奇波雷墨西哥燒烤 (CMG) 2007 Q3 法說會逐字稿

Good afternoon, everyone, and welcome to the Chipotle third quarter earnings conference call.

All participants are now in a listen only mode.

After the speakers' remarks, there will be a question-and-answer session.

(OPERATOR INSTRUCTIONS) As a reminder, this call is being recorded.

I would now like to introduce Chipotle's, Investor Relations Manager, Miss Sandra Curlander.

Please go ahead.

Hello everyone and welcome to our call today.

By now you should have access to our earnings announcement, released this afternoon for the third quarter ended September 30, 2007.

It may be found on our website at 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 meanings of the securities laws.

These forward looking statements will include projections of our restaurant comp sales trends, the number of restaurants we intend to open, 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 on our annual report on form 10-K, for 2006 as updated by the 10-Q, which we expect to file this week, for a discussion of the risks that could impact our future results, 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 fourth quarter it will begin December 1st and continue until our fourth quarter release in mid February.

On the call with us today are 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 comments, we will open the call for questions.

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

Thanks Sandra.

Once again, I am pleased to report another quarter of strong performance for Chipotle.

We generated same store sales of 12.4% for the third quarter.

Which brings our year- to-date restaurant comp sales growth to 10.9%.

On the strength of these numbers, we are now positioned to reach our tenth consecutive year of double digit comps, which is certainly an extraordinary achievement.

We believe that these results are evidence that people appreciate our continued focus on improving the customer experience in our restaurants.

Our unit economic model strengthened during the quarter as well, with both average restaurant sales and restaurant level margins increasing.

Even while higher commodity costs are pressuring margins, our managers are improving the customer experience, while effectively managing the business, and they are doing this during a difficult restaurant operating environment.

I am really proud of what our managers are able to accomplish.

And we continue to grow as we open 20 new restaurants in this quarter, and 88 year-to-date.

More and more of these new restaurants are staffed with managers that we developed from within.

And the sales of these new restaurants continue to keep pace with our existing restaurants, such that the new openings still track at the 85% of the volume of our mature restaurants, which continue to increase each quarter.

A better customer experience, double digit comps, higher margins and more new restaurants, it all adds up to EPS reaching 72% for the quarter over last year.

For years you have heard me say that we want to change the way the world thinks about, and eats fast food.

To accomplish this mission, we obviously plan to continue serving great tasting food using high quality ingredients and classic cooking methods, but we also need to continue to evolve in every aspect of what we do.

This evolution has continued over the last 14 years.

We have continued to refine what we do, and by doing so, have been able to further strengthen the unit economic model, which is at the core of our success.

So we view these latest operating results as a natural consequence of our continued effort in this regard.

We are very proud of what we have accomplished so far to change the landscape of fast food in this country.

We believe Chipotle is the only national restaurant chain committed to making better-tasting, socially responsible gourmet food better and affordable.

So that everybody can eat better.

We feel that this sets us apart from all other restaurants, but our ambitions stretch far beyond what we have accomplished so far.

We know that we can operate our restaurants more efficiently.

We know that we can find even better ingredients from which to make our food.

We know we can find better equipment and design better restaurants, which will allow our crews and managers to cook even better food and provide a better customer experience.

We know we can create better training tools which allow our employees to take on more responsibility more quickly.

And by doing all of these things, we are confident that we can continue to improve the experience we offer so we will be an experience of increasing relevance to our customer.

Clearly, a key part of this ongoing effort is our Food with Integrity philosophy.

Again, this term describes our ongoing effort to find better quality, better tasting raw ingredients from which to make our food.

You've heard me talk about this, and this began with our switch to 100% naturally raised pork.

Our naturally raised meats come from humanly treated animals, which are never given growth hormones or antibiotics.

And which are raised on 100% vegetarian feed rather than being fed feed that contains animal by products.

I am pleased to say that the amount of meats that we serve which follow these protocols have continued to grow.

We recently completed the roll out of naturally raised chicken into our entire Texas market.

So that about 80% of our restaurants nationwide serve chicken which is naturally raised.

Additionally, nearly half of our restaurants serve naturally raised beef.

This has allowed us to continue to serve better and better tasting food.

Important improvements in our dairy supply are also contributing to an improvement to the taste of our food.

All of our sour cream is now made from milk from cows that are never treated with the growth hormone rBGH, as is nearly all of our cheese.

But there is another exciting development, which we expect to make soon to our dairy, and that is our switch to using dairy from pasture raised cows.

Commodity cows are usually raised in confinement with little or no access to suitable grazing land and given hormones to stimulate milk production and antibiotics to stave off illness.

By contrast, pastured raised cows are raised in an open pasture.

They don't need to be given antibiotics to remain healthy and are comfortable and well treated, and enjoy a much longer life span.

The result is not only a much more sustainable agricultural system, but better tasting milk, which makes delicious sour cream and cheese for our restaurants.

Beyond our food, we are testing a number of technicological and equipment improvements in our restaurants.

These improvements are at the very early stages but are aimed at creating more operational efficiencies in our restaurants.

One example of this is the hand-held POS terminal, which we are testing in some of our Denver and Chicago restaurants.

This device allows us to take orders from customers who are using credit cards while they are waiting in line.

These customers still get the full experience of custom ordering their food, but by the time they receive their order, they have already paid for their food, which helps alleviate the bottle neck at the cash register at the end of our serving counter.

Not only is this faster and more respectful of our customers' time but it's also a chance to give great, personalized customer service.

In other developments, we are now at the very early stages of plans to add restaurants in Toronto, Canada.

We think Toronto is a logical geographic extension for Chipotle, given its demographics and proximity to some of our strong U.S.

markets.

We believe customers in Canada will appreciate our great tasting food, made of high quality raw ingredients.

We believe that we will be able to open a restaurant in Toronto by the end of 2008, once we determine a suitable location and the proper staffing for the market.

We still have a lot of work to do ahead, including a lot of HR requirements and supply logistics associated with sourcing our high quality ingredients.

But we are excited about entering the Toronto market.

I am confident that the foundation we built will continue to serve us well, through our mission of Food with Integrity, together with our disciplined approach to our unit economic model.

With that, I will turn it over to Monty.

Thank you, Steve.

As you have heard Steve discuss today our strong performance this quarter is due to our continued focus on things like, Food with Integrity and our culture of empowering managers and crews to reach top performance.

When things are going well, as they are now, it is healthy to think about what could limit our growth in the future.

We've always said that there are two things that could limit our growth in particular.

One is our ability to find great real estate and the other is our ability to find and develop great managers to run our restaurants.

In a few minutes, Jack will talk more about our specific real estate plans but for now I would like to say that we are very optimistic about our ability to find and develop new restaurant locations.

In fact, next year we expect to more restaurants than we have in any prior year.

Of course to effectively open these restaurants will require even more great managers and crews.

Fortunately, our previous efforts to improve the quality of our managers will give us a head start in accomplishing this.

Specifically, our acknowledgement that the manager is the most important position, our restauranteur program, our new staffing structure, our promote from within philosophy and the great opportunity we provide our crews are all examples of steps we have already taken to ready us for this faster growth.

The restauranteur program is our foundation to develop better managers.

Not only does the program reward our most elite managers, but it also clearly defines the role of every manager.

As you recall, the focus of every manager is simply to develop their best crews into managers, as well as building sales by running great restaurants.

The restauranteur program continues to gain momentum and deliver better results.

While about 10% of our managers today are restauranteurs, virtually every manager aspires to be one, and is working to become one.

Right now, we have almost 40 candidates ready to be interviewed.

Steve and I plan to interview nearly all these candidates over the next few months while we visit the restaurants around the country.

Additionally, our field leaders have identified another 80 managers who they believe will be ready to become restauranteurs over the next six to 12 months.

Steve and I really enjoy these interviews and it is inspiring to see that more and more of the candidates that we meet have the energy, passion, skill and desire to become restauranteurs.

As a result of these efforts we now have stronger managers who deliver better customer service than ever before.

Even while increasing the pace of new restaurant growth, we continue to promote the majority of our managers from within.

Also, our management turnover continues to decline from last year, and remains well below the industry average.

I am also encouraged that our focus on people is resulting in better applicants.

As we travel around the country, we keep hearing about how our improved brand recognition, our market presence, visibility and career opportunities all together, are helping to attract stronger applicants.

It is very encouraging for us to hear, especially in an environment where there is so much competition for good employees.

With all this growth, we need to do more than just have great managers and crews.

We also need to ensure that we have an effective and efficient field support system for our restaurant managers.

To that end, we are working to ensure that we have strong field leaders who are in clearly defined roles.

Just as we previously worked to better define the roles of the various positions in the restaurant, we are now working to ensure that the roles and responsibilities of every field staff position are equality well defined.

Quite simply, we expect that every staff position be structured in such a way that it supports our efforts to identify people with potential, develop crew into managers, ensure high standards in our operations and remove any obstacles that may be in the way of our managers being successful.

It is our objective to exult our best people and let them achieve their highest potential and to remove the weak performers.

Not coincidentally, our best mid management staff has learned to work well by empowering those whom they supervise.

We are trying to elevate these individuals by making certain that they are in positions where they can have the greatest positive impact on as many restaurant managers as possible.

The good news is that as we clearly define each role, and develop stronger performers in each position, not only do we get better results but we also gain efficiencies.

For example, our area managers now oversee about 7.6 restaurants each.

That ratio is over 40% higher than it was just five years ago.

And we expect the ratio to further expand as we develop even stronger area managers and more restauranteurs who need less oversight.

We are also working with our restauranteurs to expand the scope of their leadership to help adjacent restaurants with opportunities for improvement.

By doing this, we will allow the natural leadership of our restauranteurs to impact more restaurants while further expanding the number of restaurants an area manager can oversee.

We are also working with our training department to create the necessary tools to help assist our crews and field leadership with their development.

Our focus on hiring high potential people and making them better we will help ensure the success of our future fast paced growth.

All of these efforts defining and developing better people, whether it is staff, management or crew, leads to a better experience for our customers.

We see the results every day with crew who go out of their way to learn the names of their regular customers and even the usual orders for these customers.

We see it every day with managers who spot new customers in line and take the initiative to walk them through the ordering process and introduce them to Food with Integrity.

We see it every day with stronger sales and a stronger brand.

I will now turn it over to Jack.

Thanks, Monty.

We are really pleased that we are able to deliver these strong third quarter results in what many have described as a difficult restaurant operating environment both in terms of customer visits and as well as operating margins.

These results are evidence that customers appreciate better tasting food as a result of our investment in these higher quality ingredients.

But it also means that our empowered managers and crews are providing a special dining experience for our customers while effectively managing the business.

As a result, our comp sales increased 12.4% for the quarter, on top of 11.6% last year.

This 12.4% comp was mostly driven by increased customer visits, as menu price increases related to the rollout of naturally raised meat contributed about 2.6%.

While we expect to finish 2007 with a full year comp in the lower double digit range, for our tenth consecutive year of double digit comps, we did see a slight fall off of comps starting in mid September continuing into October.

But comps have remained in double digits.

We remain confident full year comps will be 10% or greater, though fourth quarter comps may slip into the high single digit range.

Total revenues increased by 35.6% to $286.4 million in the third quarter as a result of new restaurant openings, including 28 in the quarter, along with the 12.4% increase in comps.

For the nine months ended September 30, comps were 10.9% and total revenues increased 32.1%.

Our new economic model continues to strengthen with average restaurant volumes now over $1.7 million to the 540 restaurants that have been open at least 12 months.

This was up from under over $1.6 million at this time last year and just over $1.4 million two years ago.

With 28 new restaurants opened during the quarter, and 88 year-to-date, our total restaurant count at the end of September, now totals 668, all company operated restaurants.

We've opened restaurants in three new markets through September, including Salt Lake City, Birmingham and Iowa City and we just opened our first restaurant in Philly, this month, with first week sales of $46,000.

We expect openings for the full year to be at the high end of the guidance range of 110 to 120 new restaurant openings.

We continue to be pleased with the strong inventory our development teams have delivered, allowing us to open new restaurants evenly through out the year.

And we are pleased with how the pipeline is building for 2008 so far.

As a result of this very disciplined and effective approach to build inventory, we now expect to open between 130 and 140 new restaurants next year.

Restaurant operating margins improved by 150 basis points to 23% compared to 21.5% last year, despite an increase in food costs of 110 basis points.

Our restaurant level margins benefited from labor efficiencies and menu price increases associated with the introduction of naturally raised meats in certain markets.

Food, beverage and packaging expenses were 32.1% of restaurant sales or 110 basis points higher than last year and 20 basis points worse than last quarter, and this is due to continued cost pressures associated with avocados, as a result of the freeze in California earlier this year and recent freezes in Chile.

Also contributing to our increased food costs are elevated levels of demand for corn which impacts the cost of our chicken and our beef.

We continue to see commodity prices from these items as we look into the fourth quarter and into 2008, and we will begin to experience pressure on cheese when our pricing protocol with our supplier ends December 31.

Labor improved 190 basis points to 26.3% verses 28.2% last year.

We continue to benefit from our national labor matrix, along with higher than average restaurant sales which drove about 150 basis points in the improvement, while the balance was driven by lower than expected insurance costs, to now being self insured.

We implemented the labor matrix about this time last year, so we expect to see diminishing leverage on the labor line as we move into the fourth quarter and into 2008.

Occupancy costs were 6.9% of sales or 20 basis points better than last year, due to efficiencies from higher sales, and other operating costs decreased 60 basis points to 11.6% as a result of inefficiencies from higher sales, along with lower promotional marketing costs for the quarter.

G&A as a percent of total revenue was 6.7% for the total quarter, compared to 7.4% for last year, primarily due to efficiencies from higher sales.

And year-to-date our G&A is at 6.8% of sales.

We expect fourth quarter G&A will be right around that 6.8% to 7% level due to the effect of seasonality.

We expect G&A as a percent of revenue to be slightly higher in 2008, in the low 7% range.

Our 2008 G&A will be impacted by our stock based compensation expense, as the noncash accounting charge for each share or option granted will be much higher in 2008 based on a higher stock price.

Equity grants are typically approved by our comp beginning in the first quarter of each year.

So while we are not able to project accounting costs of stock based compensation until the first quarter, we do expect the total noncash costs for stock based comps to be significantly higher in 2008.

Excluding the effective stock based comp, we do expect to see modest G&A leverage next year.

To a lesser extent, 2008 G&A will also be impacted as we begin to invest in supporting our development of the Chipotle brand outside the U.S., with Toronto targeted as our first international market.

It has been our disciplined approach in managing G&A which has allowed us to reach our stated 2008 goal of the low 7% range, a full year earlier in 2007.

In fact we have pushed below that original target and below 7% for the year so far.

We will continue to use a disciplined approach in managing our G&A as we continue to invest in people development and a field structure which will best support our future growth.

Preopening costs were $2.4 million compared to $2.1 million last year.

We opened 28 restaurants this quarter compared to 30 during the same quarter last year.

Preopening expenses are higher this year as we have a greater number of new restaurants under construction.

Loss on disposal of assets increased 10 basis points year-over-year, mostly due to write offs associated with the upgrading of our security system along with the normal ongoing maintenance of our restaurants.

Income from operations increased 76% to $31.4 million compared to $17.9 million last year.

And our operating margin improved 250 basis points to 11%.

Year-to-date our operating margin increased 240 basis points to 10.1%.

We ended the third quarter with a cash balance of just over $167 million.

Net interest income was down compared to last year due to a greater investment in tax exempt securities.

Our effective tax rate was 37.4% for the quarter as we continue to benefit from the taxes and securities and slightly lower state taxes.

For the full year 2007 we expect our effective tax rate to be right around 37.7%.

Net income for the quarter increased by over 74 % to $20.6 million from about $11.8 million last year.

And diluted EPS was $0.62 this quarter, 72% higher than the $0.36 from last year.

For the nine months ended in September, net income increased 73%.

Operating cash flow for the first nine months of the year totaled $105.6 million compared to $73.5 million last year.

As a result of the strong comp sales year-to-date, we are increasing our comp guidance to the low double digit range for the full year 2007.

Also for 2007 we expect to open new restaurants at the high end of our new restaurant opening range of 110 to 120 and expect development costs to be slightly under $900,000 per restaurant.

For 2008 we are introducing comp guidance in the low to mid single digit range.

We expect to open between 130 and 140 new restaurants in 2008, mostly in existing markets; that includes markets we will enter by the end of 2007.

And we continue to believe we can grow diluted EPS at an average annual rate of at least 25% over the long term.

Thank you for your time today.

Now we will be happy to answer any questions you may have.

Operator, please open the line.

Thank you, sir.

(OPERATOR INSTRUCTIONS) We will go first to Paul Westra of Cowen and Company.

Hi, thanks.

Good afternoon.

Hi, Paul.

Hi Paul.

Question for each of you individually.

Monty, if you could talk a little bit more about I guess some of the human resources efforts, you mentioned management turn over.

Can you give us those numbers and comment a little bit more about the restauranteur program?

What percentage of GMs would you like to eventually get to?

And then a question of, as you seem to add some responsibility to maybe help other restaurants in adjacent areas, will the restauranteurs be a source of field management down the road?

How much internal churn would you like to ultimately settle down at?

Great question.

Number one, on turnover, we have continued to see our turnover fall and it is now in the mid 20% range, which is the lowest it has been.

As an interesting side note on turnover, as it has always been, our internally promoted folks see a lower level of turnover than our externally promoted people, but actually that gap has narrowed, which it is such that the people we hire from the outside have a turnover in the low 30% range.

And we see that as a great result, because since we are having to hire less people from outside we are able to really focus more carefully on who we hire.

So that is neat.

Turnover among our crew has remained in that sort of 100%, about 106 % realm.

In terms of restauranteurs taking on more field management, yes, it is our goal to try to leverage our restauranteurs more, as a way of allowing our area managers to handle more restaurants.

But, we also have a twin goal of making sure that our restauranteurs remain in the restaurants where they can do the most good, actually impacting customer experiences every day.

So, what we intend to do is start associating some of our restauranteurs with nearby restaurants which are having less luck with certain aspects of their operations, and make sure we leverage the skills of those restauranteurs into some neighboring restaurants.

By doing that we will allow our area managers to handle more restaurants.

So now we are going through all our regional directors and identifying throughout the country which locations these restauranteurs can effect and which area managers can take on more responsibility as a result of that.

We are really taking a look at our field management to make sure that each of these roles, whether it be restauranteur, area manager or operations director, all are created and defined in such a way as to have a maximum possible benefit to the most people possible.

What percentage would you like to get?

You are at 10% now of restauranteurs.

Would you like to get the system up to 40% or 50% or even more?

Yes.

We kind of, ideally, the more the better in terms of restauranteurs.

If all of our managers were restauranteurs, that would be a perfect situation for us.

So our goal is as high as 100% but we do not really chase a number in particular.

What we are looking for is to make sure that as Steve and I interview our restuaranteurs that we continue to see a greater and greater level of confidence among the folks we are interviewing, and that we keep the bar pretty high to entry into this sort of elite class of managers.

That being said, we are about to go interview about almost 40 of them in the next couple of months.

We are seeing a larger and larger percentage of those that we are presented with being accepted into the program.

We believe that, of that 40, certainly better than half, if history is any guide, will become restauranteurs and we will increase our percentage quite aa bit just in the next couple of months.

Even more exciting is the fact that there are 80 more waiting in the wings in the next six to 12 months that will be ready for interviews.

And so we are very excited to meet with them as well.

And as that happens, as we see more and more of these restauranteurs ready to be interviewed, that is just a function of the fact that all of our managers know what it takes to become a restauranteur, are being given more clear direction as to how to get there, more specific training as to the areas of their weakness and we think that that will continue to see a increase in the amount of managers applying for the role.

Great.Thanks that is helpful.

Steve, could you just comment a little bit more?

You mentioned this new equipment test with the hand-held POS?

What is the goals, and what's the potential investment and the rewards of the test?

Its' very, very early, Paul.

I think one of the things that we really want to do for customers is to get them through faster, especially during the busy lunch period.

As you know, there are so many people who want to eat at Chipotle, certainly in the busy dense areas, that we usually have very, very long lines.

Most of the people in those lines know exactly what they are going to order and they also have a credit card.

And so we take care of that problem before they ever start the ordering process.

And so once they get to the line, they order just as they normally would, picking and choosing among all of ingredients and then once they are finished doing that and their burrito, or order of tacos is ready, then they are free to go have a seat.

They eliminate that 18-22 second POS experience, which is really not adding anything beneficial to the overall dining experience.

We think it is really going provide a lot better customer experience, especially during that busy crunch hours during lunch.

So that 20 seconds.

What is the total line time currently?

I have not added it up.

To help you put it in perspective, the tortilla station is probably eight to ten, putting cheese and sour cream and wrapping it up, about another eight seconds or so.

The expediter is pretty quick, single digits.

And then you tack on the POS, that is all the way up into the high double digits, 18 to 22 seconds.

So, it is a significant amount of time that you can save if you have allowed the guest to prepay.

What is unique about Chipotle, though, is that you just need to know chicken burrito and you can still go through and have all the choices, so it is not a cumbersome ordering process in the line.

It is just simply the chicken burrito or a steak burrito or something like that.

Then just two quick questions for Jack, if you don't mind.

The tax rate you got at 37.7%.

Do you still expect that to come down over time?

Yes, Paul.

We said next year to expect it to stay at that 37.7%, but we think we have some opportunities in state taxes.

And as those opportunities materialize, we will tell you about them.

They are going to be relatively small.

We were at this time last year, we were about 40% so we brought it down quite a bit to now under 48% and we are going to continue to work to bring it down.

But there is going to be a limit to how much we can get it down.

It is going to be tens of basis points and kind of as we see those opportunities actually materialize, we will let you guys know through the releases.

Great.

Thank you.

Thanks, Paul.

We will take the next question from Nicole Miller of Piper Jaffray.

Hi.

Good afternoon.

Hi, Nicole.

Can you talk to us about, it like you removed the hormone from the cheese in the quarter and did you have an opportunity for pricing because of that?

Could you repeat that question?

Sure.

Was there an opportunity for pricing in the quarter?

It looks like you went hormone free on the cheese?

Is that correct?

Yes.

The cheese did not -- asking the supplier to remove -- our only source of milk from cows that were not treated with rBGH did not cost us more money.

OK.

When was the last price increase, and what are you looking for for next (multiple speakers)?

So therefore no, we did not take a price increase associated with that.

We did not.

There was not really an opportunity.

The messaging around that would be tough.

So most of our price increases have really been around natural meats and we do marketing and education with our customers around natural chicken or natural beef.

You know, we are running, Nicole, about 2.6%, you know, for the third quarter.

Right now the pace we are at right now through the fourth quarter is up to 3%.

As you know, you know, that menu price increase is not an across the board type menu price, it is really just market by market as we have had the Food with Integrity opportunities.

That is very helpful.

Thank you.

Have any commodities been contracted for next year?

No.

We would normally contract cheese or agree on a price with our supplier for cheese and we did that and we benefited from that for all of 2007.

We have not yet done that for cheese.

We will probably do something before the end of the year.

But, you know, we are kind of watching what the market would look like.

Right now we have nothing really contracted for next year at all.

When we look into development for next year, on a quarterly basis should it be in your image of this year or is there anything that would shift that?

I really hope so, Nicole.

We are really proud that our inventory building was so strong this year that we are almost perfectly level loaded.

You know, with 30 restaurants, 30 restaurants and now 28, I would not necessarily promise you that it would be that perfect in terms of level loading, but the inventory is nice and strong.

So it should for sure not be back loaded the way we have been historically and the way most restaurants are.

So, it will be relatively even throughout the year.

On the labor line, there was a labor system implemented last year.

Where are you at in terms of seeing that in the margin?

We implemented that and it was our national labor matrix, and we implemented that really at the end of the third quarter and into the fourth quarter.

And so what you will see is if you go back to last year in the fourth quarter, we started to see labor leverage.

We got about 30 basis points of labor leverage in the fourth quarter of last year and we got basically 0 labor leverage or virtually 0 in the second and third quarter before we implemented this national labor matrix.

We are starting to go comp up against that in the fourth quarter and for sure into 2008, Nicole, so you will see much less labor leverage going forward than we have seen in the last few quarters.

Okay, and one big picture question.

The margin -- obviously the margin results are obviously very impressive, and on a corporate level, could you talk to us about the best performing margin units?

Are they in classes in terms of when they opened or by region?

What do those peak margins look like and then what would either allow or prevent the corporate to have those margins over time?

Well, Nicole, the very highest margin restaurant, rather than by [past historic], would be, you know, based on the sales and based on occupancy.

For example, we have restaurants that are doing $3 million and they are in middle America and paying very modest occupancy costs.

Those restaurants can easily do margins in the 30% range or higher.

Your next question is, what is preventing really us achieving those types of margins across the country.

Well if we can do $3 million in volume and pay the kind of occupancy costs that we can pay in middle America, we could do that.

The reality is, you are not going do $3 million in every restaurant.

We are now in NY and we are now in Philly and the occupancy costs are much, much, much higher.

So, we don't know -- I think the real answer is we have not seen a limit yet to what our volume can be either by market, because we have got individual markets that are averaging $2.5 million across the whole market.

I mentioned, we have got individual restaurants that are well over $3 million.

We have not seen a limit to really what we can do in terms of sales volume.

We know that our new economic model and our managers' focus on strengthening that model, we can continue to deliver these very, very nice margins.

Now the challenge ahead of us Nicole, is that we are going comp against the national labor matrix, so that is going to be tough to see more of that labor levered.

Commodity costs, there is still pressure there.

We don't see really any meaningful relief in the near future.

It is going to be tougher to continue to lever these margins, but our year new economic model continues to be strong.

Thank you so much for your time and congrats on a nice quarter.

Thank you.

We will go next to David Tarantino of Robert W.

Baird.

Congratulations on a great quarter.

Thanks.

Congratulations on a great quarter.

Jack, just a follow up to the margin question.

As you look out into 2008 with the pressure you are seeing on commodities and maybe less benefit from the labor matrix, what type of same store sales number would you need to hold restaurant level margins flat next year?

Good question, David.

We don't see any worsening of commodities.

Let's take that off the table.

So, commodities stay where they are at, just normal inflation creeping into all the line items.

We typically need about a mid single digit comp in order for us to hold our margins.

Okay, so would that imply you are expecting, then, with your guidance, some margin compression next year?

If food costs stay the same, and if we can do something -- you know, I think if we were at the high end of that range we could probably hold our margins as is.

If we hit the low end of our guidance range, in the low single digits, yes, I would expect to see margin degradation.

The way to offset that would be for menu price increases, which you've seen over the last couple of years, we have been running at this 2% to 3% range.

If we could do a couple of percent comps in transactions and a couple, 3% comps in margins—in menu price, that would be another way to at least keep the restaurant level margins.

There are a lot of different ways to get there, David, but if we don't do a mid single digit comp, and we do not have price increases, normal inflation would begin to eat away at the margins.

That is helpful.

Then a broader question about next year's earnings growth.

I know you didn't give a specific target for next year but you said you were committed to 25% plus EPS growth over the long term.

Is that what you might expect for next year?

If so, what are the components that get you there for next year, if you are just holding restaurant level margins flat?

Yes, David, we have never broken out as you know and given specific EPS guidance.

We feel comfortable over the long term with that 25% rate.

Into next year, we are not going give a specific, whether it is 25% or something different that that.

It is going to be more new store openings, based on our comp guidance.

We are finishing this year with double digits, our comp guidance we have been in the low to mid single digits.

That means we are going to have to rely more on new store openings.

Now, the good news is our new store openings continue to perform at exceptional levels.

Even though we are now over $1.7 million with our restaurants open more than 12 months, our new restaurants continue to open up at 85% of that level.

They open up within striking distance, with just a year, a couple of years of comps, to that $1.7 million range.

We also look at new restaurant openings as a class are cash flow positive within the first full month.

By the end of the first full 12 months they are not all the way up into what our average margins are today but they are way up there.

So they are much stronger today than they have ever been before.

We are relying on new store openings based on the higher number of 130, 140, and based on the better quality.

The quality that gets better and better even year, we feel that will be main driver of our EPS growth for next year.

Great.

That is helpful.

And then a broader question.

What are your thoughts on expanding the brand into international markets beyond Canada at this stage?

Well, you know, I will say the kind of the same thing I said last time, that I certainly think going into the big markets in Europe, U.K., France, Germany, are no-brainers for us.

I think the concept is going to do really, really well.

The idea of superhigh quality ingredients prepared in front of the customer, served in an interactive format, is something that is going to do well.

If there is one thing we have learned over the past 14 years is that we come out of the box really, really strong when we have a great team in place and when we pick great real estate.

That is our plan for our international expansion.

We are not in any hurry to get there.

We still have thousands of restaurants that we can build in the United States.

That is where you should expect to see a lot of the short and midterm growth for us.

International is a long term opportunity.

We are confident that we are going to do it right.

We have got the experience and we have picked out great areas to go into that we are confident are going to be real strong countries and cities for us.

So again, it looks really good.

But think of it as long term expansion.

OK.

Great.

Thanks a lot.

All right, David.

And we will take our next question from Steven Rees of JP Morgan.

Hi.

Thanks.

I just wanted to ask about the new unit volumes, which do sound like they're strengthening and growing even closer to the system averages.

Is this a trend we should expect to continue into next year?

Is there anything, I know you mentioned you are going to do most existing markets next year.

Should we expect that gap to widen at all?

It is a good question, Steven.

First of all, let me clarify.

Our new store openings have grown every single year, but they have not closed the gap.

What's happened is our average for the restaurants open 12 months or more has risen pretty dramatically over the last three, four years, really over the last five years.

But what has happened is our new restaurants over the last three years at least have kept pace at this 85% so it's grown every year at the same pace as our restaurants open 12 months or more--at the same growth rate.

So, in terms of what to expect for next year, there is nothing, Steven, that we are doing differently in terms of building our pipeline, that would cause us to believe that next year's numbers would be higher or lower than this 85% range.

We are still looking for high quality real estate.

Most of the openings are going to be in markets we are already in.

We did just open up Philadelphia and you never know how restaurant two, three, or four is going be in a new market.

We are not doing anything fundamentally different.

I would expect that trend would change either way.

Okay, and just for Steve, you mentioned fast food in your comments, but as you look at your consumer research and some of your more developed or mature markets, like a Denver or even a Dallas, how is your customer using the concept today versus when it was more in its earlier stages?

Are you still growing traffic in these units?

Who do you think is the right competition at this point?

Is it fast food or is it increasingly casual dining?

You know, it is an ongoing debate that we have here internally.

We have even been working with some consultants, some branding consultants and we have that argument with them, also.

Are we fast food?

Are we fast-casual?

Are we more toward casual dining but fast?

I guess I cannot answer that question, and everyone should be excited that I cannot answer that question.

The answer really is that we draw from so many different places.

Chipotle was built on my experiences from fine dining.

I did not know anything else.

I didn't know the fast-food rules.

Chipotle was built on fast -- on fine dining classical cooking methods but done in this format that allows us to serve it fast.

If you want to call it fast food, go ahead, but realize that the kinds of ingredients we use are like fine dining ingredients.

And so, I guess I would summarize by saying, you know, our demographic is very, very broad.

And we draw from all different places, from fast food, from health conscious people, from casual dining, and certainly smack dab in the middle of where a lot of people put us in this fast casual.

I think that is good news.

I think, if one is just drawing primarily from one area, that is kind of a limiter.

So we are excited that this is a hard thing to define.

OK.

Great.

Thank you very much.

And we will take our next question from Mark Wiltamuth of Morgan Stanley.

Hi.

Congratulations on a great quarter.

Hi, Mark, Thank you.

I would like to ask a little about your cash levels.

What are your plans for your cash and maybe a thought on cap-ex and free cash flow generation moving forward?

Yes.

We don't plan to do anything different with our cash balance.

Frankly, there are limits without getting into it.

There are limits with what we can do in terms of things like buyback or dividend or things like that because of the separation agreement we had with McDonald's.

We plan to, we've invested it in highly liquid, highly safe high quality instrument.

We are doing things like we are taking a small step into Canada.

We feel like we are very privileged to have this very strong balance sheet, such that if we decide that Canada opens very well, and we have got a very strong team there and we want to dial it up, we've got the capital to do that.

Same thing here in the U.S., the inventory building is going well.

Our development of our people is going very well.

So we can step up our openings to this range of 130 to 140.

So we feel privileged to be able to do that without having to go to a bank or without having to raise more money.

So we do not plan to really change our balance sheet in any kind of fundamental way.

Going forward, Mark, I would expect that we will continue to invest the vast majority of our cash flow that we generate from the business in new restaurants and in maintaining our existing restaurants.

We might take away from that cash balance a little bit, we might att to it a little bit but I would not see any really dramatic change in that cash balance either way as we move forward.

OK.

And when is the restriction on the McDonald's over so you could start doing share repurchase or other activities?

You know, there really is not an over.

There are some dates where it is a really hard and fast can't do anything, and that's a couple of years, October of 2008.

Even beyond that, it then boils down to facts and circumstances that we would not want to do anything, and would be very thoughtful and careful to not do anything that might affect the [tact] free nature of the split that McDonald's entered into back a year ago.

OK.

Thank you very much.

We will take our next question from Glen Patraglia, of Citigroup.

Hi.

This is actually [Jeff Hahns] actually talking on behalf of Glen.

How are you?

Hi Jeff.

A question for you.

You mentioned before about commodity costs and your expectation how they are not going to get worse from here.

Have you given any thought as to maybe doing some purchase or spot purchases on cheese, for instance, for next year?

Have you ever done that in the past, or is it typically all contracted?

First of all, Jeff, I don't think I said they shouldn't get worse, I think I said I don't see them getting better.

If anything we see continued pressure on all the key commodities that have caused pressure for this year so far.

We have locked into cheese, for example, this year, we are not seeing any of the degradation of our margin due to cheese at all, like other restaurant companies are, because we did lock into with our supplier a fixed price for the entire year.

We have the ability to do that again for next year.

Normally we would have done it by now, we just have kind of been waiting because the market has been so volatile.

We expect that we will probably lock into a price for some, maybe all of the cheese for next year.

So we have taken advantage of that in the past.

OK.

And are there any pockets of consumer weakness that you may be seeing from a regional perspective, i.e.

certain states not performing as well as maybe the company average?

That is a great question.

We have seen that other restaurant companies are reporting pretty severe weakness in a number of markets.

I can tell you we have not seen what I would call severe weakness, the way other restaurant companies are defining it, in markets like California and Florida, and those type of markets where this kind of housing bubble has happened.

One market that we have seen some softening, that other markets have as well, is in Arizona, in Phoenix.

We have got about 25 restaurants there.

Our sales are still well into the mid single digit range in terms of comps but earlier this year they were in low single digits.

We have seen an impact there.

But that is really the only one.

Our sales in California continue to impress.

Our sales in California are still very, very strong.

We have not seen what I think you have been reading about with other restaurant companies.

Have there been any price increases in Arizona at all associated with (multiple speakers)?

No.

There is not, although we are hoping, in the near future, we can introduce natural meats to Arizona.

So we think there is an opportunity to really talk to our customers and talk to them about the high quality ingredients with the rollout of natural meat.

We hope that might happen by the end of this year or early next year.

And last one for you.

I thought you had mentioned about a potential same store sale fall off in this coming December.

Is that correct?

Well no, what I wanted to tell you is we did see a fall off in the second half of September, [none for] October so far.

It's still double digits.

We did not want anyone to expect that our comps will sequentially increase in the third quarter.

Because that is what our comps have done each quarter.

They have climbed from the first quarter to second, from the second to the third.

So far, we have seen just a slight fall off.

It's still double-digits, it's still very strong, but not as high as we saw in the third quarter.

OK.

Thanks a lot.

Thank you.

We do have time for one final question from Rachel Rothman of Merrill Lynch.

Hey, guys.

For the same-store sales growth guidance, I guess if we roll back the tape to this time last year, I think the guidance you gave out for '07 was low to mid single digit.

Can you maybe talk about what surprised you the most in terms of the comp growth this year?

What drove the upside surprise and how we should think about conservatism of next year's guidance in that context?

Tough question.

I will give it a shot, Rachel.

We were going up against -- when we were at the same time last year, we were looking ahead to a first quarter of where we would be going up against a 19.7% comp and that was very scary.

We were going up against the awareness building from the IPO which we know was significant.

We were going up against the initial surge that we saw in our comps due to throughput because we had this increased awareness about throughput.

We were much more aggressive in communicating what works with throughput, and really holding out our fastest stores and telling all of our restaurant managers how those stores are performing at the levels that they were performing.

It was scary at this time last year, to be going up against all of those very, very, strong trends.

At this time, this year, it is still very, very difficult to predict.

We are now a restaurant company that has well over 500 restaurants that are averaging over $1.7 million.

In looking ahead into next year, following up on our tenth consecutive year of double digit comps, we don't know what to expect for next year.

We are not going change what our strategies are.

We are going to continue to focus on running great restaurants, developing great managers, developing great crew; we are going to focus on Food with Integrity; we are going to focus on serving the very best food that we can, and we hope that that results in better comps than what our guidance is, but we don't know what those comps are going be.

We feel like it is the appropriate guidance to give at this time.

And then, did I hear you comment that the labor matrix contributed 150 bips of the 190?

If that is correct, does that mean the insurance was the incremental 40?

How should we think about that rolling through?

Is that going to continue for the next quarters as you now accrue at a lower rate or was that a one time reversal of some prior accrual?

The 40 -- you are talking about the insurance?

Yes.

Yes.

That is a recurring number but we are going to go comp against that in the middle of next year.

You will see this benefit for another quarter or two.

And then you will be going comp against it and you won't see that benefit any more.

And one last one, on the incentive comp or restricted shares and options.

I know you talked about it being a higher dollar impact in next year's G&A.

Can you talk about that?

Is it based on a fixed number of shares or is it a fixed dollar amount of compensation?

Given your share prices doubled you would be allocated fewer shares?

It is hard to precisely answer that.

I know I'm not expressing it well.

I get your question and I will answer it the best I can.

We don't know what the grants are going to be.

We really need to let our comp committee do that.

They will look at a number of different factors as you can imagine and they will decide what the appropriate grant rate would be.

But to give you an example; what happens is you are layering on whatever the grants are in terms of stock and in terms of stock options, whatever the grants are, they are going be at a higher price than they were last year based on the stock price today.

What is removed from our stock option expense is options that were granted back in 2004 which were at a much, much, much lower rate.

For example, if we issued the same number of options and the same number of shares exactly as last year and we issued them at last year's price which is less than half of where we are at today, we would see a 50% increase in our stock comp, from kind of an $8 million to $8.5 million number this year to a 50% higher number like a $12 million to $13 million number.

If we issued the same number of shares as last year at this much, much, much higher price, our stock comps would more than double.

It is a dramatic increase.

It is going to be increased no matter what.

We don't know exactly what the numbers are going to be.

We need our comp committee to do that.

We wanted to let you know this is ahead of us.

And no matter how we slice it and no matter what matter we go through, it is going to have a meaningful impact on our G&A next year.

Should we think about it as a number of shares or based on the out-performance you guys have been given this year?

I guess said another way, let's imagine you (multiple speakers).

Remember, it is noncash.

Correct.

So last year we issued 275,000 options and 120,000 restricted shares.

We don't know what numbers are going to be issued for next year but the accounting expense that is impacting our G&A, it is a noncash expense.

I would leave it up to you in terms of how you want to deal with that noncash expense versus a dilutive effect that will happen in the future when the restrictions lift and when these options are exercised.

OK.

Thank you.

And there are no further questions at this time.

Miss Curlander I will turn the call back over to you for additional and closing remarks.

Thank you, everyone, for joining us.

We certainly appreciate your time today.

Thanks Dana.

Thank you.

And that does conclude today's conference call.

You may disconnect at this time.