奇波雷墨西哥燒烤 (CMG) 2007 Q1 法說會逐字稿

Good day, everyone, and welcome to the Chipotle Mexican Grill first quarter 2007 earnings conference call.

Today's call is being recorded.

At this time, all participants are in a listen-only mode and the floor will be open for your questions following the presentation.

And now, it is my pleasure to turn the floor over to your hostess, the Manager of Investor Relations for Chipotle Grill, Ms.

Sandra Curlander.

Ms.

Curlander, please go ahead now.

Thank you.

Hello, everyone and welcome to our call today.

By now you should have accessed to our earnings announcement released this afternoon for the first quarter ended March 31st 2007.

It may also be found on our website at www.chipotle.com in the Investor Relations section.

Before we begin our presentation, I will 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, restaurant comp sales trends, earnings per share, certain expense items 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 them.

Forward-looking statements are subject to risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements.

We refer you to the risk factors in our annual report on Form 10K for 2006 and as updated by the 10Q which we expect to file this week for a discussion of the risks that could impact our future operating results and financial condition.

I want to remind everyone that we have adopted a self-imposed quiet period restricting communications with investors during sensitive periods.

This quiet period begins on the first day of the last month of each fiscal quarter and continues until the next earnings conference call.

For the second quarter, it will begin June 1st and continue until our second quarter release in late July.

We appreciate the strong interest the investment community has in Chipotle and are confident that this policy strikes the appropriate balance in allowing this management team to focus on running the business and communicating with both current and potential investors in our company.

On the call with us today is Steve Ells, our founder, Chairman and Chief Executive Officer, Monty Moran, our President and Chief Operating Officer, and Jack Hartung, our Chief Finance and Development Officer.

After their prepared comments, we will open the call for questions.

With that out of the way, I would like to turn the call over to Steve Ells.

Thank you, Sandra.

I'm really pleased with our results for the quarter.

They reflect our discipline to focus on just a few things and try to do those things better than anybody else.

This is the foundation of our economic model.

During our 14-year history, we have held true to this economic model and refined all the details that make it work so well.

We haven't added new menu items, marketing schemes or been distracted by the other things commonly used by the restaurant industry to increase comp sales.

But that's not to say that we have not been innovative.

In fact, in our history, I think we've had two really significant innovations that have helped improve the Chipotle restaurant experience.

The first thing is the thing we call Food With Integrity.

And it's about buying the best raw ingredients, raw ingredients that not only make our food taste better, but are also sustainably raised.

Raised without the use of antibiotics, added growth hormones, chemical fertilizers or pesticides.

Raised with respect for the land and the independent family farmer.

It's really about a quest for sustainability.

The other big innovation is on the people side.

It is a way to ensure successful growth by harnessing the talent of the very best people.

These are people who are already in the organization.

This promote from within approach is possible because we are developing a culture that identifies the usually hidden talent among the ranks.

Not only does our culture find this great potential, but then we use our resources to help bring out the very best in those who have the potential to make a profound difference in our company.

Together, these are the things that helped us generated an 8.3% comp, net income growth of more than 55%, diluted EPS growth of 46.2% and the opening of 28 new restaurants, restaurants with strong opening sales volumes.

These results were against a very strong comparison in the first quarter of 2006, but we are able to show these strong results because the things that we are focusing on make for a more relevant customer experience.

Therefore, our customers come more often and tell others about their great experience at Chipotle.

But, beyond producing strong quarterly results, this focus is allowing us to build a stronger relationship with both customers and our employees.

And, together, we can change the way Americans think about and eat fast food.

On each of our quarterly calls we've talked about our Food With Integrity philosophy and how we carefully consider all the ingredients we use.

We work on improving them so that they are better tasting and more sustainability raised.

We believe that you can't make great food without using great ingredients.

Beyond that, we also do not want our success to come from the exploitation of people's health, the environment or animal welfare.

And we know our customers don't want that either.

So far, these efforts have led Chipotle to serve more naturally raised meat than any other restaurant company in the world, to source a growing percentage of organic beans and to use only sour cream that comes from cows that are never given any synthetic growth hormone, RBGH.

Our mission towards sustainability goes beyond food.

We are looking at all aspects of our restaurants to make sure that we are using materials and supplies that are better for the environment.

You have heard me say before that our design says something about our food.

It is about taking simple materials and elevating them into something more extraordinary.

Both the food and the design share this commonality.

From a high percentage of post-consumer paper to low energy lighting fixtures and beyond, our new restaurant design reflects this sensitivity that we have to the world in which we live.

And we're not stopping there.

While I'm certainly proud of what we've accomplished, rest assured we are always looking for ways to build upon these accomplishments.

And we'll continue to challenge ourselves to improve on every aspect of what we do, especially those things that seem to be going really well, from making better food to providing increasingly meaningful opportunities for our people.

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

Thanks, Steve.

You know, we've made a lot of progress towards our Food With Integrity mission and we're setting ourselves up nicely to change the way Americans think about and eat fast food.

Last week we had our annual operations conference here in Denver, where about 160 of field operations people got together to discuss our business.

In addition to the field staff, a lot of our department heads also joined us.

We had a number of extraordinary guest speakers come and talk to us during the conference who were real visionaries in the area of agriculture.

One of these was Joel Salatin who, along with his family, runs a farm in Virginia called Pollyface Farms.

What makes Joel's farm amazing is how he runs it in the most sustainable way possible.

He raised pork, chicken and beef, as well as produce and when you hear the ingenious and practical methods that he's used to take care of his land so that it can sustain the animals and crops that he raises, it's very inspirational.

He talked about food and farming in a way that anyone would become inspired.

And when you compare Joel's method to those used to produce food served in the vast majority of restaurants, it really inspires all of us at Chipotle as an organization and it compels us to work even harder on our mission to make sustainability-raised food available to the masses.

Unfortunately, we can't supply all of our restaurants from farmers like Joel today.

There just aren't nearly enough of them.

But it is our aspiration to do that.

Now, let me tell you about some of the important progress we've made towards this quest.

During the first quarter we added naturally-raised chicken and beef to restaurants in our Kansas City market.

And in April, we added naturally-raised chicken in our 62 Colorado restaurants.

So, as of today, all of our pork and more than two-thirds of the chicken we serve nationwide is naturally raised, as it over 43% of our beef.

Of course, all of our naturally-raised meat comes from animals that are humanely raised, fed a pure vegetarian diet and never get antibiotics or added hormones.

At the operations conference, we also discussed the importance of developing the right type of leaders to ensure that we build a culture that appeals only to the highest performing people.

We talked again about the critical importance of our restaurant managers and how to best develop them so that they can continue to improve our operations.

Next, we focused on our area managers and we worked to better define and focus their role to ensure the greatest positive impact on our crews and managers throughout the country.

Nearly all the participants agreed that this was our most valuable operations conference ever and that our field teams are now more focused than they've ever been on this things that will lead to years of excellent restaurant operations.

And on the subject of our people, we are seeing some of our most impressive improvements.

We continue to get better at training as we harness the skill of our best performing managers, to train and develop our future leaders from crew who are already working with us in our restaurants.

Over just the last year, we've moved from promoting only 30% of our managers from within to almost 60% at the end of the first quarter.

This is resulting in better service in our restaurants, while also giving us a much deeper bench of new managers to support our future growth.

Turnover for our managers is also lower than it's been in years.

And it's trending downwards still further.

Our crew turnover has dropped as members of our crew are seeing greater opportunities for themselves at Chipotle.

Our restauranteur program continues to be a key focus at Chipotle and we're always looking for new candidates.

Our field teams have identified dozens of potential candidates at this time and Steve and I are going to be going out and interviewing these candidates in the coming months.

From what we've seen recently, the quality of these applicants is excellent and the awareness of what it takes to be an effective manager at Chipotle is getting clearer all of the time.

Our restauranteurs are doing a great job focusing on the two key aspects of their jobs, which are running great restaurants and developing their people.

As a result, our restauranteurs are earning significant bonuses.

In fact, we've already seen our first restauranteur top the $100,000 mark and that happened solely as a result of increasing the sales in her restaurant.

But, now that the program is a year old, we also expect to start seeing more of our restauranteurs receive the $10,000 bonus for developing crew people into managers.

Overall, the restauranteur program has had a strong positive effect on this company.

It's helped us create a career position in the restaurants and allowed us to give great awards to some of our top managers.

It has helped retain some of our top talent in the restaurants where they can continue to provide a great customer experience.

It has reduced manager turnover.

It has helped focus all of our managers on the most critical aspects of their job.

It's also helped us to achieve a culture where we are helping our most talented crew people become our future managers and leaders.

But beyond that, it's also had positive effects throughout the entire organization.

An example of this is that, as the restauranteurs take on more responsibility for running their own restaurants, they lessen the burden on our area managers, who at this time manage an average of about 7.5 restaurants each.

Specifically, as the restauranteur program grows, this will allow our area managers to focus on the most important aspects of their job, which are identifying and developing talented crews and managers, setting high standards and removing obstacles from their teams in order to ensure the greatest success of their restaurant.

In terms of improving customer service, we continue to see strong through put, particularly during our peak hours.

During the quarter, we completed the installation of change machines in about 400 more restaurants.

These machines help make us faster during our peak hours, which reduces lines and therefore improves our customer service.

We're now entering into some of the busiest months of the year, and we believe that we're in a position to move our lines even faster during these spring and summer months.

So, even though we do not expect the gains in transaction speed to be as dramatic as they were last year, we do think there's still much room for improvement, particularly as we see a greater and greater number of our internally promoted managers and crews working in our restaurants.

With that, I'll now turn the call over to Jack Hartung, our Chief Finance and Development Officer.

Thanks, Monty.

Our restaurant managers improve, continue to build customer loyalty and delight new customers, resulting in a healthy 8.3% comp for the quarter.

Combined with the opening of 28 restaurants during the quarter and the non-comp openings from last year, our revenues increased 26.2% to $236.1 million.

The 8.3% comp was primarily driven by incremental customer visits, while menu price increases contributed about 1% to the comp.

Certain markets were impacted by weather on specific days during the quarter, however, sales in those markets rebounded nicely when the weather cleared, resulting in no meaningful net impact on the overall sales comp for the quarter.

Our real estate pipeline is as strong as it's ever been, as we opened 28 new restaurants during the quarter.

We also purchased 4 franchise restaurants in March and acquired the remaining 4 franchise restaurants during April.

After our split from McDonald's last October, our 3 franchisees decided to return to operating a McDonald's restaurant exclusively.

We don't expect the acquisitions to have a material affect on our overall results, so they will be nominally accretive to EPS about $0.02 on a full year basis.

Our restaurant opening- - our restaurant operating margin improved 50 basis points to 27.7% compared to 20.2% last year.

Higher average restaurant sales, menu price increases associated with the introduction of naturally raised meats and labor efficiencies were the primary drivers of this improvement.

Food, beverage and packaging expenses were 31.6% of restaurant sales versus 31.7% last year as modest increases in commodity costs were offset by menu price increases and better controls.

Looking at the balance of the year, we continue to expect upward pressure from commodity costs due to the effect of higher corn prices on beef and chicken.

And, in addition, we'll begin to receive avocados from California later this month, at which time we'll evaluate the quality of the fruit and the pricing impact from the California freeze.

Labor improved 60 basis points to 27.7% versus 28.3% last year due to crew efficiencies and improvements in staff scheduling.

We are especially pleased with this result, considering we have now implemented the new staffing structure in most of our restaurants.

We made a significant labor investment with roll out of the new staffing structure, which began last year.

And it's paying dividends in the form of significantly greater internal promotion.

We also created a national labor scheduling matrix which allows our managers to efficiently develop crew and managers under the new structure, while also providing great customer service.

Occupancy costs were 7.3% of sales, which represents 10 basis point improvement over last year.

And the improvement was mostly driven by higher average restaurant sales on a partially fixed cost basis.

Other operating costs increased 20 basis points to 12.6% as a result of comparing to lower marketing costs last year, partially offset by lower training costs in 2007.

G&A as a total percent of revenue was 7.2% for the quarter and this 100 basis point improvement was primarily a result of higher restaurant sales.

Our first quarter G&A includes only one month of stock-based compensation expense associated with our 2007 grants.

We expect the full effect of our 2007 grants to add about 40 basis points to G&A in the second quarter when a full quarter's worth of equity compensation is recognized.

We do continue to expect G&A will trend towards that low 7% range over the next few years.

Pre-opening costs were $1.8 million compared to $1.1 million last year, as a result of opening 28 restaurants in the first quarter of '07 compared to 15 last year.

Net interest income increased to $1.4 million compared to about $900,000 last year due to higher daily average cash balances we carried in the first quarter of 2007.

Income from operations increased 46.5% to $18.6 million compared to $12.7 million last year.

And our operating margin improved 110 basis points to 7.9%.

Our effective tax rate was 38% for the quarter and benefited from tax-exempt interest income and a decrease in estimated statutory state rates.

For the full year of 2007, our expected rate is expected to be right around that 38%.

Net income for the quarter increased by 55.7% to $12.4 million from about $8 million last year.

We generated diluted earnings per share of $0.38 this quarter versus $0.26 last year.

Operating cash flow for the first quarter of '07 totaled $30.7 million compared to $23.2 million last year.

So, as a result of this strong comp [Inaudible] in the first quarter and a healthy real estate pipeline, combined with an increasing manager pool from internal promotions, we're increasing our guidance for the rest of 2007.

We now expect comps in the mid to high single digit range for the year and we expect the comps to be relatively level throughout the rest of the year.

I would encourage you not to use a combined two-year comp approach to predict comps for the remaining quarters this year, as the quarterly comps in 2006 completed a trend that began in 2005, driven by IPO publicity and the significant early gains in through puts.

Essentially, we're beginning a new quarterly comp trend in 2007.

We expect to open between 110 and 120 new restaurants during the year, up from the previous guidance of 95 to 105.

And we expect those openings to be relatively level loaded throughout the year.

And development costs are expected to remain in the area of $900,000 per restaurant.

Our non-cash stock-based compensation is expected to range between $8 million and $8.5 million, which includes 10 months of expense for the 2007 grants.

And we expect diluted weighted average shares to be about $33.25 million during the year.

Finally, we remain confident that we can grow diluted earnings per share at an annual rate of at least 25% over the long term.

So, thanks for your time today and now we'd be happy to answer any questions you might have.

Operator, please open the line.

Thank you, sir.

Ladies and gentlemen, our question and answer session will be conducted electronically.

[Operator Instructions] And, for our first question, we got to Larry Miller with RBC Capital Markets.

Yes, hey, guys.

Just had a question on pricing.

I thought that you guys weren't going to take any price in Q1 and just sounds like you might have.

Could you talk about the decision there.

How much pricing you were running and how much you might price going forward?

Also had one other question, please.

Yes, Larry.

We did mention when we had our fourth quarter release that we did take pricing.

This really relates to some markets that we rolled out natural meats in the fourth quarter of last year.

So, those rolled into the first quarter.

We also mentioned that we rolled Kansas City early in the first quarter during January.

So, it's really nothing new since our fourth quarter release, but those markets did have a full 1% impact on pricing during the quarter.

What was the net effect of that pricing for the quarter?

1%.

A 1% holdover?

1%.

For the whole chain.

For the whole chain, right.

Gotcha.

Thanks.

Also, if I may, you're upping your unit guidance.

Any change in how that composition of the 25% growth would come from going forward?

Are you still comfortable with that number, I guess, or are you actually effectively raising that?

Well, Larry, we haven't raised it.

But, you'll notice when we talk about the 25%, we talk at least 25%, so we're comfortable that we can be in that 25% or greater range.

But, we've not tried to pinpoint that.

Okay, thanks.

And if I just might, on the comps for sales, are you suggesting that comps for sales should be in that mid to high single digit on an even quarterly basis?

Is that what you're seeing now as you start into April, rather than- - I'm sorry.

Generally, yes.

What I really want to do, Larry, is I want to not- - I want to caution you not to take last year and then somehow assume that our trend is going to somehow be kind of a mirror reflection or an opposite of last year.

Last year was a perfect opposite reflection of 2005 for the reasons I mentioned.

We saw a sales surge beginning 2005 due to awareness and publicity around the IPO and that began when McDonald's first made their announcement early in 2005, as well as through put.

And so, when we saw the effects of those two things that began in 2005, run its course in 2006, each of our quarters, if you look at a 2-year basis for '05 and '06, we had a combined comp of 24%.

I'm suggesting to you that, based on what we're seeing in the second quarter and what we expect for the rest of the year, that 2-year kind of combined rate will not work whatsoever.

So- -

Okay, but you do have the easier comparison, so you're suggesting that we should model something a little bit more consistent.

Yes, we expect, based on what we're seeing so far and what we expect for the rest of the year, that will be more consistent, Larry.

I don't think last year's quote easy comparison will really help you much at all, based on the way we see things.

Okay.

Perfect.

Any help on food costs?

I know it seems like it's going to be a little bit uneven for the year and possibly Q2 because there's a little bit more pressure because of the avocados.

Can you give us a little help there, Jack?

Yes.

You know, Larry, there's still uncertainties.

We're pretty delighted with the first quarter that they held their own.

But our food costs, when they compare to second and third quarter, our food cost was in the 31% range during the second and third quarter.

So, if we see no additional pressure, let's say our commodity costs stay exactly as they are today, we saw food costs in the first quarter of 31.6, so right out of the box, we had a 60 basis point disadvantage.

The wild card is we don't know what's going to happen with avocados.

And with avocados we still are going to wait until we see the fruit, we seen the pricing and all options are on the table up to and including possibly suspending the sale of guacamole, if we're not happy with the fruit, not happy with the pricing.

So, we continue to see pressure, but we're cautiously optimistic that it won't get, hopefully, won't get much worse than what we saw in the first quarter.

Okay, thank you very much.

Thanks, Larry.

Thanks, Larry.

And for our next question, we go to Paul Westra with Cowen and Company.

Hi, good afternoon.

How you doing, Paul.

Hi, Paul.

Just a quick question or two, just on some pre-opening costs.

Seemed a little bit higher, just curious that you're still running that $60,000 range on a go-forward basis.

Yes, Paul.

Good question.

We actually ran a little above $70,000 in total per store last year.

For the first quarter it was more like $64,000.

It was really higher only as a function of opening 28 restaurants this year versus 15 last year.

I would say if anything that $64,000 on a per store basis is on the low side.

I'd expect for the year that we'd probably be more in that kind of $70,000 range per store.

And actually it's driven by which markets you open in and what kind of rent.

If you open more stores in New York, you're going to have a higher cost.

And we didn't happen to open, I don't think any store, maybe a store, in the first quarter in New York.

So, I would expect a number more in that 70,000 per restaurant for the rest of the year.

Great.

And then just one more follow up question on the G&A.

You mentioned the one-month of stock comp.

Just for curiosity, why was that the case.

Was that the case last year as well?

On a go-forward basis, assuming you have that mid single digit comp performance, I assume you're still expecting modest leverage.

I know your long term leverage looking out in low sevens.

Yes, we absolutely- - I'll answer the last question first- - we absolutely expect that we can get down into the low sevens, between this year and then into next year.

So, we haven't changed our expectations as far as that goes.

We only had one month in the first quarter, just because that's when we had to wait until we released earnings and then the window opened again.

And so, our comp committee granted the equity grants in late February.

And so, that's why we picked up only one month worth of expense during the first quarter.

The other thing that's happening, Paul, is in '06, yes, we did have a partial quarter, although those options were issued on the IPO, which was at the end of January.

So, we have two months worth of expense there.

But those options were priced based on a stock price of $22.

These were priced based on a much, much higher stock price, almost triple.

And so, that all by itself drove our option price, our equity price, up pretty dramatically.

And then, last question.

One last question, on pre-store costs, build out costs, I see depreciation, not much leverage, given even though on the good comp, I was just a little bit over your discovery development, talk about build out costs and what's happening with the depreciation line?

Yes, Paul.

We still expect the build out costs in '07 will average right around $900,000.

And we've been in this kind of $900,000 range for the last, this will be the fourth year running.

It's really just a function of the newest stores that we built are more expensive than the stores we built four and five years ago.

Great.

Thanks.

Thanks, Paul.

[Operator Instructions] And for our next question, we go to Jeff Omohundro with Wachovia.

Thanks.

Congrats on the quarter to start.

Really, my question's in the area of marketing.

Perhaps you could give us a little bit of color on how you're spending might evolve as the system grows.

Both on a percentage basis and how you might apply those marketing dollars if you look beyond the primarily billboard strategy.

Thanks.

Yes, Jeff.

Historically, we've been about 1.75% of revenue in terms of our marketing costs.

And as we grow, of course, the absolute dollars grow and that's great.

But, we don't intend at this time to increase the percentage of dollars that we're spending on marketing.

In terms of where we're spending, we continue to spend primarily on the local basis and use, and spend a lot through our local store marketing efforts and not so much on national television or national radio or anything like that.

And that also we intend to remain with for the time being.

So, I wouldn't look for any significant change in terms of the expenditures or where they happen going forward.

Great.

Thanks.

And we go next to Mark Wiltamuth with Morgan Stanley.

Hi, Mark Wiltamuth from Morgan Stanley.

Jack, wanted to ask you about your cash balances here at the end of the quarter.

I assume you're still running well over $100 million.

How much did you end up spending to buy the franchisees and what are you going to do with all that excess cash?

Well, Mark, yes, we did finish the quarter with over $150 million, so the balance has been creeping up each quarter.

We spent, in total with the ones that we bought in the first quarter and the fourth quarter, we spent roughly $6 million.

That will be fully disclosed in the Q when that's released this week.

And right now we don't have any specific plans.

I do think, Mark, that because we increased our guidance to 110, 120, that we will begin to eat into that amount.

We also will not benefit this year from the tax hearing agreement, which as you know, we collected nearly $30 million on the tax hearing agreement that we had with McDonald's last year.

So, we did collect $6 million in the quarter.

But that's pretty much, that receivable now is fully recovered.

And so, I would expect that we'll start to eat into that gradually.

But, we still find ourselves, Mark, in a very nice position where we don't have any debt.

We've got a lot of cash on the balance sheet.

So, as we need to do things, whether it's in the future ramp up or invest in things like labor or technology or what have you, we have that ability to do that.

But, as you've seen in the last year and a half, we're very disciplined.

We're very thoughtful.

And so, for the most part, we will sit tight and enjoy our very liquid position and be very smart about the investments that we make.

What is the constraint on really increasing the store count further?

Is it finding enough good managers?

Or is it finding enough good sites?

It's really both, Mark.

And I would tell you that we did a great job of building great real estate.

But, throughout the year of last year, we were monitoring how the real estate building was going, as well as how our people pipeline was going as well.

You heard Monty say that we basically flipped that, where we were developing our higher, promoting 30% of our managers internally from crew about a year ago.

We're now promoting about 60%.

So, we've really flipped that on its head.

So, we're in a position where we're developing a lot more managers internally.

We found over time that those managers typically turn over less and perform a lot better.

And at the same time, we've been able to build our pipeline, real estate pipeline.

So, we'll continue to do that, Mark.

We'll continue to monitor both in our ability to find sites and our ability to develop and promote managers.

And so far, they have really moved forward really nicely in the past year.

So, we'll continue to move it forward, but only as those two items move up.

Thank you.

Thanks, Mark.

And for our next question, we go to David Tarantino with Robert W.

Baird.

Hi, good afternoon and congratulations on a great quarter.

Jack, just to clarify pricing and the menu.

What do you have going forward, especially in view of the Food With Integrity that you just rolled out in Colorado?

Yes, David, in addition to the 1%, when the roll out of Colorado is fully rolled out, that will add another 1%.

You won't see a full 1% in the second quarter, because we just rolled out Colorado during April to get a partial quarter for that.

But, when it's fully rolled out, I'd expect another 1%.

So, cumulatively, when it's fully in, it will be about 2%.

And then we don't have anything specific yet, David, to report, and so as that happens, we'll report that to you.

Okay.

And would you say, with that additional pricing that you have in Q2, would that allow you to hold your cost of sales where you had it in Q1, the ratio where you had it in Q1, assuming no incremental pressure from the avocado situation?

Yes, I would say, David, if we get no additional pressure from avocados, no additional pressure from chicken or beef costs, and so if our commodities stay the same, I would say we ought to do a little better than we did in the first quarter.

Because the menu price increase that we saw in Colorado should improve our gross margins, not just hold them competent.

So, we think we've got a little room there.

That's why when I answered the question earlier, we're cautiously optimistic that, if commodities perform reasonably well and the pressure isn't too great, that we might be able to hold our own.

We're- - I wouldn't bet that we'll be able to beat the 31% from last year.

But, if we can hold the 31.6 or something in that ballpark, we'd be pretty happy with that for the next two quarters.

Okay, thanks.

That's helpful.

And then on through put, what is the run rate that you're seeing now that you've rolled out the automatic change dispensers?

Well, that's kind of a tricky question.

Do you mean the run rate nationally?

Right.

I think you've quoted 110 per hour in the last couple of quarters.

Has that changed?

Yes, really that hasn't changed.

But, it has and it hasn't.

It was up to 110 and then, as we discussed in the first quarter, it had sort of fallen off a little bit due to seasonality of our slower fourth and first quarters.

But, we've seen that pick up again to the point where we are now at the fastest levels of through put that we've ever seen.

That is to say about 110 again.

But, we're there a little bit earlier this year than we would have been in past years, like 2006.

So, we believe that we're poised to really exceed those numbers going into the busiest months of the year here, in the spring and summer months.

So, like I said, we're, we don't anticipate that the improvements will be as dramatic as they were last year.

We think we're in a great position, because we've already achieved that sort of 110 range.

Now, with regard to the change machines, those change machines do very little to speed us up if we don't have the high traffic.

So, really, you're looking at the very busiest stores where we see that in our busiest stores, during our busiest periods of time, we see speeds increase because of the change machines from 1 to 4 transactions per 15 minutes.

So, if you had sort of a hypothetical, really, really busy hour, it could increase transactions 15, 16 transactions for an hour.

But that would be under sort of ideal circumstances.

Okay, great.

Thanks.

And last question, Jack.

On the other operating expense line, I think you mentioned that you had more normalized marketing costs this year.

Is that a one-time phenomenon in Q1 where you de-levered a little and should we expect some leverage on that line as you go forward?

David, the way I would say it is we don't spend our marketing evenly.

Monty said that we spend about 1.75% for the year.

Give you an idea on the first quarter, we spent about 1.6.

So, we're close to that, but still under it.

Last year, we spent 1.3.

So, we had an artificially low number last year.

1.6 is pretty close to 1.75.

And it wouldn't be unusual for us during quarter to spend maybe 2.2 or 2.3.

So, we select, depending on what we want to accomplish in certain markets what kind of message we want to get across, and that spend is not necessarily even throughout the year.

I would say our other operating costs in the first quarter, David, was pretty normal.

Because we had I would say pretty close to normal marketing costs at 1.6, maybe a little bit light.

We benefited from training costs by about 20 basis points.

But that's sustainable.

That's all driven by our new restaurant structure and promote from within, so that's sustainable.

So, really, I would say our first quarter, other operating at about 12.6 is pretty normal.

It might bounce around throughout the next few quarters based on things like marketing and things like that.

But, it was relatively clean, if that helps you.

Okay, great.

Thank you.

All right.

Thank you, David.

We go next to Bryan Elliott with Raymond James.

Good afternoon.

A couple of clarifications, actually.

On the, you gave us a non-cash compensation expense estimate, I think, of 8 to 8.5 million for the year?

Right.

Okay.

And that compares to like 5.2 million last year, that correct?

Right.

There's no restricted or other things in there.

Okay.

And then the pricing question of just a couple of moments ago.

You say you're going to take incremental or we're going to get the effect of incremental that you took in Colorado during Q1 that's going to obviously be in place for all of Q2.

And that might add close to a point to the run rate of 1% that we saw in Q1.

Is that correct?

Yes.

I would say that's pretty correct, Bryan.

I would say that you'll get something less than 1% for Colorado, because we rolled out during April.

So, something less than 2% in total.

But, then by Q3, it will be fully loaded and you can expect pretty much a full 2% by Q3.

And just one clarification, David, or Bryan, on the stock comp.

The stock comp was $8 million, $8 to $8.5 million, does include the restricted stock element as well.

You've seen a previous announcement by us that we did have some restricted stock.

That $8 million to $8.5 million includes stock option grants as well as restricted stock, so it's a fully loaded number.

Okay.

All right.

Thank you.

My question is, related to avocado prices, are we not, I've seen data suggesting that, given that the California crop which was damaged is just now reaching its point where it traditionally begins to supply the market, that we're only now beginning to see a pretty sharp rise in spot avocado prices.

Is that information that I have inaccurate?

No, it is accurate, although I would say that we have yet to see it.

We're expecting to see the avocados this month.

We haven't seen it.

We haven't seen the price spike yet at all.

Our prices have held pretty stable through the fourth quarter and into the first quarter.

And so, we have not at all, even throughout all of April, seen any price effect from the California freeze.

So, we're waiting just like you are to see exactly what impact that might have.

Right.

And then, on the food cost side, is the natural meats- - obviously commodity meat prices are up a lot with the grain price and feed stock increases- - are we not seeing the farmers who raise natural meats having to cover those increased costs at the same magnitude as their scale offsets or something that's preventing that increase in your meat costs from being similar to those of commodity meat costs?

So far, Bryan, in both commodity and our naturals, we've seen only modest increases, but we keep hearing it's coming.

So, we don't believe we've seen it all yet and we don't know what it's going to be.

But, so far, as you can see from our food costs, we only have relatively modest increases so far.

When you compare to year-to-year, both our chicken and beef, both the natural and the commodity, we see relative stability compared to what we're hearing about the impact of corn price and the impact that's going to have.

So, we're feeling like that pressure is yet to come.

All right.

Fair enough.

Thank you very much.

Thank you, Bryan.

We go next to Steve West with A.

G.

Edwards.

Hello.

Hey, guys.

Just wanted to say I'm glad to see that the Burrito's finally landed here in St.

Louis.

And on that note, a kind of personal side, on the other side of that, the past year or so, Qudoba, they're fully entrenched here and they've been throwing up units right and left, I guess, in response to your announcement that you're coming.

They're now doing TV advertising.

What, do you guys have any plans to try to get St.

Louis up and running a little faster than maybe you did with Indianapolis, which also was a strong Qudoba market?

Is there anything you can say about that?

There's really nothing in particular.

I think that, as we go into new markets, and St.

Louis is no exception, and if Qudoba is already there, it may take a little more time for us to catch on.

But, right now, our stores in St.

Louis are doing very, very well.

They operate- - Steve and I just went out and looked at the operations a week or two ago and they were exceptional.

And I think that what happens is customers very quickly start noticing the difference between us and Qudoba, so it doesn't, it's not going to take any sort of gimmicks on our part of extra or unusual advertising spend to differentiate ourselves.

We're just going to do that through continuing with superior operations and hope that the folks notice as they have elsewhere.

Okay, great.

Thank you very much.

Thank you.

Thank you, Steve.

And we go next to Steven Rees with J.

P.

Morgan.

Hi, thanks.

I just wanted to ask about the maturity curve of these stores and specifically how long it's taking the new units to ramp up, the system average.

And if that time now is any different than what it was, say, three or four years ago.

Yes, Steven, our new stores have continued to open up right around in that kind of 85% of mature stores.

But, what's happened is, our mature stores have grown in volume dramatically, and so our mature store- - and we define a mature store as any store opened 12 months or longer- - is now at 1.632 million.

When we first filed for the IPO, our mature store was only at 1.4 million.

Well, during this whole period, as our existing stores have grown in volume dramatically, our new stores have continued to hold right about at that 85% range.

And so, we're delighted by that.

And so, when you're within 15% of what the mature or existing restaurants are and with the comps that we've been running, you're really within a couple of years of reaching that, quote, mature status.

Okay.

Great.

And then perhaps for Steve or Monty, I just wanted to ask you what opportunities you see to more explicitly brand the Food With Integrity initiative both in stores and perhaps in certain markets?

Yes, I don't think that we're going to do any specific sort of marketing, new kind of marketing campaign to brand Food With Integrity or anything like this.

People are starting to catch on to Food With Integrity.

And largely the way people caught onto Chipotle in the past, a lot of our marketing is local store marketing, word-of-mouth marketing and teaching customers that we are different.

And so, I would expect to see, to continue to see a lot of that.

That being said, we have had a lot of billboards in various markets, talking about naturally raised meats.

We think this is very important and people are appreciating this.

So, as these things become more available, we continue to talk about them and I think it's, it will be quite the tipping point phenomenon when people will all of a sudden start to realize the importance of Food With Integrity and it really will become relevant.

And at that time, just like Chipotle in the past, people just sort of realize it's there.

We believe that's the best way to market it.

It's the most believable way to market it, to create that relationship with the customer.

Okay.

Great.

Thank you very much.

We go next to Nicole Miller with Piper Jeffray.

Good afternoon.

Hi, Nicole.

Hi, Nicole.

Hi.

I just wanted to ask the G&A question again a different way.

Are you suggesting that 17's a good run rate, Jack?

And then we have about 8.5 million spread evenly beyond, into the next three quarters to absorb, so about, getting into the 20 million range.

I wasn't speaking so much, Nicole, from a $17 million.

I assume that's what you mean by the 17?

Yes.

Each quarter.

We would expect that as we add restaurants and add markets, that that number from a dollar standpoint is going to increase.

What I really meant to say is the 7.2% is light to begin with, if you roll in the full effect of the equity comp, that would put you about 7.6%.

I think that is a more clean number, if you will, for the first quarter.

But, I still think, over the rest of this year and then into next year, that we think that we can get that number.

So, more than a year.

So, some part of two years or maybe the full part of this year or next year, we expect that we can get that number into the low 7% range.

Okay.

Thanks for the additional clarification.

Okay.

Can we talk a little bit about are you seeing any- - I know you're fairly evenly split, your mixed lunch and dinner.

Have you seen any change there in pattern?

No, just over the last I guess five years now, we've seen dinner gradually, very gradually, take sort of a larger percentage, but it's still close to 50/50.

Okay.

Can we also talk, you guys usually give a nice update, if you look at your most penetrated markets, and you're still back filling there, are you seeing continued comp growth?

Are you running into cannibalization at this point?

Yes, Nicole.

We see...

At this point.

Yes, Nicole.

We see cannibalization just on an individual restaurant basis.

We're not seeing an entire market for example that is negative comping.

Really, all of our markets are comping very nicely, including our most populated market in Denver.

Same thing with our Ohio markets, which are approaching the density of Denver.

We're still seeing very nice comps in those markets.

We do see impact when we open up a restaurant that's near another restaurant or near a few other restaurants.

We predict that impact.

It's, we're not perfect at predicting it, but we're getting better all the time.

And we make our decisions based on what the financial returns are going to be and what the sales are going to look like considering that impact.

So, really no new news to update you on there.

It's really been kind of more of the same.

Okay, great.

And back to the day part question.

I may be a little bit forward thinking, but is there any thought to day part expansion on this, going forward in terms of the breakfast for example?

Not right now.

We certainly have had opportunities and, again, even though we say that we hope that we have the same menu today in 50 years that we have today, maybe like In 'N Out Burger, we're always considering new sorts of ideas.

But that's today not where our time is best spent rolling out a breakfast item.

Okay.

And is it too early to ask about international development?

And even if you could just comment, if that were in your future, would that be a franchise or company-owned type strategy for you?

Well, I think certainly international expansion is in our future.

The question is when.

When is the right time to go?

We have explored international for sure and talked about where to go first, whether that be Canada, which is sort of an obvious, easy next step, or maybe Europe.

I think the most important question to ask, though, is that of acceptability.

And I think the brand would be accepted very, very easily and appreciated, especially in Europe where this idea of Food With Integrity is already very important to people.

So, I think it would be a natural.

Tack onto that the concept of preparing fresh food in front of the customer and our ability to have through put in high dense, dense neighborhoods.

I think it's a no-brainer.

The question, though, is when we're best served to do that.

And that we have not determined yet.

Thank you for that color.

And as a final question, in terms of operational efficiencies, are you willing to explore drive-throughs at any point?

Again, drive-through is really a departure from the concept, from the brand that we've been refining for the past 14 years.

If you look at the way we've grown the business, grown comps so dramatically, so significantly, year after year.

It hasn't been by adding new menu items or new day parts or marketing schemes or really anything like that.

It has been about continuing to serve the very same menu item, but improving cooking methods, improving the quality of the food, through Food With Integrity, improving our customer service by having better crew people and better managers.

And the profitability of stores is so much greater when you can keep to a really streamlined economic model and add just top line sales through focusing on the things that I mentioned, rather than creating complexity.

So, I would say that we'll continue to refine the basic operating system and that there's a lot of, there's an awful lot of runway left in just the basic operating system, the basic unit economic model that we've had for the last 14 years.

Thank you very much.

Thank you, Nicole.

Thank you, Nicole.

[Operator Instructions] We go next to Larry Miller with RBC Capital Markets.

Yes, just had a question on your fax program.

Can you give us a little color on how that might be helping sales?

How it's being received?

Yes, two aspects to that.

One is that we have this Don't Stand In Line system, which is an on-line ordering system which we've done, which we rolled out some time ago, but we've been sort of perfecting.

And that's working better and better and it's growing.

Our fax sales overall are about 3% of our sales, including DSL.

But, most importantly, when we have that, when we use the second [mig] line in the store, the most significant thing about that is its' an opportunity for us to serve customers better by allowing customers who perhaps have large orders not to have to wait in line.

But also, it helps eliminate problems with our through put.

Because as people come in with big orders in the middle of our lunch rush or our dinner rush, for instance, it really detracts from our ability to serve the other customers in line efficiently.

So, we continue to look at the stacked business or the second mig line as being a very important part of how we're improving our customer service and our speed of service.

And it's been going very, very well.

Thank you very much.

And, ladies and gentlemen, this does conclude our Q&A session of today's conference.

And with that, Ms.

Curlander, I'll turn the conference back over to you for any closing remarks.

Thank you, everyone.

We appreciate your time today.

And, ladies and gentlemen, that does conclude today's conference call.

We do appreciate your participation and you may disconnect at this time.

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