |  | 102,328
Restricted cash |  | 27,877 |  |  | 27,849
Operating lease assets |  | 2,945,912 |  |  | 2,767,185
Other assets |  | 59,918 |  |  | 59,047
Goodwill |  | 21,939 |  |  | 21,939
Total assets | $ | 6,320,454 |  | $ | 5,982,896
Liabilities and shareholders' equity |  |  |  |  |
Current liabilities: |  |  |  |  |
Accounts payable | $ | 140,251 |  | $ | 121,990
Accrued payroll and benefits |  | 225,104 |  |  | 203,054
Accrued liabilities |  | 143,469 |  |  | 164,649
Unearned revenue |  | 113,016 |  |  | 127,750
Current operating lease liabilities |  | 213,646 |  |  | 204,756
Total current liabilities |  | 835,486 |  |  | 822,199
Commitments and contingencies (Note 10) |  |  |  |  |
Long-term operating lease liabilities |  | 3,134,555 |  |  | 2,952,296
Deferred income tax liabilities |  | 133,510 |  |  | 149,422
Other liabilities |  | 42,745 |  |  | 38,844
Total liabilities |  | 4,146,296 |  |  | 3,962,761
Shareholders' equity: |  |  |  |  |
Preferred stock, $0.01 par value, 600,000 shares authorized, no shares issued as of June 30, 2021 and December 31, 2020, respectively |  | - |  |  | -
Common stock, $0.01 par value, 230,000 shares authorized, 36,988 and 36,704 shares issued as of June 30, 2021 and December 31, 2020, respectively |  | 370 |  |  | 367
Additional paid-in capital |  | 1,654,195 |  |  | 1,549,909
Treasury stock, at cost, 8,890 and 8,703 common shares as of June 30, 2021 and December 31, 2020, respectively |  | (3,067,458) |  |  | (2,802,075)
Accumulated other comprehensive loss |  | (4,187) |  |  | (4,229)
Retained earnings |  | 3,591,238 |  |  | 3,276,163
Total shareholders' equity |  | 2,174,158 |  |  | 2,020,135
Total liabilities and shareholders' equity | $ | 6,320,454 |  | $ | 5,982,896

See accompanying notes to condensed consolidated financial statements.

1

Table of Contents

CHIPOTLE MEXICAN GRILL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(in thousands, except per share data)

(unaudited)

| Three months ended |  | Six months ended
| June 30, |  | June 30,
| 2021 |  | 2020 |  | 2021 |  | 2020
Food and beverage revenue | $ | 1,869,365 |  | $ | 1,350,188 |  | $ | 3,585,355 |  | $ | 2,752,305
Delivery service revenue |  | 23,173 |  |  | 14,550 |  |  | 48,758 |  |  | 23,205
Total revenue |  | 1,892,538 |  |  | 1,364,738 |  |  | 3,634,113 |  |  | 2,775,510
Restaurant operating costs (exclusive of depreciation and amortization shown separately below): |  |  |  |  |  |  |  |  |  |  |
Food, beverage and packaging |  | 574,478 |  |  | 454,756 |  |  | 1,097,149 |  |  | 917,055
Labor |  | 464,506 |  |  | 385,266 |  |  | 898,175 |  |  | 778,831
Occupancy |  | 103,430 |  |  | 95,576 |  |  | 205,199 |  |  | 190,855
Other operating costs |  | 287,242 |  |  | 262,378 |  |  | 581,952 |  |  | 473,140
General and administrative expenses |  | 146,044 |  |  | 102,647 |  |  | 301,147 |  |  | 209,117
Depreciation and amortization |  | 62,082 |  |  | 60,024 |  |  | 125,204 |  |  | 118,398
Pre-opening costs |  | 4,965 |  |  | 3,644 |  |  | 8,386 |  |  | 7,210
Impairment, closure costs, and asset disposals |  | 4,266 |  |  | 5,386 |  |  | 9,934 |  |  | 14,722
Total operating expenses |  | 1,647,013 |  |  | 1,369,677 |  |  | 3,227,146 |  |  | 2,709,328
Income (loss) from operations |  | 245,525 |  |  | (4,939) |  |  | 406,967 |  |  | 66,182
Interest and other income (expense), net |  | 851 |  |  | 623 |  |  | (1,317) |  |  | 3,366
Income (loss) before income taxes |  | 246,376 |  |  | (4,316) |  |  | 405,650 |  |  | 69,548
Benefit/(provision) for income taxes |  | (58,402) |  |  | 12,491 |  |  | (90,575) |  |  | 15,015
Net income | $ | 187,974 |  | $ | 8,175 |  | $ | 315,075 |  | $ | 84,563
Earnings per share: |  |  |  |  |  |  |  |  |  |  |
Basic | $ | 6.68 |  | $ | 0.29 |  | $ | 11.20 |  | $ | 3.04
Diluted | $ | 6.60 |  | $ | 0.29 |  | $ | 11.04 |  | $ | 2.99
Weighted-average common shares outstanding: |  |  |  |  |  |  |  |  |  |  |
Basic |  | 28,134 |  |  | 27,911 |  |  | 28,130 |  |  | 27,851
Diluted |  | 28,501 |  |  | 28,333 |  |  | 28,542 |  |  | 28,328
Other comprehensive income (loss), net of income taxes: |  |  |  |  |  |  |  |  |  |  |
Foreign currency translation adjustments | $ | 305 |  | $ | 1,055 |  | $ | 42 |  | $ | (786)
Comprehensive income | $ | 188,279 |  | $ | 9,230 |  | $ | 315,117 |  | $ | 83,777

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 |  |  |  |  |  |  |  |
| Shares |  | Amount |  | Additional ‎Paid-In ‎Capital |  | Shares |  | Amount |  | Retained ‎Earnings |  | Accumulated Other Comprehensive Income (Loss) |  | Total
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
Balance, December 31, 2020 | 36,704 |  | $ | 367 |  | $ | 1,549,909 |  | 8,703 |  | $ | (2,802,075) |  | $ | 3,276,163 |  | $ | (4,229) |  | $ | 2,020,135
Stock-based compensation | - |  |  | - |  |  | 55,960 |  | - |  |  | - |  |  | - |  |  | - |  |  | 55,960
Stock plan transactions and other | 232 |  |  | 2 |  |  | 632 |  | - |  |  | - |  |  | - |  |  | - |  |  | 634
Acquisition of treasury stock | - |  |  | - |  |  | - |  | 74 |  |  | (106,036) |  |  | - |  |  | - |  |  | (106,036)
Net income | - |  |  | - |  |  | - |  | - |  |  | - |  |  | 127,101 |  |  | - |  |  | 127,101
Other comprehensive income (loss), net of income tax | - |  |  | - |  |  | - |  | - |  |  | - |  |  | - |  |  | (263) |  |  | (263)
Balance, March 31, 2021 | 36,936 |  | $ | 369 |  | $ | 1,606,501 |  | 8,777 |  | $ | (2,908,111) |  | $ | 3,403,264 |  | $ | (4,492) |  | $ | 2,097,531
Stock-based compensation | - |  |  | - |  |  | 47,670 |  | - |  |  | - |  |  | - |  |  | - |  |  | 47,670
Stock plan transactions and other | 52 |  |  | 1 |  |  | 24 |  | - |  |  | - |  |  | - |  |  | - |  |  | 25
Acquisition of treasury stock | - |  |  | - |  |  | - |  | 113 |  |  | (159,347) |  |  | - |  |  | - |  |  | (159,347)
Net income | - |  |  | - |  |  | - |  | - |  |  | - |  |  | 187,974 |  |  | - |  |  | 187,974
Other comprehensive income (loss), net of income tax | - |  |  | - |  |  | - |  | - |  |  | - |  |  | - |  |  | 305 |  |  | 305
Balance, June 30, 2021 | 36,988 |  | $ | 370 |  | $ | 1,654,195 |  | 8,890 |  | $ | (3,067,458) |  | $ | 3,591,238 |  | $ | (4,187) |  | $ | 2,174,158

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,
| 2021 |  | 2020
Operating activities |  |  |  |  |
Net income | $ | 315,075 |  | $ | 84,563
Adjustments to reconcile net income to net cash provided by operating activities: |  |  |  |  |
Depreciation and amortization |  | 125,204 |  |  | 118,398
Amortization of operating lease assets |  | 105,485 |  |  | 88,139
Deferred income tax provision |  | (15,884) |  |  | 55,122
Impairment, closure costs, and asset disposals |  | 8,235 |  |  | 13,747
Provision for credit losses |  | (220) |  |  | 82
Stock-based compensation expense |  | 102,680 |  |  | 40,762
Other |  | 2,467 |  |  | 1,670
Changes in operating assets and liabilities: |  |  |  |  |
Accounts receivable |  | 37,286 |  |  | 22,598
Inventory |  | 1,309 |  |  | 2,029
Prepaid expenses and other current assets |  | (18,186) |  |  | (6,250)
Other assets |  | 117 |  |  | (8,574)
Accounts payable |  | 12,525 |  |  | 40,530
Accrued payroll and benefits |  | 21,068 |  |  | 3,264
Accrued liabilities |  | (20,102) |  |  | (8,120)
Unearned revenue |  | (11,487) |  |  | (4,027)
Income tax payable/receivable |  | (1,851) |  |  | (70,119)
Operating lease liabilities |  | (101,818) |  |  | (69,468)
Other long-term liabilities |  | 955 |  |  | 587
Net cash provided by operating activities |  | 562,858 |  |  | 304,933
Investing activities |  |  |  |  |
Purchases of leasehold improvements, property and equipment |  | (212,123) |  |  | (165,455)
Purchases of investments |  | (190,920) |  |  | (101,104)
Maturities of investments |  | 162,045 |  |  | 198,578
Proceeds from sale of equipment |  | 2,885 |  |  | -
Acquisitions of equity method investments |  | - |  |  | (7,525)
Net cash used in investing activities |  | (238,113) |  |  | (75,506)
Financing activities |  |  |  |  |
Acquisition of treasury stock |  | (203,151) |  |  | (54,401)
Tax withholding on stock-based compensation awards |  | (58,860) |  |  | (47,947)
Other financing activities |  | (2,208) |  |  | (1,855)
Net cash used in financing activities |  | (264,219) |  |  | (104,203)
Effect of exchange rate changes on cash, cash equivalents and restricted cash |  | (216) |  |  | (104)
Net change in cash, cash equivalents, and restricted cash |  | 60,310 |  |  | 125,120
Cash, cash equivalents, and restricted cash at beginning of period |  | 635,836 |  |  | 508,481
Cash, cash equivalents, and restricted cash at end of period | $ | 696,146 |  | $ | 633,601
Supplemental disclosures of cash flow information |  |  |  |  |
Income taxes paid | $ | 108,247 |  | $ | 657
Purchases of leasehold improvements, property, and equipment accrued in accounts payable and accrued liabilities | $ | 50,403 |  | $ | 41,504
Acquisition of treasury stock accrued in accounts payable and accrued liabilities | $ | 3,372 |  | $ | -

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 Policies

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, quesadillas, tacos, and salads, made using fresh, high-quality ingredients. As of June 30, 2021, we operated 2,808 Chipotle restaurants throughout the United States as well as 41 international Chipotle restaurants. We are also an investor in a consolidated entity that owns and operates four 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.

Certain prior-year amounts have been reclassified to conform to the current year presentation.

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, 2020.

2. Recently Issued Accounting Standards

Recently Issued Accounting Standards

In March 2020, the Financial Accounting Standards Board (the “FASB”) issued ASU No. 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” The pronouncement provides temporary optional expedients and exceptions to the current guidance on contract modifications and hedge accounting to ease the financial reporting burden related to the expected market transition from the London Interbank Offered Rate ("LIBOR") and other interbank offered rates to alternative reference rates. The guidance was effective upon issuance and generally can be applied to applicable contract modifications through December 31, 2022. We are currently evaluating the impact of the transition from LIBOR to alternative reference rates but do not expect a significant impact 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, 2021, we adopted ASU 2019-12, “Simplifying the Accounting for Income Taxes (Topic 740)”, which modified certain technical guidelines for accounting for income taxes. The adoption of ASU 2019-12 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, 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 (“gift card breakage rate”). The gift card breakage rate is 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 gift card 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.

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The gift card liability included in unearned revenue on the condensed consolidated balance sheets was as follows:

| June 30, |  | December 31,
| 2021 |  | 2020
Gift card liability | $ | 87,964 |  | $ | 105,413

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,
| 2021 |  | 2020 |  | 2021 |  | 2020
Revenue recognized from gift card liability balance at the beginning of the year | $ | 8,628 |  | $ | 4,064 |  | $ | 39,494 |  | $ | 32,134

Chipotle Rewards

We have a national loyalty program called Chipotle Rewards. Eligible customers who enroll in the program generally earn points for every dollar spent. After accumulating the required number of points, the customer may select a reward. We may also periodically offer promotions, which typically provide the customer with the opportunity to earn bonus points or other rewards. 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. In June 2021, we enhanced Chipotle Rewards and introduced a new redemption feature we call the “Rewards Exchange” that provides loyalty members multiple redemption options. Previously, Chipotle Rewards points were automatically redeemed for a free entrée when the customer obtained the required number of points. The change in the Chipotle Rewards program did not have a material impact on our condensed consolidated financial statements.

We defer revenue associated with the estimated selling price of points or rewards earned by customers as each point or reward is earned, net of points or rewards we do not expect to be redeemed. The estimated selling price of each point or reward earned is based on the estimated value of the product for which the point or reward is expected to be redeemed. Our estimate of points and rewards we expect to be redeemed (“rewards breakage rate”) is based on historical and other company specific data. The change in the Chipotle Rewards program in June 2021 did not materially impact our estimate of the stand-alone selling price or breakage rate of each point. The costs associated with rewards redeemed are primarily included in food, beverage, and packaging expense on our condensed consolidated statements of income and comprehensive income.

We recognize loyalty revenue within food and beverage revenue on the condensed consolidated statements of income and comprehensive 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.

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,
| 2021 |  | 2020 |  | 2021 |  | 2020
Chipotle Rewards liability, beginning balance | $ | 23,925 |  | $ | 13,484 |  | $ | 22,337 |  | $ | 10,584
Revenue deferred |  | 26,509 |  |  | 25,226 |  |  | 52,370 |  |  | 40,443
Revenue recognized |  | (25,382) |  |  | (18,698) |  |  | (49,655) |  |  | (31,015)
Chipotle Rewards liability, ending balance | $ | 25,052 |  | $ | 20,012 |  | $ | 25,052 |  | $ | 20,012

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, restricted cash, accounts receivable and accounts payable approximate fair value because of their short-term nature.

Our investments are comprised of held-to-maturity U.S. Treasury securities, non-marketable equity securities and an equity method investment. We also maintain a deferred compensation plan with related assets held in a rabbi trust.

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Held-to-Maturity Investments

We invest in U.S. Treasury securities with maturities of up to 19 months, with $322,460 maturing within one year from June 30, 2021. The fair value of our held-to-maturity 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.

All held-to-maturity investments are carried at amortized cost. The amortized costs of these investments exceeded the fair value by $140 and $117 as of June 30, 2021 and December 31, 2020, respectively. We recognize a reserve for the expected credit losses when lifetime credit losses are expected by management. As of June 30, 2021, management has concluded there is no risk of non-payment.

Rabbi Trust

We 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 $18,418 and $15,296 as of June 30, 2021 and December 31, 2020, respectively. We record trading gains and losses in general and administrative expenses on the condensed consolidated statements of income and comprehensive 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, investments in non-marketable equity securities, other assets, and goodwill. These assets are measured at fair value whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

The following table summarizes our assets measured at fair value by hierarchy level on a nonrecurring basis:

|  | Carrying Value
|  | June 30,
| Level | 2021 |  | 2020
Leasehold improvements, property and equipment, net | 3 | $ | 893 |  | $ | 2,096
Operating lease assets | 3 |  | 2,839 |  |  | 3,977
Total |  | $ | 3,732 |  | $ | 6,073

Fair value of these assets was measured using Level 3 inputs (unobservable inputs for the asset or liability). Unobservable inputs include the discount rate, projected restaurant revenues and expenses, and sublease income if we are closing the restaurant. During the three months ended June 30, 2021 and 2020 we recorded asset impairments related to restaurants and offices of $519 and $2,380, respectively. During the six months ended June 30, 2021 and 2020 we recorded asset impairments related to restaurants and offices of $3,228 and $10,029, respectively. Carrying value after the impairment charges approximates fair value.

Non-Marketable Equity Securities

On March 23, 2021, we acquired 766 shares of the Series C Preferred Stock of Nuro, Inc. (“Nuro”) in exchange for cash consideration of $10,000. Our investment represents a minority interest and we have determined that we do not have significant influence over Nuro. Nuro is a privately held company, and as such, the preferred shares comprising our investment are illiquid and their fair value is not readily determinable. We have elected to measure our investment in the non-marketable equity securities of Nuro at cost, less impairments, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer.

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. On August 6, 2020, we acquired an additional 3.2% of the common stock of the same supplier in exchange for cash consideration of $2,500. As of June 30, 2021, we own approximately 12.7% of the supplier’s common stock and have invested total cash consideration of $10,000. 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, 2021, with a carrying value of $9,109. The investment would be impaired if the carrying value exceeds the fair value of the investment.

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5. Shareholders’ Equity

We have had a stock repurchase program in place since 2008. As of June 30, 2021, we had $208,498 authorized for repurchasing shares of our common stock, which includes the $200,000 additional authorization approved by our Board of Directors and announced on July 20, 2021. Shares we repurchased are being held in treasury stock until they are reissued or retired at the discretion of our Board of Directors.

During the six months ended June 30, 2021, 40 shares of common stock at a total cost of $58,860 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, 2021, we granted stock only stock appreciation rights (“SOSARs”) on 74 shares of our common stock to eligible employees. The weighted-average grant date fair value of the SOSARs was $393.61 per share with a weighted-average exercise price of $1,479.31 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, 2021, 291 SOSARs were exercised, and 8 SOSARs were forfeited.

For the six months ended June 30, 2021, we granted restricted stock units (“RSUs”) on 24 shares of our common stock to eligible employees. The weighted-average grant date fair value of the RSUs was $1,472.07 per share. The RSUs generally vest in two equal installments on the second and third anniversary of the grant date. For the six months ended June 30, 2021, 44 RSUs vested and 5 RSUs were forfeited.

For the six months ended June 30, 2021, we awarded performance share units (“PSUs”) on 18 shares of our common stock at target performance to eligible employees. These PSUs are subject to service, market and performance vesting conditions. The weighted-average grant date fair value of the PSUs was $1,479.55 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.

On December 30, 2020, due to the impact that the novel coronavirus (COVID-19) pandemic had on the growth in comparable restaurant sales and restaurant margin relative to the trajectory of both of these performance factors prior to the pandemic, and also due to the significant shareholder value created over the three-year performance period of the original award, the Compensation Committee of our Board of Directors modified the 2018 PSU award. This modification pertained to all seven recipients of this award, and resulted in an incremental compensation expense of $71,441, of which $47,827 was recognized during the six months ended June 30, 2021, and $23,148 remains unamortized as of June 30, 2021. Based on the terms of the modification, 29 PSUs vested on March 15, 2021, pursuant to the original performance condition of the 2018 PSU award. To receive all incremental shares generated through the modification, the recipients of this award must remain employed through December 31, 2022, and the incremental shares will vest in four installments over this period. The first of the four installments vested on June 30, 2021, which included the vesting of 17 PSUs. The remaining expense will be recognized over this requisite service period. For the six months ended June 30, 2021, no other PSUs vested, and no PSUs were forfeited.

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

| Three months ended |  | Six months ended
| June 30, |  | June 30,
| 2021 |  | 2020 |  | 2021 |  | 2020
Stock-based compensation | $ | 47,670 |  | $ | 23,676 |  | $ | 103,630 |  | $ | 41,384
Stock-based compensation, net of income taxes | $ | 42,722 |  | $ | 20,007 |  | $ | 93,187 |  | $ | 34,512
Total capitalized stock-based compensation included in leasehold improvements, property and equipment, net on the condensed consolidated balance sheets | $ | 380 |  | $ | 309 |  | $ | 950 |  | $ | 622
Excess tax benefit on stock-based compensation recognized in benefit/(provision) for income taxes on the condensed consolidated statements of income and comprehensive income | $ | 9,421 |  | $ | 15,708 |  | $ | 24,446 |  | $ | 39,339

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7. Income Taxes

The effective tax rate for the three months ended June 30, 2021, was a provision of 23.7%, a change from a benefit of 289.4% for the three months ended June 30, 2020. The change is primarily due to the proportionality of the excess tax benefits from option exercises and equity vesting relative to profit or loss before tax in each respective quarter.

The effective income tax rate for the six months ended June 30, 2021, was a provision of 22.3%, a change from a benefit of 21.6% for the six months ended June 30, 2020. The change is primarily due to increased profit before tax and fewer excess tax benefits related to option exercises and equity vesting in the six months ended June 30, 2021 compared to the six months ended June 30, 2020.

On March 11, 2021, President Biden signed the American Rescue Plan Act (“ARPA”). The ARPA includes several provisions, such as measures that extend and expand the employee retention credit, previously enacted under the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), through December 31, 2021. For the quarter ended June 30, 2021, we did no t record a tax benefit related to the employee retention credit. We are still evaluating the ARPA and we do not expect that it will have a material impact on our condensed consolidated financial statements.

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.

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

| Three months ended |  | Six months ended
| June 30, |  | June 30,
| 2021 |  | 2020 |  | 2021 |  | 2020
Cash paid for operating lease liabilities | $ | 89,134 |  | $ | 66,595 |  | $ | 177,942 |  | $ | 144,484
Operating lease assets obtained in exchange for operating lease liabilities | $ | 150,561 |  | $ | 102,113 |  | $ | 294,663 |  | $ | 239,079
Derecognition of operating lease assets due to terminations or impairment | $ | 432 |  | $ | 12,410 |  | $ | 1,979 |  | $ | 14,417

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. In 2020, we received non-substantial concessions from certain landlords in the form of rent deferrals and abatements related to the COVID-19 pandemic. 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, 2021.

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,
| 2021 |  | 2020 |  | 2021 |  | 2020
Net income | $ | 187,974 |  | $ | 8,175 |  | $ | 315,075 |  | $ | 84,563
Shares: |  |  |  |  |  |  |  |  |  |  |
Weighted-average number of common shares outstanding (for basic calculation) |  | 28,134 |  |  | 27,911 |  |  | 28,130 |  |  | 27,851
Dilutive stock awards |  | 367 |  |  | 422 |  |  | 412 |  |  | 477
Weighted-average number of common shares outstanding (for diluted calculation) |  | 28,501 |  |  | 28,333 |  |  | 28,542 |  |  | 28,328
Basic earnings per share | $ | 6.68 |  | $ | 0.29 |  | $ | 11.20 |  | $ | 3.04
Diluted earnings per share | $ | 6.60 |  | $ | 0.29 |  | $ | 11.04 |  | $ | 2.99

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

| Three months ended |  | Six months ended
| June 30, |  | June 30,
| 2021 |  | 2020 |  | 2021 |  | 2020
Stock awards subject to performance conditions |  | 76 |  |  | 100 |  |  | 73 |  |  | 95
Stock awards that were antidilutive |  | 76 |  |  | 117 |  |  | 62 |  |  | 110
Total stock awards excluded from diluted earnings per share |  | 152 |  |  | 217 |  |  | 135 |  |  | 205

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

New York Legal Proceedings

On September 10, 2019, the New York City Department of Consumer and Worker Protection (“DCWP”) filed a complaint in the City of New York Office of Administrative Trials and Hearings alleging violations at five Chipotle restaurants of New York City’s Fair Work Week law (“FWW”) and Earned Safe and Sick Time Act (“ESTA”) between November 2017 and September 2019. On April 28, 2021, DCWP amended the complaint to cover purported violations of FWW and ESTA at substantially all Chipotle restaurants in New York City, through the date the amended complaint was filed. Chipotle and the DCWP have engaged in mediation proceedings, which are ongoing. In the event the parties are not able to resolve the matter, Chipotle intends to vigorously defend against the allegations, and it is not possible at this time to reasonably estimate the outcome of or any potential liability from this matter.

Other

We are involved in various claims and legal actions, such as wage and hour, wrongful termination and other employment-related claims, slip and fall and other personal injury claims, advertising and consumer claims, and lease and other commercial disputes, that arise in the ordinary course of business, some of which may be covered by insurance. The outcomes of these actions are not predictable, but 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, if there is a significant increase in the number of these claims, or if we incur greater liabilities than we currently anticipate under one or more claims, it could materially and adversely affect our business, financial condition, results of operations and cash flows.

Accrual for Estimated Liability

As of June 30, 2021, we had an accrued legal liability balance of $29,517 included within accrued liabilities on the condensed consolidated balance sheet.

11. Debt

On May 8, 2020, we entered into a $600,000 revolving credit facility with JPMorgan Chase Bank (“JPMorgan”) as administrative agent. On April 13, 2021 we terminated this facility, which we did not borrow on at any time over the period of which it was active.

Concurrently, on April 13, 2021, we entered into a new 5-year $500,000 revolving credit facility, with JPMorgan as administrative agent. Borrowings on the new credit facility bear interest at a rate equal to LIBOR plus 1.375%, which is subject to increase due to changes in our total leverage ratio as defined in the credit agreement. We are also obligated to pay a commitment fee of 0.175% per year for unused amounts under the credit facility, which also may increase due to changes in our total leverage ratio. Further, we are subject to certain covenants defined in the credit agreement, which include maintaining a total leverage ratio of less than 3.0 x, maintaining a consolidated fixed charge coverage ratio of greater than 1.5 x, and limiting us from incurring additional indebtedness in certain circumstances. We had no outstanding borrowings under the credit facility as of June 30, 2021.

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12. Related Party Transactions

As of June 30, 2021, we owned approximately 12.7% of the common stock outstanding of a supplier. As we are a significant customer of the supplier and maintain board representation, we are accounting for our investment under the equity method. Accordingly, we have identified the supplier as a related party. We purchase product from the supplier for sale to customers in our restaurants. During the three and six months ended June 30, 2021, purchases from the supplier were $7,401 and $13,143 respectively.

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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, supply chain or liquidity, the potential impact of actions we have taken to mitigate the impact of COVID-19, the expected benefit of the CARES Act or the ARPA on our taxes and tax rate, the number of new restaurants we expect to open this year, our expectation to generate positive cash flow for the foreseeable future, our plans for continuing stock buybacks 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,” “remain confident” 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, 2020, this Quarterly Report on Form 10-Q and in other reports filed subsequently with the SEC.

Overview of the Impact of COVID-19

The COVID-19 pandemic has adversely affected, and may continue to adversely affect, our operations and financial results for the foreseeable future. We continue to follow guidance from health officials in determining the appropriate restrictions to put in place for each restaurant. Our restaurant operations have been and could continue to be disrupted by employees who are unable or unwilling to work, because of illness, quarantine, fear of contracting COVID-19 or caring for family members due to COVID-19, or for other reasons. 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.

For a further discussion of the impacts that COVID-19 has had on our financial results, refer to “Results of Operations” below.

Second Quarter 2021 Financial Highlights, year-over-year:

Total revenue increased 38.7% to $1.9 billion

Comparable restaurant sales increased 31.2%

Diluted earnings per share was $6.60, which included an $0.86 after-tax impact from expenses related to the 2018 PSU modification related to COVID-19, restaurant asset impairment and closure costs, certain legal expenses, as well as other costs

Sales Trends. Comparable restaurant sales increased 31.2% for the three months ended June 30, 2021, which included a 27.4% increase in transactions. We believe lapping the peak of the pandemic from last year, on-going strength in digital sales, the strong recovery of in-restaurant sales, as well as positive guest reception for our quesadillas contributed to second quarter growth.

Digital sales grew 10.5% to $916.5 million for the three months ended June 30, 2021, as compared to the three months ended June 30, 2020 and represented 48.5% of sales. Just over half of the digital sales were from order ahead transactions.

Loyalty. In June 2021 we enhanced the Chipotle Rewards program and introduced a new Rewards Exchange. This feature gives multiple redemption options and provides members with greater flexibility to redeem rewards and allows them to earn rewards faster. Members will continue to earn points for every dollar of eligible spend, and we will continue to defer revenue associated with the estimated selling price of points earned, net of points we do not expect to be redeemed.

Wage Increases. In May 2021 we announced that we are increasing restaurant wages resulting in a $15.00 average hourly wage as we look to continue to provide industry-leading benefits and accelerated growth opportunities for our restaurant employees. This wage increase was implemented across all restaurants by June 30, 2021.

Restaurant Operating Costs. Our restaurant operating costs (food, beverage and packaging; labor; occupancy; and other operating costs) as a percentage of total revenue decreased 1,230 basis points to 75.5% for the three months ended June 30, 2021, as compared to 87.8% for the three months ended June 30, 2020. The improvement was driven primarily by leverage from the comparable restaurant sales including menu price increases, and to a lesser extent lower promotional activity and beef prices. The decreases are partially offset by higher costs associated with new menu items, wage inflation for one month of the second quarter, and avocados.

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Restaurant Development. We opened 56 new restaurants including one relocation, and closed five restaurants during the three months ended June 30, 2021. Of the 56 new restaurants, 45 included Chipotlanes. 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 North America. We believe our strong financial position will allow us to build a robust new unit development pipeline.

Restaurant Activity

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

| Three months ended |  | Six months ended
| June 30, |  | June 30,
| 2021 |  | 2020 |  | 2021 |  | 2020
Beginning of period | 2,803 |  | 2,638 |  | 2,768 |  | 2,622
Chipotle openings | 56 |  | 37 |  | 96 |  | 56
Chipotle permanent closures | (5) |  | (3) |  | (10) |  | (5)
Chipotle relocations | (1) |  | (3) |  | (1) |  | (4)
Total restaurants at end of period | 2,853 |  | 2,669 |  | 2,853 |  | 2,669

Results of Operations

Our results of operations as a percentage of total 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
| 2021 |  | 2020 |  | change |  | 2021 |  | 2020 |  | change
| (dollars in millions) |  |  |  | (dollars in millions) |  |
Food and beverage revenue | $ | 1,869.4 |  | $ | 1,350.2 |  | 38.5% |  | $ | 3,585.4 |  | $ | 2,752.3 |  | 30.3%
Delivery service revenue |  | 23.2 |  |  | 14.6 |  | 59.3% |  |  | 48.8 |  |  | 23.2 |  | 110.1%
Total revenue | $ | 1,892.5 |  | $ | 1,364.7 |  | 38.7% |  | $ | 3,634.1 |  | $ | 2,775.5 |  | 30.9%
Average restaurant sales (1) | $ | 2.5 |  | $ | 2.2 |  | 14.3% |  | $ | 2.5 |  | $ | 2.2 |  | 14.3%
Comparable restaurant sales increase |  | 31.2% |  |  | (9.8%) |  |  |  |  | 24.1% |  |  | (3.5%) |  |
(1) Average restaurant sales refer to the average trailing 12-month food and beverage sales for restaurants in operation for at least 12 full calendar months.

The significant factors contributing to the total revenue increase for the three months ended June 30, 2021 compared to the three months ended June 30, 2020, were comparable restaurant sales increases of $420.1 million, and to a lesser extent, increases in total revenue from restaurants not yet in the comparable base of $107.6 million, of which $33.3 million was attributable to restaurants opened in 2021.

The significant factors contributing to the total revenue increase for the six months ended June 30, 2021 compared to the six months ended June 30, 2020, were comparable restaurant sales increases of $654.5 million, and to a lesser extent, increases in total revenue from restaurants not yet in the comparable base of $203.7 million, of which $41.9 million was attributable to restaurants opened in 2021.

Food, Beverage and Packaging Costs

| Three months ended |  |  |  | Six months ended |  |
| June 30, |  | Percentage |  | June 30, |  | Percentage
| 2021 |  | 2020 |  | change |  | 2021 |  | 2020 |  | change
| (dollars in millions) |  |  |  | (dollars in millions) |  |
Food, beverage and packaging | $ | 574.5 |  | $ | 454.8 |  | 26.3% |  | $ | 1,097.1 |  | $ | 917.1 |  | 19.6%
As a percentage of total revenue |  | 30.4% |  |  | 33.3% |  | (2.9%) |  |  | 30.2% |  |  | 33.0% |  | (2.8%)

Food, beverage and packaging costs decreased as a percentage of total revenue for the three months ended June 30, 2021 compared to the three months ended June 30, 2020, primarily due to the benefit of menu price increases, and to a lesser extent, lower beef prices. These decreases were partially offset by higher costs associated with new menu items, like quesadillas, and, to a lesser extent, avocado costs.

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Food, beverage and packaging costs decreased as a percentage of total revenue for the six months ended June 30, 2021 compared to the six months ended June 30, 2020, primarily due to the benefit of menu price increases, and to a lesser extent, lower beef prices. This decrease was partially offset by higher costs associated with cauliflower rice and fewer sales of high margin beverages.

COVID-19 had an immaterial direct impact on food, beverage and packaging costs for the three and six months ended June 30, 2021.

Labor Costs

| Three months ended |  |  |  | Six months ended |  |
| June 30, |  | Percentage |  | June 30, |  | Percentage
| 2021 |  | 2020 |  | change |  | 2021 |  | 2020 |  | change
| (dollars in millions) |  |  |  | (dollars in millions) |  |
Labor costs | $ | 464.5 |  | $ | 385.3 |  | 20.6% |  | $ | 898.2 |  | $ | 778.8 |  | 15.3%
As a percentage of total revenue |  | 24.5% |  |  | 28.2% |  | (3.7%) |  |  | 24.7% |  |  | 28.1% |  | (3.4%)

Labor costs decreased as a percentage of total revenue for the three and six months ended June 30, 2021 compared to the three and six months ended June 30, 2020, primarily due to sales leverage. This decrease was partially offset by restaurant wage increases implemented in June 2021 and to a lesser extent higher bonus expense.

COVID-19 increased labor costs as a percentage of total revenue for the three and six months ended June 30, 2021, by 0.2% and 0.3%, respectively. This was due to our emergency leave benefits to accommodate employees directly affected by COVID-19.

Occupancy Costs

| Three months ended |  |  |  | Six months ended |  |
| June 30, |  | Percentage |  | June 30, |  | Percentage
| 2021 |  | 2020 |  | change |  | 2021 |  | 2020 |  | change
| (dollars in millions) |  |  |  | (dollars in millions) |  |
Occupancy costs | $ | 103.4 |  | $ | 95.6 |  | 8.2% |  | $ | 205.2 |  | $ | 190.9 |  | 7.5%
As a percentage of total revenue |  | 5.5% |  |  | 7.0% |  | (1.5%) |  |  | 5.6% |  |  | 6.9% |  | (1.3%)

Occupancy costs decreased as a percentage of total revenue for the three and six months ended June 30, 2021 compared to the three and six months ended June 30, 2020, primarily due to sales leverage, partially offset by increased rent expense associated with new restaurants.

COVID-19 had an immaterial impact on occupancy costs for the three and six months ended June 30, 2021.

Other Operating Costs

| Three months ended |  |  |  | Six months ended |  |
| June 30, |  | Percentage |  | June 30, |  | Percentage
| 2021 |  | 2020 |  | change |  | 2021 |  | 2020 |  | change
| (dollars in millions) |  |  |  | (dollars in millions) |  |
Other operating costs | $ | 287.2 |  | $ | 262.4 |  | 9.5% |  | $ | 582.0 |  | $ | 473.1 |  | 23.0%
As a percentage of total revenue |  | 15.2% |  |  | 19.2% |  | (4.0%) |  |  | 16.0% |  |  | 17.0% |  | (1.0%)

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 decreased as a percentage of total revenue for the three months ended June 30, 2021 compared to the three months ended June 30, 2020, primarily due to sales leverage and lower delivery expenses primarily due to free delivery campaigns last year.

Other operating costs decreased as a percentage of total revenue for the six months ended June 30, 2021 compared to the six months ended June 30, 2020, primarily due to sales leverage and lower promotions due to free delivery campaigns last year. The decrease in other operating costs was partially offset by higher delivery expenses associated with increased delivery sales.

As a result of COVID-19, sales shifted towards delivery after we temporarily closed our dining rooms in response to COVID-19 and delivery sales have remained elevated from pre-pandemic levels. We are also continuing to limit non-essential controllable costs.

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General and Administrative Expenses

| Three months ended |  |  |  | Six months ended |  |
| June 30, |  | Percentage |  | June 30, |  | Percentage
| 2021 |  | 2020 |  | change |  | 2021 |  | 2020 |  | change
| (dollars in millions) |  |  |  | (dollars in millions) |  |
General and administrative expense | $ | 146.0 |  | $ | 102.6 |  | 42.3% |  | $ | 301.1 |  | $ | 209.1 |  | 44.0%
As a percentage of total revenue |  | 7.7% |  |  | 7.5% |  | 0.2% |  |  | 8.3% |  |  | 7.5% |  | 0.8%

General and administrative expense increased in dollar terms for the three months ended June 30, 2021 compared to the three months ended June 30, 2020, primarily due to a $22.8 million increase in stock-based compensation, primarily attributable to the modification of 2018 PSUs related to COVID-19, a $9.3 million increase in outside services expense related to initiatives to support our digital and restaurant growth, a $4.8 million increase in performance bonuses and a $4.1 increase in wages primarily due to headcount growth.

General and administrative expense increased in dollar terms for the six months ended June 30, 2021 compared to the six months ended June 30, 2020, primarily due to a $59.7 million increase in stock based compensation, of which $47.8 million relates to the modification of 2018 PSUs to account for the unplanned effects of COVID-19, a $16.7 million increase in outside services expense related to initiatives to support our digital and restaurant growth, a $8.9 million increase in performance bonuses and a $4.1 increase in wages primarily due to headcount growth.

Other than the impact on stock-based compensation discussed above, COVID-19 had an immaterial impact on general and administrative expenses for the three and six months ended June 30, 2021.

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Depreciation and Amortization

| Three months ended |  |  |  | Six months ended |  |
| June 30, |  | Percentage |  | June 30, |  | Percentage
| 2021 |  | 2020 |  | change |  | 2021 |  | 2020 |  | change
| (dollars in millions) |  |  |  | (dollars in millions) |  |
Depreciation and amortization | $ | 62.1 |  | $ | 60.0 |  | 3.4% |  | $ | 125.2 |  | $ | 118.4 |  | 5.7%
As a percentage of total revenue |  | 3.3% |  |  | 4.4% |  | (1.1%) |  |  | 3.4% |  |  | 4.3% |  | (0.9%)

Depreciation and amortization decreased as a percentage of total revenue for the three and six months ended June 30, 2021 compared to the three and six months ended June 30, 2020, primarily due to the benefit of sales leverage.

COVID-19 had an immaterial impact on depreciation and amortization for the three and six months ended June 30, 2021.

Impairment, Closure Costs, and Asset Disposals

| Three months ended |  |  |  | Six months ended |  |
| June 30, |  | Percentage |  | June 30, |  | Percentage
| 2021 |  | 2020 |  | change |  | 2021 |  | 2020 |  | change
| (dollars in millions) |  |  |  | (dollars in millions) |  |
Impairment, closure costs, and asset disposals | $ | 4.3 |  | $ | 5.4 |  | (20.8%) |  | $ | 9.9 |  | $ | 14.7 |  | (32.5%)
As a percentage of total revenue |  | 0.2% |  |  | 0.4% |  | (0.2%) |  |  | 0.3% |  |  | 0.5% |  | (0.2%)

Impairment, closure costs, and asset disposals decreased in dollar terms for the three months ended June 30, 2021 compared to the three months ended June 30, 2020, primarily due to a comparison against elevated impairments of operating lease assets and leasehold improvements in 2020. These elevated impairments in 2020 were primarily the result of the COVID-19 pandemic negatively impacting our near-term restaurant level cash flow forecasts. The decrease in impairment, closure costs, and assets disposals is partially offset by asset impairment charges for restaurant equipment, and certain corporate equipment.

Impairment, closure costs, and asset disposals decreased in dollar terms for the six months ended June 30, 2021 compared to the six months ended June 30, 2020, primarily due to a comparison against elevated impairments of leasehold improvements and operating lease assets in 2020. These elevated impairments in 2020 were primarily the result of the COVID-19 pandemic negatively impacting our near-term restaurant level cash flow forecasts.

While the majority of our restaurants and markets have returned to pre-pandemic restaurant level cash flow levels, COVID-19 continues to have a negative impact on our assumptions for future near-term restaurant level cash flows for certain markets or restaurants.

Benefit/(Provision) for Income Taxes

| Three months ended |  |  |  | Six months ended |  |
| June 30, |  | Percentage |  | June 30, |  | Percentage
| 2021 |  | 2020 |  | change |  | 2021 |  | 2020 |  | change
| (dollars in millions) |  |  |  | (dollars in millions) |  |
Benefit/(provision) for income taxes | $ | (58.4) |  | $ | 12.5 |  | (567.6%) |  | $ | (90.6) |  | $ | 15.0 |  | (703.2%)
Effective tax rate |  | 23.7% |  |  | 289.4% |  | n/m* |  |  | 22.3% |  |  | (21.6%) |  | n/m*
*Not meaningful |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

The effective income tax rate changed from a benefit of 289.4% for the three months ended June 30, 2020, to a provision of 23.7% for the three months ended June 30, 2021. The change is primarily due to the proportionality of the excess tax benefits from option exercises and equity vesting relative to the profit or loss before tax in each respective quarter.

The effective income tax rate changed from a benefit of 21.6% for the six months ended June 30, 2020, to a provision of 22.3% for the six months ended June 30, 2021. The increase is primarily due to increased profit before tax and fewer excess tax benefits related to option exercise and equity vesting in the six months ended June 30, 2021 compared to the six months ended June 30, 2020.

COVID-19, the CARES Act and the ARPA did not have a material impact on our tax rate for the three or six months ended June 30, 2021.

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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

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, 2021, we had a cash and marketable investments balance of $1.1 billion, excluding restricted cash of $27.9 million. We expect to utilize cash flow from operations to provide capital for the continued investment in new restaurant construction and to remodel restaurants, primarily those that do not have a digital kitchen or Chipotlane, to repurchase additional shares of our common stock subject to market conditions, and for general corporate purposes. As of June 30, 2021, $208.5 million remained available for repurchases of shares of our common stock under previously announced repurchase authorizations. Under the remaining repurchase authorizations, shares may be purchased from time to time in open market transactions, subject to market conditions. Additionally, as of June 30, 2021, we had $500.0 million of undrawn borrowing capacity under 5-year revolving credit facility.

In our restaurants, we are working to minimize waste and effectively schedule labor hours. 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 no significant declines in comparable restaurant sales, we expect we will generate positive cash flow for the foreseeable future. Should our business deteriorate due to changing conditions, there are other actions we can take to further conserve liquidity.

We have not required significant working capital because customers generally pay using cash or credit and debit cards 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, 2021, and December 31, 2020, 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, 2020.

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

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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 some 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, 2021, we had $1.1 billion in interest-bearing cash accounts, including insurance-related restricted trust accounts classified in restricted cash, and U.S. treasury securities. We had $67.2 million in accounts with an earnings credit we classify as interest and other income. Combined these earned a weighted-average interest rate of 0.09%.

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.

Evaluation of Disclosure Controls and Procedures

As of June 30, 2021, 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.

Changes in Internal Control over Financial Reporting

There were no changes during the fiscal quarter ended June 30, 2021, 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” in our condensed consolidated financial statements included in Item 1. “Financial Statements.”

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ITEM 1A. RISK FACTORS

The risk factor below updates the risk factors contained in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2020.

Our Bylaws contain exclusive forum provisions that may increase the costs for our shareholders to initiate certain types of legal disputes, discourage our shareholders from initiating such disputes, or limit our shareholders’ ability to obtain a favorable judicial forum for such disputes.

Our Amended and Restated Bylaws (the “Bylaws”) provide that, unless we consent in writing to an alternative forum, the sole and exclusive forum for certain legal actions specified in the Bylaws is the Court of Chancery of the State of Delaware (or another state or federal court located within the State of Delaware, if the Court of Chancery does not have subject matter jurisdiction) (collectively, “Delaware Courts”). These Bylaws provisions may limit a shareholder’s ability to initiate a dispute with us or our directors, officers or other employees in a judicial forum of their choosing, which may discourage these types of legal actions, and may increase the costs for the shareholder plaintiff, particularly if they do not reside in or near Delaware. The Delaware Courts may reach different results than would other courts, including courts where a shareholder would otherwise choose to initiate the legal action, and such results may be more favorable to us than to our shareholders. Our Bylaws also provide that, unless we consent to an alternative forum, the federal district courts of the United States of America shall be the sole and exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act of 1933, as amended. This provision does not relieve us of our obligation to comply with the federal securities laws and the rules and regulations thereunder, and our shareholders will not be deemed to have waived our compliance with these laws, rules and regulations; however this provision may discourage these types of legal actions.

A court might determine that these Bylaws provisions are inapplicable or unenforceable in any particular legal action, in which case we may incur additional litigation-related expenses in such legal action, and the legal action may result in outcomes unfavorable to us, which could have a material adverse impact on our reputation, business operations and financial results.

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

Purchases of Equity Securities by the Issuer

The table below reflects shares of common stock we repurchased during the second quarter of 2021.

|  |  | Total Number of Shares Purchased |  | Average Price Paid Per Share |  | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(1) |  | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs(2)
April |  |  | 25,876 |  | $ | 1,496.89 |  | 25,876 |  | $ | 115,058,860
| Purchased 4/1 through 4/30 |  |  |  |  |  |  |  |  |  |
May |  |  | 39,109 |  | $ | 1,367.64 |  | 39,109 |  | $ | 261,571,846
| Purchased 5/1 through 5/31 |  |  |  |  |  |  |  |  |  |
June |  |  | 38,208 |  | $ | 1,389.08 |  | 38,208 |  | $ | 208,497,826
| Purchased 6/1 through 6/30 |  |  |  |  |  |  |  |  |  |
Total |  |  | 103,193 |  | $ | 1,407.99 |  | 103,193 |  |  |

(1) Shares were repurchased pursuant to repurchase programs announced on February 4, 2020 and April 21, 2021.

(2) This column includes an additional $200 million in authorized repurchases approved on May 17, 2021 and announced July 20, 2021. There is no expiration date for this program, and the authorization to repurchase shares will end when we have repurchased the maximum amount of shares authorized, or our Board of Directors have determined to discontinue such repurchases.

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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
10.1† | Director Compensation Program and Stock Ownership Guidelines (revised May 18, 2021) | - | - | - | - | X
10.2† | Form of 2021 Director Restricted Stock Unit Agreement | - | - | - | - | X
31.1 | Certification of Chief Executive Officer 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

|  |  | †- Management contracts and compensatory plans or arrangements required to be filed as exhibits.

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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 23, 2021

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