奇波雷墨西哥燒烤 (CMG) 2008 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Chipotle Mexican Grill Second Quarter 2008 Earnings Conference Call.

Please note today's call will be recorded.

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

It's now my pleasure to turn over to your host, Chris Arnold, of Investor Relations for Chipotle Mexican Grill.

Please go ahead, sir.

Hello, everyone, and welcome to our call today.

By now, you should have access to our earnings announcement released this afternoon for the second quarter of 2008 ended June 30, 2008.

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 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 in our annual report on Form 10-K for 2007, as updated in our subsequent 10-Q, for a discussion of the risks that could impact our future operating results and financial condition.

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

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

For the second quarter, it will begin September 1st and continue until our third quarter release in October.

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 Financial 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 proud of our financial results and strategic accomplishments during the second quarter of 2008, particularly in an environment that remains very challenging for restaurant companies.

Specifically, Chipotle was able to deliver a 7.1% comp in the quarter, which contributed to revenues of $340.8 million and diluted earnings per share of $0.74.

Our continued strong performance was a result of a sharp focus on doing just a few things, but always looking for ways to do them better.

We have always believed that this is the right way to run our business.

Given the pressure our customers are currently facing, it would be easy to look for a quick and easy way to boost business or to cut costs in order to improve short-term results, which Chipotle has never done these simply to improve results in any given quarter.

We have always run the Company based on our long-term vision, to change the way the world thinks about and eats fast food.

To realize this vision, we make decisions based on what we think is right, not solely on what might be convenient at the time.

We continue to work on improving the customer experience, so that we can continue to provide value and drive excellent results over the long-term.

During the quarter, we continued to make progress in our effort to serve our customers' food made with the very best ingredients we can find, ingredients that have traditionally been available only in high-end restaurants and specialty food markets.

In May, we reached an important milestone in our effort to serve 100% naturally-raised meat.

We introduced naturally-raised chicken in all of our Pacific region restaurants.

And with that move, 100% of the chicken we serve is now naturally-raised.

Today, we are also serving 100% naturally-raised pork, and nearly 60% of the beef we serve is naturally-raised.

In all, we are serving more naturally-raised meat than any other restaurant company in the world.

And as we have said before, this meat costs us much more, but it tastes better.

It's better for the animals, the environment and the people who raise the animals and, ultimately, better for our customers.

And our commitment goes well beyond serving naturally-raised meats.

In fact, we just announced details of our program to source produce from local farms for all of our restaurants.

Our initial commitment is to purchase at least 25% or at least one produce item from local farms, when seasonally available.

And if there are opportunities to purchase more than 25% or more than one item, we'll do that.

All of this produce will come from farms that are within about 200 miles of our restaurant, which is a sharp contrast to most produce in this country, which is typically transported about 1,500 miles from the farm to where it's consumed.

By buying produce from local farms, Chipotle will provide fresher, better-tasting food for our customers, while reducing fuel consumption for shipping, supporting rural economies, and improving the overall food supply.

Of course, locally-sourced ingredients have long been used by great chefs around the country.

We are following their lead and doing so on a much broader scale, so that we can make good kind of great food acceptable to everybody.

During the second quarter, we held our annual suppliers meeting where the discussion focused on sustainability and our commitment to pushing ourselves to develop a more sustainable supply for all of the food we serve.

Our suppliers share our passion for making this happen.

And we believe we are well-positioned to keep pushing forward in our efforts to make better food from socially-responsible sources available and affordable.

And people are taking notice.

In fact, for the second year in a row, Chipotle was just named one of the world's top 20 sustainable stocks by SustainableBusiness.com.

This list is made up of companies that have a strong commitment to sustainability and that demonstrate strong financial performance.

Chipotle was the only restaurant or food company to make that list this year and was selected for our commitment to serving food from more sustainable, socially-responsible sources.

We are also in the process of retooling our marketing, both inside and outside the Company.

While our marketing approach has often been considered edgy and innovative, our vision and strategy have not kept pace with the evolution of our food culture and our people culture.

For that reason, we are in the process of changing our internal structure and have hired an outside branding group to help us develop the right marketing and branding strategy for Chipotle.

We are in the early stages of this work, and we'll keep you posted as we progress toward developing this new strategy.

While the best opportunity to communicate the Chipotle brand is with top-performing managers and crews providing an extraordinary restaurant experience, I also believe that a more effective marketing strategy can enhance our ability to connect with our customers in a meaningful way.

Before I turn the call over to Monty, I wanted to update you on the status of Toronto where we will open our first restaurant in August.

I want to remind you that international expansion is not a key driver of our current growth strategy.

Our plans are to introduce the Chipotle brand in Toronto, establish a solid base of suppliers in that market, and begin to build a local operations team, so that our growth is driven by people with first-hand knowledge of that market.

The majority of our growth will continue to be in existing Chipotle markets where our brand is already known and where great opportunities still exist for us.

We are changing the way the world thinks about and eats fast food, a compelling vision that we believe sets Chipotle apart.

I'll now turn the call over to Monty.

Thank you, Steve.

Steve talked about our continued commitment to improve the quality of the food we serve and how we believe that staying focused on that is the right thing to do, even as our operating environment gets more difficult.

And we're equally committed to creating a performance-based culture that leads to the best restaurant experience possible for our customers.

And the foundation of that culture starts with hiring and developing the very best teams in our restaurants, a function performed by our general managers and our restaurateurs.

Since our last earnings call, we have continued to visit with and promote additional managers to the restaurateur position.

As you know, we still interview each and every one of these candidates individually, and we speak with their entire crew before accepting them into this elite position.

In fact, we recently completed interviews with potential restaurateurs in Northern California, Portland, Seattle, Houston, Dallas, San Antonio, Washington, D.C., and New York, and we're very encouraged by the quality of the candidates that we're meeting as we travel around the country.

We now have a total of 93 restaurateurs including 37 who are acting as a mentor for a neighboring Chipotle restaurant, what we call R2s.

We remain confident that our continued focus on improving the quality of our managers is the best way to ensure strong performance and growth for Chipotle over the long-term.

Another step we're taking in terms of our culture is hosting our first ever all-managers conference.

This is a significant undertaking, but we think it's an important time to make sure that all of our managers are aligned on how to build the very best teams.

The conference will bring together all of our restaurant managers from the whole country, our operations leadership, and people from many of our corporate departments.

And we're going to carefully focus our message during that conference on building a culture that appeals only to the highest performers.

Specifically, we're going to stress building strong teams by hiring the right type of people.

We're going to stress effectively leading and developing these people, and we're going to stress quickly removing low performers from the restaurants.

In terms of restaurant operations, while food, fuel and other operating costs escalate, it would be plausible to try to squeeze costs out of the food line, our labor line, or to aggressively raise prices in an effort to sustain our margins for the short-term.

But, we're not going to do that.

Instead, we're going to focus on improving our food and on improving the quality of our restaurant teams.

With that said, because Chipotle does continue to offer such an extraordinary value, we still have pricing flexibility should we decide to use it.

While we're holding our menu prices steady at this time in an effort to maintain and reward customer loyalty, given the many other financial pressures which are customers are already facing-- however, if food costs continue to rise and present greater pressure on our margins, at the appropriate time we may make the decision to adjust menu pricing, after our fixed pricing for many of the ingredients we buy expires in the fourth quarter.

Before I turn the call over to Jack, I'd like to speak to the salmonella issue that has been in the news a lot lately.

The government's recent investigations into produce items, including tomatoes and jalapeno peppers, have naturally heightened the state of consumers' awareness about fresh produce, whether they buy it from a grocery store or a restaurant.

This issue has been a stark reminder of how circumstances beyond our control can impact our business.

Even though Chipotle has not been a source of any tainted food, we believe these issues may have contributed in one way or another to softer comps in the second quarter.

We continue to closely monitor developments in the ongoing investigation.

And when there's a need to take action, we will take immediate and decisive action to continue to ensure the safety of our food and to maintain the trust of our customers.

When tomatoes were the sole target of this investigation, we immediately stopped serving fresh tomatoes until we could be certain that all of the tomatoes we were using were coming from growing regions that were approved as safe by the Food and Drug Administration.

During that time, we altered the recipe for our corn salsa slightly, to offer a mild salsa alternative to tomato salsa.

And when the investigation expanded to include raw jalapeno peppers, we immediately implemented a procedure to grill all of the jalapenos we use in our fresh salsas and our guacamole.

In both these cases, we were able to move very quickly because all of the food we serve is made from scratch in our restaurants with our very own recipes.

Food safety is always our highest priority, and we will continue to take any precautionary steps we can to reassure our customers when consumer confidence in certain foods is shaken.

We believe that this commitment to food safety further strengthens the trust that our customers have in Chipotle, but we also acknowledge that frequent warnings by governmental agencies about the safety of eating certain fresh salsas and guacamole is something that's bound to temporarily dampen the enthusiasm of certain customers.

Additionally, the many changes to our restaurant operations occasioned by these issues certainly poses a distraction to our managers who have done a wonderful job of dealing with these changes over the last weeks and months.

While it's likely that our comps were affected in the quarter by these numerous news reports, at this time, we see no way of actually quantifying that effect.

However, we're hopeful that the source of this outbreak will soon be determined and that we can return to a more normal operating environment in that regard.

I will now turn the call over to Jack to walk through our financials for the quarter.

Thanks, Monty.

Our second quarter of 2008 was another challenging quarter for the entire restaurant sector.

And our continued ability to drive comparable sales transactions and net income growth is a credit to the strength of our brand and the significant efforts of our restaurant managers and crews.

But, during the second quarter, we began to see the effects of the economic pressure our customers are feeling as we saw our sales comps decelerate more than we expected.

We've always thought in terms of earning each and every customer visit by serving the very best food made from the finest ingredients we can find, served by top-performing managers and crews.

In this environment, when our customers are forced to prioritize where they will spend their hard-earned food dollars, it's more important than ever for us to be on top of our game and provide an exceptional dining experience to every customer who visits our restaurants.

And while we've held up well so far in this difficult environment, we take nothing for granted.

Our restaurant economic model continues to be one of the strongest in the industry and continues to be an important differentiator for Chipotle.

It has allowed us to continually increase the quality of our ingredients, even in this difficult commodity environment, most recently by reaching 100% naturally-raised chicken, while passing on only a modest price increase to our customers, and retaining among the highest margins in the industry.

Now, while we gave back some of our restaurant level margin gains from the second quarter of last year, we continue to believe we hold significant menu pricing power even in this tough environment.

Our ability to prepare and serve great-tasting food made from high-quality, premium ingredients, while remaining accessible or affordable to our customers, and delivering industry-leading margins is central to achieving our vision to change the way the world thinks about and eats fast food.

During the second quarter of 2008, we increased revenue by 24.2% over the prior year to $340.8 million.

For the first half of the year, revenue increased 26.6% to $646.1 million.

These increases have been driven by new restaurants, a 7.1% increase in comps during the quarter, and a 8.5% comps increase for the year.

The increases in restaurant comp sales came from an increase in customer visits, with about 4% of the comps coming from menu pricing in the quarter, largely associated with the rollout of naturally-raised meats.

We expect the full-year menu pricing benefits to run in the 3.5% to 4% range.

We also picked up about 1% in the comp from an extra day in the quarter, as Easter fell in April of 2007, and we are closed on Easter.

Our underlying comps for the quarter were about 6%, excluding that extra day.

We don't expect our comps to hold at that level as comps decelerated during the quarter and into July as a result of economic pressures on our customers.

Food beverage and packaging costs were 32.2% in the second quarter of '08, up 30 basis points from 31.9% in the second quarter of 2007.

Year-to-date, we were up 50 basis points to 32.3% from last year.

These increases are primarily due to the higher cost of cheese, avocados and tortillas.

And like all consumers and all food retailers, we continue to see significantly higher costs for almost all of our raw ingredients, which we expect to continue through the rest of 2008 and into 2009.

We expect food costs to continue to increase slightly in the third quarter, as rising feed costs continue to pressure the costs of our meats.

And we expect a significant increase in the fourth quarter when our pricing agreements expire on rice, corn for our salsa, and soy oil.

While we are hesitant to increase menu prices further in this difficult consumer environment, we'll take a harder look in the fourth quarter.

Labor costs were 25.9% of revenue in the second quarter of 2008, the same as in the second quarter of 2007.

And as expected, we saw no labor leverage in the quarter as the improvements due to increased comparable sales growth was offset by normal wage rate increases and labor efficiencies associated with a greater number of restaurant openings in the second quarter.

For the full year, labor was at 26.3%, which reflects 50 basis points of leverage year-over-year.

As we saw for the quarter and as we continue to lap our national labor matrix and our switch to self-insurance, we expect to see no leverage in this line for the remainder of the year.

Occupancy costs for the quarter were $23.4 million, or 6.9% of revenue, up from $18.3 million, or 6.7% of revenue, in the second quarter of 2007.

Year-to-date occupancy costs have remained at 7% of revenue for both 2007 and 2008.

Occupancy costs as a percentage of revenue were up during the quarter primarily due to our opening proportionally more restaurants in more expensive, densely populated areas, such as Boston, New York, Philly, Washington, D.C., Florida and San Francisco.

In addition to being much more expensive on a square footage basis, these sites typically have significantly higher non-cash straight-line rent expense associated with them, as we lock up these sites for the long-term with capped and rent escalations.

In fact, half of the 20 basis point increase in the quarter is due to an increase in this non-cash straight-line rent.

Of the total occupancy expense in the quarter, about $1.6 million, or 50 basis points, is non-cash straight-line rent related to future rent escalations.

And while these rent escalations are expense today, they typically relate to escalations that are payable five to 20 years from today.

Other operating costs for the quarter were 12.6% of revenue, or $42.9 million, and that's up from 12.3% of revenue, or $33.7 million, in the second quarter of 2007.

Year-to-date, these costs are $81.3 million, or 12.6% of revenue, which is up from 12.4% of revenue last year.

The increase is largely due to an increase in marketing during the quarter and for the year so far.

We also saw higher bank fees as a percentage of customers paying with credit cards continues to increase, and higher utility costs, but these costs were offset by lower promotional costs.

We expect our full-year marketing expenses to average out to about 1.8% of revenue we have traditionally spent.

However, as you heard from Steve, we are retooling our marketing efforts and, should that lead to a compelling marketing opportunity later in the year, we may decide to invest additional funds into those opportunities.

Our G&A expenses were $20.7 million for the quarter, or 6.1% of revenue, compared to $18.1 million in the second quarter of 2007, or 6.6% of revenue.

Our G&A of 6.1% includes a 50 basis point benefit due to the reversal of a portion of the bonus accrual booked in the first quarter of this year.

Now, keep in mind, last year, the second quarter also included a benefit of about 40 basis points related to the reversal of our $1.2 million credit card reserve.

So, the second quarter is reasonably comparable to last year.

Year-to-date, G&A expense is $42.2 million, or 6.5% of revenue, compared to 6.9% of revenue last year.

As we move into the third quarter, G&A will increase to a low 7% range as the $1.8 million benefit from the bonus of accrual reversal will not recur, our non-cash stock-based comp expense will increase by about $1 million over the second quarter, and we will host our first ever all-manager meeting in August.

Overall, for the year, we expect to see slight to no leverage in G&A, and that has improved from our previous outlook where we expected to see deleveraging on the G&A line.

In addition to the reduced bonus accrual, our non-cash based stock comp expense is expected to be around $13 million for the year, which is less than the previous estimate of around $16 million, and that's as a result of the non-cash accounting expense being calculated using a lower stock price.

Income from operations increased 25% to $38.3 million for the second quarter and increased 32% for the year-to-date period.

Interest income for the quarter was $925,000, down $605,000 from the second quarter of last year.

Year-to-date interest income was $2.3 million, down from $3 million for the same period last year.

The decline is primarily due to a drop in the yield on our short-term investment, partially offset by an increase in our cash balance which now stands at $196 million.

Our year-to-date tax rate for June, for both this year and last year, was 37.9%.

While we've realized a decline in our statutory state tax rate for 2008, it has been offset by declining yields on short-term tax-exempt securities.

Our effective rate for the second quarter of both years was impacted by our smoothing of the projected full-year rate and resulted in an effective rate of 37.5% and 37.8% respectively for the second quarter of 2008 and 2007.

For the year, we expect our tax rate to remain in this 37.9% range, but it is sensitive to both short-term interest rates, as well as the interest rate spread between tax-exempt securities and taxable securities.

Net income for the quarter grew 23% from last year to $24.5 million, or $0.74 per diluted share, compared to $20 million, or $0.60 per diluted share, in the second quarter of 2007.

And year-to-date net income grew 29% to $41.8 million, or $1.25 per diluted share, compared with $32.4 million, or $0.98 per diluted share, through June of 2007.

Since going public in January 2006, we've increased our cash balance from $120 million to nearly $200 million today, while funding the opening or repurchase of over 300 restaurants in just two-and-a-half years.

We generate more cash than our income statement might imply because of some non-cash accounting charges that are expensed on our income statement today, but don't require a current cash outflow.

In addition to depreciation and amortization for the year of just about $25 million, we also have significant non-cash expenses in occupancy and pre-opening related to straight-line, non-cash rent expense, and in G&A related to non-cash stock comp expense.

These items together total around $11 million so far this year, or about 170 basis points, and will total about $25 million for the full-year.

We'll also pick up a cash flow tax benefit of about $20 million this year related to the tax stimulus package, which will allow us to accelerate depreciation for tax purposes.

We expect to continue to generate significant cash flow which will fund expansion and continue to strengthen our cash position even in these challenging economic times.

As a result, we do not need to tap into the equity or the debt markets in any way to execute our plan.

On the development front, we continue to benefit from a strong real estate pipeline, opening 49 new restaurants, including one relocation during the quarter, with 77 openings year-to-date.

All our openings so far this year have been in existing markets, and our total number of restaurants at June 30 stands at 778.

We continue to expect to open 130 to 140 new restaurants during the year, with about one-third of the remaining openings in the third quarter and about two-thirds in the fourth.

Lastly, we face significant challenges in the near-term, including significant commodity increases, low interest rates, and a slowdown in consumer spending.

And while these challenges make it difficult to grow EPS at or above our target of 25% in the short-term, we continue to believe we can grow diluted EPS over the long-term at an average annual rate of at least 25%.

So, thanks for your time today.

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

Operator, please open the line.

Thank you, ladies and gentlemen.

We will now take your questions.

(OPERATOR INSTRUCTIONS.) Nicole Miller, Piper Jaffray.

Just a couple of housekeeping things.

Thanks for the update.

It just went so fast.

In the comp, what was the price in the quarter?

4%, Nicole.

Okay, thanks.

And then, you just mentioned the development for the third and the fourth quarters.

Could you give me that again?

Yes.

We still expect to open 130 to 140 for the full-year, but it's not going to be perfectly, evenly spread.

So, it's going to be about one-third of the remaining openings will be in the third quarter, and about two-thirds will be in the fourth.

Okay.

And then, you said G&A would be favorable on a year-over-year basis.

Is that on a percentage?

Yes.

Nicole, last year we finished the year, I think, at 6.9%.

And so, we expect to see either flat or slight G&A leverage, and that is better than what we had predicted previously, where we thought we would see deleveraging and we'd be in the low 7% range.

So, overall for the year, we expect to see either flat or a slight benefit to our G&A as a percent of revenue.

Okay.

What I really wanted to address was kind of a couple of things this morning.

In terms of-- or this afternoon, sorry.

It's been a long day.

In terms of development for '09, I guess some of your peers are pulling back in development given the macro.

I mean, do you think that you would do some of the same for '09, or do you look at that as an opportunity for you guys to take those sites and accelerate your store openings in '09?

Yes, Nicole, we're still building our pipeline for 2009, so it's too early for us to tell exactly what our plans are for 2009 in terms of numbers.

But, we have no intention of pulling back.

I mean, our strategy has been to open up in markets where we're performing the best, and we want to open as many great sites in those markets where we're performing great from a financial standpoint and where we have great teams, where we know we can grow the brand in those markets.

And about two-thirds of our openings are in those top-performing markets.

The other third of our openings are in newer markets, where we're very thoughtfully and very carefully building the brand.

And those are markets that we've entered within the last few years.

And we plan to continue that strategy.

Our openings continue to open up at the same range I talked about last quarter, in that $1.350 million to $1.4 range, and so, opening up in that kind of a level.

And with the comps that we expect, that we've seen in the past and continue to expect with our new stores in the first few years, we still expect cash-on-cash returns in a 40% kind of range by about that year-three.

And so, we don't have any plans to pull back at all.

Now, if possible, ones that we are seeing is that it does seem like some developments are a little slower to get out of the ground.

So, it's possible that as we continue to build our inventory, that forces out of our control may cause us to slow down a little bit.

But, it wouldn't be because we're going to slow down.

We believe that we can continue to generate significant returns by continuing to grow the brand.

That's very helpful.

And also, Monty, appreciating the comments you made around the food safety.

I know you can't quantify what that impact could have been, and I'm not asking for any guidance.

Isn't it safe to assume, then, that concept rebounded as these issues have sort of expired from a consumer confidence standpoint?

Well, I wouldn't say that, Nicole, and the reason I wouldn't is because, I mean, even just Monday of this week, there was a new issue on the jalapenos, that there was a warning that people should steer away from raw jalapenos.

And while we don't cook-- while we are now grilling all of our jalapenos and, therefore, not serving any raw jalapenos, before you really know that, you probably have to come into a Chipotle and see that we're doing that or seeing our little poster in the store which informs our customers of our practice in that regard.

So, we are concerned that there is a chilling effect that's taking place as this salmonella investigation continues to go on and on and on without any real focus.

And they've mentioned jalapenos, they've mentioned tomatoes, they've mentioned cilantro, and they've mentioned avocados over the last six weeks.

And never have they ever concluded that there's an all-clear on these ingredients.

So, even though we're very confident that our food is entirely safe and even though we're doing everything we can to stay abreast of the situation, we think there is still a chilling effect on it.

So, we wouldn't expect to see any sort of-- that this is clearing up yet.

Okay.

Just, I guess, a hopeful question.

And then, just my--.

--Yes.

Well, we're hopeful, too.

Just my last question on the handheld, can you just please give us an update?

And then, I just wanted to better understand on those credit card transactions, do they carry a higher average ticket?

I'm wondering if that could actually benefit mixed shift.

Yes, yes.

Well, first of all, with regard to the handheld, the handheld POS has been a real challenge for us.

We've seen real potential in a few of our highest volume stores that have committed to make this handheld POS work.

But, we've been unable to effectively use the POS on a consistent basis in more than some of our top volume restaurants so far.

We continue to use it in around 50 of our highest volume restaurants.

But, the learning curve for these is much steeper than we had anticipated.

In essence, we're trying to take our highest volume restaurants during their highest volume hour and inject a completely new technique into a place that has throughput down to a science.

And to be successful in that, you need to take one of your top-performing employees out of the service line to work the handheld.

And all of this is tough to do.

But, when we have our most persistent managers who have really stuck with this, they have literally been able to set new sales and volume records and new throughput records that they tell us that it would not have been feasible without the handheld.

So, that keeps us very interested in continuing to work with this POS, and so we're going to keep working to deploy them.

But, the impact is not as broad or immediate as we had hoped, so far.

Thanks.

Yes.

Thank you, Nicole.

Thanks, Nicole.

John Glass, Morgan Stanley.

Hi, thanks.

Good afternoon.

I guess I have to ask the question about comps.

Jack, you talked about a deceleration through the quarter and into July.

Can you put a parameter around that?

How much sequentially did they decelerate, maybe at least just during this quarter?

Well, I'd rather not put a number on it, John.

I mean, we're still seeing kind of the pattern unfold, and it's been choppy because there's been a lot going on in the quarter.

But, I think knowing that our underlying, taking a day out, we were running 6% overall for the quarter.

Knowing that we were decelerating during that quarter and knowing that we expect to be in the mid-single digits for the year, I think you can get close.

I hesitate to put a number down, John, just because the sales pattern has been choppy, and I don't want to throw out a number as we're continuing to kind of follow the pattern to figure out exactly where our sales are going to lead us ourselves.

Okay.

And then, can you just go back to the G&A, the one-times that were affecting this quarter?

You said the bonus accrual was a $1.8 million benefit for the quarter.

Is that correct?

That's right.

And then, you had $1 million less stock comp for the quarter?

Well, it's more that.

It's going to grow.

We've been talking about our stock comp throughout the year, and so what's going to happen is it's going to increase by about $1 million from the second quarter to the third quarter, okay?

And then, we've got our all-manager conference which we're going to take about 1,000 people from around the country and fly them all into one city.

And we're going to meet them, talk about the business for a few days, and so that's going to be a significant expense as well.

Okay.

Do you have a frame for how much that costs?

Well, that will be a couple of million bucks.

And overall, for the quarter, we think that our G&A for the quarter, as I mentioned, be kind of in the low 7% range.

Okay, great.

And then, finally, I didn't hear you provide any sort of annual view on the occupancy and other operating lines.

Do they continue to delever to the same things that caused them to delever this quarter, continuing to the back half?

Well, I think the-- on the other occupancy line, we should get some of that back, John, because we basically have front-loaded our marketing so far this year.

So, we spent about 2.4% so far for the year, and we still expect-- and unless a marketing opportunity is placed in front of us, as we retool our marketing effort, that we want to invest more money, we still expect our advertising expenditures to be around 1.8% for the year.

So, we spent about 2.4% in the first half of the year.

In the second half of the year, we'll spend a lot less to average out somewhere in kind of that 1.8% range.

And so, we should get some of the other operating back.

I don't expect to get anything back on the occupancy line because we are continuing to invest in those higher cost areas that we talked about.

Those areas are performing very well for us.

And unfortunately, the occupancy costs are higher in those areas, but we're confident in investing those areas because the returns are very, very attractive.

And then, you've got this non-cash rent thing as well that continues to add expense on the occupancy line, even though we don't have to spend any of that money until much, much later in the future, five to 15 years out in the future.

So, I don't expect to get that leverage back.

Great, thank you.

Sure.

Thank you, John.

David Tarantino, Baird.

Hi, good afternoon.

Jack, just another question on the restaurant level margin.

On the occupancy-- or on the other operating and occupancy lines and even the labor line, would you say that the large number of openings during the quarter might have influenced those numbers in a negative way?

And is there any way to quantify how that played out in the quarter and how that might look as you look at the second half of this year?

Well, it did, David, it did hit us.

It's not as much as you might think.

It did hit us some, some in labor, so it does costs some inefficiencies.

We do a lot more labor when a new restaurant opens up.

And we don't really squeeze that very tightly at all.

We want to make sure that we're providing the very best experience, and we allow labor to spill when we have new restaurant openings.

But, that'll likely be offset by the fact that we expect lower comps going forward, too.

So, I still don't think we'll get leverage on the labor line at all.

I think on the occupancy, it had some effect, but really not much at all, not enough, because if we took it back to a normal amount, I mean recount it, you don't lose the deleveraging at all because that's driven really primarily by these more expensive areas.

And like I said, half the deleverage was non-cash rent expense.

It's just a calculation we have to go through.

And I forget, what was the other line item that you mentioned?

The other operating line which I think you addressed previously with the marketing, but would that have also been affected by the inefficiencies in the new source?

No, that's really not.

That's not.

I would say the things that worked against us there was the marketing and this timing that I talked to you about.

That's utilities and that's just a function of rising energy costs.

And then, credit cards, just more people are using credit cards, and those fees are not cheap.

And I think Nicole had asked a question that we didn't answer about the average check.

The average check on the credit card transactions are higher.

It's just over 50% of our transactions now are credit card, and so it's a business that you have to be in.

And by the way, credit card transactions are a lot faster than cash transactions, so there's a proven benefit there.

So, there's benefit to accepting more and more credit cards in a lot of ways, but the offset is our fees do continue to rise as a result.

Okay, that's helpful.

And then, a question on your willingness to invoke your pricing power that you mentioned earlier.

What is the criteria that you'll be using when you make that decision as you look at Q4 costs and costs heading into 2009?

Well, it's a great question, David.

And we're going to watch the customer very closely because this is the first quarter we've seen any kind of pull-back at all.

And a lot happened in this quarter.

Economic conditions are certainly there.

The things that Monty talked about are certainly there.

And so, we're going to watch very closely, market by market, how our customer responds.

And we're going to balance that will really our unit economics, and we want to make sure-- because the vast majority of the value that we can add over the long-term is by opening up restaurants with expectations of premium returns, this 40% cash-on-cash return.

We need to make sure that we have a pricing strategy that allows that kind of a margin, that allows that kind of a premium return.

I'd be happy, frankly, David, if we could finish this year with a restaurant level margin somewhere in kind of that 22% range or so.

If we can do a 22% range, we'd still have expectations of a kind of 40% to 45% cash-on-cash return within three years.

Now, that would mean we'd lose some margin from last year, but that would be kind of the unit economic scenario, balanced with the customer's ability to afford Chipotle.

The last thing we want to do-- and we would be willing to suffer some short-term pain in order to not drive people away from Chipotle.

They've been very loyal to Chipotle.

And we want to really cherish that loyalty, and we want to build that loyalty.

And so, we're going to be very thoughtful and patient before we do it, but those are the two things, David, that we'll consider when we balance.

Great, thank you.

Thanks, David.

Jeffrey Bernstein, Lehman Brothers.

Great, thank you.

Two questions.

First, on the commodity contracts you talked about, I guess, the fourth quarter when the fixed contracts come off, I'm just wondering if you can give us a little more color in terms of how much is locked in through that fourth quarter?

And then, is there any visibility as you look out towards '09 with other suppliers allowing you to lock in for extended periods or at fixed rates, or do you just see '09 as an extension of '08 in terms of pressure?

Yes.

Well, let me first answer-- the three items that we have fixed pricing expire at the end of the third quarter is rice, corn and soy.

And we are starting to look very closely at what those markets are doing.

We're not ready to lock yet, but we're certainly assembling all the facts, so we can decide when to lock and at what rate.

Just to give you an idea, based on if we were to lock today, those three items alone could increase our food costs if we don't increase menu prices by in the neighborhood of maybe 80 to 100 basis points.

And most of that is coming from rice.

As you all know, rice has been in the ballpark of doubling since we locked in about a year ago.

So, that gives you a kind of an order of magnitude.

2009, we're certainly looking into 2009.

I think it's too early to tell you exactly what we're seeing, but we're seeing pressure kind of everywhere because the problem is produce is pressured, corn is pressured, and so that means other produce items are pressured as well.

And that also affects our meat prices as well.

So, when we look at what the trends are suggesting, it's suggests that 2009 could be a continuation of 2008.

But, we're going to focus more on what's before us in terms of those three commodities.

And we're going to focus most of our attention on what we can control, and that is hiring the best people, developing great managers and running great restaurants.

And we'll deal with the commodities as the locks come off.

We'll deal with whether we should lock, how much we should lock, and at what price when we're faced with that decision.

Okay.

And then, I mean, obviously, your comp's more resilient than peers.

But, in terms of the deceleration you're seeing for July, is there anything you can comment on in terms of is it market-specific, or are you seeing a change in menu mix?

And what are you able to see?

And are there any efforts to potentially offset such a deceleration, especially to just slow marketing?

Jeff, I would say it's not really market-specific, so it's different than what other restaurant companies and retailers have suggested.

It's really just kind of an across the board kind of thing.

I think if you were going to isolate it at all you might describe it as more middle America.

It is definitely not in some of the areas that others have talked about.

We remain strong in markets like California and Florida.

So, I would say if you were going to say isolate it, it might be more in kind of the middle America.

And I forgot the other part of your question.

Oh, just in terms of whether you're seeing menu mix changes, or how you can potentially offset something like that?

Not significant.

The only thing that we started to see over the last month or two is that people are buying less tacos and they're moving more towards bold.

Now, we've seen a gradual move towards bold really ever since we introduced them back in about 2004.

But, it seems like people are buying less tacos now, and I don't know if that's because they feel like they're getting more food for the money because we charge the same for tacos as we do for a bold.

But, that's kind of the only thing that I would say we're seeing.

Just within the last month or two, that seems to be some change in shift, but just a slight change.

Okay.

And then, just lastly, I know-- I don't know if I missed your comment, but I know you reiterated the 25% long-term.

The comment that you made about 2008 specifically, was that purely that you're facing significant challenges, or are you thought it might be tough based on the current comp units and margins you're forecasting to actually hit that 25% this year?

Well, it's not.

I mean, we didn't hit 25% this quarter, and I'm talking about comps decelerating and continued pressure on margins.

And we're going to lose that $1.8 million benefit.

So, this year is going to be tough.

But, that doesn't change our outlook for the long-term, but there are things that are facing us right now that suggests that, yes, it's going to be tough to rebound and hit that 25% for this year.

Got it, thank you.

Thank you.

Jeff Farmer, Jefferies.

Great, thanks.

Are you guys-- I guess just following up on John and Jeff's comp questions, are you willing to say if you saw any months with slightly negative traffic in the Q2 heading into July?

Can you repeat that question, Jeff?

I'm sorry.

Yes.

I was just curious, following up on the comp questions, if you're willing to say if you saw any months with negative traffic in the second quarter or early July?

Jeff, the connection's just not great.

Was the question are we seeing certain markets with negative traffic?

No, I'm sorry.

I don't know if you can hear me now.

Does that help at all if I--?

--That's a lot better.

Okay.

Let me try this again.

So, I'm just curious, again, following up on the comp questions from John and Jeff, have you seen any months with negative traffic, not in markets, but the entire system put up negative traffic in any of the months in the Q2 or heading--?

--No--.

--Into July?

Okay.

No.

And then, following up on that, what amount of [seems to] sales growth at this point that you need to hold onto your restaurant level margins?

Well, that depends on food costs, Jeff, and that's the question that we deal with all the time.

If food costs did not continue to increase, which is a big if because they're going to continue to increase, we've always talked about needing kind of a mid-single digit comp.

That mid-single digit comp I used to think was about 5%.

It might be a little bit higher than that with this occupancy deleveraging that I talked about.

So, we still need kind of that mid-single digit comp.

So, with the comp guidance and with the comp trends that we just talked about, we're kind of right on the tipping point.

Okay.

And then, the final question from me, I guess, I mean, I know you guys have numerous protein suppliers across chicken, beef and pork.

Is there any way to drive economies of scale with that many suppliers?

Because you guys are getting pretty good pretty fast.

Is there any way to take advantage of your scale with so many suppliers?

There really isn't because we've already reached those economies of scale some time ago.

And with 778 restaurants as of the close of the third quarter, we are a really, really, really big buyer from most of these suppliers and are getting basically the best pricing we can in terms of at least the economies of scale.

Okay.

Thank you, guys.

Thanks, Jeff.

Jeff Omohundro, Wachovia.

Thanks.

Just wondering if you could talk to the marketing strategy a bit more.

I guess, first, why you're planning to slow marketing spending in the second half with sales decelerating?

Well, we typically spend a little heavier in the second quarter as we enter into the Spring and Summer months which, seasonally, are our best-performing months.

So, for example, last year we spent about 2.1% of sales in the second quarter compared to about 1.8% overall for the year.

And this year in the second quarter we spent a little heavier than normal at about 2.5% of sales as we wanted to add additional support to those markets on the West Coast which introduced naturally-raised chicken.

But, I mean, as Jack said, if we come to a strategy and have the right tactics in place that we think would be useful and would really help us in the second half of the year, we remain open to doing something additional with marketing during that time.

But, as we're in this retooling period and as we're working on really defining better the strategy and making sure that what we do is consistent and properly represents our brand, we're not-- we don't plan on sort of spending more without that clear direction.

Okay.

And how comprehensive a marketing review are you contemplating?

Would it incorporate broadcast media, other venues beyond what we normally see with Chipotle, for example?

Well, I mean, yes, all that's up in the air, and all that is wide open, and we're going to consider sort of all of that.

But, right now, what we're doing, again, is just kind of taking a step back, analyzing and creating our strategy and really trying to develop a clear path for what we think best can represent our brand going forward.

So, in light of that, we don't want to sort of increase spending without a clear path.

Very good, thanks.

Thank you.

Thanks, Jeff.

Steven Rees, J.P.

Morgan.

Hi, thanks.

I just want to ask about the new unit volumes.

It sounds like they continue to open up at about $1.35 million to $1.4 million.

But, has there been any change in the way that those units ramp up over time to the system average?

Is it still taking about three years?

That's what you said in the past.

Yes.

I mean, that hasn't changed at all, Steven.

We're still seeing them opening in the $1.350 million to $1.4 million range.

We're still seeing our new restaurants comp in the first couple of years at much higher than Company average.

And we still are opening up about two and three on what we call the proven market, and we expect that to continue for the rest of this year and as we're building the pipeline for next year.

So, we don't see anything that suggests there's a change in that trend line whatsoever.

Okay.

So, you said it was about one-third of the development this year was in, I guess, newer or newish markets.

And will that--?

--Yes, yes--.

--Be steady next year?

Yes.

And that's exactly the niche that we talked about at the last quarter.

Okay, that's helpful.

And then, has there been any change between your lunch and dinner mix, any softness in any-- or has been pretty much throughout the day?

No, it still remained right about where it is.

It's slightly skewed towards dinner.

Okay.

And then--.

--But, it's about 50/50.

Just in terms of the new store development in 2009, is there any change to the prototype in terms of the size or the cost?

Well, we're always open to smaller restaurants.

Most of our restaurants go into somebody else's building, and so we don't always have control; in fact, most often don't have control over what the size is.

So, we'll do smaller restaurants when they become available.

There's not a strategy to drive that down.

This year, we talked about our development costs being about in that $900,000 range again.

Too early, we haven't communicated and we really haven't done a calculation that I would rely on, on what our average development costs will be for next year.

But, there's nothing, Steven, strategic in terms of what we're driving one way or another in terms of size or what our prototype might look like.

Okay, great.

Thank you very much.

Thanks, Steven.

Mitch Speiser, Buckingham.

Please go ahead.

Thanks very much.

First, I just want to get a better sense, the food safety issues that have been in the news.

Did you-- when they did kind of hit the headlines, did you see a slowdown, or are you just kind of speculating generally that it's had just a negative halo on the business?

I think it's more of the latter.

It's sort of a negative halo.

I mean, it wasn't that we saw a sudden, abrupt change, but just sort of anecdotally, we've noticed that there are some customers that have concerns.

There's some that have questions.

Our crews and managers have been dynamite about answering those questions and satisfying our customers about the fact that our food is very, very safe.

But, for every number of questions and concerns we receive in our restaurants, we're left to wondered how many people just didn't come in to the restaurant and thought maybe I'll wait until this crisis passes or maybe I'll wait until the FDA comes to a clear understanding and makes a clear announcement as to what's causing all of this?

So, it really is-- it's sort of more anecdotal and it's more of a halo effect that we're looking at as opposed to something very quantifiable that we can say is completely measurable.

Got it, thanks.

And separately, I'm just wondering in the New York stores, where the calorie counts are on the menu, any views?

Like, are the sales trends any different than the other markets?

No.

It seems that that has had almost no effect.

And we've had a couple of customer comments to our Website, and even those aren't particularly negative, but it's sort of like, "Hey, noticed you put up calories," and maybe there's a follow-up question or two that they have about some of our food or some of the nutritional qualities of our food.

But, no, that's really been pretty much a non-event since we put those calories on our menu board in New York.

Great, thanks.

And my last question, just what is the average check running?

And if you could break it out by lunch and dinner, that would be great.

Thanks.

Yes, our average check is right around $10 right now.

In terms of dinner and lunch (inaudible - multiple speakers)--.

--We know it's a little higher, so within the kind of $11 range for dinner and something below $10 for lunch.

I don't have the exact numbers, but--.

--It's pretty close, so it's not dramatically different.

Right.

Okay, great.

Thanks.

Thanks, Mitch.

Rachel Rothman, Merrill Lynch.

Hi, just a follow-up on the new store openings.

Can you-- the revenue growth was a little bit lower than what we were looking for, and the unit growth was fine, and the same store sales slightly better than expected.

And you talk about the unit openings in kind of more established markets being at parody.

Can you talk about how the new stores in new markets are opening?

Yes.

Rachel, it's very similar to my comments on last quarter, where we talked about the newer markets are opening still in that $1 million to $1.5 million range.

And so, that's been the trend.

That hasn't changed.

That hasn't fallen off.

And the $1.350 million to $1.4 million, that hasn't fallen off either.

I did notice that there's a sales difference between what we're delivering.

And one consensus is even though the comps are close-- and I can only imagine that it's some kind of a mechanical thing with the models, maybe the assumption in terms of when you think they open, for example.

But, there's no deterioration in the trend whatsoever.

Okay.

And then, could you talk about the uses for the $200 million in cash?

Obviously, you have more than enough cash to continue building out your pipeline as it's currently established.

Would you be thinking about an acceleration in the growth pipeline or maybe a buyback or a dividend at this point?

Well, the acceleration won't come because we happen to have to have the cash.

The number of openings will be based on the things that I talked about earlier, and that's we want to go into markets and open where we're performing well financially, where we have great teams, so we know we can grow with those teams, and we want to find great real estate.

And then, in the newer markets, we want to continue to build the brand until those markets become proven.

And so, that's what's going to drive our real estate strategy, not how much capital we have.

We can't do anything in terms of a buyback under the contract that we signed with McDonalds, when we split from them, until the two-year anniversary of the split off.

That anniversary is in October of this year.

At that time, when that expires, we'll certainly take a look at it.

And when we look out into the future, look at our capital needs, and if we have excess cash at that time and if the conditions are-- if they warrant-- and you know what I mean by that, is looking at our stock price and looking at what the interest rates are.

If it makes sense for us to do a buyback, we'll certainly look at it at that time.

Do you have a sense for how much cash you would need to keep on hand just for working capital purposes, how much of the $200 million would be necessary to run the business just kind of day-to-day?

Yes.

I mean, we're self-funding, right?

So, we would want-- maybe we'd want $40 million, $50 million on hand, I mean, a relatively small amount because we're self-funding now.

We're about to go into Canada.

We don't know what that's going to lead to.

And so, we'd like to not cut ourselves too short.

We've talked about we'll eventually get into Europe some day.

So, when we look at what we're going to do with this cash, we will look beyond just a year or two and look at what might happen in the future.

So, we don't want to be handcuffed by the equity markets or the debt market.

Today would be a bad time to be out there trying to borrow money.

So, we don't need a lot based on what we're doing today, but we'll look out into the future and make sure we don't cut ourselves too short, if in fact we do take a look at alternative uses of our cash.

Great, thank you.

Thanks, Rachel.

Paul Westra, Cowen and Company.

Please go ahead.

Hi, guys.

Good afternoon.

Hey, Paul.

Hey, Paul.

Most questions have been asked and answered, but I just want to make clear on this other operating cost line item.

You had 30 basis points year-to-date deleveraged it looks like, or at least in the second quarter here.

And that was solely a function of the 40 basis points, as you just articulated, Monty, on the marketing expense.

So, in the second half of the year, should we expect-- you kind of got it to 60 basis points last year-over-year of marketing spend.

Is that about right, in the second--?

--Yes.

I mean, Paul, I think quarter-to-quarter is the best way to think about it.

We're 2.4% year-to-date in marketing.

To average out to 1.8%, you need to be in the kind of 1.4%-ish range.

And so, you need to be a lot lower, about 100 basis points or so lower.

I wouldn't encourage you to take it all the way down to 100 basis points because there's other things happening-- credit cards and utilities and things like that.

But, it's a pretty meaningful change in our marketing quarter-to-quarter.

Now, we've had these changes in the past because we've always loaded up different quarters.

We've never spent 1.8% evenly throughout the year.

But, this year, we happened to spend more in the first and second quarter than we typically have.

And so, the second half of the year, it'll be a pretty significant swing in our marketing.

Does that help?

Yes, that does help.

Then, a question on longer-term on unit development.

You said, obviously, if the world gets to back to a little bit normal, the 25% EPS is still your long-term expectation.

Does that apply 20% plus in the growth for at least the next two to three years?

Is that something--?

--Yes.

We wouldn't necessarily say it that way because that's not how we decide how many we're going to open.

But, it feels like yes.

I mean, it feels like there's opportunity for us certainly to do that.

It feels like there's opportunity for us to maintain a reasonable comp.

And we hope that the commodity market will stabilize such that we don't have to try to make up the losses on the food line through some other line or by raising menu prices.

And so, those are the pieces that fit together.

And the other disadvantage we've got going this year, Paul, is we're losing a few points just on interest rates.

And so, just interest rates alone mean that we have to generate growth somewhere in the high 20s or approaching 30%, something in that ballpark, just off the fact that we're earning less on interest.

But, the pieces you described are in the ballpark of what we would need to deliver over a period of time in order to deliver the 25% or greater.

Great.

And then, I had a question on the manager conference.

It's about $0.04 expense, it sounds like, $2 million.

Is that a feeling, too, expect it at this point to be an annualized event?

Well, we haven't determined that it's going to be annual yet.

It's something we'll consider.

We're going to look carefully at the impact and how much benefit this is to our managers and how much guidance it gives them, and we'll make a decision in the future about that.

But, at this point, we certainly haven't signed it up to be an annual event, no.

Okay, that's great.

Thanks.

Thank you, Paul.

Thanks, Paul.

Tom Forte, TAG.

Great, thanks.

Hi.

I wanted to know a couple of questions regarding the comp performance, if you saw anything different from the competition as far as the level of promotion during the quarter?

I'm sorry, if we saw anything different from the competition with regard to what now?

Promotional activity?

Not really.

I mean, I'm sure they're out there doing something.

But, I'm not sure who in particular-- you're probably better aware of it than we are.

I mean, I'm not aware of anybody that we might consider a competitor that's doing something out of the ordinary.

Okay.

And then, regarding when the shift in the salmonella seemed to go from tomatoes to essentially ingredients in salsa, do you think there was a greater anecdotal change in customer sentiment that may have got markedly a little worse?

When it went from tomatoes to jalapenos?

Yes, tomatoes to essentially jalapenos, cilantro, other ingredients maybe in salsa?

Yes.

I don't think so.

Yes, I think the tomatoes was probably the biggest thing in terms of gathering customer attention for what was going on, just because everyone was aware of it.

It was something that was visible and in groceries and in restaurants nationwide.

We got rid of our tomato salsa altogether, so our line looked different for, frankly, the first time in a long time.

So, that was something very noticeable to our customers, and it drew a lot of comment.

When the newspapers and when the FDA started warning about jalapenos, that was just sort of additional stuff that made more people aware of an ongoing something with regard to salmonella.

And when they speculated with regard to cilantro or other ingredients, again, it just sort of continued the story.

So, it's been an ongoing saga, but I think the tomatoes were certainly the thing that was most noticeable.

And then-- thanks.

Last question.

Generally speaking, when we think of your Food with Integrity program, should we think that it inherently makes your cost of goods higher, or it enables you to buy deeper with certain suppliers?

So, in that regard, the additional expense of higher cost ingredients would be offset by scale?

Well, the cost is definitely more expensive.

Our scale helps for sure.

But, the premium on our naturally-raised meats generally range anywhere from 20% to it could be as high as 50% depending on what's going on in the commodity market.

So, it's very, very significant.

Now, when you're in a restaurant, you'll notice that our menu prices are generally similar to other restaurant companies in our kind of category or the category that some people put us in.

And so, when you go to other restaurants that are in this fast-casual category, our prices are about the same.

But, our model, where we focus on just a few things-- and we have a very limited menu.

And we can start with all fresh ingredients, high-quality ingredients, and we can make all our food in our restaurant.

That focus allows us to not only prepare this great-tasting food, but we can buy these premium ingredients and find efficiencies in other areas on the P&L, in our labor line.

For example, we have-- even though we make everything from scratch, our labor, at about 26%, is much lower than others.

And so, we figure out a way for efficiencies of the P&L to afford to pay for these premium ingredients.

It's critical to our vision to change the way the world thinks about and eats fast food.

Not everybody can afford to go to whole food and buy these premium ingredients.

But, we're taking these premium ingredients, finding efficiencies elsewhere in the P&L, so it is affordable.

Great.

Thank you very much.

Thanks, Tom.

Bryan Elliott, Raymond James.

Hey, just real quick, most of them have been asked.

But, Jack, what was stock-based comp in the quarter?

Stock-based comp in the quarter was around $4 million, but let me double check.

Yes, it's just about $4 million.

Okay.

And you said sequentially up $1 million, and now $13 million for the year is what you think it'll be?

Yes, up $1 million into the third quarter, and $13 million for the year.

And that's down $3 million from previous estimates?

That's right.

And we're giving estimates before it was at a higher stock price, and so it is $3 million less than what we talked about at the last quarter.

And that's all stock price?

We haven't reduced the plan grants, correct?

That's right.

That's exactly right.

Okay.

And what was the-- just help me understand the basis, I guess, for the-- well, what is the bonus based on?

Is it basically an EPS growth rate and that's why the reversal had to occur?

Well, it's based on a number of performance factors.

The financial factors are operating income.

It's comp sales.

It's our new store performance.

And frankly, we over-performed in the first quarter, and we underperformed based on internal targets in the second quarter.

And so, what we picked up in the first quarter as additional bonus accrual that was in our first quarter results, we basically took those back out in the second quarter.

Okay.

So, it was sort of normal for the first half?

Overall, pretty close to normal, I would say.

Okay.

Yes.

So, we're pretty much set in the (inaudible - multiple speakers).

But, looking at the slowdown and the situation with the environment, should we assume maybe less than normal accrual second half?

I wouldn't, Bryan.

And what would happen is if we over-perform or underperform, part of that over-performance or part of that underperformance is just going to be partially, but just in a small way, funded by either a higher bonus or a lower bonus, okay?

I think it's worth pointing out this time because we had a pretty significant bonus grow in the first quarter that we reserved, and so it stands out.

But, generally, I would not expect that, if results get significantly better or significantly worse, that I'm going to be talking to you about a bonus accrual.

In fact, you've never heard of us talk about it before.

Yes, agreed.

Okay, thanks a lot.

Okay.

Thanks, Bryan.

Rob Wilson, Tiburon Research.

Yes, thanks for taking my call.

You mentioned that you're not going to hit the 25% earnings per share growth target this year.

After listening to you, I'm hearing about higher food costs, no labor leverage and less interest revenue.

What gives you confidence you can hit it next year?

Well, first of all, I didn't say we weren't going to hit 25%.

I said it was difficult, and I gave reasons why it's going to be difficult.

Secondly, there are things that are tough comparisons this year, and there are things like commodity increases that we don't know where they're going to lead us in the future.

We believe that relative to other restaurant companies, and we believe that the potential that we've got before us to grow from under 800 restaurants to thousands of restaurants, with the unit economic model where we can expect cash and cash returns of 40% returns, where we've got significant pricing power because of the unit economic model and the way that we fund these premium ingredients I talked about before, we have a high degree of confidence that we can hit 25% over the long-term.

If our goal was to hit 25% each quarter in each year, we'd have raised prices and we would hit a 25% each quarter in each year.

We're in this for the long-term.

We've got a vision.

We think it's a worthy vision, and we're going to stick to it.

And we're not going to do something in the short-term that might throw us off that vision.

Okay.

And I believe on the last conference call you suggested that your Canadian stores were not a significant part of your growth strategy.

Why would that not be the case?

Because it's one store.

Well, okay.

So, you're just referring to the one store.

You say Canada may be a significant part of your growth strategy.

We said it's not part of our near-term growth strategy because we're going to open up one store.

One store is intended to introduce the brand.

One store is intended to start the building of the team up there.

And we're going to take the exact same strategy we take here in the US, and that is when we see the customer acceptance, that people understand and appreciate and are becoming loyal to Chipotle, and when we feel comfortable that the team is being built there, we will then turn it into the appropriate growth strategy at that time.

If we were only into this for the growth, to open as many restaurants as we could, we'd be franchising up there.

We wouldn't care who's running the store.

We care who's running the stores, and so we're going to take it as a very thoughtful approach.

And so, it's going to be one store to start.

Now, that sounds appropriate.

And one final housekeeping question.

Your stock-based compensation last year, what was that, about $2.5 million in Q2?

No, it was $8 million altogether.

And in Q2, it was--.

--But, in Q2 this year, it's $4 million versus one half--.

--Yes, $2.5 million.

Yes, it was about $2.5 million last year.

So, $4 million versus $2.5 million.

Yes.

And actually, it's probably, for this quarter, close to maybe $3.5-ish million, $3.2 million, $3.5 million.

I said $4 million before and that was a guess.

So, it's more in the low threes for the second quarter of this year compared to about $2.5 million last year.

And then, it's going to step up to around $4 million in the third quarter for this year.

Okay.

Well, thank you.

Okay, thank you.

Ladies and gentlemen, this will end our question and answer session.

I'll now turn the call back over to our presenters for any additional or closing remarks.

No, that's all.

Thank you very much today.

And again, ladies and gentlemen, this will conclude today's teleconference.

Thank you for joining us today.