奇波雷墨西哥燒烤 (CMG) 2007 Q4 法說會逐字稿

Good day, and welcome to the Chipotle Mexican Inc.fourth quarter 2007 earnings conference call.

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

It is now my pleasure to turn floor over to your host, Chris Arnold, Investor Relations for Chipotle Mexican Grill.

Please go ahead.

Hello, everyone.

Welcome to our call today.

By now you should have access to our earnings announcement released this afternoon for the fourth quarter and full year 2007 ended December 31st, 2007.

It may also 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 meaning of the securities laws.

These forward-looking statements will include projections of 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 in our annual report on Form 10-K for 2006 as updated by our subsequent 10-Q and the 10-K we expect to file around the end of February for a discussion of the risks that could impact our future operating results and financial conditions.

Our presentation today may also include non-GAAP financial measures as defined by the Securities and Exchange Commission.

A reconciliation of those non-GAAP financial measures can be found in the supplemental information at the end of our earnings release.

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 first quarter it will begin March 1st and continue until our first quarter release in late April.

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 John 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 to turn the call over to Steve.

Thank you, Chris.

I'm really proud of our accomplishments during the fourth quarter and full year 2007.

We generated a 10.6% comp for the quarter and a 10.8% comp for the year, making this our 10th consecutive year of double digit comps.

Our diluted earnings per share grew by 61% for quarter and 66% for the full year.

These are extraordinary accomplishments for Chipotle, accomplishments that are the direct result of the hard work of our restaurant managers and crews and the loyalty of our customers.

But they are also the direct result of our relentless focus on our vision to change the way the world thinks about and eats fast food.

Chipotle is changing food culture in this country by bringing consumers a new kind of dining experience.

Something they never had before, and something most never would expect from a chain restaurant.

But we are also changing food culture through our food with integrity initiative.

Again, this is our philosophy of selecting the very best raw ingredients we can find with an eye toward great taste, sustainability, care for the animals, land and farmers who raise the food.

We continue to care more about the quality of the food that we serve than our customers do.

And while they are not asking for these better ingredients, we strongly believe that they will continue to develop a greater appreciation for what we are doing, which will only strengthen the bond our customers have with Chipotle.

Most customers are not aware of our food with integrity mission.

They come to Chipotle for great tasting food and great service in an interesting restaurant environment.

But with more access to information than ever before and more attention being paid to issues associated with food and farming, people are becoming more aware of what they eat.

This awareness combined with an impact on consumer behavior will continue to build trust between Chipotle and our consumers.

We fully intend to stay ahead of that curve, always evaluating our own practices and protocols we've established for the food we serve, and always looking for ways to provide better tasting more wholesome food.

When we first introduced the idea of food with integrity, people told us it wasn't possible to do this on a large scale, that customers wouldn't appreciate and pay for these better ingredients.

But our success so far makes it clear that this direction has been the right one.

As a result of investing in these premium ingredients, we had the highest food costs in the industry as a percentage of revenue, but our discipline and strong unit economic model allow us to thrive even with these higher food costs and while remaining affordable and accessible to everyone, producing attractive margins.

One of the questions we hear most frequently if our meeting with analysts is what are you going to do next to drive sales.

Each time we provide the same answer -- that we are going to do the same things we do now, but we are going to do them better.

Quite simply, this is the best way for us to improve shareholder value: to remain focused on just a few things and to do them better than anybody else.

This disciplined approach impacts our business in many ways.

It allows us to serve better tasting food, it allows us to allocate labor more efficiently, to design and build better more efficient and environmentally friendly restaurants and to provide a better customer experience.

That's what keeps our customers coming back and that's what makes Chipotle appeal to new customers as well.

While this direction has worked very well for us, I want to be clear to our investors that we still have a long way to go.

And to help us get there, no innovation is beyond the realm of consideration.

There will always be better ways to raise or grow food and Chipotle will always be the first in line to buy those better ingredients.

There will be better ways to cook food, to employ labor, to design and build restaurants and to serve our customers.

We will always be looking for ways to improve in all of these areas.

And finally as Monty will discuss in more detail, we will continue to work to build a better culture that appeals only to the highest performers.

In fact, we recently made some additions to our senior management team and our regional field structure, changes we think will have a significant impact on our restaurant operations.

First we promoted two of our executives, Rex Jones and Bob Blessing, to officer positions.

Begin March 1, Rex will our be Chief Development Officer and starting May 1st, Bob will be Restaurant Support Officer.

Rex and Bob have both have been with us for years and have a deep understanding of our culture and our vision.

We believe that the impact of their leadership will be even greater in these new roles.

We have also changed our regional structure, dividing the country into five operating regions instead of three and adding three new internally promoted regional directors.

This new structure will allow us to strengthen the oversight of our restaurants around the country and also provide new opportunities for other strong performers to take on new leadership roles.

Finding or creating new opportunities for our highest performers remains one of the hallmarks of our culture and these changes demonstrate our commitment to doing that.

We remain committed to fundamentally changing food culture, to change the way the world thinks about and eats fast food.

We understand the magnitude of that challenge, but we also believe we are the right company with the right people and at the right time to be working toward this very lofty goal.

I will now turn the call over to Monty.

Thank, Steve.

Steve talked about our vision and our discipline, our focus on doing just a few things but doing them better than anyone else.

While our customers might not immediately notice the results or the benefits of this focus, it is at the heart of what makes Chipotle special.

Another thing that might not always be apparent to our customers but which strongly colors the experience they have is the attention we pay to the hiring and development of our people.

For years, we have been a place that people want to be a part of.

But we are consistently working to improve in this area as well by creating a culture that rewards our top performers and empowers them to rise into positions where there can have a stronger impact on our company.

By creating this sort of culture, we are laying a foundation that will continue to support an increasingly relevant and exciting dining experience and which will allow us to add more restaurants so we can bring this new way of eating to more people.

This foundation starts with hiring the best people.

At Chipotle we look for a certain sort of attitude and a sense of hospitality and maturity that are nearly impossible to train and then we teach these people how to cook and how to provide great customer service.

Once they start working with us, our highest performers quickly move through the ranks and become effective leaders within our company.

We are already seeing great results from this approach, especially within our restaurants where our turnover is low and where our crews and managers are more effective than ever.

Two years ago we started a program called the Restaurateur Program.

Basically it elevated the status of those restaurant managers who is demonstrated the ability to develop and empower their crew.

Since then we've had great results, the food is better, the service is better, turnover is lower and our facilities are better maintained than ever before.

So it is clear to us as we look at our field support staff that they have to be focused on developing and empowering more restaurateurs.

Just like we identified our top managers as restaurateurs, based on their ability to develop people, we know that our very best area managers are the ones with a proven ability to develop restaurateurs.

So we are going to elevate those best area managers to a new position, which will be called team leader.

These team leaders will earn incentives when they develop restaurateurs and will supervise 12 or more restaurants.

This is significantly more than our current average of about eight restaurants per area manager.

This is possible only because restaurateurs require less oversight, allowing their team leaders to take on this additional responsibility.

This new structure benefits our employees who will now have even greater opportunities to develop their careers at Chipotle, but it also benefits the company which will be able to benefit a stronger bench of talent at all levels.

Today, our turnover rate among managers is around 25%, which is well below the industry average.

More than half of these managers have come from crew positions.

Of course, we do expect that this percentage of managers who come from our own ranks will increase as we attract and hire better crews and as our managers become stronger and better at developing these people into managers.

We ended 2007 with 78 restaurateurs total.

That means about 11% of our restaurants are current by being managed by this elite class of managers.

We have about 25 more Restaurateur candidates currently slated for interviews and our operation teams tell us that they have 110 potential candidates for development over the next six to 12 months.

But every restaurant manager aspires to become a Restaurateur someday, so all are focused on developing and hiring a great crew.

These changes will continue to fuel our culture, built around great managers and crews who serve delicious food, outstanding service and keep our customers coming back.

Building a strong bench of talent will be very important to us this this year, as we are going to open 130 to 140 new restaurants.

Being able to better develop our people and to do so more quickly gives us the confidence that these new restaurants will be run well right from the start.

Certainly that stands to further drive our strong unit economics.

Finally, I would like to speak for a moment about the regional realignment Steve mentioned.

Our move to creating five operating regions instead of three gives us stronger oversight of our restaurant operations and creates new opportunities for three of our outstanding performers, Phil Petrilli, Michelle Small, and Bobby Shaw, each of whom will be a regional director.

In their previous positions, each of these people worked closely with our restaurant managers and crews, helping to develop people and improve our operations.

In addition to recognizing their accomplishments, these promotions will reinforce for all of our people just how much our employees can grow their careers with Chipotle.

I will now turn the call over to Jack.

Thanks, Monty.

We are proud of what Chipotle has accomplished during 2007.

These are accomplishments driven by the significant efforts of our restaurant managers and crew.

We are especially proud we are able to achieve these results in such a difficult operation operating environment.

Our restaurant economic model continued to strengthen during the fourth quarter and full-year 2007 with higher average top line sales and higher restaurant level margins.

You have heard us talk often about how we focus intently on the strength of our restaurant economic model.

It is important to us for two key reasons.

First, our strong economics at the restaurant level allow us to invest in the premium ingredients Steve talked about earlier.

In other words, efficiencies we generate from a focused menu and the economies of scale from higher sales (inaudible) are reinvested into higher cost premium ingredients.

So we can afford to invest more in food as a percentage of revenue than other restaurant companies because of the strength of our model.

It funds our vision of changing the way the world thinks about and eats fast food by making these premium ingredients accessible and affordable to everyone.

Our restaurant economic model is also critically important to us because the stronger it becomes, the more value we can create as we continue to open new restaurants.

As we continue to thoughtfully expand the Chipotle brand across the U.S., we know we are not only making Chipotle accessible to more people, we are investing with the expectation of generating high restaurant level returns.

So let's look at some of the highlights of what we accomplished in 2007.

Our average restaurant now generates $1.734 million in sales.

That's for the nearly 600 restaurants that have been open for at least 12 months.

Restaurant level margins increased by 140 basis points to 22.3% for the full year compared to 20.9% last year, and that's even though we lost 50 basis points in food costs due to higher commodities.

We opened 125 new restaurants in 2007, exceeding our guidance of 110 to 120 openings.

We finished the year with 704 restaurants, all company-owned.

We achieved our tenth consecutive year of double-digit comp increases with a full year comp of 10.8%.

Total revenue for 2007 increased by 31.9% to $1.1 billion.

Operating income increased by 250 basis points to 10% in 2007 and our full-year diluted EPS grew 66% to $2.13 over last year's $1.28 per share.

As you saw in the release, that includes a $0.01 nonrecurring tax charge in the fourth quarter which I will talk about later.

Our balance sheet remains strong as we ended the year with $171 million in cash and available for sale securities.

We invested a total of $139 million in capital expenditures which includes $5.6 million for the purchase of eight franchise restaurants early in the year.

It was fully funded by cash generated from operations of $140 million for the full year, an increase of about 41% from the $100 million generated in 2006.

Average development costs per restaurant were about $880,000, slightly better than the $900,000 projection.

We expect development costs in 2008 to be slightly above $900,000 per restaurant, which will be the fifth consecutive year with average investment costs right around $900,000.

We have been able to achieve this relatively flat average investment cost in the face of construction cost inflation by building fewer freestanders, by developing smaller restaurants, and by carefully managing our costs.

Capital expenditures in 2008 are estimated to be about $150 million, the majority of which will be invested in new restaurants, along with reinvestment to existing restaurants and corporate capital requirements.

We opened ten restaurants in five new markets in 2007 including Philadelphia, Salt Lake City, Birmingham, Iowa City, and Oklahoma City.

We are now in all major markets throughout the U.S.

and our focus will be on developing strong team and a strong Chipotle brand in the markets we are in while introducing Chipotle to smaller adjacent markets.

Our development teams have continued to build a healthy real estate pipeline to support our previous opening guidance of 130 to 140 new restaurants in 2008.

Though we expect to open about the same number of new restaurants in the first quarter as we opened last year, around 28, we expect to open more in the remaining three quarters, which will be relatively reasonably level loaded for the rest of the year.

For the quarter, our comp sales increased 10.6% on top of 10.1% for the fourth quarter of last year.

The 10.6% comp was mostly driven by increased customer visits while menu price increases related the rollout of naturally raised meats contributed about 3.3% in the first quarter.

This menu price impact is up from the 2.6% in the third quarter as a result of introducing naturally raised chicken and beef in Phoenix, Tucson, and Las Vegas in the fourth quarter.

Total revenues increased 31.5% to $289 million in the fourth quarter as a result of new restaurant openings, including 37 in the quarter, along with the 10.6% increase in comps.

Restaurant operating margins improved 180 basis points in the quarter to 22.1% compared to 20.3% last year, primarily due to labor efficiencies and menu price increases associated with the introduction of naturally raised meats.

As we predicted the labor leverage is significant in the quarter.

It began to decline as we started to lap improvements from the labor matrix, which was introduced late in the third quarter of 2006.

Food, beverage, and packaging expenses were 31.9% of restaurant sales in the quarter, the same percentage as last year and a modest 20 basis points better than the third quarter.

We expect cost pressures to remain throughout the course of 2008 for a number of reasons.

First, we began to pay current market prices for cheese in 2008.

The remaining strong demand for corn, which impacts chicken and beef prices, and higher wheat prices will increase the cost of our tortillas.

In fact, higher cheese and tortilla costs alone will add 50 basis points to food costs.

Labor improved 120 basis points during the quarter to 26.8% versus 28% last year.

We continue to benefit from our national labor matrix along with higher average restaurant sales, which together drove about 90 basis points of the improvement, while the balance was driven by lower insurance costs due being self insured.

With the labor matrix fully lapping in 2008, we expect little or no additional leverage on labor over the course of 2008.

Occupancy cost for 7.1% of sales, the same as last year, as economy from higher sales were offset by the higher occupancy costs of new restaurants.

Other operating costs decreased 60 basis points to 12.1%, primarily as a result of reduced promotional cost.

In 2006 we gave a free burrito away with the purchase of a $25 gift card.

G&A as a percent of sales was 7.1% for the quarter compared to 7.6% in the fourth quarter last year, primarily due to efficiencies from higher sales.

As I mentioned last quarter, G&A as a percent of revenue is expected to be slightly higher in 2008, in the low 7% range.

While we expect to see slight G&A leverage in G&A before noncash stock-based compensation charges in 2008, that will be more than offset by the increase in the noncash accounting charge, which will be higher for each share or option granted in 2008 due to higher stock prices.

We will not know the full impact until the equity grants are approved by our compensation committee, which will occur during the first quarter.

But as a perspective, if is similar grants are issued this year as in 2007, our noncash stock comp will be in the $16 million range or roughly double the 2007 stock comp.

We will be able to give you a clearer picture of the stock comp with the fourth quarter release.

Interest income was 6.1% for the full year 2007, with most of that interest earned on tax exempt securities.

With the current much lower interest rates, we expect the interest income in 2008 to be reduced nearly in half.

Income from operations increased 77% to $27.5 million compared to $15.5 million last year and operating margin improved 240 basis points to 9.5% in the fourth quarter.

Our effective tax rate was 39.3% for the quarter and included a $500,000 nonrecurring charge associated with the secondary offering and split off transaction in 2006 which were deemed nondeductible, therefore increasing the rate for the quarter.

This charge resulted in a $0.01 reduction in the fourth quarter and full year diluted EPS.

Without this nonrecurring charge, our tax rate would have been 37.7% for the year compared to 39.3% for 2006.

Our effective tax rate in 2007 benefited from our increased investment in tax free securities together with a decrease in the state statutory tax rate.

We expect our 2008 effective rate to be around 37.7% as the reduced benefit from tax exempt securities is offset by other tax saving opportunities.

Net income for the quarter increased by 62% to $17.5 million, up from $10.8 million last year.

Diluted EPS was $0.53 for the quarter, 62% higher than last year.

Excluding the one time tax charge, EPS would have been $0.54, right in line with our comments at the two analyst conferences we attended last month.

For the full year 2007, net income increased 70%.

So finally as we look into 2008, we reiterate our expectation for comp increases in the low to mid single digit range.

With our strong real estate pipeline, we expect to open between 130 to 140 new restaurants in 2008.

It is a tough environment to hold on to margins, but we are cautiously optimistic that if commodity costs hold reasonably steady throughout the year, that with relatively modest menu price increases, mostly associated with additional rollouts of natural meats, that we can hold most if not all of current margins.

We face significant challenges in the near term.

Over the long term, we remain confident that we can grow diluted EPS at an average annual rate of at least 25%.

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

Operator, please open the line.

(OPERATOR INSTRUCTIONS) We will go first to Jeffrey Bernstein with Lehman Brothers.

Can you hear me?

Yes, Jeff.

Go ahead.

A couple of questions, first, just the final comments you talk about reiterating the long-term guidance for at least 25% but obviously noting significant near-term challenges.

Based on the comp and the unit growth assumptions you laid out there and like you said hoping to maintain most if not all of the margins, is your model -- should have any concern around reaching that target at least for '08 or are you still comfortable with at least 25% for '08 as well?

I think you heard the comment exactly right.

We are very confident over the long term.

We just don't have a great crystal ball for 2008.

If commodities stay relatively stable from here on out -- and so far we know we are going to lose 50 basis points on the food line.

To cover the 50 basis points would only require about an increase in menu prices incrementally of 1.5%.

Based on the increases we took last year, we will run about another 1.5% increase just based on the increases we took last year.

So with a combined about 3% price increase, we know we can hold on to margin.

We know we can cover that 50 basis points.

And looking at what other restaurant companies are doing, they're generally raising prices quite a bit more aggressively than the 3%.

My, our main purpose in saying that there's a little bit of -- I don't want to say doubt, but in the short term, there are things we can't control.

There may be individual quarters, for example where commodities spike up unexpectedly and we have often said that we are not going to react suddenly or in a kneejerk reaction to raise prices just save a particular quarter or to save a particular period.

If things hold pretty steady, we are confident that even in 2008 we can hit the 25%, but if things happen unexpectedly, it is possible we may fall short.

I have a follow on to that, reiterate the comps of mid to low digits in '08.

The fourth quarter '07 was tremendous up, close to 11%.

Just wondering whether you think '08 is likely to prove conservative or have you seen a sequential decline in 4Q or something in early '08 that might give you more cautions in terms of '08 breaking that double digit record?

Listen, we certainly hope that proves to be conservative.

The way we do this is we look at just our dollar sales through the fourth quarter and we push them out and adjust for seasonality to come up with this comp guidance.

The comp guidance is exactly the appropriate guidance.

I think the low to mid is still the right guidance.

We will be able to update you as the year unfolds.

I can tell you our business is as strong as ever.

We finished the fourth quarter, as you saw, with a very strong better than 10% double digit comp.

That's in the face of other restaurant companies having difficulties.

So our business continues to be very, very, very strong.

So there's not been really any kind of noticeable decline in our business.

For the time being it's the the best guidance we can give.

It is difficult really to work out a pattern so far in the first quarter because the weather throughout the country has been very, very difficult.

So I think the best I can say is as the year kind of unfolds and as we later in each quarter we can give you more update.

But right now it's the right guidance.

Lastly, we have lots of questions I am sure you guys do on the class A versus class D, just wondering if there's any newfound plans to merge?

Obviously there's a greater disparity in the shares than there has been in the past.

Doesn't really seem justified.

I am just wondering if you have any thoughts to potentially make a change to that.

Thanks.

I am sorry.

I missed part of it.

Make a change to what?

To the CMG [versus] class D shares.

Obviously the disparity is significant being justified.

Whether you might merge those shares or what your thoughts are?

Yes.

I am sorry.

I just didn't hear part of it.

We can't do anything contractually until October of 2006.

That's an agreement we have with McDonald's during the split off.

I'm sorry, 2008.

So two years, two years from the split off, which was October 2006 would put it in October of 2008.

We can't do anything contractually until then.

After then it is still not a slam dunk we will be permitted to do anything.

We would have to do one of a few different things -- like for example get an IRS ruling to say if we did something with the stock it wouldn't jeopardize the original deal, the split off that McDonald's did that was tax free.

Another possibility is to get an opinion from a law firm that says if we go ahead and class the shares, there wouldn't be an impact to that tax free nature of the split off McDonald's executed.

So there are certain circumstances, and those are not small hurdles that we would have to overcome to even attempt to do something with the shares and the penalty if it goes against us is really severe.

Meaning that we indemnify McDonald's that if we do anything that would jeopardize the tax free nature of the split off, we indemnify them, which is a significant penalty in the neighborhood of hundreds of millions of dollars.

We can't do anything until October 2008, and after that we at least will be able to take a look at whether we can class the shares, but there's some hurdles for sure we have to get over.

Thank you.

We will take your next question from David Tarantino with Robert W.

Baird.

Hi, good afternoon.

Could you give us an update on the food with integrity and the rollout of naturally raised meats and what you might see in '08?

Yes.

David, as you have heard us talk about in the past, it is difficult to predict and then tell you exactly when we might roll out natural meats.

We are doing great with more than 80% chicken and about 50% beef.

We for sure have additional supply coming on board.

We for sure have markets that we have tentatively lined up during the year.

It's one reason why I feel pretty good that an incremental 1.5% of so price increase mostly related to rollout of natural meats feels pretty good.

But in terms of specific markets and when we might roll, we are very cautious not to communicate that.

We are very, very particular about making sure that supply is exactly meeting our specs and so we really take our time.

We are really very patient with that.

I hesitate to say exactly which markets and when that might happen.

There for sure will be more activity there.

Okay.

Thanks.

A follow up to that, what is your philosophy on taking pricing outside of food with integrity?

I know you have not done that in the recent past.

But would you ever raise prices if commodity pressures dictated that?

Absolutely.

We have always said that strategically we prefer to raise prices when we have food with integrity, the opportunity to roll out natural meats.

For sure we are beginning to see that like everyone is that these commodity costs increases are, don't seem to be cyclical.

They seem to be more fundamental shifts in the cost.

We have been very fortunate that we have found lots of efficiencies where we can, where we could increase the quality of our ingredients, increase the cost of these ingredients.

Still bear the higher costs of commodities of nonnaturally raised ingredients and still raise our margins, but it is getting tougher.

2008 is going to be tougher.

We have some markets with all natural meats right now.

For sure we are prepared to raise prices when it makes sense to do that even without a rollout.

Okay.

Thanks.

Monty, can you talk about what the potential drivers of throughput might be in '08?

Sure.

Sure.

I mean the thing that is will continue to drive throughput predominantly are those same things we have identified in the past.

Basically two different categories -- training our people and then the sort of equipment that we work with.

On the training side, really good scheduling, having our top crew people in there, in the right places on the line, having all hands on deck during peak hours so that people aren't doing prep work which could have been done before the rushes of lunch and dinner.

Having an expediter next to the cash register at all those times, having great (inaudible) -- in other words, having everything set up and ready to go before the shift begins before the lunch rush begins, and a continuing focus on 15 minutes period of time.

If we don't have a line for an entire hour, we are charting and encouraging our, charting 15 minute periods and encouraging our managers to work on throughput even during shorter periods of time.

On the equipment side, we are still working on our tortilla warmer.

We anticipate we will start rolling more of our new tortilla warmer which will help us.

We are still making changes to the POS station.

You heard about the coin machines in all of the restaurants now.

We continue to work and test this hand held POS which we are now going to roll out into the 50 restaurants the next eight weeks or so.

Beyond that, our customers continue to become more and more familiar with how to use Chipotle and more familiar with what they want, how to put it together, how to order especially multiple orders.

That's helping.

Additionally, we are continuing to do, to work on more and more business through fax or DSL orders which allows us to make, make the food off of the main line on our second make line, which keeps those transactions sort of out of the way of the busy lunch line.

We believe that we will continue to see gains and throughput.

Frankly this is a tough time of year to look at that, because the first and fourth quarters are lower transaction times of year.

And so what we are working on now is making sure we get everything in place, get the handheld POS well understood and trained.

So when April, May, and June comes, we can address those crowds with the best possible training, best possible equipment, and best possible techniques we can to continue to make those strides and throughput.

Great.

Thank you.

Thank you.

Thank you.

We will take our next question from Glen Petraglia with Citi.

Can you hear me?

Hi.

We can hear you.

I am traveling.

I apologize if I have to repeat things.

Jack, first, you made a comment that interest income in 2008 would be about half of what it was in '07.

I was hoping that you could repeat exactly why that might be.

I missed that.

Yes.

Glen, it is just interest rates.

We have invested all of our cash in very, safe, very short-term instruments.

The yield has just dropped dramatically.

Last we invested, we were able to get tax-Free MUNIs for in the 3.5 to 3.6% range or something like that.

Right now the rates are below 2%.

Nothing we can control.

but our interest is going to be lower because of that.

Sure.

In terms of the G&A realignment in terms of the restaurateurs and having area managers covering 12 stores I think the it was versus eight, I guess how quickly can that happen if you only have 78 restaurateurs now?

Are you anticipating being able to do in the course of the next couple of years.

What concern is there that's too much on one area manager's plate whether it is a Restaurateur or not, and perhaps if the other way, is it something you've tested already?

Great question.

Basically we sort of have tested it.

The answer to the last question first.

We sort of have tested it.

Let me describe it in a little more detail.

Basically our restaurateurs are very, very good and very self sufficient.

The area managers we have who have been able to develop a lot of restaurateurs find it pretty easy to manage more restaurants.

We have area manager who is have developed five restaurateurs and those area managers are able to spend more and more time just developing those managers who aren't restaurateurs and focusing on perhaps picking up additional responsibility in other areas of their job.

Basically those folks come to us wanting more work to do.

If an area manager has no restaurateurs and has sort of average managers, it is certainly creates a lot more work for them and puts more work on their plate.

When I talk about 12 restaurants per team leader, this is something only our team leaders which are essentially the elite area managers are going to get 12 plus restaurants.

We will continue to have quote unquote regular area managers who will still have something less than that.

We will not make area managers into team leaders until they have demonstrated the ability to develop additional restaurateurs.

When they do that, what the team leaders will do is when they have 12 restaurants you would think -- well, that means they have 12 managers reporting to them, right?

Not really.

Because what we are going to do is ask our restaurateurs, our best restaurateurs to mentor a restaurant, sort of a neighboring restaurant or two if they can can handle two or perhaps more if they can in the future.

But we will start with one additional one per Restaurateur.

So what will happen is you will be leveraging the restaurateurs, they will remain in the restaurant, they'll stay general managers, they're not taking them out and making them quote unquote multiunit people.

But they will spend some time mentoring a neighboring restaurant and bringing that restaurant up to the standards they demand and they're used to in their restaurant.

These area managers who become team leaders are going to be able to leverage the top restaurateurs to help them oversee more restaurants and they will be incentivized for doing that.

And through bonuses related to their restaurant's performance and through bonuses relating to the amount of restaurateurs they were able to develop in that position.

In terms of G&A, this wouldn't be something where anyone should expect that suddenly we have a significant drop in G&A as a result of all of the area managers taking on 12 stores.

It is just not going to happen that way.

But like we've gradually layered on restaurateurs and now we are up to 78, we will gradually lay on these team leaders and in time we will have more and more of them.

Over time, as we have more of them, we will see some real benefits on the G&A side as we have fewer managers managing managers and less people doing more by focusing on these top performers.

Okay.

Jack, I don't know if you mentioned this or not, but I didn't hear it.

I know that the average unit volume is $1.743 million.

Are the new stores still opening up at about 85% of that level.

As you go out into smaller neighboring markets from the major markets you are in, are the economics replicable even at a lower average unit volume?

They are.

They're right in that same range, that mid 80% of the existing store even though the existing store volume continues to increase.

The economics vary by market but we have great unit economics in areas like Ohio and in far away areas, remote areas in Ohio where we have $1.8 million to $1.9 million to $2 million restaurants.

We haven't found an area anywhere in the country we don't believe will be enormously successful.

We do have some markets that are starting out a little slowly.

But even markets today that are underperforming at less than $1.7 million -- $1.734 million -- they're comping very well.

So we can see the momentum building.

We have not seen an area in the country, whether it's urban or suburban, remotes, small towns or major suburbs, we haven't seen any area where we start building Chipotle and start adding restaurants we don't feel like we will be successful.

Last one, elasticity of pricing -- you are up in the $9.50 to $10 average check range in general.

That's getting up there, do you -- I know you have answered the pricing question before, but is there any way to test how consumers react, if they don't understand that you're doing food with integrity, and they're not asking for these things, do you not run the risk that as you raise pricing more, they think it becomes too expensive?

We just did a study and we did this in Arizona because we just rolled out natural meats in Arizona.

If you think about Arizona for example, that's a market that I mentioned in the past as being a little soft for us -- not as soft as other restaurants, but it has been soft.

We rolled natural beef and natural chicken out in the fourth quarter.

We had not raised prices in nearly four years in Arizona just because we were generating efficiencies and building margins without pricing prices.

We raised prices by 10% in this market that's economically sensitive.

We did not see -- Arizona had fallen off in terms of transaction as I mentioned previously -- but when we increased prices, we didn't see any additional fall out whatsoever in transaction.

We talked to customers and 70% of the customers said they're willing to pay more based on our food with integrity initiative, based on the fact that they understood we are offering natural meat, natural beef and natural chicken.

We talked to them about the value, the money that you are spending for a Chipotle meal and 90% of the people that we surveyed said Chipotle was good food for the money or a lot of food for the money.

90% of the people felt good about the money they were paying either because they felt it was a lot of food or it very very high quality food.

We kind of feel like that was a tough market to do this in, a very, very high price increase in a market that's economically sensitive.

So, this reinforces the fact that if we communicate it well, we talk about the high quality ingredients with our customers, that they're willing to pay a little more.

Keep in mind a little more means a little more than they were paying before.

If you compare Chipotle prices to other restaurants and you can figure out which restaurants to compare us to, but other fast casual express restaurants, the menu prices are right with them but the food quality is dramatically higher.

Are the Arizona customers typical of the rest of the system?

Well, that's hard to say.

I mean yes, they're as typical as anybody.

The volumes are right about average.

There's nothing unusual in Arizona.

We have done this type of thing although not as formal of a study before when we talked to customers and found very similar result results.

Okay.

Thank you.

Thank you.

We will go next to Jason West with Deutsche Bank.

I was wondering if you guys could provide a little more color on the commodity outlook.

I believe you had said in the past that you had cheese contract rolling off at the end of '07.

I was just wondering if you decided to reup that or if you are in the open market?

And if you can talk about the protein side, what the contracting status is there?

Yes, on cheese, we have not locked in -- we were considering it, you probably heard us talk about considering it in the fourth quarter.

We have not locked in.

We are considering it still, but watching the market very closely.

The impact is in 50 basis points that I mentioned.

In fact, most of that 50 basis point impact is from cheese.

In terms of meats we don't really have any locks on meats mostly because we want to serve less commodity meats and more natural meats.

It is very difficult to lock in natural prices.

Now, on chicken, we do have very, very stable prices with our natural.

Generally they're not as volatile as commodity just because they're not affected by world markets, not affected by world prices if you will.

So, generally they are stable, but in terms of a real lock, a really forward crack we have not really done that per se with our meat.

And would the bulk of the commodity pressure be expected in the first half of the year since that's when cheese will have a tough compare or are you thinking about that as more balanced?

In terms, was that a question on cheese or beef?

Just across the food line.

Well, from what we know right now, if nothing else changes, we think it will be roughly 50 basis points worse pretty much across the year from where we are today.

Okay.

That's based on low to mid single digit comp?

Yes.

Thanks a lot.

Thank you.

We will go next to Steve Rees with JPMorgan.

Thanks.

Jack, you mentioned the unit volumes continue to discount which is actually a nice part to the story as those ramp up over time and contribute to comps.

But can you perhaps comment on how your traffic is holding up in more mature markets you have been in for four or five years?

Our older stores in general not even going by markets, they generally comp a little less than our newest stores.

But even our oldest stores still comp like in the fourth quarter, they're comping in that generally mid single digit.

It is not that we don't have stores in the low single digits -- we do.

But generally if you take store openings by class and take (inaudible) market, they're still comping in at least the mid single digit kind of range.

We have markets we have been in for a lot longer than five years that are high volume, much higher volume than average that are comping above average, above the 10% range as well.

So it is generally, there is this the older the store generally the comp will generally be lower, but it is still very, very respectable.

And then we have exceptions to that as well.

Okay.

So for the '08 comp forecast is that based on slower ramp up period for the new units, or just a lower comp level overall for the entire base?

It is just our best estimate.

Our crystal ball is not great, but it is our best estimate of what we think the comps will be.

Frankly, if we don't get better as Monty and Steve talked about in running better restaurants and serving better food, that's that's the comp we will deliver.

The only way we will beat that is to run better restaurants.

Same situation when we looked at our sales last year and gave you the same guidance, the outlook looked very similar -- meaning we would do a comp in that kind of a guidance unless we get better, unless we could attract more new customers into our restaurant, unless we invite our existing customers into our restaurant more often.

We have to continue to get better so we continue to raise the comp line.

Okay.

Great.

Thank you very much.

Thanks.

Thank you.

We will go next to Jeff Omohundro with Wachovia.

Thanks.

Just wonder what other changes, like the shift from three to five regionals or perhaps an infrastructure you might be contemplating to manage this growth?

Yes, I mean, we sort of, that is sort of it.

I mean we, we tried to think long and hard about how we wanted to structure this, who we wanted to put in positions and we very deliberately did all of this sort of in one fell swoop so that we feel like all of the position throughout the country are well covered and we had the right people in them.

So you are sort of looking at it.

Great.

Thanks.

You bet.

Thank you.

We will go next to Dean Haskell with Morgan Joseph.

Thank you very much.

As you're expanding in 2008, how much of that expansion will be in existing markets versus new markets?

How do you expect that to positively impact preopening expenses -- hopefully down -- and then I have one more question.

Okay.

First of all, Dean, most of the restaurant openings are going to be in existing markets.

Some 90% or so will be in existing markets.

That's because we entered most large markets throughout the country.

I would not expect to see really much of an impact in preopening costs at all.

If you look at the preopening costs, they have somewhere in the $70,000 to $75,000 range.

About 60% of that, 59% to be exact, is noncash.

It is related to straight line rent.

That's just a calculation that even though we are not paying rent during the construction period, the accounting rules require us to take it over the entire lease period and straight line it over that entire period including about a 3.5 month construction period.

We got the $70,000 to $75,000 per store number, but 59% is noncash, so we're kind of stuck with that.

Most of the rest of that, very little of it is actual rent we pay.

The rest is like marketing expenses and it's local store marketing and it is sending out mailers to surrounding businesses and doing things to invite people into the restaurant for the new store opening.

I would expect that the preopening cost will stay relatively intact.

Okay.

And the last question is as you continue to expand, are you having to tweak your real estate model any to push the edges as you enter new and different demographics?

Well, I don't know what you mean by push the edges.

We are, when we go into a market and we have been there for a while.

we have found that we can go further and further into the outskirts of the market.

We have found that we can go into lower income areas.

We might go into an area to begin with and look for more of the higher income areas.

But as the brand gets established and as we develop loyal customers, we are able to find we can push out to the outskirts both in terms of income and in terms of geography and do exceptionally, exceptionally well.

As the brand becomes more well known, we are finding we can push out, push out and be a little more aggressive.

But we'll generally do that in markets we are already in, we are very successful and the brand is well known.

Okay.

Thank you very much.

Thank you.

We will go next to Mitch Speiser with Telsey Advisory Group.

Thanks very much.

Two questions, first, I believe you said you went into five new markets in '07?

Right.

Can you tell us about the experience, the sales ramp up of the new stores and new markets versus the new stores in existing markets if there's any difference?

And then I have a separate question.

It varies a lot by new market.

So it is a lot more volatile I would say.

Of the five markets we entered, two of them were kind of above the mid 80% range that I talked about.

We talked about new stores opening up in the mid 80% range.

Two of them opened above that.

Two of them opened a little bit below that, within striking distance, and one opened quite a bit below that.

One of them opened up slow.

So one of the five opened up what we would say is slow, but that's not unusual.

It will happen into markets that our brand is not very well known and it will take a little time for us to get customers to come in and try Chipotle and then become loyal customers.

So generally those five markets opened up pretty representative.

Overall, on average, they opened up about what a typical new market would open up at.

Great.

If you thank you.

Secondly, I believe if I do the math rate in '08 given about $150 million in CapEx, you should be able to meet those cash needs with cash flow from operations.

You do have over $170 million of cash in the balance sheet.

I guess a two prong question, would you consider doing like a stock split or so to increase your flow and then perhaps at some point start buying back some stock?

Is that in the thought process?

And in the foreseeable future?

Well, on the stock buyback we do have certain restrictions.

It is really related to the A versus B question that was asked before that we're prohibited from taking certain actions that might change our capital structure.

Buying back stock for sure in the short and medium term we would not be able to do.

Generally, (inaudible) even if we are allowed to do it, even once we get past this contractual restriction later this year action, just because we are a growing company.

We have got a lot more growth ahead of us than we have behind us.

We are only at 700 restaurants right now -- we have potential for 1000.

We will enter Canada later this month.

So we think we have lots.

Later this year.

Later this year, sorry.

We have lots and lots of growth ahead of us.

We don't have any specific plans to give capital back.

We know if we can take that capital and invest it in these very, very high cash on cash returns which are in the 40% range, that would be the best way to add to shareholder value rather than give it back to shareholders.

In terms of a stock split, no, we are not considering a stock split either.

We don't think it does anything to add to shareholder value.

The way to add to shareholder value is focus on running great restaurants, serving great food, developing our people so that we can constantly improve the experience.

That's where most of our focus is.

Thank you.

Thank you.

We will go next to Bryan Elliott with Raymond James.

Good afternoon.

Jack, I wanted to circle back to make sure I understood what you were trying to convey.

You talked about the 50 bips of food cost margin pressure.

Let me find my notes here.

Then you said -- I think we if we can get 3% pricing we can hold our margins.

Were you -- holding most if not all of our current margins on price.

Were you referring to the food cost line or were you referring to restaurant or were you referring to the EBIT line when you talked about margins in that statement.

Mostly restaurant level, Bryan, which when you hold it at the restaurant level.

As long as we manage our G&A, which we did say that there will be a little bit of negative leverage in G&A because of noncash stock options.

We should be able to come close to holding our margins at the income level as well.

Okay.

And so you're basically indicating you think food costs will be up 50 bips even with pricing, but with the pricing impact and the leverage on the other line items that even with the 50 bip headwind after pricing essentially I guess is my question -- you are indicating if commodities stay current you will have 50 bips of pressure even after 3% pricing, but you can offer set that at the restaurant line?

Did I get that right?

No.

Let me clarify.

If we do no additional pricing, we will see 50 basis points of higher food costs because of higher cheese and tortilla prices.

For us to completely offset that at the food cost line and more than offset that at the restaurant level line, we would need to raise prices sometime throughout the year to give us an effective 1.5% menu price increase throughout the year.

Now, the 3% came in, Bryan, where we are already running at a rate such that just the menu price increases we took in 2007, just letting them, those roll out -- that will have an effect of about 1.5% menu price increase next year.

Layer on another 1.5 that I just talked about to cover the 50 basis points and then we have the margins covered.

We feel good about that.

Now, we don't know what commodities are going to do, but we feel like 3% is a really modest menu price increase in today's environment.

Many restaurant companies are increasing a lot faster than that, and keep in mind, our increases are associated with a significant increase in the quality of our food.

Sure, sure.

So as again, I am a little confused.

If we do assume a 3%, we will see a little bit of food cost pressure, less than 50 bips, we will make that up or more at the other line items at the restaurant.

So we will be flattish restaurant and then we have down cash G&A.

But we have got the nonstock cash, noncash stock pressure that you referenced earlier.

Did I get it right now?

No.

The 3% -- if you build in 3%, 1.5 rolling off from last year, 1.5 incremental, we have covered the 50 basis points of pressure.

Okay.

Food cost will be the same.

But then we will have up margins at the restaurant then, right?

That's right.

Okay.

So we won't cover our margin, we will improve our margin?

If, with no other commodity surprises.

My point is that we are not specifically planning 1.5, but 1.5 is reasonable and I am very confident that's a reasonable incremental price increase to expect that it will cover it at the food cost line and more than cover it at the restaurant level line.

That's right.

Got it.

Thank you very much.

Thanks, Bryan.

We will go next to Nicole Miller with Piper Jaffray.

Hi, Congrats on a great quarter.

Thank you.

Can you give some example of the POS results, walk us through a couple of stores, what you saw where why you are so confident moving forward and some kinks you worked out?

Yes, well, Nicole, are you talking about the hand held POS?

Yes.

Yes, keep in mind this is something that we have only been experimenting with half a dozen stores so far.

This allows us to send one of our employees out into the line and ring up transactions and give them a receipt in the line so that the process of paying for the meal is totally over with.

So that they then just go through the line, order their food, when they're done getting their food present the receipt to the cashier and walk away without having to ring up the order.

In our restaurants that have very, very busy lunchtimes, and very long lines, this is a really neat thing we can do to really improve customer service by having someone talk to someone and assure them that the thing moves quickly especially with new customers.

Our customers like it.

First and foremost, it is a way of improving customer service.

Our customers are saying they like it.

In terms of pure throughput, we have seen in some of our experimentation that this speeds us up as many as four transactions per 15 minutes.

But that is -- I want to caution not to use that four transactions per 15 minutes and extrapolate that in a real way.

That would be at the very busiest restaurants during the busiest lunchtimes with the optimal use of this device.

So it will help the throughput we believe.

It will only help with throughput at our restaurants that generate really long lines during lunch such that it is worth going into the line to ring up the transactions.

We look at it as just a nice positive way to improve the experience for our customers.

What percentage of the base to be considered a really busy restaurant that could benefit somewhere close to this four transaction per 15 minutes?

It is too early to say what it is, Nicole.

Right now what we have done is looked at the 50 restaurants we think have the greatest opportunity to benefit.

We will roll it out the next eight weeks or so into those 50 restaurants.

And once we get that -- we will learn from that obviously and it will give us a better idea to let you know how deep we would like to go beyond that 50 restaurants.

We think it is, that the handheld will be relevant, will be useful and will be an advantage in significantly more than the 50 restaurants.

But we will do that first and find out what we learn before rolling it further.

Great.

What should we expect from the new ad agency?

What's going to change?

What might be new?

Yes, Nicole.

Far too early to tell.

As you know, we have engaged DeVito/Verdi and in fact they're in the offices today.

They have been here this week.

Basically we are just getting to know each other.

They're going to really do a deep dive, travel around with us, understand our culture, what makes Chipotle tick, understand from the customer perspective what Chipotle is all about.

And then we will go into the process of talking about what kinds of advertising things, what kind of creative we might be going after.

We are just in the very, very early exploring stages right now with DeVito/Verdi.

Okay.

Thank you.

Jack, what should we expect on a development new units on a quarterly basis?

What's a fair cut each quarter?

The first quarter will be a little lighter than perfect level loading, so it will be close to what we opened last year.

Last year I they we opened 28 in the quarter.

It will be in that ballpark.

The remaining three quarters -- Q2, 3 and 4 will be heavier and reasonably level loaded between those three quarters.

How many have opened quarter to date, please?

We haven't disclosed that yet.

Okay.

I think that's -- one last question on guidance.

I have been jumping around on some calls tonight.

I saw the guidance in press release, but are you also basically still reaffirming your long term 25% earnings growth goal?

Yes.

Okay.

Thank you so much.

Thanks, Nicole.

Thank you.

We have time for one final question.

We will take that from Paul Westra with Cowen.

Great.

Thanks.

How are you guys today?

Great, how are you, Paul?

Most of the questions answered but just back to Bryan's question on 3% pricing, I still have a little more into the labor line particular and lines below the food cost line.

How would you expect to get some leverage there assuming mid single digit comps which would be modest traffic gains?

How would you expect to get labor leverage in particular?

Just very, very little, Paul.

We have so much leverage really much more leverage than even we internally expected last year.

We just got to the labor chart so fast.

So I think with kind of normal wage inflation, and because most of our comp growth we expect to be transaction driven or at least partially transaction driven so you have to add labor to deal with the additional transaction.

I think the combination of wage inflation and adding some labor for the additional transactions and within our comp range, I would expect not to see much if any labor leverage is the way I would describe it.

What is the wage inflation rate looking like and trending?

In the past year or so it has been, it is picked up, been more in the 3.5% range.

So if you get wage inflation of 3.5% range, if you have comps that are a little higher than that, and you need to add some labor to handle the additional transactions, you can see there's not much room for leverage great.

Not unless you can do a higher than, higher comp than what our guidance is.

And a follow up question on your, you are averaging a volume distribution, you talked about the left side of the bell curve as these things open up 15% below average.

Trying to see if anything is stalling out on the right side of the bell curve.

Are you seeing stores start to clump when they hit $1.9 million to $2 million from an age standpoint or are you seeing some going through?

Just the opposite.

We just do not see these high volume stores leveling off.

We have restaurants that are well beyond $3 million.

We have entire markets that are well beyond $2 million and still comping, at company average comp, sometimes higher.

So no, we are not seeing anything in terms of these high volume restaurants saying that's it.

As long as we are inviting more customers into the restaurant, the restaurant can handle lots of volume.

Do you see stores opening this year at $1.5 million, 15% below your $1.7 million, you don't, maybe, not down the road as far as body count you don't see, you can envision $2 million stores, you are opening today?

Yes, absolutely.

Because like, you probably heard us say before we are entire markets doing $2.5 million in volume and they're comping really well.

There's nothing to tell us there's a leveling offer point where that's it -- you hit $1.8 million, you are done.

It is really a matter of bring bringing more customers in.

We feel like a lot of people don't know about Chipotle or don't know about our food integrity.

We have an opportunity to convert a lot of people that just don't know much about us into loyal customers.

So we think we have lots of opportunities.

Last question on the $5 a share cash you have outstanding.

You mentioned it might be on the balance sheet for a while.

Why not chase better yields if it is going to be on there and I know you are on these short-term investments?

Well, Paul, the best deal is in investing one of our restaurants.

That's a 40% yield or so.

In the meantime, we are going to play it very safe.

We were thinking that way even before this whole credit problem.

Since this credit problem we are being even more diligent to make sure we have got our money invested in very, very safe instruments.

So we are not going to move the money around to try and chase an extra 50 or 100 basis points if for sure.

We want to put the money to use, but we want to open the right amount of restaurants based on finding great real estate and having great managers run those restaurants.

The best thing to do to better utilize our capital frankly is to really accelerate this Restaurateur program that Monty talked about to the extent we have more great managers available/ We'll dial it up in terms of real estate to go get more real estate and put this capital to use.

We know that's the best way to add to shareholder value.

Great.

Thank you.

Thanks, Paul.

Thank you.

At this time, I would like to turn the call back over to the presenters.

That concludes our call for this quarter.

Thanks all for tuning in.

Thanks everyone.

That does conclude today's conference.

You may disconnect your lines at this time.