奇波雷墨西哥燒烤 (CMG) 2006 Q1 法說會逐字稿

Thank you for holding, and welcome to Chipotle Mexican Grill First Quarter 2006 Earnings Conference Call. Today's call is being recorded.

And, I'd like to turn things now over to Chris Arnold. Chris?

Hello everyone, and welcome to our call today. By now, everyone should have access to our earnings announcement released this afternoon for the first quarter ended March 31st, 2006. It can also be found on our website at www.chipotle.com in the Investor Relations section.

Before we begin our presentation, I need to remind everyone that parts of our discussion today will include forward-looking statements within the meaning of the securities laws. These forward-looking statements will include projections of the number of restaurants we intend to open, pre-opening expenses, comparable restaurant sales trends, earning per share growth and other statements of our expectations and plans. These forward-looking statements are based on information available to us today, and we are not assuming any obligation to update any forward-looking statements.

Forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties that could our actual results to differ materially from the forward-looking statements. We refer you to our annual report on Form 10-K for 2005 as updated by the 10-Q we expect to file this week for a discussion of the risks that could impact our future operating results and financial conditions.

On the call with me today is Steve Ells, our Founder, Chairman and CEO. Steve is going to provide some introductory remarks. Monty Moran, our President and Chief Operating Officer, will offer additional comments about our operations and Jack Hartung, Chief Financial and Development Officer will walk you through our financials, development and some general thoughts for the full year of 2006. And then, we'll open it up for questions.

That said, I'd like to turn the call over to Steve Ells.

Thank you very much Chris, and thank you all for listening today. Obviously, I am very pleased with our first quarter results, which exceeded our plan by virtually every measure. And, I want to give special credit for these results to our managers and crews across the country who continue to provide and extraordinary restaurant experience to our customers every day.

Looking back on this first quarter, there is still much to be excited about. And, my excitement goes well beyond our financial results. For one thing, I was concerned that our management team might be distracted by the requirements of being a public company and that we might lose focus. But, that has not happened. To the contrary, I feel more confident than ever that we are focused on the right things, the things that will bring success to Chipotle as it grows. And because I believe this focus is the cornerstone of our success, I would like to talk about how it affects the general direction of our business. After that, Monty and Jack will add some texture describing how this intensified focus is driving improvements to our people, our operations and our financial results.

Our work on the quality and sustainability of our raw ingredients, what we call Food with Integrity, continues to be an important focus for Chipotle and is a key element of our company's culture. This mission is important to us for a number of reasons. We think that food raised this way tastes better. We also believe it's better for our customers, for the environment, the animals and the people who raise the animals or grow the produce. We do this because we think it's the right thing to do for our customers, and we are convinced that it will be broadly embraced by consumers.

Our menu is another example of where our focus affects what we do, and we keep it very simple, essentially unchanged for 13 years. We don't do this because we can't think of anything else to serve. Instead, we do it because we believe the simplicity and focus of our menu allows us to do what we do better than anybody else. And, it allows us to continue to improve more effectively as we are not always chasing a moving target. We are confident that our customers appreciate this attention to detail in striving for perfection. So, where competitors try to increase same store sales by adding new menu items, we try to increase sales by constantly improving the taste and quality of the food that we're already serving. And instead of the new menu items, we encourage our customers to customize their orders in exactly the way they want.

We are bringing this same focus into all parts of the company, and I think that this is a key reason for our improving results. For instance, we have a renewed commitment to our people through our focus on internal promotions and creating better opportunities for our managers. We are focusing on better restaurant designs through the use of sustainable building materials and more efficient layouts, which increase the durability of the structures, and it creates a better work environment for our crews.

Certainly there are customers that frequent Chipotle who appreciate our food even though they don't notice some of these efforts. And there are others who do. But over time, we strongly believe that by continuing to surpass the expectations and experiences of our customers, Chipotle will remain a relevant and exciting experience for all of our customers. Ultimately, we think that we will continue to change the way Americans think about and eat fast food. Overall, our focus is on innovation through constant improvement, and Food with Integrity is one of the key ways that we are continuing to improve our food. We are very excited about this. I've often said that Food with Integrity is a journey, not a destination. That is, we believe we never will be finished, but rather will continually investigate how we can improve the quality of our offerings.

In 2005, we made great progress by dramatically increasing the amount of naturally raised meat served in our restaurants. Specifically, despite adding 80 restaurants, we continue to serve 100% naturally raised pork, and at the same time, we nearly tripled the amount of naturally raised chicken and beef served in our restaurants and we are making progress toward our goal of serving 100% naturally raised meats. We have also made improvements to our produce. And we continue to make progress to increase the contents of recycled material in our packaging. As always, we still have work to do. We're looking to add new sources of naturally raised meat and exploring similar alternatives for all of the ingredients we use. We will keep you informed as we make more progress on this initiative and in all areas of our business. And, we believe these efforts will continue to drive our performance in the years to come.

When I opened Chipotle near the University of Denver about 13 years ago, I was very excited by the enthusiasm of the early customers who discovered Chipotle and claimed it as their own. They were passionate about the taste of the food, the simplicity and convenience of the concept and the atmosphere of the restaurant, as passionate as I was in sharing it with them. You can imagine the pride and excitement I feel today when I walk into stores in Manhattan or Sacramento or any number of other cities and meet customers who have that same sense of ownership and excitement I saw in the first customers. To me, this enthusiasm is an indication of the health and strength of the Chipotle brand.

I am personally committed to sharing our food and the Chipotle experience with new customers across the United States. I wish I could snap my fingers and instantly have thousands of new ones across the country, but having built this business one store at a time, I understand what it takes to grow successfully. And so just as importantly, I am committed to understanding this growth in a manner that not only protects the brand but continues to strengthen it.

Before I turn it over to Monty, I want to make a few comments about the McDonald's recent announcement to divest of its interest in Chipotle by the end of the year. Our partnership with McDonald's began about 8 years ago when we were just a small Colorado business with a vision of changing the way people think about and eat fast food. McDonald's has been a generous partner, giving us the capital we needed to grow and allowing us to tap into their resources along the way.

But perhaps most importantly, they displayed confidence in us by allowing us the autonomy to run our restaurants and our business in pursuit of our vision. The Chipotle brand became stronger and stronger each year as did our financial results. So, I want to express my deepest thanks to McDonald's for being a true partner these past several years. And, I have the highest confidence that we are ready to thrive on our own and continue to work toward achieving our vision.

I'll now turn the call over to Monty Moran, our President and Chief Operating Officer.

Thank you, Steve. As Steve said, we continue to believe that focusing on a few things and doing them very well is central to our success. And the central focus by which we intend to continually improve our operations is a focus on the Restaurant Mangers. Our managers are the ones responsible for ensuring a great customer experience. The best managers attract, hire and retain the strongest crews, needing the least oversight and create the strongest bond with their local community. The best managers are passionate about Food with Integrity and can effectively communicate the virtues of this program to our customers.

The best managers take ownership and pride in their restaurants, keeping them not only clean but well maintained. They want to see their crews succeed, fulfill their own aspirations and become managers themselves. Overall, managers with these qualities run restaurants with strong unit economics. But, we also believe that improving the quality of our managers will have significant positive consequences beyond the restaurant. Be requiring less oversight, better managers will allow us to create more favorable ratios in terms of field supervision, which will lower G&A. By better maintaining their restaurants, they'll lower our repair and reinvestment costs. And by better managing our crews, they'll lower costly turnover and help train our future managers.

At Chipotle, our people perform meaningful work and we encourage them to express their individuality. And Chipotle is also a fun place to work where our managers and crews serve food that they actually want to eat, which they cook themselves and are proud of. We think that these job qualities are some of the reasons that we have enjoyed to this point, higher employee job satisfaction and relatively low turnover. But, we now realize that we can do much, much better. And since we have realized that the Store Manager is the most important employee in the company, it's critical that we take every opportunity to elevate that position in terms of stature, prestige, income and station.

Historically, we have hired most of our managers from outside the company and put them through a 6-week training program. This was effective in that it provided us with capable managers, but when we compared the performance of those externally hired managers with the managers that we promoted from within, we found that those who came from within had higher performance ratings and were much less likely to leave. We also had developed our best managers out of the restaurants into multi-unit positions where their direct impact upon our customers and crew was diminished.

These are some of the reasons why we created the Restaurateur program, which allows us to reward our top managers through incentive-based bonuses, which are paid to them for training new managers and for increasing sales in our restaurants. The incentivized program is to retain our very best managers in the restaurants where they have the greatest impact and to encourage them to develop a strong new group of managers from our top-performing crew. We believe this program will allow us to reach our goal of hiring all of our managers from within. But, it will also dramatically reduce the high cost of recruiting, interviewing and training outside candidates while providing excellent career opportunities for our crews to advance within the organization.

During the months since our last conference call, Steve and I have spent a great deal of time traveling throughout the country interviewing restaurateur candidates. Both of us found this process immensely rewarding. We met with a lot of outstanding and talented people and were able to identify and select our first class of 43 restaurateurs. These candidates ran phenomenal restaurants and have an intense focus on customer service. But, what made these candidates really stand out was their history, passion and ability to develop their crew. These particular managers treated their crew like family. They had a deep personal commitment to see to it that each of their crewmembers achieved their very fullest potential. And, it was that focus that was at the heart of the terrific operations that they were running.

Steve and I plan to continue this process of personally selecting these candidates in the coming months. This will be an important step towards reaching our goal of hiring all of our managers internally within the next few years. Currently, about 36% of our managers were promoted from within and this percentage has been steadily rising since last year.

Another component of our renewed focus on people is the restructuring of our crew and management level positions and responsibilities. Specifically, we have reworked job roles and responsibilities to provide both a clearer path from crew to manager and a more seamless and logical progression for our crew. To accompany this, we have developed communication and training materials, which are designed to create an expectation in the minds of our crews and managers that the position of Manager is easily accessible to those with a strong ethic and a passion for great customer service.

Our travels also allowed us to see firsthand the great efforts and improvements that our teams were making on increasing their speed of service, what we call a throughput. And the numbers demonstrate that their efforts are working. Our average store during its peak hours on weekdays is able to server ten more customers per hour than it did one year ago. And this is important for several reasons.

First, our customers prefer not to wait in line and this faster service has reduced that waiting time. Second, we deliver our best customer service and hottest food when we move our line efficiently. And finally, there's also a strong correlation between faster throughput and higher comp store sales. That is, the stores that have increased throughput the most have a much higher average comp increase than the others. And, there is still room for much improvement. We know this because the stores with the fastest throughput during their peak hour are still much faster than our average restaurant.

Constant improvement is a key aspect of our culture, which we know we will accomplish by attracting and retaining the very best people. And to do this, we need to create a culture that appeals to the highest performers. We believe that our new restaurant staffing structure and the Restaurateur program are significant steps towards further establishing this culture.

Next, I'd like to briefly address McDonald's plan to fully divest its position in Chipotle. As Steve mentioned, we have run our business with a high level of autonomy from McDonald's, and for this reason, we expect a very smooth transition. Additionally, we have been working to prepare ourselves for this possibility for quite some time. We have talked to suppliers and have received comforting assurances that they share our desire to continue to work together after any divestiture with no change to pricing.

In our conversations with Coca-Cola, we were assured that there would be no pricing changes in 2006 and that thereafter we will continue to receive very competitive service and pricing. You may also recall that we share some of the same independent distributors, which McDonald's also uses. Our initial discussions with this group lead us to believe that we will not see any disruption or modification to our distribution system and that there will be no changes in the key components of this function.

We've also begun to explore alternatives for the administration of benefits that we received through McDonald's. Once again, we don't foresee any substantial changes in terms of the benefits that we offer, and we believe that any increase in the cost of benefits will not be significant. These initial discussions accompanied by the autonomy McDonald's has always allowed us lead us to believe that things will be very much business as usual when McDonald's completes the sale of its interest in Chipotle.

So, we continue to make progress, and we're very excited about the future. We're making investments in our people, training models and technology and they are paying dividends. They're strengthening our culture and raising our performance level. Specifically, I'd point to the fact that our average store sales surpassed $1.5 million during this quarter, an increase of $60,000 per store in just the last three months. Obviously, this was driven in large part by our high comps, which averaged 19.7% system wide for the first quarter. We look to continue these trends as we build more restaurants and as we continue to tap the talent and creativity of our people to further improve on the strong foundation that we've already built.

I will now turn the call over to Jack Hartung, who will review our first quarter results.

Okay, thanks Monty. So, I'll just jump into the financial highlights for the quarter. For the first quarter of 2006, revenues were $187 million, 40% increase from the comp quarter in 2005. Of that, $53.5 million increase in revenue, $26.1 million was driven by a 19.7% increase in the comp stores sales while $27.5 million was related to the impact of new non-comp restaurants opened in 2005 and 2006. We opened 15 new restaurants during the quarter, brining our quarter-end total to 504, which includes 8 franchise restaurants. With the opening of three restaurants outside Detroit, our latest new market, we are now in 22 states and the District of Columbia. The 19.7% comp was driven mainly by transaction growth, although we did take a small price increase in certain markets in the second half of 2005.

We rolled out natural beef, more natural chicken, and that added about 2.8% to the comp. We also benefited from a soft comparison to the first quarter of 2005, mild weather and significant publicity surrounding the IPO. And, we define comp restaurants as those that are open at least 12 full months and we do not include sales during a partial month in which a restaurant begins operating.

Our store level cash margins that's before depreciation, were 20.2% for the quarter, which represents a 310 basis point improvement over last year. Specifically food, beverage and packaging fell to 31.7% of restaurant sales, which is down from 32.3% last year or a 60 basis point reduction. This improvement was driven by lower commodity costs including lower avocado and cheese prices as well as menu price increases in certain markets in the second half of '05 related to the roll-out of naturally raised beef or naturally raised chicken. And, this was offset by the impact of higher fuel costs.

Labor expenses were 28.3% of restaurant sales versus 29.7% last year. This a 140 basis point improvement, which is driven largely by efficiencies associated with the higher average sales. Occupancy costs are 7.4% of restaurant sales compared to 7.9% last year, a 50 basis point reduction. And, other operating expenses declined 60 basis points to 12.4% of restaurant sales. Both of these are driven largely by fixed costs spread over the higher average restaurant sales. And, this decline was offset somewhat by inflationary pressures and the opening of restaurants in more expensive locations.

G&A as a percent of total revenue was 8.2% for the quarter. This was a 20 basis point improvement from the same period last year. And though some of the higher costs of operating as a public company are reflected in our first quarter, these costs will continue to increase throughout the year. And as a result, though we expect to leverage our recurring G&A over time, we expect to see little or no recurring G&A leverage in 2006 as a result of these added public company costs as well as the stock-based compensation and the cost of separating from McDonald's.

In addition to our recurring G&A, we will incur some one-time legal accounting, printing and other expenses related to McDonald's disposition of its interest in Chipotle in the second quarter and with the exchange transaction expected later this year. Pre-opening expenses totaled $1.1 million this year compared to $450,000 last year. And, though we opened three fewer restaurants for the year, we did record and additional $650,000 in pre-opening rent as a result of an accounting change, which now requires the expensing of rent during construction. Prior to this change, these costs were capitalized. So, these strong restaurant level sales and markets increased our first quarter op income by 189% to $12.7 million versus $4.4 million in the first quarter of 2005.

Our effective tax rate was 41.4% for the quarter, and we expect our tax rate to remain in the 41 to 42% range for the rest of the year. Net income for the quarter more than tripled to $8 million in '06 form $2.6 million in '05. And, we delivered earnings per share of $0.26 compared to $0.10 last year. And, both of these calculations include stock-option compensation.

Turning to operating cash flows, net cash provided by operating activities more than doubled to $23.2 million from $11 million in the first quarter of last year. We expect to incur capital expenditures of about $95 million for the full year of 2006 relating primarily to our construction of new restaurants. And, we believe that our cash flow from operations will again, fund most if no all of these capital expenditures.

Our 2006 development is on track. We're committed to brining the Chipotle experience to more and more customers through a thoughtful and disciplined growth plan, which includes adding stores in both existing and new markets. We still expect to add between 80 and 90 restaurants in '06 with most of the openings occurring in existing markets, most of the openings toward the back half of the year.

Our new restaurant investment has averaged right around $900,000 recently, and we expect to maintain that same level of investment for our 2006 openings by focusing on adding a greater number of smaller restaurants to the mix and by reducing the mix of free-standing restaurants. Our smaller restaurants deliver the same or higher sales than our larger restaurants, and our end caps at inline restaurants generally--generate nearly the same sales as our free-standers at a much lower investment. So as a result, we're not only offsetting the rising construction costs, but we're able to boost our ROIs.

Though we don't offer specific quarterly guidance, we do expect that our comp sales trends will be sequentially lower over the next three quarters as we face tougher comparisons. In fact, thus far in the second quarter, we've seen comps level off a bit in this manner. Also, we expect that the unusually high first quarter comps end margins will smooth out some of the quarter-to-quarter seasonality that we've seen in sales and profits this far away.

Overall for the full year 2006, we've raised our comp sales estimate to the high single digits, and that's up from the mid to high single digits that we've previously guided. And we continue to view ourselves as being to grow EPS over time at a rate similar to many of the other high-growth emerging restaurant concepts in the ballpark of 25% per year. So, thanks for your time today.

And now, we'd be happy to answer any questions you might have.

Thank you.

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First up, we have a question from Morgan Stanley's Mark Wiltamuth. Please go ahead.

Hi, good afternoon, and congratulations on the results. I was questioning about your company level restaurant margins. Do you think you can stay at this 20% level with the comp estimates you've mapped out? And, built into your comp assumption, are you assuming that we kind of stay at the current run rate and you're just lapping difficult year-ago comparisons? If you could just give us a little clarity on those two items.

Yes, Mark. On the comp, it really is that we think we've reached a new level starting in the fourth quarter and continuing into the first quarter. And, when we just schedule what the recipe here looks like going up against those difficult comparisons, that's where we think our comps will just naturally level off.

In terms of margins, everything went right for us in the first quarter. We had great sales comps. With that sales comp, we had very nice pass-through, so the efficiencies that you'd expect to see in comps, we did see. Commodity costs behaved very well, so we got benefit from commodity costs. And then, we had roll-offs of natural beef and chicken in the second half of last year, and so we got some margin improvement as a result of all of that. So, if everything stays intact, meaning we don't have any surprises from a commodity cost standpoint, etcetera, fuel costs don't continue to rise, I think we can stay at that 30% range.

Okay, thank you.

Thanks, Mark.

Next up, we have a question from Paul Westra at Cowen & Company.

Great, thanks. Good evening, gentlemen. Congrats on a good quarter as well.

Hey, Paul.

How are you? Just a couple of questions, I--also--can you talk about your new store volume openings? It looks pretty--it looks like your AUVs were up almost as your comp, and you've closed that gap significantly, implying that's pretty good volume on your new stores as well. Is that true? And can you point to some explanation, perhaps why?

Yes, Paul, I would say it's more a function of we just didn't add a lot of new stores into the comp base during the quarter, so we had a nice lift of 19.7% for the comp. We added 18 stores in the first quarter of last year, and so, we didn't--and on a base of 420-something comp stores, we just had a very, very small drag by adding those newly comped stores into the base. Having said that, our new stores continue to open up strong. Our new stores continue to open up, even with this rising average volume in the 80% to 85% range. And so, as our new store average volume has risen from 1.4 million to 1.44 million to 1.5 million, our new stores have kept pace with that.

Okay. So, this spread hasn't changed much? When you said 80% to 85%, you meant that's the rough difference between them?

I would say the spread has not changed. We're still in the 80% to 85% range. But, by maintaining that spread, basically our new stores are opening at higher volumes to keep pace with the higher comps.

Okay. And then, just another follow-up question on your seasonality comments, and clearly, this was a big quarter, probably obviously helped buy the publicity from the IPO. I'm just trying to gauge--put that in the context of your seasonality question. Historically, you've done much better in the summer months, as most restaurants do, yet it seems like you guidance implies that you'll be again more of an evenly keeled company from a seasonality standpoint. Are you seeing different shifts going on in usage, days, evenings, take-out, dine-in or what makes you alter the usage patterns in a material way? Or -.

No. I would say, Paul, we're not seeing a change in the patterns. We're not seeing a change in shifts, lunch versus dinner. I just think last year was only a 4% comp, which is the lowest comp we've had in a long time. I think that kind of exacerbated our seasonality, and I think this year we're -- with the 219.7% comp, I think we just smoothed it out. I still think that the second and third quarter will be likely be our two strongest quarters for the year. I just think the difference between the performance between the first quarter and then the second and third will be less than what we've seen in the past just because our sales and margins have lifted up so significantly.

Great. And then just a final question, Monty. Can you give us a little more detail on the Restaurateur program? I know you explained a little bit on the road show. But, I assume these new 43 candidates that will be involved and obviously much more maybe senior training now they're staying in the restaurants, and where will you be sourcing some of your regional personnel?

Yes. We just had our operations conference about a week and a half ago down in Orlando, Florida where we got everyone together, everyone meaning all of the regional sort of field folks. Usually, our managers don't come to that conference. There are just too many of them, but this year, we did have all of our restaurateurs come to that conference. It's hard to give you a lot of detail as to any effects of the program because, of the 43 candidates, 33 of them started in that role during the last one month or so. And even though these are our very, very best store managers, we don't really see them as a source of sort of short-term field leadership outside the restaurants. Our goal really is to keep them in the restaurants.

That being said, we believe that the Restaurateur program is going to pull stronger and stronger candidates into the Restaurant Manager position, and over time, we will sort of select some of those folks to enter the multi-unit leadership team in the field. So in terms of where our people are going to come from for regional leadership, they're going to continue to come from our top people within, from crew will become managers, and from mangers will become restaurateurs and ultimately, some restaurateurs will ultimately enter some of those field positions.

Can you give us just a last gauge of what would be the bonus potentials difference or total comp difference potential for a restaurateur candidate versus a general manager?

Oh, okay. They both have the same salary and the same base bonus structure except that restaurateurs are given a signing bonus upon entering the program. But on top of those regular bonuses, they're given two additional bonuses, which are incentive-based bonuses. One bonus is--they receive $10,000 for each person that they train from crew to become a new restaurant manager in our stores, and they'll get that bonus when that person leaves the restaurant at which the training occurred and goes out to successfully manage another restaurant for a period of six months.

And after that six months, if their rating is an outstanding or above expectation rating, so our two highest performance rating, then that bonus will be paid to that restaurateur. The other type of bonus is a straight basic 10% of the amount by which the restaurateur increases the store sales beyond a comp. SO, it's 10% of gross sales beyond a planned increase in those sales. And that varies on a store-by-store basis and is set by the Regional Director and the Office Director for that particular restaurant.

So but in terms of what the potential is, Paul, it's--we suspect that there will be restaurant managers who train a number, maybe from one, two or three people a year, certainly when it becomes a steady state program to become restaurant manager, which would mean a bonus of between $10,000 and $30,000 a year and some might be higher than that. And we also suspect that there will be managers who will increase their store sales sort of dramatically above the plan. It's hard to predict exactly what that was, but when we -- before we put the program into place, we looked at what some of the bonuses would have been had this program been in place a year ago, and we had bonuses as high as nearly $30,000 from this -from managers increasing their stores sales. So, it could effectively more than double what our managers are making on the high end. And, we hope that it will.

Great, thank you.

You bet, thanks Paul.

Moving on now to Andy Barish, Banc of America Securities.

Hey guys, a couple of questions on Food with Integrity. Can you kind of just refresh our memory? Do you actually have markets sort of picked out this year that you expect to kind of roll as you sort of lap some of the increases you put in place in the second half of last year with natural chicken and beef? And then, one clarification on your--I think it was you Jack, had talked about kind of the food cost line. My understanding was that you kind of priced Food with Integrity to make it kind of gross margin neutral with what the pricing structure may have been otherwise on commodity stuff. But, it sounded like you're actually getting a little bit of maybe food cost benefit from those pricing increases. Is that accurate?

Yes. In terms, Andy, of the markets that are next for more Food with Integrity items like naturally raised chicken or naturally raised steak, we don't know those specific markets necessarily right now, although we do anticipate increasing the amounts of naturally raised chicken and steak that we'll be adding even this year. But, we just haven't selected which markets those go to. And then on the pricing, Jack?

Yes Andy, what we do is, we will take a look at our whole menu board when we do roll out Food with Integrity and what we'll do is the items that we're rolling, like let's say that we're rolling natural chicken, we'll make sure that we price it so that we keep the same food cost percent. If we get the same gross profit, but then, we'll also look at our chips, look at our drinks, look at the entire menu board. So, if we're going to go to the menu board, we want to go and take a look at, especially if it's been a while since we raised prices, and we'll adjust the entire menu at that time.

So, you really get a couple of benefits on the margin. One, you get it because we're looking at more than just the natural food that we rolled out. Secondly, we look at our gross profit margin. And as you know, if we raise prices to keep our food cost percent the same, because a lot of the rest of our P&L is fixed, we get kind of a margin benefit throughout the rest of the P&L.

Right, thanks. That's helpful.

Okay. Thanks, Andy.

We have a question now from Jeff Omohundro with Wachovia.

Yes, thanks. Just two questions, I guess first, could you talk about operationally how you managed through such a significant increase in your comp sales? And also, as it relates to the supply chain and your naturally produced products? And I think you mentioned there that you--I might have caught it wrong, but something to the effect that you didn't see much of a shift in day part mix. Is that the case? There wasn't a relative pickup at lunch?

Yes, Jeff. There's kind of two different answers to that question. Obviously--how did we manage through such a--we were having kind of troubles hearing, so I'm going to repeat the question and you tell me if it's right. Basically, how did we manage through such a significant comp sales increase and yet continue to supply all the food of integrity, right?

Exactly.

Okay. We -- basically, this was just sort of--we just owed this to our purchasing team who is very adamant about not adding a food of integrity item to any store without feeling a very high degree that they'll be able to continue supplying at least those stores where they put the food of integrity items. So, whenever we put it into a market, we plan on continuing to have those--to sell those items in that market. We have had eight years of double-digit comps, which has been something that we're very proud of. And so, they plan for the comp to continue at a fairly high level, and purchase with that in mind. So, they really plan for it.

But also, I should tell you that we are very aggressively pursuing going after 100% naturally raised meats in all of our stores, and as part of that, our purchasing team understands that that's--that that is a very high hurdle to cross, given that our level of--that we're building 80 to 90 new restaurants this on top of obviously, the increase in comp to our existing restaurants.

In terms of day part mix, we really haven't seen--we really haven't seen much of a shift, although I would tell you over the last couple of years, we've seen a gradual shift whereas lunch used to be something just over half of our sales, now dinner is something just over half of our sales. So, we've seen a slight lunch to dinner shift. I would say that the throughput successes we've had have been greater at lunch than at dinner, and our numbers show that. So, what that might mean, is that the shift would have been greater towards dinner than it has been and that we've captured more dollars at lunch to sort of keep it more stable. But, that's just speculation.

Very good, thanks a lot.

Thanks, Jeff.

Thanks, Jeff.

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And, we will move next to Nicole Miller at ThinkEquity.

Good afternoon, great quarter.

Thank you, Nicole.

Thanks, Nicole.

Hi, I was just hoping to clarify some numbers. First, can you walk through the $1 million of stock-option expense and where that was caught up in the model in the first quarter?

Do you mean where--what line item it's in?

Yes.

It's in G&A.

The whole $1 million?

Yes. The whole million is in G&A.

Okay, perfect. I just didn't see that in the press release. And the same store sales, did you say 2.8% was pricing?

2.8% was pricing per quarter, that's right.

And what will you be rolling on going into the second quarter, that same amount?

Nicole, we don't have any--we're always looking for Food with Integrity opportunities, and so we've got a lot of possibilities. We have nothing that's eminent. And so right now, I would tell you we don't have any price increases specifically planned in the second quarter. Now having said that, we have an opportunity to roll additional chicken in the market, and we're able to do that in June/July. Or May/June, we will do that. So I think a safe assumption would be about 2.8% again, would carry through the second quarter.

Perfect, that's very helpful. Thank you. And in terms of development, will we see a slight acceleration sequentially to get to the 80 to 90 units for the year? Or will the second quarter--should we expect a few less than the first quarter?

There will be a slight acceleration, Nicole, not so much of an acceleration. You will see 15 for the first quarter, and I expect to see a few more openings in the second quarter. And then, there will be a rapid acceleration from there.

Okay, thanks.

Will be rapid acceleration there. We still feel very good we've got lots of sites.

In terms of '06.

In terms of '06.

That's also very helpful, thank you.

And that will keep us in that 80 to 90 range. We feel very good about that 80 to 80 range.

And then one last question, can you just update us on food evolution? I think last quarter you gave percentages of how much food, either organic or naturally sustained in each--in the majority of stores? And can you maybe outline a goal of where you'd like to be this year and in the future?

Sure. Today, 100% of the pork that we serve has been naturally raised, and that's been the case for a few years now. About 50% of the chicken that we serve is naturally raised, and now a little over 1/3 of the beef is naturally raised. And, we continue to increase those percentages throughout this year. I can't give you an exact number at this point though, other than to say that it'll continue to increase. We are exploring beyond meats though into produce, whether it be organic or other sort of sustainable kinds of things that we're looking at.

That's very helpful. Thank you so much, that's it for me.

Thank you, Nicole.

Thanks, Nicole.

We will move onto Robert Derrington at Morgan Keegan.

Yes. Hi, thank you. Steve, can you give us some color on what you think the contribution in this past quarter to sales could have been from the DSL program?

I'm sorry, who is this again?

It's Robert Derrington with Morgan Keegan.

Oh, thanks, Bob. So basically, you want to know how much of our sales came from the DSL program?

Yes, it seemed like a great opportunity to drive traffic, and I'm just wondering, to the extent to which it contributed to the same store sales in the quarter.

It's -I will tell you, it's relatively small. It's something that we think is going to help us with throughput down the road. But, it's really part of our fax business, and our total fax business is a couple percent of -- is a couple percent of sales. And, that's been -- and that's something that's been growing over time. We haven't done really much marketing of the DSL, and so some markets have caught on. Some have not. And so, it's working quite well for us, and we do think it's an opportunity for us in the future. But, in terms looking at the 19.7% comp, really a very, very small amount would be attributed to the DSL.

Got you, okay. And Monty, you had talked about the turnover. Could you give us some sense on how that trend has been recently, for both the managers as well as your hourly workers?

Yes, yes. Well first of all, let me just sort of preface this by saying that we've got this very intense focus right now on increasing the quality of our store managers, and by doing so, to increase the quality of the crew that we have in all of our restaurants. And in order to do that, we accept that there may be some times where we have higher turnover for a period of time, during which we are holding people more accountable and during times that we're seeing more and more top-notch candidates come in, for whom we need to make room in our restaurants. So, we aren't going to look at it--we aren't going to focus on a quarter-by-quarter number or a quarter-by-quarter target for our management turnover. That being said, happily our turnover has dropped quite a lot since we last spoke three months ago. And, so we're pleased with that trend.

Our crew turnover has not dropped, but we are studying the reasons why it hasn't. And, we hope that it will. But again, it may--that may go up for a little while, while these better managers work harder to develop even better crews. For example, with our restaurateurs, all of our--all of the crew members at any given restaurant, and there are about 22 per restaurant, all of those crew are potential bonus, sort of potential bonus opportunities for our managers, because any of those who are developed into a manager will carry with them a bonus.

So, our managers who are in the Restaurateur program are looking very, very carefully at who they hire into the crew level and are making sure to increase the amount of the top-notch crew that they have so that they have management potential. And even managers who are not restaurateurs, they know that the way is to become a restaurateur is to demonstrate that they're able to develop crews into management roles. And, so they too are looking for much better crews. So, we anticipate that may be one of the reasons why our crew turnover has not gone down and might not go down for a little while here.

Great, that's very helpful. And then, one other question if I may, Jack, you had mentioned that same store sales had leveled off in Q2. Can you give us any kind of a definition of what that leveled off means?

Yes. We're not going to give a number to that. I can tell you that sales have, they have dropped from that very high number. And what I think I want you to be thinking in terms of is that as we go up against these tougher quarters, we think that we'll end up the year in that high single-digit range. And so, if you look at our quarter-by-quarter, results are going up again. I think you can kind of see just a natural kind of intercepting down for year. And then, we expect that to end in that high single-digit range. But, we're not guiding in terms of specific quarterly comps.

Sure, that's fair. Congratulations, it was a great quarter.

Thank you very much.

Thank you very much, Bob.

There's a question now from Michael Perna at AAD Capital.

Hi, good afternoon. Congratulations on the quarter. I think on your last --.

Hey Michael, can you speak up a little bit?

Sure.

Great.

I think on your last call, you discussed a smaller store format and mall-based stores. Can you just discuss what percentage of your new store growth might be coming from a smaller format or mall-based stores?

Yes. We're not so much the mall piece. I think that was maybe a misunderstanding. What we're doing is, we're not replacing any restaurants. Most of the restaurants we go into is really landlord space. And, we typically don't have control over that space. But, what we are doing is, in the past where we would have walked away from a store that was 2,000 or 1,800 or 1,500 square feet, we now will look at those restaurants, and we will develop those restaurants.

And so, I think what you'll see is that we'll do more of those smaller restaurants. We're working on a design of a freestanding restaurant that's smaller than the ones that you see out there today. And so, I think what you'll see is over time, our average development will decline. In fact, today our average -- the average size of a restaurant is around 2,700 square feet. The restaurants that we're building in 2006 are under 2,600. And so, we're already seeing a decline. But, I think you'll see more of a gradual decline as we kind of layer on these smaller restaurants and as our freestanding restaurants that we're -- that are in design phase become smaller.

Great, thanks.

Thank you.

Thanks, Mike.

There are no other questions holding in the roster. I will turn things back over to our speakers for any additional or closing remarks.

Yes, I guess I feel like I just want to say one more thing to Paul Westra's question, which was the second question. But Paul, in your question, you asked about where our regional field support would from too, given that we're going to be trying to keep more of our people in the restaurants for a longer period of time. And the answer to that question also is that we believe that these restaurant managers, when they are at their very -- at the top of their game, require much less supervision in the field. And so, we will be able to reduce our field ratios. That's our hope on a long-term basis.

And as we reduce those field ratios, then obviously each of the people in the field, being able to handle more, we will not need to hire as many field folks. So, that's another answer to your question. With that, if there's no more questions, then Chris, do you want to wrap it up?

I think we're all set for the day. Thank you all for joining us and we'll look forward to talking to you all again soon.

Thanks, everyone.

Thanks again, everyone. That will conclude today's conference call. Have a good day, thanks for joining us.