In early 2019, the executive leadership of Chipotle Mexican Grill, Inc. (Chipotle), gathered to discuss the company's 2018 performance and align the company's capital structure policy and its growth aspirations going forward. Over the previous year, the company had enjoyed a lot of success. Its same-store sales had increased 6.1%, fueled by a 2% rise in traffic, and margins that had risen to nearly 19%, reaching gourmet restaurant levels.
Chipotle's mission to deliver "Food with Integrity" resonated with its customers—primarily millennials, they valued quality over price and were constantly on the go with limited time to spare for eating. The company capitalized on healthy eating trends. Its recipes relied on just 53 ingredients that people could both recognize and pronounce and did not include any artificial colors or flavors. Chipotle successfully marketed its brand by utilizing digital channels and social media alongside traditional television events and sponsorships.
Yet in the long term, the company still underperformed. Chipotle stock was $431 per share—less than half of the $757 per share it had reached in August 2015. The company's roughly 7% margin was a far cry from its historical 18% levels. Only 83 new locations had opened in 2018, considerably fewer than the historical average of around 200 per year. Despite all the accomplishments over the last 12 months, the executive team continued to face pressure to increase the value Chipotle delivered to company shareholders.
Year after year, Chipotle distributed earnings to shareholders by implementing stock repurchases. Should it consider orchestrating a larger stock repurchase funded by debt? Since going public in 2006, Chipotle had kept a clean balance sheet, never taking on any debt. The executive team contemplated the benefits of levering up Chipotle to fuel the shareholder returns. How far should the company go in levering up? How quickly? What risks would Chipotle be exposed to? Would the leverage decision affect its treasured operations?