奇波雷墨西哥燒烤 (CMG) 2008 Q4 法說會逐字稿

Good day, and welcome to the Chipotle Mexican Grill fourth quarter 2008 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.

(Operator Instructions).

It is now my pleasure to turn the floor over to your host, Kate Giha, Investor Relations for Chipotle Mexican Grill.

Please go ahead, ma'am.

Hello, everyone, and welcome to our call today.

By now, you should have access to our earnings announcement, released this afternoon for our fourth quarter and year-end 2008.

It may also be found on the website at Chipotle.com in the Investor Relations section.

Before we begin our presentation today, I will remind everyone that parts of our discussion will including forward-looking statements within the meanings of the securities laws.

These forward-looking statements will include projections of restaurant comp sales trends, margins, food costs, other expense items, the number of restaurants we intend to open, 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 SEC filings, including our annual report on Form 10-K for 2008, which we expect to file later in February for discussion of the risks that could impact our future operating results and financial condition.

Our discussion today will include non-GAAP financial measures, a reconciliation of which can be found in the presentation page of the Investor Relations section of our website.

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

On the call with us are Steve Ells, our Founder, Chairman and co Chief Executive Officer, Monty Moran, our co Chief Executive Officer, Jack Hartung, our Chief Financial Officer.

After the comments we will open the call for questions.

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

Thank you, Kate.

While 2008 was a challenging year for the restaurant companies including Chipotle, we remain focused on our vision to change the way the world thinks about and eats fast food.

And our ability to remain focus on this vision helped us deliver a 5.8% comp for the year, a revenue increase of roughly 23% to $1.3 billion and an 11% increase in diluted earnings per share for the year to $2.36.

We made some important announcements recently, and I want to share some perspective with you about what this means for the Company.

First we announced that Monty and I will now share the role of CEO.

Monty's promotion is a recognition of the tremendous impact he's had on our business including his creation of a special people culture at Chipotle that rivals are unique food culture.

But this moves also allows me to focus more of my time on the things that I am most passionate about, which I believe can add the most value to Chipotle.

Specifically, I intend to spend the vast majority of my time on improving our food, improving the design of our restaurants, and ensuring that our marketing efforts drive transaction growth by educating our customers about our leadership position with food integrity and creating a lasting bond with our customers.

While we have done a good job in these areas over the years, I believe that we can do much better and significantly improve our restaurant experience and our business.

To help us continue making progress in our efforts to serve food made with better, more sustainably raised ingredients in 2009, we asked Bill Niman to join Chipotle as Sustainable Agricultural Advisor.

Bill, who founded Niman Ranch, which provides much of our naturally raised pork and some of our naturally raised beef, is a pioneer in the sustainable food movement.

He is very well known and well regarded in food and sustainability circles.

In his new capacity, Bill will work closely with us to improve the quality of the ingredients we use, broaden our commitment to sustainable agriculture and provide another voice to help carry our message of making food from sustainable sources available and affordable so everybody can eat better.

Throughout the year, we made considerable progress on our effort to provide food with integrity.

Specifically, we reached the important milestone of serving 100% naturally raised chicken in all of our US restaurants and increased the quantity of naturally raised beef, which is now more than 60%.

Of course, 100% of the pork we serve is also naturally raised.

Beyond increasing the amount of meat we serve, in 2008 we also launched a program to serve locally grown produce, making Chipotle the only national restaurant company with a significant commitment to using produce from local farms.

Under this program we met or exceeded our goal to serve at least 25% of at least one produce item when seasonally available in all of our markets.

The produce we are serving as part of this program comes from within about 200 miles of our restaurants, and that is in contrast to 1,500 miles which is the distant most produce has to travel to its final destination.

In 2009, we plan to increase this percentage of locally raised produce to 35% from 25%.

And while Bill Niman will help advance our food with integrity initiative by revisiting all facets of our supply chain, I plan to spend much more time in the restaurants cooking to make sure all of our food prep, cooking techniques, and equipment are the best they can possibly be.

Cooking has always been a passion for me, and I frankly have not had the time to do as much of it as I would have liked to in recent years.

There are so many subtleties that make our food delicious, and by focusing more of my time in every detail of how our food is prepared and cooked, we can be sure that will serve the very best tasting food using these top quality ingredients.

I can say the same thing with regard to the design of our restaurants.

We have always been praised for for a unique and innovative design of our restaurant spaces.

But truthfully ,there's a lot of opportunities here as well.

I believe that by carefully focusing on this area, we can come up with a great design that will enhance the customer experience, allow more operating efficiencies and reduce our investment costs.

I have been working extensively with an outside architect over the last year, and I am very excited about the possibilities that this focus has for our business model.

I also plan to devote more of my time to advancing our marketing strategy.

We recently announced the addition of Mark Crumpacker as our first ever Chief Marketing Officer.

Mark comes to us from Sequence, a San Francisco based brand consulting firm he co-founded.

Mark has a longstanding tie with Chipotle, having developed our original logo and the original identity package.

Through Sequence, Mark has been doing some consulting work with Chipotle over the last several months and led the search effort for a new ad agency.

Mark and I have been working very closely together to develop a new marketing strategy.

We believe the new strategy will be much more effective in communicating to our customers what makes Chipotle a special restaurant experience, and will encourage new customers to visit Chipotle and existing customers to come more often.

For ten years, while we were enjoying double digit comps, we did not need or expect marketing to contribute to our business results.

We looked at marketing more as brand building and did not really measure the results of these efforts or hold the team accountable to driving more business to the restaurants.

I fully expect that our new marketing effort will drive business results and we plan to carefully measure the effectiveness of our marketing going forward.

In this way we will be certain that the significant investment that we make each year in marketing is providing us with a solid return.

Just last month we announced the hiring of our new ad agency, Butler, Shine, Stern & Partners.

This decision came after a very thorough review that started with 27 agencies and was narrowed to three finalists who were each hired to do a project for us.

Through this very methodical approach, we had the opportunity not only to see what each of the finalist agencies was capable of in terms of work product, but also to see what it would be like to work with them on a day-to-day basis.

We believe that Butler Shine is the right partner for us, and will help us elevate our marketing both creatively and strategically.

We've been working closely with the team at Butler since their announcement, and you can expect to see initial creative through these efforts during the second quarter of this year.

One of the things that continues to contribute to Chipotle's success is our commitment to constant improvement.

With these changes, I think we're in a stronger position than ever to continue our work to change the world thinks about and eats fast food.

I'll now turn the call over to Monty.

Thanks, Steve.

I had a chance to spend a lot of time in the restaurants around the country during the fourth quarter and continue to be impressed with what I see.

Our managers and our crews are empowered.

They're serving delicious food and providing great customer service.

Our pipeline of potential new managers is better than it has ever been and I continue to meet great managers on their way to becoming restaurateur.

If I were to use what I see in our restaurants and the enthusiasm that I feel when I'm there as the only benchmark of the economic environment, I wouldn't believe there would be any recession at all.

Our restaurant operations are stronger than ever, our people are more optimistic then ever about the opportunities they have with Chipotle, and our customers still line up with the expectation of a great dining experience.

But the reality is the recession has effected and will likely continue to affect the amount of people out shopping and eating meals away from home.

While we cannot control the economy, we can do everything within our power to make each customer's experience at Chipotle the best dining experience possible, so that when they do go out to eat, Chipotle will be at the top of their list of restaurant choices.

Our managers and our restaurant teams understand this and are committed and ready to delight each customer.

Because of this, the number of positive customer service comments through our website today has doubled what it was a year ago.

While we have held up better than many other restaurant companies in this environment, our comps have slowed, and our margins have declined.

That have caused us to take a fresh look at everything we do, to make sure that our business is as strong as it can possibly be.

This includes critically analyzing our restaurant staffing model, reviewing the way we prepare our food, analyzing how we source our ingredients as well as the business terms with all the key suppliers.

Looking at the way we design and construct our new restaurants, and how we maintain them are just a few examples.

We're looking at the current situation as an opportunity to look at everything we do to make sure that we are as disciplined and as efficient as possible without compromising on the taste or quality of our food, or quality of our customer's dining experience.

We don't have anything yet to report on what this critical review might lead to in terms of the impact on our results, but I am confident that we will leave this recession stronger than when we entered it in terms of the quality of our people, the quality of our restaurant operations and the strength of our business.

We remain convinced that the single most important thing we can do to ensure the success of our Company is to build the very best people culture possible.

A culture which attracts and empowers the highest performing people.

We can see that we're having a lot of success building this culture every time we visit our restaurants.

The energy and optimism is apparent from the moment you step into the restaurant.

Each member of the team knows that they have a bright potential future ahead of them.

This is very different than what you might find in other organizations, where managers are usually hired from outside the Company and crew are not expected to advance.

Where promotions happen because of seniority, not based on merit.

Where people focus on short-term results and not a long term vision.

Where mid-management level employees police and mico-manage but do little to empower their people.

Where favoritism or internal politics count more than real leadership.

What we're doing is very different.

We hire people who have those certain characteristics that you just can't train, and we teach those people the skill that they need to be successful at Chipotle.

The crew that we are hiring in our restaurants are better than ever.

In fact, the current economic conditions are actually helping out a bit in this respect.

There are more top performing people wanting to join Chipotle.

And as soon as they start working with us, we give them a very clearly defined path to success.

We remove obstacles that may limit their progression by eliminating politics, bureaucracy and low performers who may impede their effectiveness.

And then we empower these top performers to take on roles of increased leadership and reward them when they do so.

In fact, we've already decided that there will be no across the board cuts to bonuses for our restaurants managers in 2008.

Restaurant managers are the most important people in the Company and we believe it's important that we set the right example by rewarding our top performers.

As you know, the foundation of our culture is the restaurateur.

We now have 112 restaurateur, each of whom was personally selected by Steve and myself.

And the impact of these restaurateur can be felt across all of our restaurants.

All of our general managers aspire to be restaurateur, and in striving towards this elite position they are working to create excellent restaurant experiences while developing their crews to be our future leaders.

We are also making improvements and becoming more efficient in our field management structure.

Five years ago, each of our area managers oversaw only five and a half restaurants on average.

Today they are responsible for nearly twice that many.

This enables us to do more with less, without compromising quality or service, and it also allows us to better retain and award our mid level leaders.

This is contributing to a decline in G&A as a percentage of sales over the years, with 2008 G&A at 6.7% which is our lowest level ever.

We are taking a disciplined approach to reviewing all of our practices, starting with the selection of sites and continuing through the way we source ingredients, the way we prepare food, and the way we interact with our customers.

And this approach will continue to make Chipotle a stronger Company, allowing us to continue to increase the quality of dining experience which we believe will increase shareholder value over the long term.

I'll now turn the call over to Jack Hartung.

Thanks Monty.

We remain as committed as ever to delivering superb customer service and treasuring each and every customer who visits Chipotle, especially in this economic environment.

Staying focus on what we do best, providing a great dining experience with great customer service with food made from high quality ingredient and prepared using classic cooking technique will keep us firmly on the path toward our vision to change the world thinks about and eats fast food.

And it's imperative that we all this while managing the business in a discipline manner, so we can remain financially strong in this environment.

Our healthy balance sheet and strong economic model has allowed us to continue to open restaurants funded by operating cash flow, deliver restaurant level margins higher than most competitors, and opportunistically pursue the $100 million buy back we announced during our third quarter call.

For the fourth quarter, our revenue increased 19.5% to $345.3 million from $288.9 million last year.

Our fourth quarter revenue included a one time gift card breakage catch up benefit of $2.3 million for the recognition of estimated unredeemed gift card balances.

Our revenue for the full year was up 22.7% from last year to $1.3 billion.

Our comps for the fourth quarter was 3.5%, we ended 2008 of full year comps of 5.8%.

Menu price increases were about 7% overall in the quarter, with about 3.5% coming from previous increases and 3.5% coming from price increases during the quarter.

We actually increased prices by about 6%, which was done market by market throughout the quarter, which resulted in the effective 3.5% incremental increase for the quarter.

And not every market saw an increase.

For example, California's prices were not changed since they received an increase in the second quarter when they received naturally raised chicken.

As we discussed in our last call, historical prices have been met with little or no resistance as they typically have been associated with the roll out of naturally raised meats.

But as expected, given the economic environment and the absence of the additional food of integrity news, we have seen resistance to the most recent price increases.

Though it's impossible to identify how much of the lost traffic is the effect of general traffic continue and how much is due to price resistance, the net effect seems to be that we've been able to retain a little less than half of the incremental 6% price increase in the quarter.

Looking ahead to 2009, the price increases taken to date will roll over with an effective increase of about 6% for the full year, higher in Q1 and lower in Q4.

Based on transaction trends we have seen so far, and assuming the economy does not worsen, we expect comps in the low single digits for 2009.

If the economy weakens further and unemployment continues to rise in the absence of improved customer confidence, we would expect comps in the very low end of that range, if not worse.

Food and beverage and packaging cost for the quarter were 32.1%, 20 basis points higher than Q4 of last year but down 90 basis points from the third quarter.

A decrease from the third quarter is mainly due to the menu price increase.

For the entire year food packaging and beverage costs were 32.4%, or 50 basis points higher than the prior year.

Higher avocado, chicken and cheese cost were the main drivers behind the increase and were partially offset by the menu price increase.

We now expect 2009 food inflation at a 2% to 3% range.

Lower than the mid single digits we expected during our third quarter call.

This lower expected inflation is a result of a establishing pricing agreements that lower prices in 2009 for cheese and tortillas and is offset by the higher cost of chicken and beans during the year.

Overall, we expect food costs for 2009 to be in the same ballpark as the 32.1% we saw in the fourth quarter.

So the more modest commodity inflation is certainly a welcome trend over the past few months.

Unfortunately, it has been accompanied by a worsening economy including rising unemployment which increases the likelihood of worsening transaction trends.

So despite the more favorable food inflation, we still anticipate margins in that 19% to 20% range as we are concerned that a continued deleveraging due to weakening transaction trends will offset the modest positive impact of lower food inflation.

Labor costs were 26.6% for the quarter, down 20 basis points from last year.

And for the year, labor costs were 26.4%, down 30 basis points from 2007.

The leverage on this line for the quarter and for the year is largely attributed to the impact of the menu price increases.

And we expect to see no additional labor leverage in 2009.

Occupancy cost for the quarter were $28.4 million, or 8.2% of revenue and that is up 110 basis points from last year.

And for the full year, occupancy cost were $98.1 million or 7.4% of sales, up 40 basis points from prior year.

Occupancy cost in the quarter included a one time non-cash straight line rent expense adjustment of $2.6 million, and without this adjustment, occupancy would have been 7.5% in the quarter or 40 basis points higher than last year.

And as we discussed in previously calls, this increase is driven by opening proportionately more restaurants and more densely populated areas such as Boston, New York, Philly and Florida combined with the decelerating comps.

Other operating costs remain relatively flat from the prior year at 12% for the quarter but off slightly 20 basis points to 12.3% for the full year.

The increase for the year was driven by utilities, repair and maintenance cost and higher banking credit card fees.

Our SG&A for the quarter was $24.3 million or 7% of revenue, down 10 base points from last year.

And for the year, G&A was $89.2 million or 6.7% of revenue which is down 20 basis points from last year as a result of the menu price increase and lower performance base bonus accruals.

We will not know the full impact of stock comp expenses until the equity grants are approved by our comp committee which will occur during the first quarter.

However based on our current estimate considering historical grants, we anticipate our stock comp expense to be in the $14 million to $5 million range in 2009, off slightly from about $12 million in 2008.

As expected, we saw little leveraging in G&A for 2008 and continue to expect the same for 2009.

Loss and disposal of assets was $4.1 million for the quarter, which included write offs related to remodels in about 125 restaurants in Colorado and California as well as an impairment charge for a restaurant that we closed of about $1 million.

Our cash preservation strategy in this unstable banking environment, let us continue to invest most of our cash in US treasuries.

This naturally led to a significant reduction in interest income and tax exempt interest in 2008.

So as a result, interest and other income was 0.1% of sales in the quarter, down 40 basis points from last year and down 30 basis points for the full year to 0.3%.

For the quarter, income from operations was 27.9%, a 1.5% increase over last year.

And for the year, Op income was $124 million, up 14.7% from last year.

Our effective tax rate for the quarter was 39.5% compared to 39.3% from last year.

And for the full year, the effective tax rate was 38.5% compared to 38.1% last year.

The increase for the year was driven by lower taxes and interest partially offset by a lower effective state tax rate.

We opened 39 restaurants in the quarter for a total of 136 for the year, all of which were funded from operating cash flow.

And we now anticipate opening 120 to 130 restaurants in 2009.

This is down from our previous guidance of 135 to 145 which reflects our continued concern about many developers' ability to complete projects and deliver our space in time to support a 2009 opening.

Delays have caused time lines to be expanded and about two-thirds of the restaurants will open in the second half in the year.

With that in mind, along with the growing financing and leasing challenges facing developers, we determined it was necessary to pull back on our guidance.

There may still be risk in this guidance, which is outside of our control.

We made nice progress on $100 million share repurchase plan we announced in October.

Through the end of last week we repurchased about 880,000 shares for $39.1 million, an average price of $44 per share.

Now it's difficult to predict when the buy back will be completed as its dictated by the market and it's dependant upon the share price and the trading volumes.

And our repurchases did slow down over the past several weeks based on the price and trading volume.

I will caution you against simply extrapolating our progress so far and predicting how quickly we can complete the repurchase.

Finally, we've investigating the possibility of collapsing our dual class stock structure.

We've been working with outside tax counsel and have discussed the issue with both McDonald's and the IRS.

And it's important to understand that in cases where other companies have collapsed dual share structure debts have split up.

There's generally been a ruling from the IRS at the time of the original transaction, which was not obtained with our split-off transition.

That severely complicates the issue of getting an IRS ruling.

And because of this area of the tax law is very complex, it is not clear that we will be able to obtain an opinion of counsel that will satisfy will satisfied the requirements of a separation agreement.

Thanks for your time today.

At this time, we'd be happy to answer any questions that you might have.

Operator, please open the line.

Thank you (Operator Instructions).

We'll go first to David Tarantino with Robert W.

Baird.

Hi.

Good afternoon.

Hi David.

Jack, just a question on the commentary related to the price increase and the traffic subsequent to that.

Can you give us a little bit more color on how you determined it was the price increase rather than just the economy in general that caused a little bit of traffic softness?

You really can't, David, and what my comments intended to say was, we can't separate how much is general softening in traffic, and how much is resistance to the price increase.

And so just looking at what our transactions trends were before the price increase in the various markets and what they were afterwards, we are holding on to something less than half of that.

But I can't tell you.

It's a great question.

I can't tell you how much is general economy, softening economy, that softer transactions might have happened anyway and how much was specifically resistant to the menu price increase.

We'll go next to John Glass with Morgan Stanley.

I was hoping to get more clarity on what you are seeing in traffic counts right now.

I guess in the fourth quarter, you are seeing down what 6% or 7% would be the simple math.

Is that a stable trend as you enter the first quarter or maybe you can talk about how the trends progressed as you took the pricing as well?

Thanks.

Well, it wouldn't be down 7%, John.

We had a positive comp of 3.5%.

We had effective menu.

The overall effective menu price increase was 7%, so we're negative transactions somewhere in that 3.5% to 4% range.

So, it wouldn't be as deep as 7%.

And I would say we are still looking at this market by market, because some of the markets took the increases early in October, and we have more data, more trends for those markets.

Some took the increases as late as the middle of December.

And we have less data to track, and the last several weeks the weather has been up and down.

We've had some extreme weather on the cold and snowy side in much of the country.

And then we've had warm weather.

So, we're still watching the patterns, John.

But when we sort it altogether, throw all the markets together, the ones that went first, the ones that went last, try to factor out the weather, et cetera, we kind of net out that it looks like we are keeping right around something less than half of the increase.

That's the best way we can summarize it for you.

We'll go next to Jeffrey Bernstein with Barclays Capital.

Hi, Jeff.

Are you there?

Yes, sir.

Can you hear me?

Now we can.

Just a clarification on the prior question, and then a question.

I don't know if you were intending to or gave any directional trends in terms of how January and early February fared, just a broader system rather than market that took pricing earlier then later.

Just wondering if there is any color in terms of what's been seen over the past six weeks?

We didn't, Jeff, give specifics on what we saw in January and February.

What we did though is we took that into account, along with what he saw as a reaction to the price increase during the fourth quarter to provide a guidance for the year, and we think the right guidance is in that low single digit range.

That is all depended on the economy.

If the economy worsens as most people are predicting, I would expect that we could end up in the low end of that range.

And if the economy continues to worsen even further, I think that we could even fall below that range.

So I'd say the biggest wild card is what happens to the economy, what happens to consumer confidence.

But I would tell you we took into account the January and February results so far in putting that guidance together.

We'll go next to Nicole Miller with Piper Jaffray.

Good afternoon, just a couple of housekeeping things, Jack.

What was CapEx in '08 and what is projected for '09?

CapEx was just over $150 million for the year, and we spent, our average investment costs for all of the openings was around $916,000.

So a little over -- about $900,000 we had been trending for the last few years.

I would expect our investment cost to be similar to that on a per store average, and we haven't announced this yet.

We might have this in our 10-K.

It should be somewhat lower, Nicole, just based on the expected openings but kind of in that same ballpark between $140 million to $150 million in total.

Our next question comes from Larry Miller from RBC Capital Markets.

Thank you very much.

Can you give a little bit more color on that 19% to 20% margin?

I thought you said that food and beverage costs might be flat in that 32% range.

So where is that major source of pressure as you are seeing it in the line items in 2009?

Thanks.

Yes, Larry.

The thing I'm most concerned is deleveraging.

That we are still seeing even with this price increase in the fourth quarter even though we have respectable margins in the fourth quarter, we still saw our margins decline because of the effect of deleveraging.

And as we continue to have negative transactions, we ran negative transactions in the fourth quarter, and as we continue to have negative transactions throughout the year, and those negative transactions may get worse if the economy worsens.

The impact of deleveraging on the P&L and on the margins can have a pretty significant effect, and we think that could potentially eat up most or all of the menu price increase that we just took.

If the economy stabilizes, Larry, we have a shot at doing better than that margin range, but because of the uncertainty with the transaction trends and what might happen with the economy, we are very hesitant to move that margin range up.

And we'll go next to Sharon Zackfia with William Blair.

Hi.

Good afternoon.

Jack, it seems pretty clear from the commentary that comps worsened as the fourth quarter progressed.

I guess, two questions on that..

Can you give us order of magnitude as to how the first half looked versus the second half.

And then secondarily, in your low single digit guidance for 2009, are you expecting comps to get better against the easier comparisons or are you handicapping for the probably that that may not happen?

Yes On the transactions throughout the quarter, it's -- it was hard for us to get a real pattern throughout the quarter because we are taking menu price increases throughout the quarter and even throughout the quarter the weather was very choppy.

I will tell you that transactions did worsen from the third quarter to the fourth quarter because you're going to find based on the third quarter, where we had a 3.1% comp and 4% pricing, we only had a 1% overall negative transaction for that quarter.

Whereas in the fourth quarter, with 7% pricing and 3.5% comps, our transactions did worsen and they were in that negative 3.5% to 4%range.

There's nothing specific in the patterns throughout the quarter that I would tell you is significant to add, mainly because it was choppy.

Like I said, as we took price throughout the quarter and because of choppy weather.

And in terms of 2009, we are concerned, Sharon, that even though we are going off against softer numbers, we haven't seen any signs that the economy has bottomed.

We haven't seen any signs that consumers are ready to go out and eat again.

We've seen a very strong correlation between the unemployment rate and that has increased and our impact on the transaction.

And so, until we feel like customers are confident again.

Until we feel the unemployment rate has bottomed out and will start to increase, I do think that the trends will likely worsen.

So I do think that even though we are up against softer trends at the end of the year, that the effect of the economy may take away that benefit of going up against those softer prior year comps.

We'll go next to Jason West with Deutsche Bank.

Thanks.

I wanted to clarify where pricing is coming out of the fourth quarter.

It sounds like you took 6% incrementals and then you had 3.5% still on the menu.

Then you had 9.5% then coming out of the fourth quarter?

Just wanted to clarify that.

And when would the 3.5% start to roll off?

And also just wanted to -- it sounds with pricing being so significant here in the first part of the year, that earnings may be front half loaded as well as margins and then trail off in the back half?

If you can just clarify if that is what you are thinking.

Thanks.

On the pricing, it's not as high as 9% because we had some price increases that were built in prior quarters that were rolling off.

There were some price increases that we took in the fourth quarter in 2007.

So roll in the first quarter, the effective price increase would be something a little bit more than 8%, but then the price increase will level off in the second and third quarter into the 6% range.

And then it will be lower in that fourth quarter as we bump up against the increase we just took, more in kind of that 3 to 4% range to give you an idea.

And I think in terms of the impact on margins, there might be a little bit of a front loading.

It just depends on whether resistance continues or not.

But if resistance continues and if transactions do continue to soften with the weak economy, then the deleveraging effect would have a sequential deteriorating effect on our markets throughout the year.

So, I do think that is possible, probably likely that we may see margins get tougher throughout the year.

Keep in mind seasonality, our two best quarters for the margins standpoint are typically the second and third quarter, but in terms of sequential challenges?

Yes, I think the challenges get tougher as the year unfolds.

Our next question comes from Paul Westra with Cowen & Company.

Hi.

Good afternoon.

I have a question to follow up.

Really your marginality, Jack, you clarified a little bit more here for us.

The 20% assumes about 200 basis points of deleveraging from line items other than food, and it seems as though that's conservative at a minimum.

Are you saying that-- You are assuming your comp guidance is correct in the low single digits.

Is that your official guidance assuming that the comps negative 2%-- Are you going to see that much deleveraging?

I think we might, Paul.

With us being just being in February, with us just having taking the price increase and no signs of the economy is going to recover, we are taking a cautious and thoughtful view of what the impact on softer transactions might have on the margins.

Certainly if transactions hold up, and if we continue the trend throughout the year, we do have a shot at beating those margins.

But we are not confident enough in what will happen to transactions to go ahead and up the guidance on the margins.

We'll go next to Tom Forte with Telsey Advisors.

Great.

Thank you very much.

I wanted to know if you can give us your thoughts on menu flexibility.

For example, I think you talked a little bit the fact that you sell one taco versus three and in that regard you have some items lower price points which may be perhaps better suited for the weakening economy .

And then also to what extent do you plan on perhaps advertising these

Sure.

Well, first, I think that we recognized that we have not done a good job of communicating the different combinations of things that one can get when one goes to Chipotle.

It's not just burritos and tacos and bowls and salads.

You can definitely customize and get things for kids like small quesadillas or a single taco.

And so we are in the process of developing a new menu board.

The new menu board, although we haven't honed in on one particular format, we are experimenting with a number of different formats in different markets right now in order to do a bunch of things.

One is to address all the different kinds of combinations and tastes and sizes and price points that you can arrive at from our already existing menu.

But we also want to generally feel more welcoming to first timers and to families.

We also think that we can do better with more consistent pricing from restaurant to restaurant when we give these sort of customized individual quesadillas or tacos or things like that.

We also want to use this menu board to help people discover new tastes and encourage experimentation with different combinations of flavors.

We think this could actually reduce the burn out rate for long-time customers.

We think also, since it is confusing and a little daunting for the first time customer, we think that we can help increase through put by showing how streamlined it can be if you understand the ordering process.

So I think that this will probably not be through advertising per se, but more through the reimaging of the menu board.

We'll go next to Bryan Elliott with Raymond James.

Good afternoon.

Jack, a clarification.

You mentioned a couple of times language, if I remember correctly, that you think you are getting about 3.5% of the price increase that actually was realized in the fourth quarter.

Are you just netting the traffic declines against there, or are you seeing trade down in average ticket decline and therefore an impact on the average check as a reaction to the price increase?

Well, the 3.5% is really a function.

We took 6%, because we took some in October and some in November and some in December.

It works out to a weighted average price just impact on the quarter of 3.5%.

That is just the timing of when we took the whole thing.

I did not weight that down at all by any resistance whatsoever.

But in terms of the full 6%, when you look at the full 6%, fully loaded by the time the quarter was over, it looks like we are only keeping less than half of that.

So we are keeping something less than 3% from a sales standpoint.

And so that basically helps understand why we went from something in the negative 1% margin in the third quarter to something in the more negative 3%, 3.5% negative transaction in the fourth quarter.

So there are two different concepts if that makes sense.

We'll go next to Steven Rees with JPMorgan.

Hi.

Thanks On the new unit volume, on buyer model, it looks like they are fairly stable in the quarter, at a about a 20% discount.

Jack, how should we be thinking about in the new store growth in 2009 in terms of the opening volumes, and maybe you can talk about the ramp-up period.

Are you still seeing ramp-up over the two, three year time frame you talked in the past.

And if the stores are out comping the overall base once they enter the comp base.

Our new openings that we saw during the year, we're opening pretty steady in that same range we've been talking about, that $1.350 million to $1.4 million.

From a comp standpoint, the new stores generally have comped at a higher level.

You might see in a month or a month and a half or so, where you are going up against a grand opening, where you might see softer comps, but after that, that very short period, we have seen our new stores even during this period, typically out comp our average store.

What we don't know, your question about the ramp-up, I don't know how that's going to work out, because our pattern had been that we would open a new restaurant and they would comp at really high levels for the first couple of years, and they continue to comp at high levels in the double digit range, which is why we had double digit comps for ten years before this year.

So it's hard to tell what the ramp-up is going to be for stores we just opened up in 2008 without knowing when the economy -- the economic problem is going to end and what will happen after that.

But when we look at -- if we look, if we open up in this $1.350 million, this $1.4 million and we have a couple of years of calling it a mid single digit comps which is very reasonable even in this environment, it doesn't take long to get up to $1.5 million kind of average volume..

And if you do a margin in the 19% to 20% range, within a few years, we can do a cash return between 30% and 35% on a $900,000 or something slightly over that cash on cash investment.

So those are the unit economics that we are looking at.

As long as our new store volumes hold up, as long as we can expect to have even modest comps in that mid-single digit range for a couple years, and as long as we can keep our margins in the 19% to 20% range or higher, we still think we can invest confidence and get cash return.

What we really expect is when the economy improves is that all those measures will move up and we can get our cash return back to that 40% or above range which is where we prefer to operate.

But we still invest confidence knowing that we can get that 30% to 35% or so return.

We'll take our next question from Mitch Speiser with Buckingham Research.

Thanks very much.

Jack, just another question on the fourth quarter comp trends if I may.

Putting aside traffic, just in terms of same-store sales, can you give us a sense of what the trends were from October to December?

We don't normally do that, Mitch.

And there is nothing really meaningful.

I think what is most important is that we took into account all the trends throughout the quarter.

We took into account to the best of our ability to measure what the impact of the economy was, what the transaction trends were and we tried to build those into our guidance for the year.

I would tell you there's not anything meaningful in the month to month trends throughout the quarter that would add any value to the guidance that we've already given.

Okay.

And separately just on the new unit productivity question, I guess it's been in- that 76% to 79% range I guess as a total of the average, just given what you said, and again it's maybe more of a victim of your own success, but if the overall average is going up, but the new store average unit volumes are flattish, should we imply that spread or that percentage has come down a little bit or --

The percentage really came down, Mitch, earlier this year and we talked about that.

We talked about that -- in 2008.

We talked about that percentage coming down from something in the mid 80% to that mid 70% to high 70% range.

I would encourage you -- the percentage is meaningless.

That was a way who talk about how the new stores was opening, and it was an easy way for us to talk about the fact that new stores were opening up at increasing volumes and they kept pace with the average sales volume for our typical store.

I would encourage you to think in terms of what are the unit economics, which is the way we think about it.

What are the opening, what kind of comps, what kind of margin can you expect and what kind of cash and cash return can you expect.

The percentage itself isn't as meaningful as long as when we put those numbers together we have superior return.

Even if we have a high percentage, Mitch if the high percentage resulted in a weak cash return, for example if our investment costs were too high and our margins were too low, I would tell you that it's a weak story even if the percentages were higher.

So I would encourage to forget about the percentages and focus on the dollars and I think that would be more meaningful and it gives us greater confidence when we invest our dollars.

And I hope that it would give you guys confidence as well.

We'll now take a question from Nicole Miller with Piper Jaffray.

I just wanted to followup, I meant to ask also about the advertising and when we might see a change there.

You talked about the new agency.

What should we be looking for and how are you going to monitor that success?

Well, we have been working actively now with our new agency but prior to that, through Mark we've been restructuring the marketing department.

We have been doing a lot of work behind the scenes.

You should see new creative out there in advertising format second quarter, and we will measure that through increased traffic.

We'll go next to Jeffrey Bernstein with Barclays Capital.

Great.

Thank you.

As you look at the lease terms and the one that you have on existing stores and two that you are looking at with your next round of 130 or so, I wonder if you can talk about what you are seeing in terms of trends there, whether you can renegotiate some of the existing terms, and the impact from co-tenancy.

And maybe you can talk about the real estate outlook on both the existing stores and the new stores?

Thanks.

Yes On existing tenants first, we are taking a look at a number of our leases but our focus is really on the leases that have either expirations or options coming up within the next few years.

Those are the ones where we can negotiate where we have an option to extend or when the lease ends.

Most we have options on.

Those are the ones we are focusing on.

Those are the ones we go back to the landlords.

And nothing to report yet in terms of whether there would be any room for us to negotiate a better deal.

Typically, our options will include the ability to extend the lease with a stated rent, a fixed rent amount.

So nothing to report in terms whether we can beat that number.

I will tell you, in terms of the new stores that we're looking at, we are seeing some flexibility but on the business terms, they are not really that material.

The deals that you are hearing about or reading about are in C location and B locations that we don't want.

The areas that we want to go into, which are more desirable areas and they are typically more sophisticated and well capitalized landlords, we are seeing certainly some relaxation of terms, I would say more of the terms of the lease and we are getting a little bit better business terms, a little bit better lease terms, but nothing material that will dramatically change our outlook for the economics for our 2009 opening.

We'll take our next question from Larry Miller from from RBC Capital Markets.

My question was answered.

Thank you.

We'll now take a follow up question from Paul Westra from Cowen and Company.

Do you mind following up on a little bit more color on your loss item line there.

You mentioned the remodels in Colorado and California, and do you expect more of those and the closed store as well as you look at 2009?

Yes I don't think we expect a whole lot more.

The main part that we remodeled 125 restaurants in Colorado and California was we changed the front line.

The new front counter has a lot more glass and the glass extends all the way down to really the top of the stainless steel where we serve our food.

So it's much more appealing.

We think it presents our food in a much better way.

All of our new restaurants are opening up with this new counter, and we just took the opportunity to look at our oldest market in Colorado, and changed all the restaurants there and we also decided to take another market, and we decided to take California as well.

We are not going to do any kind of across the system change with the counters.

I think what we'll do Paul is, as we have remodel opportunities in very old restaurants throughout the country, if the opportunity presents itself, we'll go ahead and put the new counter in.

So, I wouldn't expect a repeat of this.

The other thing is we did close a restaurant.

We had one restaurant in Indianapolis that we opened about four or five years ago.

It was a real estate mistake.

It wasn't performing that well.

There's going to be major road construction that will hit us within a matter of a few months here, and so we thought bad was going to go to worse.

So we took the opportunity to get out of the deal and close that restaurant.

And that was about $1 million write-off.

We'll take a follow-up question from Bryan Elliott with Raymond James.

I just wanted to follow up maybe with Steve and Monty a bit.

Monty, you talked about the testing some menu changes and reconfigurations and letting people know the bigger breadth that is really available that may not be clear.

Could you address how that might impact speed and throughput which has been the primary focus for some time?

And how you see balancing those two issues?

Actually it was me, Steve, addressing those issues before.

But I actually think this new menu board configuration, the desired outcome is to make sure that it's easier for people to understand the offerings at Chipotle.

Since I opened the first restaurant over 15 years ago, the menu board has been very confusing for first-time customers.

For the experienced customer, they know they can make all kinds of combinations, not only for different tastes but for different diets.

It's the new customers that we think we can help understand the menu a lot better.

We think with that comes better throughput.

So I don't believe at all it's a trade off as you explain the menu and explain all the different combinations.

I don't think that slows things down.

In fact, quite the opposite, it will help us be more efficient.

We'll take our next question from John Glass with Morgan Stanley.

I would like to follow up on that menu board question.

In terms of both the timing, what you think in rolling that out system-wide?

And do you contemplate adding bundles for the menu prices that exist today or is it simply just grouping them together with no discounts?

Sure.

There are a number of different ideas about how the menu board can be configured and as we dive into this project, we noticed that it becomes more and more difficult to figure out what the right answer will be.

So we have different configurations that are going to go into different test markets, and we will watch those test markets very, very closely, and then after some time, which is undetermined as of yet, after some time, we can decide when a system-wide rollout might be effective.

Now your question about bundling and such.

We never really considered bundling, because we think it hampers, we thought that it would hamper the customers ability to get exactly what they want.

One of the things that we like to encourage at Chipotle is for people to get exactly what they want, not only for taste but for diet and as soon as you start putting things in some sort of bundled package, it helped direct them.

Although that might not be a bad idea and we've discussed that that would help first-time customers.

In terms of whether those would be discounted or not, I couldn't answer that now, but certainly one thing that we've always said is that we want to make great sustainably raised food that is cooked according to classic cooking methods.

We want to make this available to everybody.

We want to really change the way people think about fast food and know that we won't be able to do that unless we are accessible to everybody.

And so the right price, especially in these economic times, these very tough economic times, is key to that.

So I wouldn't rule out something that would facilitate easier ordering and maybe there's a standardized price associated with that.

That is very accessible.

We'll take our next question from Steven Rees with JPMorgan.

Hi, thanks.

I had a follow-up on the commodities.

Can you just talk about any contracts you may have in place for your key commodities like chicken beef, pork, avocados, rice and dairy, that gives you the positive 2 to 3% increase that you are expecting?

We do have contracts for cheese for the year.

For tortilla for the year, we have contracts for beans for not quite the whole year.

We don't really have long term contracts more like a quarter at a time for any of our meats.

We don't have contracts for avocados at all.

We do have contract for rise for three quarters and for corn.

We have corn for three years and Coke.

So we have a lot of items locked in but our biggest items like the meats and the avocados we are not able to lock in.

Due to time constraints, we'll take our last question from Nicole Miller with Piper Jaffray.

I don't want to screw up preopening in the P&L.

So how many stores opened per quarter give or take?

In the fourth quarter?

No.

For all of '09.

120 to 130, how are they spread out throughout the year?

The best I can tell you Nicole, is about two-thirds in the second half of the year.

So I would say the one third in the first half of the year relatively even.

The two-thirds, if I was going to handicap it.

Even that is going to be weighted more towards the fourth quarter.

The time line for the deals that are further out continues to slip.

It's really quite back loaded.

Thank you.

Thanks, Nicole.

That concludes the question-and-answer session.

Thanks everyone.

This concludes today's today's conference.

We thank you for your participation.

You may now disconnect.

Have a wonderful day.