奇波雷墨西哥燒烤 (CMG) 2009 Q2 法說會逐字稿

Good afternoon, and welcome to the Chipotle second quarter 2009 earnings conference call.

All participants are now in a listen-only mode.

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

(Operator Instructions).

I would now like to introduce Chipotle's Communications Director, Mr.

Chris Arnold.

You may begin your conference.

Hello, everyone, and welcome to our call today.

By now, you should have access to our earnings announcement released this afternoon for our second quarter 2009.

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

Before we begin our presentation, I will remind everyone that parts of our discussion today will include forward-looking statements within the meaning of the Securities Laws.

These forward-looking statements will include projections of restaurant comp sales trends, the number of restaurants we intend to open, the timing and amount of our planned share repurchases, and expectations regarding our new advertising campaign, as well as 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 will refer to you the risk factors in our Annual Report on Form 10-K for 2008, as updated in our subsequent 10-Qs, 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 considered 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 third 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 Co-Chief Executive Officer; Monty Moran, Co-Chief Executive Officer; and Jack Hartung, Chief Financial Officer.

After our comments, we will open the call for questions.

Before beginning, I should note that our prepared remarks are a little shorter than usual.

We have been pressed for time during the Q&A portion on the last couple of calls, and wanted to be sure to leave a few for minutes for that.

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

Thank you, Chris.

We are pleased with our second-quarter performance, particularly in light of an overall operating environment that remains challenging.

For the quarter, we delivered a 1.7% comp, and saw revenues increase 14.1% from a year ago.

This brought our revenues to $388.8 million for the period, and led to diluted earnings per share of $1.10, a 48.6% increase from the second quarter of 2008.

Our ability to grow our business in this difficult economy is the direct result of our disciplined and focused business model, which emphasizes doing just a few things but doing them better than anybody else, and our ongoing review of current practices with an eye to making them better.

Most recently, we have turned our efforts in this regard toward our marketing, which we do not think has kept pace with developments we have made with our food and people cultures.

But I firmly believe we're headed in the right direction.

Since the first of the year, we hired our first-ever Chief Marketing Officer, and selected a new advertising agency.

More recently, we launched a new advertising campaign we called My Chipotle, which was designed to harness the power of our loyal customers to create ads for us, and demonstrate greater variety by highlighting actual food combinations that our customers choose.

So far, we have received thousands of submissions from our customers at www.mychipotle.com, and the website that is the cornerstone of this campaign.

While we have been encouraged by that, it is clear that most of the spots our customers have created, while they're interesting and amusing, are not strategically aligned with the story we want to be telling about Chipotle.

Our own research has shown that most of our customers are not aware of the lengths Chipotle goes to, to bring them high-quality, affordable, healthful foods, that come from more sustainable sources.

What we have seen through this campaign reinforces that.

As a result, we believe we will be best served if our marketing takes that direction.

Just recently, ABC's "Nightline" did a segment that explained in great length the effort that we take to source the ingredients that we use to make our food.

That story prompted thousands of phone calls and e-mails from customers, who were overwhelmingly supportive of our efforts and the progress that we have made.

They explained that our mission is relevant and important to them; and that tells us that many of our customers are receptive to this message, and that it is time to incorporate that into our broader marketing.

The My Chipotle campaign will continue, but only as an online program, which is where it's drawn the most interest and where the ads developed by our customers can be easily shared in viable ways.

But we are redirecting our overall advertising to focus on our food philosophy and our efforts to source the very best ingredients, because that is what really differentiates Chipotle and, increasingly, it is resonating with our customers.

This shift in direction will change many aspects of our marketing program.

Most notably, there will be a stronger emphasis on educating the half a million customers who eat at Chipotle every day.

Using communications in our restaurants, online, in social media and through other avenues, we will work harder to help our customers better understand these important differences.

Because word of mouth has always been such an important component in building our brands, we truly believe that better-educated customers will, in turn, help us with this effort moving forward.

I think it's important to remember that our advertising, while certainly the most visible part of our marketing mix to most people, is just one component of our overall marketing program; and we are continuing to make significant progress in other areas of our marketing, including local store marketing, direct mail, and public relations.

The success of these programs is evident in a current promotion we are doing supporting the documentary film "Food Inc", that has us sponsoring free screenings of the film in 32 cities, promoting the movie in our restaurants and online, and affords us a bonus feature on the DVD release of the film later this year.

So far, this promotion has generated significant numbers of common and overwhelmingly positive feedback, just like the "Nightline" piece did.

We believe that programs like this continue to help us reach and inform our customers in a very meaningful way.

Redirecting our advertising to better support this direction will enhance the effectiveness of our marketing as a whole.

Lastly, I would like to take just a minute to update you on the status of the menu test we have been running in Denver.

For now, we plan to leave that test, which includes some featured items, a new pozole soup, items with smaller portions and smaller prices, and a kids menu, in place in all of our Denver restaurants, as we're seeing some encouraging signs from this.

Among the high points are that we have held our check average, in spite of the opportunity for our customers to trade down in price.

And we have seen enough demand for our kids menu that we plan to test that part of the menu in all of our Salt Lake City restaurants as well.

We will certainly keep you apprised of other developments on the menu as warrants.

I will now turn the call over to Monty.

Thanks, Steve.

Since our last earnings call a few months ago, I have continued to spend a great deal of my time visiting restaurants, meeting more and more top-performing current restaurant managers, as well as meeting top-performing crew, who will undoubtedly be our future managers and restaurateurs.

I continue to be impressed with how our managers are constantly raising the bar in terms of identifying and developing talented crew, removing low performers from their ranks, and treating each customer to the best Chipotle dining experience possible.

Our entire Company has been committed to this effort to develop a special people culture for at least a few years now; a culture which appeals to and empowers top performers, and a people culture which matches the special food culture which has been a part of Chipotle since the first restaurant opened in Denver 16 years ago.

While most companies talk -- most companies will talk about how important their people are, our people culture has allowed Chipotle to redefine what is possible for a restaurant growth company.

For example, while most restaurant growth companies have historically relied heavily on franchising to fuel their growth, we have been able to grow by offering fulfilling career opportunities to our own employees hired as crew, without giving away our superior operating returns by franchising.

And while growth companies typically find it difficult to run consistent operations as they grow larger, as we approach 900 Company-owned restaurants, our restaurants operate better than ever, and our positive web comments about customer service, which have always been high, continue to increase.

And finally, while our unit economic model has always been very strong, with very efficient labor staffing, our top-performing managers have redefined what an efficient labor model can achieve, and all of our restaurant managers are following that lead.

This has resulted in significant labor leverage that even we did not think was possible just a few years ago when we first introduced our national labor matrix.

In fact, even during recent earnings calls and analyst meetings, I had suggested that we would not be able to continue to find more than small amounts of additional labor leverage, but our teams in the field prove me wrong.

We realized 140 basis point improvement on labor costs during the quarter, which contributed our achieving of the highest restaurant level margin we have ever achieved.

And from talking to our managers and other leaders in our restaurants, I am optimistic that about two-thirds of that leverage is sustainable going forward.

I wouldn't be able to say that if I hadn't been in so many restaurants over the past several months, to see that our teams are preparing and cooking great tasting food, providing extraordinary customer service, and running clean and organized restaurants with this more efficient approach to staffing.

In essence, what we're seeing is the powerful result a restaurant team can accomplish when all of the team members have high performing potential, and all the low performers have been removed from the team.

We continue to make progress in empowering our best performers by placing them into positions where they can have the greatest impact.

You can see this in the growing number of managers now in our restaurateur ranks, many of whom continue to run their own great restaurant while mentoring a nearby restaurant, or even two or more.

Right now we have 137 restaurateurs, and these restaurateurs are mentoring another 76 managers.

So more than 200 of our restaurants are feeling the direct impact of the leadership of these elite restaurateurs.

And since every one of our remaining managers aspires to be a restaurateur one day, our 137 restaurateurs continue to set the example for all of our managers to follow.

Chipotle is a special brand with a compelling vision, a strong food culture, and a strong economic model.

With our strong and growing people culture, we'll continue to redefine what a growth restaurant company can accomplish.

I will now turn the call over to Jack.

Thanks, Monty.

The strength of our model continues to produce superior restaurant level margins, despite the current economic conditions.

Our restaurant managers and crew remain committed to preserving this model, through their focus on excellent customer service and working hard to earn each and every customer visit.

Our results for the quarter illustrate that our culture of top performers can elevate our financial performance, and deliver superior returns on invested capital.

Our revenue for the second quarter increased 14.1% to $388.8 million from $340.8 million last year.

Revenue growth was driven by new restaurants not in the comp base, and a 1.7% increase in comps.

The comp growth was driven by a little more than a 6.5% effective menu price increase, partially offset by negative traffic of around 3.5%.

The average check was up a little over 5% from last year, slightly less than the full menu price increase.

And while sales and transaction trends remain soft due to the effects of the economy, they generally seem to be stabilizing at about this level.

So assuming no further deterioration in the economic climate, we continue to expect comps for the year in the low single-digit range.

EPS for the quarter was $1.10, up $0.36 or 49% from last year.

Restaurant-level margins were 26%, up 360 basis points from last year.

The increase in the margin was primarily the result of menu price increases, labor efficiencies and lower marketing expense in the quarter.

Food, beverage and packaging costs for the quarter decreased 140 basis points from last year to 30.9%.

The decrease was mainly driven by the impact of the menu price increase, offset by the higher cost of chicken and rice from the second quarter of 2008.

Beef, pork and cheese saw modest declines compared to last year.

Labor improved 140 bases points from the second quarter of 2008 to 24.5%.

The menu price increase offset the negative effects of inflation and deleveraging from declining transactions, allowing labor efficiencies from more effective staffing to drive the 140 basis points of net leverage within the quarter.

As we continue to focus and building a culture of only high performers, we believe we can continue to serve great-tasting food and offer superior service, with fewer hours needed in the restaurants.

Occupancy costs increased 30 basis points to 7.2% of revenue in the second quarter.

And as we've discussed on previous calls, the increase is the direct result of opening more restaurants in more expensive, densely-populated areas like Boston, New York, Philly and Florida.

Other operating costs decreased 130 basis points from last year to 11.3% of revenue.

The decrease is primarily the result of the timing of marketing expenditures, and lower promotional costs.

Marketing costs were 1.9% of sales during the quarter, compared to 2.5% last year.

We continue to expect our marketing comp to average about 1.8% of sales overall for the full year.

Year-to-date, we've spent 1.5% on sales and marketing, so expect marketing in the third and fourth quarters to be higher.

G&A increased 50 basis points from last year to 6.6% of sales, and the increase as a percentage of sales is the result of lower performance-based bonus accruals in 2008, which includes a reversal from first quarter of 2008, and that was partially offset set by the menu price increases.

Pre-opening costs decreased 60 bases points from last year to 0.4% of sales, and the decline was driven by fewer openings so far in 2009 compared to last year.

We opened up 24 new restaurants in the second quarter of this year, compared to 49 restaurants last year, and that brings our total restaurant count to 886 restaurants as of June 30th.

Despite the timing differences in the first half of this year, we expect the 2009 pre-opening expenses to be similar to 2008.

We continue to expect to open 120 to 130 new restaurants, with about two-thirds of the remaining openings scheduled to open in the fourth quarter.

And while we're confident with the number of openings scheduled, there is some timing risk.

Some restaurants could conceivably slip into 2010.

And our new restaurants continue to open at volumes around $1.35 million to $1.4 million, as they have for the past few years now, with two-thirds of our new restaurants opening in mature or proven markets.

Our tax rate for the quarter was 38.4%, and we expect our tax rate to be 38.4% for the full year.

During the quarter, we continued our $100 million stock repurchase, and are nearly complete.

As of today, we have invested nearly $95 million to purchase over 1.7 million shares of our Class B stock at an average price of just under $54 a share.

And even with the completion of the buy back nearing, we still have over $200 million in cash on the balance sheet, and we are not reliant on outside capital in any way to fund our growth.

We continue to work on the possibility of collapsing the A&B shares, working closely with our attorneys and McDonald's to identify and try to resolve potential issues and risks with a possible collapse.

As we discussed on our last call, our tax council has prepared a draft opinion letter, as required by our separation agreement with McDonald's, and we believe we have come to an agreement with McDonald's on most of the issues regarding the opinion that we've identified so far.

However, this is a complicated area, and the potential exposure is significant.

So we need to caution you that we are still working with McDonald's to formulate and support an opinion that would be acceptable.

We will continue to keep you updated as the matter progresses.

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

Operator, please open the lines.

(Operator Instructions).

We'll take our first question from David Tarantino with Robert W.

Baird & Co.

Hi, good afternoon, congratulations on a great quarter.

Thanks, David.

Thanks, David.

Jack, a clarification question first on the comps.

With the traffic figure you mentioned down 3.5%, did that include a drag from the Easter shift, and if so, could you quantify what the traffic was excluding the Easter shift?

Yes, it did.

We lost a day in the quarter.

We had one fewer day than last year, and we figure that day cost us roughly about 1%.

There really, David, were three things that occurred during the quarter that are factored in the 1.7%.

The other thing is we did lose about 2.5% in menu pricing.

So, we dropped down in menu price, a factor in the quarter.

And the other thing is we're going up against softer comparisons compared to last year.

So all those three kind of weighed together to net to the 1.7%.

Okay, that is helpful.

So, on an underlying basis, if you exclude the Easter shift, then traffic improved by about 200 basis points from Q1, if I'm reading that correctly?

That's right.

Would you -- would you chalk that up to easier comparisons, or was it some of the initiatives you have in place that you think moved the needle?

Just to clarify, David, we were 4.5% negative in the first quarter, we were 3.5% in the second quarter, and we did lose a day.

So if you adjust for the day, then effectively we're closer to 2.5% negative traffic.

I would say it was really entirely related to comparing to easier comparisons last year.

Okay.

Thank you.

Any is there any reason to believe, as you move out into the second half and the comparisons ease further, why you might not see the traffic continue to improve on a year-over-year basis?

I want to be really cautious about that.

We do have easier comparisons in the third quarter.

We have tougher comparisons in the fourth quarter because we lose, basically, all of the price increase that we're running right now.

By the end of the year, we lose all of it.

We're not seeing signs, credible signs that consumer confidence is improving.

We know unemployment is expected to get worse, and so it seems like, David, things are at best moving kind of sideways now from a trend standpoint.

And so I would hope the easier comparisons would allow us to have respectable comps, but we're being really, really cautious.

We're just not seeing positive signs from the consumer confidence side.

Okay, that is helpful.

One last one for Monty.

On the labor leverage, what did you mean by you'd be able to retain two-thirds of that leverage?

Does that mean you expect to get more like 90 basis points in the second half of the year?

Could you clarify what you meant by that comment?

Yes, I mean we had 140-basis point improvement.

Last year during the same quarter, we had some labor inefficiencies which we "benefited from" in the comparison this quarter.

So we believe 100 basis points or so of that leverage is something that is sustainable throughout the rest of year.

Okay, thank you.

Thanks, David.

Thanks, David.

We'll take our next question from Jason West with Deutsche Bank.

Yes, thanks, guys.

I was wondering if you could talk a bit about the other operating line?

It looks like you had some nice leverage there, the marketing helped a bit, but even outside of that, it was still, you know, I think about 70 basis points of leverage.

Just sort of talk about the sustainability of that, and what drove that?

Yes, David, the other thing we benefited from was lower promo costs, that was about another 40 basis points or so, and I'm not sure whether we will see the same kind of leverage throughout the rest of the year.

I think we'll see some leverage in promo, but as we continue to formulate our marketing and our local store marketing approach throughout the rest of the year and how we're going to get this message, you know, this food and integrity message and how we source our food, we're going use a combination of, you know, of media, of local store marketing, of PR, and so it's possible that our promo may bounce up later in the year.

The other things that are in this line are things like utilities.

That will depend on energy costs, and so if energy costs remain tame throughout the rest of the year, then we should continue some of that leverage.

So we should continue to see some leverage other than the marketing reversal, but I don't know that we'll be able to keep all the remaining leverage that you're talking about here.

Okay, and then just a big picture, you guys touched on the marketing program a bit and some of the feedback you have gotten from consumers, and the direction that you're going to go.

I mean, has anything, from what you have seen in the first six months of the year, you know, changed your view in terms of what you were thinking you were going to do from a marketing standpoint for the full year, either in terms of the media mix or the messaging?

And the same question with regard to kind of your outlook on opening new stores, now you guys are saying pretty comfortable, 120 to 130, and should we think about a similar kind of number for next year?

Thanks.

Well, in terms of the marketing, yes, we have moved directions in terms of the way we're promoting My Chipotle.

My Chipotle now is moving to being promoted exclusively online, it's a very efficient to do that.

And the outdoor, out-of-home and print advertising in our 9 major markets is going to be focused on a program that we call internally "Tastes good, is good," and it's our belief that customers are very interested now in our message about better-quality food makes for better-tasting food.

And we see this evidence from our overwhelmingly positive feedback on our Nightline spot, which explains in detail how we source more sustainably raised food, and our food with integrity philosophy, and how it's been around at Chipotle for some 10 years, and how it drives our thinking about how we source food.

We're very excited that customers are receptive to this message, and the "Tastes good, is good" campaign is something that we think will target that specifically.

Jason, on the new store openings, you know, we're still building inventory for 2010.

In fact, we basically spent virtually all of 2009 to build the entire inventory for 2010, so we're just a little more than halfway through.

We'll give an opening range, a 2010 opening range, with our release in October.

But I would tell you so far, it feels like, based on the inventory building we're doing so far, it will be a similar number next year, I can't tell you if they'll be slightly lower or slightly more, but right now, it seems like it's similar.

What is happening, though, is the shift -- there is a shift in the mix where we're finding far, far, fewer new developments, new spaces to go into, and we're having to make up for that by going into existing spaces.

And so it used to be that a little more than 60% -- a couple of years ago more than 60% of all of our openings would be in brand new developer spaces, and now it's looking like, based on the inventory building we're doing so far for 2010, that number will likely fall below 50%, and it might fall well below 50%.

But we're, so far, seemingly being able to make up for that by going into existing spaces, spaces that somebody had occupied and is now vacating.

So we'll give a better update, a more current update on 2010 with our October release.

Okay.

Thanks a lot, guys.

Thanks, Jason.

We'll go next to Larry Miller with RBC Capital Markets.

Larry, you there?

Yes, hey, sorry about that, guys.

I muted myself.

I do that often, don't I?

Just a couple of quick follow-ups just to clarify something you said.

When you said moving sideways, Jack, in terms of traffic, does that mean we should interpret that to be, you know, July is kind of in that 2% to 3% down range?

What I would say, Larry, is we still think that the overall comp for the year, the guidance that we've given really all year, the low single digits, still feels right.

We were 2.2% in the first quarter, 1.7% in the second quarter, easier comparisons in the third, tougher comparisons in the fourth as we lose the menu price increase that we took last year.

Overall, it still feels like we're going to settle in that low single-digit range.

I mainly wanted to say that we don't see any real signs that the trends are really bouncing up.

I'm still looking for that consumer confidence --

Uh-huh.

-- to kick in, and we're just not seeing that.

So if we stay sideways for awhile though, we stay with the guidance that we've been giving since the beginning of the year, we have got what we think are very strong margins, a very strong unit economic model.

And so going sideways until the consumer recovers, we think we can do that for quite some time, and hope that soon.

Hopefully by the end of the year, or maybe even sooner, the consumer will recover, and we'll see sideways moved to an upward direction.

Yes, that would be great.

And then just on the restaurant margin outlook, specifically for the second half, because there are so many moving pieces, it would be helpful to get kind of -- and you had such a phenomenal first half, just a view on where that operating expense might be, where the overall restaurant margin might be, and how the food line might look.

Because if I am right, or maybe what happens with the rate, because you have been running around 31%, as you roll off-pricing some pricing, should we expect that to go up then or how should we think about some of these --

Let me tell you about the pieces as we move forward, and what to expect.

Listen, we're really pleased with our margins.

These are the highest margins that we have ever had during this period of time.

And yes, we're benefiting from the menu price increase, but we're also benefiting from just a very disciplined approach to managing the business.

But the way to think about it going forward, I'm hoping, Larry, that we can keep our food in this same kind of range that we have seen the first two quarters, right around 31%.

We've been talking about seeing slight inflation, low, single-digit inflation, but the further we get into the year, the less likely that inflation is to hit.

We're hoping that we'll be able to hold at that 31%.

And if a little bit of inflation creeps in, we might see that number tick up a little bit by the fourth quarter, but still very close to that 31% range.

I would also encourage you to take into account seasonality.

Second quarter historically is always our highest margin quarter.

It's our highest from an average daily sales standpoint, and we always get a lot of leverage.

And so, you should expect to see a normal, you know, fall-off in the margin as you move to the third quarter, which is our second best quarter from a margin standpoint, and then the fourth quarter you should expect to see a seasonal fall-off.

And again, you can go back to our few prior years and see that those -- you know, that those margins do fall off seasonably.

The other thing I would encourage you to look at is, we have a significant number of openings in the fourth quarter, we have 49 new stores, and that is going to do two things.

You will see a lot more pre-opening expense in the fourth quarter, and you're also going to see a drag on the P&L.

So when we only open up 24, 25 restaurants during a quarter, that has only a very slight drag, you know, on our margins.

And when we hit the fourth quarter, you have got 49 restaurants that are going to have only a month or two or so of sales, the P&L's in that first month or so are very rough.

We -- you know, they're very, very sloppy, if you will.

We have a lot of people that we have hired to train.

The food, we don't have the food dialed in.

And we really don't focus as much on running a tight P&L during those first few months, as much as we focus on making sure we treat each and every customer, especially because they might be brand-new customers, to the best Chipotle experience possible.

So that will be a drag as well.

And then finally the marketing, keep in mind that marketing, we've only spent 1.5% so far this year.

We're going spend about 1.8% for the full year, and so we will spend more in the third and fourth quarters.

So I think if you take those things into account, and layer those into the margins we have seen so far this year, I think you will get a good idea where we might end up.

That is helpful.

Last thing for me, and then I will get off the line.

Can you remind us, I know you've talked about this in the past, but why is -- average restaurant sales are trending down, although you have the new store volumes at that same rate?

Thanks, and that is it for me.

Larry, that is a function of when you have a very low comp, which is in this 2% range, you know, that has a slight upward tick on the existing base.

But that is more than offset by the fact that even though our new stores are holding -- holding at opening up $1.35 million to $1.4 million, when you layer in 100 or 120, which is how many we layer in each year, when you layer them in at $1.35 million to $1.4 million, and your existing average TTM is in say the $1.75 million, $1.76 million, it's just naturally, you know, the law of averages, it's going to bring that number down.

The only way to keep that number up is to have a comp that's higher than 2% that will offset the layering effect of having these $1.35 million and $1.4 million ones added to our comp base.

Thanks, guys.

Thanks, Larry.

Thank you.

Our next question will come from Matt DiFrisco with Oppenheimer.

Thanks.

I have a follow-up question a little bit on the new development and some of how that's skewing.

What do you experience as far as the overall investment cost or the site opening volumes?

Would you anticipate that being traffic already there, so you're not necessarily going see the follow-on comp but maybe opening up at bigger volumes?

And then also am I presuming correctly if that -- given it's a shell you are assuming in the current economic environment, you're probably coming in at a lower investment cost as well?

Okay, let me talk about the cost, first.

First of all, we expect for the full year that our openings will average right around $900,000, just like they have for the -- this will be about fifth year running that we've been right around $900,000.

Unfortunately, going into existing space actually costs us more.

Usually there is nothing, you know, very little or nothing in the existing space that we would end up keeping.

None of it really contributes to the trade dress that we're looking for, none of it really matches the functionality that we're looking for with the kitchen that we want to build out, and the flow that we want to build for our customers.

So there is actually more work and more money spent to go into an existing space, and then gut it, rip it out, and you have to replace a lot of the functionality, a lot of electrical and plumbing and things like.

So unfortunately, it actually costs more to go into existing spaces, not less.

It's always easier to go into a very clean, brand-new space.

Having said that, we still think we will average right around $900,000.

In terms of sales, I would continue to expect that we'll open up in a $1.35 million to $1.4 million kind of range.

We're still looking for the same type of trade areas that we've had in the past.

The difference is rather than looking at going into a brand-new development, we're going into an existing development.

We really haven't fundamentally changed the type of trade area that we're looking at.

So I wouldn't expect to see a change in trend with the new store sales.

Okay.

And then also, just looking at how we should expect some of the new development to affect some of the line items, especially say in the fourth quarter, if you're going to open up 50 to 55 stores or so, would you presumably expect greater labor deleverage in that quarter in particular, because of the resumption of a more meaningful year-over-year incremental growth?

And also what that might mean to some of the efficiency gains you've already reflected in cost of goods sold, occupancy and other things and other operating expenses?

As far as incorporating those 50-plus stores, I really can't go back and find a quarter where you've opened that many before.

So is there a little bit of a concern prepping for that type of a large opening in such a short period of time?

We opened -- I think it was 49 or 48 in the second quarter of last year.

So, we did -- we have done this before.

It will have a drag on the P&L, and to be honest, Matt, I just -- I don't feel comfortable predicting what impact that would have.

I would just caution you to be conservative in the fourth quarter.

As you're rolling forward from the second quarter and factoring in the things I mentioned before, I would take into account that another factor is our margins are going to tick down a little bit.

But I don't feel comfortable giving you an amount, because we're adding 49 stores, and that will be a drag on the P&L.

50s, okay, 49, 50ish.

Whatever.

And then also looking at the reasons for some of the delays, is that something that you're now just coping with by going further out in the pipeline or starting the pipeline earlier on, or are you sort of beholden to some of the developers just missing their promises, their initial opening dates, and your co-tenants sort of dragging their feet on opening up around you as well?

What is the main cause for the delays?

We're beholden to the developer.

We're ready.

Our timelines are very efficient, but they're just being turned over to us later, and it's just delays because of delays in financing or delays in filling up the space with tenants, or you name it.

But as soon as we get the space, we can move fast and we have a very predictable timeline.

So it's all a function of when we get the site turned over to us.

Okay, great.

Thank you.

Thank you, Matt.

We'll take our next question from Jeff Farmer from Jefferies & Company.

Great, thank you.

Jack, I might have missed this, but did you highlight your preliminary pricing plans for 2010?

Did you give us any color on what you might do there?

No, we don't have plans right now, Jeff, to do anything from a pricing standpoint.

As long as commodity inflation remains tame, our markets are in great shape.

We would rather sit back and be patient, as it relates to any menu price increase.

Okay, and then just as relates to your commodities, just to help us a little bit in terms of understanding the direction potentially next year.

When we're look at chicken, beef, pork costs for you guys, should we be tracking the spot prices, or is it more useful to track things like corn and soy?

I guess historically, my understanding was this is essentially a cost-plus situation for you guys?

What is the best way to monitor your commodity prices on the protein side moving forward?

There is nothing perfect, Jeff.

You can check the spot -- I would check the spot market, I would look to corn, because clearly if corn goes up, that is going to cause an impact on the cost of our protein.

You also have to look at the strength of the dollar, because whenever the dollar either strengthens or weakens, you have the opposite effect on commodities, and so that would have an effect as well.

Generally, Jeff, I think over time, when pork -- spot prices go up and down, generally our naturally-raised prices are going move in that same direction.

But not often -- not always at the same rate, and not always at the exact same time.

There are some irregularities, like we have seen with chicken so far, our chicken prices have not really dropped nearly as much as commodity chicken and, you know, mainly because the economics of naturally-raised chicken are tougher, because there is lesser demand for the premium-priced naturally-raised chicken breast.

So that is a good example of something that we're not seeing the same effects on what we buy versus the commodity market.

I think generally over time, you can look at the spot market, look at the price of corn, but there is always going to be these imperfections.

There is nothing really perfect that I can point to you to tell you to track that would be a perfect guide for you.

Okay, and then final question, I realize you probably don't want to provide too much color on this, but -- you're tracking at 31% on the COGS line this year.

Does that -- is that a sustainable number moving forward?

I know there are a lot of moving pieces there, and you probably don't want to get in too much detail, but is that realistic to think that you could achieve that two years in a row?

It depends on commodity, and it depends on what, if anything, we want to do with menu prices if there is inflation.

But I'll tell you, Jeff, our model works at 31% at it works at 32% really well also.

You know, the vast majority of our growth going forward is going to be by opening new stores.

We think we still can open up thousands of new restaurants.

As long as we make sure our unit economics for the new stores that we open up can generate superior returns, our model works at either 31% or 32%.

Certainly, we prefer to stay at 31% but we can afford for that to slip as well.

And then just the final question, as it relates to pricing power, do you feel you have that if you needed it?

If you needed to take another two, three, four points next year, do you think that your customers would push back on that?

I think, Jeff, we have got as much, if not more, pricing power than anybody out there.

But I would say we spent a good -- a good part of the pricing power that we built up over the years in the fourth quarter of last year.

So I think we're going to be patient.

I think we would rather let some of the others whose margins are not quite as high as ours, let them dip their toe in the water and let's see what happens, what kind of customer response they get, and then we can be patient in terms of whether we want to increase price or not.

I think generally, though, yes, I think we have pricing power.

Our customers are very, very loyal.

What we've found is we're not losing customers.

They may not come as often, because they are tightening their budget, or they may cut back on buying a drink, but they still coming in for their burrito.

We still we think offer, and our research says we offer, a compelling value to our customers, and so we still think we have pricing power.

Thank you, Jack.

Thanks, Jeff.

We'll take the next question from Jeff Omohundro with Wells Fargo Securities.

Thanks.

Just wondered if you could elaborate a bit more on the significant food cost improvement, just how much was simply related to the positive leveraging related to the pricing versus operational improvements, perhaps as a unit, perhaps in areas such as waste management or portion control?

So just maybe a little bit more color on the food cost thing?

Yes, most of it was the menu price.

I would say second is the relaxed commodity prices.

And we have done a better job in terms of food controls, but I would say that would be the minor piece of the improvement.

Great.

Thanks.

Our next question will come from Sharon Zackfia with William Blair.

Hi, good afternoon.

Hi, Sharon.

It was good to hear the update on the cost to build out the new restaurants.

I think Steve was going to take a look at the restaurant design and maybe streamline some things or take some costs out, or make changes there.

I'm not sure if that has been a focus yet in the first half of the year, or where you are on that?

It has been a focus, and we have been working on that.

It's too early to report any numbers, though.

But certainly -- but certainly with the new trade dress that we're going to be introducing, the new architectural features, that has all been done with an eye toward more efficient installations, smaller footprints, things that are easier to assemble, with the goal of making this more efficient and hopefully reducing the price.

But you have to realize it takes a long time to get these in the pipeline, design them, build them and see how much they cost.

But for sure that is something we're working toward.

Additionally, we're working toward more efficient kitchens that have a smaller footprint and, therefore, should be less to construct, but these are just early designs we have in mind, and nothing has been completely built out yet.

Do you think we'll start to see some of those built out by 2010?

I mean, what is the kind of timeline you have in mind?

Absolutely, we'll definitely see construction finished on a few of these in early 2010.

Does this also kind of change the kinds of sites that you can go in at all, or broaden the demographic paradigms that you can look at?

Jack, where do we want to go with that?

Hey, Sharon, I'm sorry, Sharon.

You can report -- repeat the question?

Sure.

I was asking about the new kind of architectural details that you're looking at, and the footprint and the efficiencies.

Does that change kind of the density of the markets you can go into?

Does it broaden the bandwidth?

Does it change the kind of sites that you will look at going forward?

Just kind of trying to get an idea of how this might change, where --

It's a great question, Sharon.

It depends on how successful we are.

If we're really successful and we can fundamentally change our investment costs, and so our average right now is $900,000, and so, for example, if we can find some real breakthroughs, and I'm not saying that we will, but we certainly would like to find some real breakthroughs, and if we can, for example, lower our investment costs to $500,000, $600,000, as an example, that would open up lots of opportunities for us to go into markets that today we might shy away from because we're not sure that the sales would support that.

And it would allow us to go into some smaller towns that maybe right now we'd say the demographics wouldn't support that.

So yes, we would certainly welcome a breakthrough like that, because it fundamentally would change our opportunity to grow, it would fundamentally change the competitive landscape as well.

We can compete with some other restaurant chains, burrito chains, that really survive and sometimes thrive at lower volumes that we tend to not like to go into.

So yes, it could have a dramatic effect on our strategy going forward.

Okay, great.

Thank you.

We'll go next to Robert Weiler with Piper Jaffray.

Hi, guys.

The first question, I'm just wondering if you can provide just a little bit more color on the same-store sales trends throughout the quarter?

Just mainly -- it seems like we saw a blip down in May and June for most concepts, and we were just wondering if you guys saw the same sort of thing on the same-store sales fronts?

I wouldn't say that.

I would say, you know, keep in mind when you look at our weekly and our monthly sales, you have to factor out the fact that we lost a day in April, you have to factor out in early May that we lost 2.5% in pricing, and then you have to factor out the fact that we were going against, in our case, softer comparisons, starting to see softer comparisons throughout the quarter.

I think when you try to factor all that out, it was pretty steady throughout the quarter.

There wasn't any kind of significant weakening.

I would say it at best went sideways.

There might have been a slight weakening, but I wouldn't say anything too significant.

Okay, and then so far into July that is holding, that is still the case, it's still pretty steady across the board?

Generally, yes.

Okay.

Generally, it's been a sideways --

Okay.

-- you know, at best a sideways-type trend line, and hopefully it will get no worse than sideways, but we'll see how the rest of the quarter unfolds.

Okay, that is very helpful.

And then finally on the commodities front going back to that a little bit, how much of the organic or naturally-raised chicken market does Chipotle account for?

I'm just trying to get a feel for that.

Yes, actually I really don't know the answer to that question.

It's a very significant portion, and it's enough that it's moved a lot of suppliers to produce a lot more chicken for us.

But I couldn't give you a number on that.

Okay, and that would be the same for beef and pork, those markets as well?

Yes, it would be.

We would account for less of, you know, the pork market for sure.

Okay.

But yes, it's just really hard to say what the percentage would be.

Okay.

Then finally, did you guys see any regional changes from a same-store sales perspective?

Anything -- even the West Coast or anything like that or the Southeast?

Particularly if you saw any improvement, or actually if any of those fell off during the quarter?

I would say generally it's similar to comps we have made in either quarter or two quarters ago that, generally, we have seen strength in the coast, in the West Coast.

And looking at it from a transaction standpoint, on the West Coast and the Northeast and in the Southeast, we have seen relative strength in those markets.

And then we have seen, you know, relative softer results from a transaction standpoint in what I would call Middle America, and that would be the Midwest, you know, through the Rocky Mountains.

I wouldn't call them dramatic differences; not as dramatic as some of the differences that others have reported, but if you're going to put them in two different buckets, those are the buckets I would put them in.

I know that goes against what some others have said, because in the West Coast and the Southeast we're performing quite well relative -- considering the economy, and we think that is the strength of our brand in those markets.

Okay, interesting.

And then finally, my last question.

The commodity expectation for FY10, I know you guys spoke about it, but overall commodity inflation, do you expect modest inflation or flat at this point in time?

I know a lot can change?

Certainly a lot can change, and it really is a mixed basket.

Okay.

Some things are going up, some things are going down.

I think when you net them all together, it would look like next year is going to have some net modest inflation.

Nothing crazy like we saw last year, nothing flat or down like we saw this year.

So it seems like it would start to return to kind of, you know, normal net inflation, and that would be a fine result as far as we concerned.

Thank you very much.

Thanks.

The next question will come from Tom Forte with Telsey Advisory Group.

Great, thanks.

I had two questions.

One is on sales trends and the other is on supply chain.

It is similar to one that was asked before, but a little different.

On sales trends, I want to know where you stood today as far as day part mix, lunch versus dinner, and if you're seeing anything interesting on weekdays versus weekends, if there is a difference in sales versus historic trends?

And then on the supply initiative, has the slowdown in the economy made it any easier for you to get the naturally-raised beef, chicken or pork, and where do you stand today as far as percentage of system rolled out to naturally-raised beef?

Yeah, okay, first of all, with regard to the day part mix, it's -- you know, it's still roughly 50/50, lunch/dinner; it's actually slightly skewed towards dinner, so that really hasn't changed.

You asked about mix weekdays versus weekends.

You know, I can tell you that we're sort of encouraged that we see that we have strength in our transactions on Fridays, much more so than on weekdays, and so we feel like, you know, that is one thing that we have noticed that gives us some confidence that consumers still consider us a treat; and even those, like Jack said, who may not have given up -- I mean, we don't feel like customers have given up going to Chipotle, but some come less often, but a lot of people seem to treat themselves on Fridays, so we feel good about that.

You asked a question about the supply chain, and is it easier to get naturally-raised meats given the state of the economy.

The short answer is no, it's not easier.

In fact, if anything, it's harder.

Pork is, you know, the easiest meat for us to keep pace with, just because there is adequate supply of naturally-raised pork, and we are well within that available supply in terms of what we need for our growth for the mid-term and long-term future.

So in pork we're in pretty good shape, and the supplies are in good shape.

Chicken has been a real bear for us lately, and the reason for that is that as the economy worsened, the sales of chicken breast fell off dramatically at supermarkets, naturally-raised chicken breasts.

The breast meat is, traditionally in the United States, anyway, the more expensive part of the chicken, and the price of the breast meat was quite high and so people quickly traded away from that as their pocketbooks were tightened, you know.

So when that happened, it became much less profitable to raise chickens.

So a lot of chicken suppliers have felt the squeeze from that, and have either stopped raising chickens, reduced the amount of chickens that they raise, or in some cases tried to visit more of the cost on to the thighs and legs, which we use, in order to try to maintain their profitability.

So chicken's been really tough for us, and it is very tight right now.

We're using essentially all of the naturally-raised chicken that we can find that is out there.

So we're using a very significant part of that supply on the leg and thigh side of things.

And on beef, you know, kind of the same thing has happened that's happened with chicken, in that the really high-end, naturally-raised beef cuts, which are traditionally sold in supermarkets, have sold at much lower rates.

People are just not buying nearly as much of those really expensive parts of the animal.

And because of that, ranchers have, you know, decided not to raise as many naturally-raised animals, and so beef has been really tight.

We're holding, too, that 60% that we're at now, and we think we're going to continue to be able to do that, but we don't think that we're going to substantially increase the amount of naturally-raised beef that we will be able to offer in the short-term, anyway, because of the economic climate.

So the short answer again is no, and there was the long answer.

Thank you.

You bet.

Thanks, Tom.

Let's go next to Paul Westra with Cowen and Company.

Good afternoon.

Hey, Paul.

Hey, Paul.

Several questions here.

Just share repurchases, you're running out of your first tranche, I guess, of $100 million.

What is your appetite for maybe additional slugs?

I think we're going to sit tight, Paul.

Clearly we have got more cash than we need.

We're self-funding right now.

We were very opportunistic when we started this last year.

We started buying in the 30s, and so we've been able to buy at a really attractive price, just under 54, and I think the Bs are trading somewhere around 74, something like that, so that's really, really attractive.

So we're certainly open to it.

I think we'll certainly talk about it not only, you know, among ourselves here but also in our Board meetings, but nothing imminent, nothing, you know, in the very near future to report on that.

Okay.

And then a follow-up on the marketing.

It sounds like you, if I'm correct here, decided kind of what to tell customers and what is resonating with them, but have you found anything sort of where to communicate them?

A change to where the highest IRRs are?

It doesn't seem like you're making a major shift in I guess your mix of billboards and social media and online expenditures?

No, no.

That stays the same, Paul.

What changes, though, is the message on the out-of-home or billboard and print, and that message is shifting from www.mychipotle.com, from promotion of that to promoting what we call "Tastes good is good." So the spend is the same, and the places that we're spending are the same.

The message is different, though.

We're going to support mychipotle.com only online, because we can really pinpoint people who are, obviously, online, and a lot of people are visiting that, and that is going well.

And, again, the reason we're switching this is because we're seeing this opportunity to really reach out to customers and talk to them in a way that they seem very interested in hearing.

They seemed very interested in the message that -- on the "Nightline" piece, and they seem very appreciative of the sponsorship of "Food Inc." So we're really going to reinforce that kind of connection through this "Tastes good, is good," which talks about the importance of sustainably-raised food, and that by cooking with sustainably-raised food, we're making better tasting burritos and tacos, and that Chipotle is the only place to get that.

So we think that is going to be a really important message for customers.

Okay.

And the question on the minimum wage that came up in a few other conference calls, that this minimum wage round is going to have a bigger impact than the prior two.

Can you comment on what potential impact you guys might be hitting from that, and I guess is assumed in your commentary about getting more labor leverage for the second half of the year?

I'm sorry, Paul, can you repeat that?

Sure, the impact of minimum wage here, the new round of minimum wage hikes.

It seems that at least other companies were talking about this round being a little bit more impactful to the wage rate than the prior ones?

Yes, yes.

It makes sense it would be more impactful for a lot of restaurant companies and a lot of our competitors because, obviously, it took it to the highest level, and this is the third year of the increase, and the last increase under that program.

But for us, it was actually no impact whatsoever.

Well, you know, to be very specific, we have about 22,000 employees; 40 were -- had their salaries increased as a result.

So it's literally completely not material.

And even when we look at sort of the indirect impact of, you know, what has happened to, you know, our recent wage increases as compared to the six-month ago wage increases, they're very similar; in fact, a little bit lower.

So there has been no impact at all, Paul, and we don't anticipate an impact from it.

And then a follow-up on some of the tests here, Denver, now you're rolling out Salt Lake City here.

I assume you're not seeing any material speed of service impact from the kids menu and/or the additional items?

You know, it's interesting, you know, the kids can take longer to order, Paul, but we see kids going in Denver, at least, to restaurants that are more suburban that were not during lunchtime, which were not traditionally as busy during lunch.

So I don't think overall we're seeing a material impact on speed of service.

So I think it can be a good thing.

Great.

My last question, re-asking sort of the ramping of these stores, I know you're changing some of the locations, you talked about in the latest [trail and the amount of] classes.

Opening up to the same range, you still feel comfortable about the three-year ramp to, you know, a segment or Companywide average performance from that level?

You know, it's really difficult to predict, Paul because you know, this is an extreme recession that we're in right now.

Our comps have been impacted not only for our mature restaurants but also our new restaurants as well.

And so during this environment, I don't think you can expect to get to system average within three years.

What we can have done instead is taken kind of a -- you know, take a pessimistic view, if you will, and say gee, if you start out $1.35 million to $1.4 million, and you have a couple of years of mid single-digit comps, which is much lower than we have seen historically in terms of a ramp, that gets you to around $1.5 million or just over $1.5 million.

And if you use a margin of not even as high as what we just reported in the first and second quarter, just used like a 22% margin or something like that, or maybe 22.5% or so, you can get to cash-on-cash returns by year 3 in the 35% to 40% range.

And so we know even if we have to, you know, just live with, for a long time, more modest comps, we may not get up to the $1.73 million or $1.74 million, you know, type system average today, but we still get to very superior cash-on-cash returns, and so that tells us that our unit economics for new stores are very healthy, and we should continue to invest in these new stores.

And when the recession subsides, and we expect that our comps will bounce back for all of our stores, including the new store ramp will increase, then the economics just get even better from there.

So that is the way we have been communicating it.

Great, thanks.

Congrats.

Take care.

Thanks, Paul.

The next question comes from Greg Ruedy with Stephens, Inc.

Thanks, good afternoon.

Following on Paul's question in terms of the new marketing campaign, for a new uninitiated guest, if we assume you can leverage that educational factor into the trial, how would a restaurateur balance the educational questioning that could pop up in the line versus just getting a guest processed?

So is your question about its effect on throughput?

Yes.

Yes, I mean certainly that could be an issue.

I mean Chipotle, on one hand, for the regular customers is kind of the ultimate experience, in that they can tailor - they know what they want, and they know how to use the system.

There is a learning curve to getting there.

We have seen it -- we see it in new markets, when there is a disproportionate amount of new customers.

And we see that they do have more questions, and they're learning the system.

It's just part of the evolution.

So, you know, more customers that are uninitiated could certainly slow it down.

But more customers in existing restaurants might not be as dramatically slow as new customers in new restaurants, because you have a mix of some regular users and, you know, we noticed that new customers watch other customers sort of how to do it.

So it's a great question.

I'm not sure what the effect will be but, obviously, you know, we would not want to not market for fear that we're getting too many new people in.

Getting new people into the brand is a great thing and, you know, we have a great rapport with customers new and old, and I'm confident that our crews will delight them.

Great.

I'll shift gears to the new menu test.

Anything -- any shifts in demographics, say male/female or the families/individuals?

You know, I think, you know -- and I don't -- no research shows this, but sort of what we have observed is that a lot of moms are bringing their kids in for the kids menu.

And so, obviously, we had more kids in there.

You know, we have always had kids but it seems -- it seems like the kids that were brought in were brought in by, you know, their parents, who were, obviously, regular users.

I think this kids menu now enables us to get kids who maybe tell their parents they want to go.

So, you know, obviously, it's due to more kids coming in.

How many SKUs did you add on that new menu test, and can we assume that if you move to a smaller kitchen, that that would encapsulate this new menu test if you do roll it out?

Sure.

It's interesting, the SKUs, I mean, there were different categories of things that we had.

We had the kids menu and then we had the low roller menu items, which were smaller portions of things.

The only true new SKU was the pozole soup.

The other things were just new combinations of already-existing things that are there.

That is kind of one of the brilliant things about Chipotle, is that there are all these new combinations you can make from already existing things.

So, we did not add complexity to the back of the house, we did not add complexity to the cooking, we didn't add complexity to what the people who are on the line serving already do.

So, no, I don't see this as something that a smaller, more efficient, kitchen couldn't handle.

That doesn't have impact that way.

Great.

Does that make sense?

That does.

Thank you.

I'll jump back in.

The next question comes from Bryan Elliott with Raymond James.

I forgot my question.

No, they have been asked.

Thank you.

Thanks.

The next question is from Steven Rees with JPMorgan.

Hi, thanks.

Just had a longer-term question on restaurant margins.

As we move closer to 2010 and the pricing rolls off, and I guess leaving the commodity uncertainty aside, do you think it's still possible to get further labor and other operating cost leverage in 2010 after the very large gains this year in 2009?

Well, you know, yes, it's possible and no, we don't think it's something that we should all count on.

There is a lot of pressures moving, you know, sort of the wrong way on margin ,as many as there are moving in the right way, so with regard to labor, for instance, I'm cautious, because last quarter during the earnings call I said that I didn't think it was likely we could get significant more leverage, and here we are 140 basis points better than we were this time last year, and so like I said, I was wrong.

Our teams in the field surprised me and proved me wrong in a very nice way.

But, you know, this is not something that -- specifically labor isn't something -- and, in fact, all of our operating costs aren't things that we were managing from this office by saying, you know, drive them down, down, down.

Our primary focus is on, you know, a top-notch customer experience, clean restaurants, great customer service, and making sure to delight each and every customer.

And we're delighted by the margin we have now.

We're not going to push our teams in the restaurants to continue to, you know, try to find, you know, labor leverage unless they find it by making -- you know, through making the operations better and through having much, much better teams.

So they proved me wrong in the past.

It would be nice if they continue to prove me wrong, but the number one thing we're looking for is that operations continue to improve, and get better and better.

Okay, and then just finally for me, I guess I didn't see it, but are you still endorsing sort of the longer-term 25% earnings growth outlook?

Obviously, you're going to be well above that this year, and I guess if so, how do the components of that change with units being relatively flat in terms of output and number of units?

How are you thinking about the components of the longer-term earnings growth rate going forward?

We took the formal long-term guidance of 25% off the table some time last year, just as the economy worsened and it became clear that it's very, very difficult to predict.

Over time, we still think that we're a significant growth company.

We still think we have the potential to grow in that kind of a range, but without knowing what is going to happen to consumer confidence, what the next wave, or if there is a next wave of commodity inflation, it's tough to reinstitute that.

Clearly, we're going have a great year this year.

If you combine this year and last year, we're probably on top of the 25%.

We think over time, yes, we can do that, but we haven't been formally communicating that just because it's been such a difficult environment.

Okay, great.

Thank you very much.

Okay.

Thanks.

That is all the time that we do have for questions today.

I would like to turn the call over to Chris Arnold for any additional or closing remarks.

That will do it.

Thank you all for joining us, and we'll talk to you again in three months.

Thanks.

Thanks, everyone.