奇波雷墨西哥燒烤 (CMG) 2009 Q3 法說會逐字稿

Thank you for standing a by and welcome to the Chipotle third 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) As a reminder, this conference is being recorded.

I would like to, at this time, now turn the conference over to Investor Relations Director, Kate Giha.

Please go ahead.

Thanks, Duane.

Hello, everyone, and welcome to our call today.

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

It may also be found on our web site at Chipotle.com in the investor relations section.

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

These forward-looking statements will include discussion of our real estate strategy, the number of restaurants we intend to open, projections of the restaurant comp sales and transaction trends, new restaurant development costs, 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 risk and uncertainties that could cause our actual results to differ materially from the forward-looking statements.

We refer you to the risk factors in our annual report on Form 10K for 2008 as updated in our subsequent 10Qs for discussion of the risks that could impact our future operating results and financial conditions.

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

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

For the fourth quarter, it will begin December 1st and continue until our fourth quarter release in February.

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 their comments, we will open the call for questions.

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

Thank you, Kate.

We are pleased with our third quarter performance, particularly in an overall operating environment that remains challenging.

For the quarter, we delivered a 2.7% comp and saw revenues increase 13.8% from a year ago.

This brought our revenue to $387.6 million for the third quarter, and led to diluted earnings per share of $1.08, and 83.1% increase from the third quarter of 2008.

Our performance continues to be driven by our disciplined approach to our business, and our constant efforts to improve every aspect of what we do.

In recent months, these efforts have included looking at our menu and working to upgrade some of our ingredients, re-examining our marketing strategy and direction, and taking a fresh look at the way we design and build our restaurants, and working to improve our real estate strategy.

This approach to running our business allows us to continue to deliver solid financial performance and excellent returns for our shareholders while continuously improving the customer experience.

As we discussed during our last call, we have been testing an expanded menu in our Denver restaurant since April.

That expanded menu includes some featured items, smaller items at lower prices, and a kid's menu.

So far the kid's menu items are proving to be the most appealing change to many of our customers.

Based on that, we have decided to expand the test to include the rollout of the kid's menu to five other markets: Boston, Arizona, Wisconsin, Dallas, and Sacramento.

The Kids menu is now available in these markets as well as the Denver and Utah markets.

And we will watch to see how it's received in the sampling of markets before we make any additional plans for it.

In the meantime, we are interested to see how the demand for our pozole soup changes as we move into the cooler months.

So we will leave that on the test in the Denver menu--at the Denver menu for now.

As for smaller items at lower prices, while our research shows that customers appreciate these options, sales of these items are not strong and we are assessing what we will do with these items going forward.

With regard to our marketing, we have wrapped up the majority of our myChipotle user generated advertising campaign, which continues as an online program and are redirecting the focus of marketing to speak more explicitly to our food philosophy.

Specifically, we're pursuing advertising which relates to the great taste of our food and the high quality ingredients we use.

Our customers love the great taste of our food and we believe building more awareness about our efforts to source great ingredients and cook the food we serve in our restaurants will strengthen that bond that we have with existing customers, while helping to reach new customers as well.

Much of our current advertising reflects this direction and we are now working on a new campaign in creative for 2010 as well.

Beyond our menu and marketing, we are also taking a fresh look at how we design and build our restaurants.

Our earliest restaurants were generally smaller, simpler, and very efficient.

As we grew, our restaurants became larger, more architecturally complex, and in some instances less sufficient than before.

Our aim is to evolve the look of our restaurant while returning to our roots of designing restaurants that are simple and more efficient, and to do this in a way that continues to build on the iconic brand that we have established.

To accomplish this, it is important to use the design changes that are more--to do this we are going to employ design changes that are more than simple--simply a veneer, or a new look.

Certainly as the aesthetics are important to us, but it's also important that the design says something about who we are and what we stand for.

We want the designs to make a connection between our simple high quality ingredients and the way we prepare them, and the way we choose the materials to build our restaurants.

Just like our simple menu, the new design focuses on only a few things.

It is less cluttered and fussy than many of the restaurants that we have built in the last decade and uses the architectural design to suggest the flow in the restaurant rather than physical barriers.

In the kitchen and along the service line, workstations are clearly defined and provide ample space for our crew to work, but use space efficiently so none is wasted.

And we are using materials like white tile on the kitchen walls instead of stainless steel that are easier to clean and maintain.

We are also working to design things in a way that uses less energy, both in the manufacture of the materials, and the energy required to run the restaurant.

The lights require less energy to illuminate the space, and the materials and kitchen equipment are more energy efficient so that the new design will reduce our environmental footprint.

I will turn the call over to Monty now who will speak about how these design efforts will be combined with our real estate selection strategy to allow us to strengthen our real estate portfolio in the future.

Thanks Steve.

Our strategy for selecting real estate has always been to find great high visibility locations in trade areas that have a combination of large daytime populations, combined with strong traffic counts, and residential populations where possible.

Following this strategy, we have been able to maintain rapid growth, establish the Chipotle brand in markets around the country, and continue to generate strong unit opening volumes.

Even in this economy, our new restaurant unit economics are very strong.

If anything, our new store opening volumes are even stronger in recent months.

This has been a result of the real estate strategy that we have often described to you.

Essentially opening two-thirds of our new restaurants in proven markets and opening one-third of them in what we call new and developing markets.

As we have described, our new stores overall have been opening in the $1.350 million to $1.4 million range with the two-thirds that we open in the proven markets above that range, and the third that we open in new and developing markets opening more in the $1.1 million range.

Openings in our proven markets typically generate superior returns right away.

And new and developing markets take longer to deliver the returns that we're looking for.

While we are delighted by the continued strength of our new store openings, we think that there is an opportunity to make our real estate strategy even better.

This is especially true given the recent pressure on developers.

and the corresponding reduction in the number of new developments currently available for us to buy or lease.

Keep in mind that these new developments have historically accounted for the majority of our new store openings.

In light of this situation, we want to find a way to continue our brisk pace of new restaurant development while maintaining a disciplined approach to site selection, taking advantage of favorable occupancy costs available in this environment, and protecting or even improving our unit economic model.

We believe that we found a way to do this.

Most of our new restaurants will continue to be built in what we call tier one trade areas.

These are trade areas that generally have high occupancy costs and high development costs, but which are great opportunities for us because of the very high sales volumes that we are able to attract to these locations.

We now plan to expand upon that strategy by pursuing additional restaurants, which we're calling A-model sites.

The A-model sites will be built primarily in tier two trade areas, which still have attractive demographics that are typically characterized by lower occupancy costs and which we can develop for a substantially lower investment cost.

What excites us about these A-model locations is that due to these lower occupancy and development costs, coupled with our ability to operate these sites with lower operating costs, we believe that we can achieve cash on cash returns in the mid 30% range or better even at sales volumes in the $1.1 million range that we have normally achieved in the third of our stores we built in newer developing markets.

This new strategy provides many benefits to us.

In the short term, it bolsters our real estate portfolio while the sluggish economy limits the availability of the new developments that we have traditionally pursued.

In the long run, it broadens the potential inventory of sites that we can consider as well as the number of markets that we can profitably pursue.

With this A-model strategy, we plan to maintain our current pace of new store growth adding between 120 and 130 new stores in 2010, with as many as a quarter of those locations being model A restaurants.

Again, our model A project is not intended to replace our traditional strategy.

Instead it will be a course of action that we pursue in tandem with our ongoing effort to pursue as many traditional tier one locations as we can find.

This new direction allows us to penetrate existing markets more deeply, bringing the Chipotle experience closer to more of our customers and making us more convenient.

Initially, we will pursue A-model locations in proven markets where our presence is already well established.

Places like Washington DC, Chicago, or Minneapolis, for example.

However, once validated, this strategy will also allow us to grow more efficiently and aggressively in new and developing markets as well.

We are committed to this new strategy and believe that it has significant benefits for us, both in the short and long term, letting us continue to pursue strong unit growth even in a sluggish economic climate, while improving our ability to compete in locations where we would not formerly have been as eager to add restaurants.

This will make us more convenient and accessible, allowing us to bring the Chipotle experience to more customers throughout the country.

With that I will turn the call over to Jack.

Thanks, Monty.

Overall, we are very pleased with our third quarter results.

Despite the fact that transaction trends remain soft, we were able to produce impressive EPS growth of 83% from Q3 of last year; and generate industry leading operating margins as a result of our continued disciplined approach to running the business.

Our top performing crew and management team continue to do an incredible job delivering great customer service while efficiently managing their restaurants and our corporate field support staff continue to find ways to accomplish more with less.

Our people culture and our business model are the strongest they've ever been.

Revenue for the third quarter increased 13.8% to $387.6 million from $340.5 million last year.

Revenue growth was driven by new restaurants not in the comp base, and a 2.7% increase in comps.

The comp growth was driven by the 6% menu price increase taken in the fourth quarter of last year, partially offset by negatively traffic of around 2.5%.

The average check was up around 5% from last year, slightly less than the full price increase.

Assuming no trend change before the end of the year, we continue to expect comps in the low single digit range for the full year.

In the fourth quarter, we will lose more than half of the menu price increase from last year as the menu price affect will drop to about 2.5% in Q4.

As we look to 2010, we remain cautious about the economic environment and without any signs of improvement in consumer discretionary spending, we expect transactions and sales comp trends during 2010 to be flat.

We don't have any current plans to increase menu prices at this time, though that may change depending on inflationary pressures and consumer spending levels.

EPS for the quarter was $1.08, up $0.49 or 83% from last year.

Restaurant level margins were 25.5%, up 410 basis points from last year.

The positive effects of the menu price increase, along with efficiencies in labor, were partially offset by deleveraging from fewer transactions, while lower promotion and utility expenses in the quarter helped fuel the higher margin.

Food, beverage, and packaging costs for the quarter decreased 220 basis points from prior year to 30.8%.

This decrease was mainly driven by the impact of the menu price increase and cost decreases for cheese, avocados, and steak and was partially offset by the increase in rice.

Labor improved 140 basis points from the third quarter of 2008 to 24.9% as our restaurant teams continued their focus on hiring and retaining only high performers, allowing our restaurants to run better and more efficiently than ever.

We expect this labor leverage to decline or even disappear over the next two quarters as we open many more restaurants in the fourth quarter, as we lose the benefits from the price increase, and as we begin to lap labor efficiency generated in the first quarter of this year.

Other operating decreased 80 basis points from last year to 11.4% of revenue.

The decrease was mainly driven by lower promotional and utility costs, but also included incremental savings across many other lines such as laundry, repairs and maintenance, and restaurant supplies.

Marketing was only slightly higher than last year at about 1.4% of sales as we ended our ad support from myChipotle during the quarter.

We plan to increase our promotional activity in the fourth quarter, which will include residential mailers in many of our markets; as well as our Halloween Boo-rito event, where customers who dress in a Chipotle costume receive a free burrito on Halloween.

G&A decreased 30 basis points from last year to 6.3% of sales, and the decrease was the result of menu price increase, decreased travel costs, partially offset by a higher bonus accrual.

Our effective tax rate for the quarter was 37.2%, which was the result of adjustments to lower our estimated annual tax rate to 38.1%.

The annual rate reduction was driven by adjustments related to our meals and entertainment deduction, federal tax credits, and benefits relating to our food donations under our harvest program.

We expect our tax rate to be about 38.1% overall for this year and about 38.5% in 2010.

We opened 26 new restaurants in the quarter and 76 for the year so far, bringing our restaurant count to 911.

And we continue to expect to open about 120 to 130 for the full year.

As we look to 2010, we plan on opening around the same number as this year in the 120 to 130 range, and while opportunities and new developments continue to decline, that has been offset by a greater number of available existing spaces, many of which will be A-model sites that Monty discussed.

In fact, as many as 25% of our openings next year will be A-models.

And because these new restaurants are expected to be designed and constructed at a much lower cost, we expect our overall investment cost to be around $850,000 next year on average, lower than the $900,000 we expect for this year.

Our new restaurants have continued to open at volumes in the same $1.350 million to $1.4 million range we have been talking about for some time now.

As we begin to open A-models next year, assuming our new restaurant volumes hold in the same range, our new restaurant returns will increase as a result of the lower investment cost, lower occupancy, and lower operating costs of the A-models.

Even if our new restaurant sales should dip a bit next year, we still expect new restaurant returns at or above our current levels.

Since we plan to open A-models only in proven markets next year, we are very confident about the quality of our portfolio.

And as the A-model strategy gains traction, we will begin to explore A-model openings in newer and developing markets where we expect this strategy will lead to more aggressive growth and more attractive returns in these markets.

We are also pleased to announce a proposal to convert our two classes of stock into a single class.

After many months of working to satisfy the requirements of our separation agreement with McDonald's, we have received an unqualified opinion of (inaudible) that has been approved by McDonald's that the share conversion will not impact the tax free status of our split off.

This was a difficult and complex challenge and we thank McDonald's for working with us through this process to make it happen.

We planned a special shareholder meeting for December 21st, where shareholders will vote on the proposal.

A proxy statement will be available electronically beginning the week of November 2nd; and assuming shareholders approve the proposal, we would expect the combination to be effective on or about December 22nd.

At that time the CMG B class of stock would cease trading and the new Chipotle common would continue to trade under the ticker symbol, CMG.

Thanks for your time today.

At this time I'd like to open the line for questions.

Very good.

(Operator Instructions)

Our first question will come from Jeff Farmer with Jefferies and Company.

Great.

Thank you.

Good afternoon, guys.

Could you just provide some additional color on your local store marketing, and direct mail efforts?

I guess more specifically , any changes you've made there in the last couple of

Yes, actually.

Since August we've done a lot more direct mail especially in--we had a big buy one get one free mailing in Boston and we got great redemption on that.

And we are planning on doing a lot more of these--of these direct mailings.

We've refined the way we do this.

So we get great redemption on those.

Okay.

And then Monty gave us a lot of color on the new versus existing market development.

And the new A buildings; but in terms of looking at--let me take a step back and see what's most important here.

Softer same store sales in the Midwest market, so a ton of color on new versus existing markets, but as you look at those softer Midwest markets from a development standpoint, are you able to sort of avoid development in those markets for now?

I'm sorry.

Can you say it again, I didn't mention anything about softer same store sales.

On the last call you had highlighted that you--in terms of where you are seeing weakness from a same store sales perspective, Midwest markets were among the softer region.

I was just curious in terms of development in 2010, how you sort of incorporated that softness into the development plan for next year?

The difference between the Midwest and other parts of the country is pretty subtle.

So it really doesn't play very much into our real estate strategy.

We still have a lot of great growth to go in that region of the country as well.

So that really isn't a big part of our real estate strategy at all.

Okay, and just final question.

Jack you touched on this, but the advertising spend for this year as you look into next year, in 2010 as a percent of revenue, what does that look like?

Yes, Jeff.

I would expect we'd return back to right around 1.75%.

But as Steve mentioned, we are really redeveloping, revising the next phase of this.

So we are going to be very thoughtful as we spend that.

We're going to, I think, develop--creative develop a strategy, begin to roll that in various markets; and as we feel good that the strategy is working and it's connecting with our customers and communicating what we want to communicate, then I think we will ramp up our investments.

So we don't know exactly how we are going to invest right now quarter by quarter, but we are going to do it thoughtfully and make decisions along the way.

But overall, I would expect us to be in the same kind of range, this 1.75% that we've been talking about for the last three years now.

Thank you.

Thanks, Jeff.

Our next question is from Matthew DiFrisco, Oppenheimer & Co.

Thanks.

I might have missed that but in responding to that question, did you also say that full year for '09 you're still guiding to 1.8, or what is going--what is '09 going to look like for marketing?

We will be lower.

We are at about 1.5% for the year.

We are 1.4% for the quarter.

That's largely because we pulled back on myChipotle.

We didn't invest as much as we had originally planned.

And rather than just continue to invest the money at that same rate, we really pulled back on the investment.

And we will reinvest again once we have our new strategy fully developed.

So I think overall for the year, we will probably end up in that 1.5%.

Okay, and then just looking at the A-model locations, I mean, how comfortable are you or how much have you tested that this might not cannibalize, give that it sounds like you're maybe increasing your development schedule into existing markets.

So I can recall, I think, when Bistro did this, PF Chang got a little close to some of their stores, there was a little bit of cannibalization.

Are you concerned with these smaller models might cannibalize some or your stronger, existing markets now?

If anything, we feel more comfortable that we can find brand new trade areas that will likely cannibalize less.

We've always looked at impact.

We've done, I think, a very nice job of identifying when impact might exist, being able to measure the impact.

And then we always make decisions based on a post impact result.

Frankly, we are not really that worried about impact at all.

Just last question, are these stores going to be open in general the same amount of hours or are these trade locations that might be smaller locations designed for optimizing one very strong day part whether it's primarily lunch in an urban area?

No.

Initially, we are looking at these as being the same exact operating hours as our existing restaurants.

We do have--we have some flexibility around the country sometimes to open a little earlier for places where there is a crowd coming right at 11:00, and sometimes we will consider opening later.

But you won't see that these will be abridged much in terms of what what they are offering.

I guess I'm thinking if you--have you had a strategy towards that a little bit on going back and looking at some locations?

I specifically am thinking of a couple in New York that I know you brought down to 4:00 p.m.

4:30-ish type closings now.

And I'm just curious if that's part of the labor optimization possibly.

Well, not so much.

That has happened in the past but that's almost totally in urban locations.

In New York and in downtown Chicago where some of our restaurants really don't lend themselves to a strong dinner.

However, in those--for instance, in some Chicago locations where we weren't experiencing a very strong dinner and where we used to close at 4:00, some of those we've experienced demand for dinner and we're opening some of those a little later, 5:00 and 6:00 in some cases.

Yes, that's usually just a solution for an urban location with very, very little dinner time.

Okay.

I'll turn it over.

But I just had one last question on same store sales with respect too guidance unchanged.

Is that somehow--are you looking at the current trends of the stores that are going to roll in to the comp base and--or the most recent stores that have rolled into the comp base, those larger 1.4 plus openings?

Are they--is that reflective of how they are comping as they enter given that they are closer to--lack of a better term, capacity?

That there is less growth opportunity and might be decelerating a little bit in that 14th and 15th month as they enter the compass?

Well, no.

I think that's reading way too much into it.

Really when we talk about the--I assume you mean the flat comp guidance for next year.

What we're talking about is we've got a comp going this year that is largely driven by menu price increases.

We don't have plans to increase menu price increases for the foreseeable future, and so we expect that we will lose that benefit and return to just a scenario where we just have flat comps going forward.

It's really a function of the economy that consumers are not out spending as much.

In terms of our new stores, our new stores continue to ramp.

There is no signs of any kind of weakness at all in our new stores.

Our next question is from Nicole Miller with Piper Jaffray.

Jack, I'm sorry I missed the--for the 2.7% comp, can you please repeat the price mix in traffic component?

Yes.

On the 2.7%, Nicole, so we had 6% price, we had about 2.5% negative transactions, and then we lost about 1% in the check.

In other words, the check increased by about 5%, it didn't increase by the full 6% menu price increase.

Got you.

And what--in the context of flat comps for next year, talk to us about break even or margin expansion.

Obviously a 3% comp today is generating a 25% to 26% store level margin, but what--give us some scenarios for each 1% comp change what it would do to margin or however you want to talk about it?

Yes, Nicole, the difficult thing about next year is we just don't know what the topline is going to do, we don't know what consumers are going to do.

And our best guess right now based on no signs that the consumer is out spending more is flat transactions and flat comp sales.

The way to think about it is if there's--in a perfect world if there was zero inflation and you had zero comps, our margins would hold up exactly as they are today.

If you have a little bit of inflation, let's say it's 1% inflation across the board, across labor, across food , across everything, that would hit your margin for about 70 basis points, 2% inflation across everything would hit you for about 140 basis points.

If the consumer confidence in spending does increase and you can raise prices for every percent inflation, if inflation's one you raise prices one, your margins hold exactly.

If inflation is two, you raise prices two, margins hold exactly.

In terms of if you don't raise prices and have inflation, you pretty much have to have about maybe a 1.5% to 2% in comp for each percent in inflation to hold the margins and not raise prices.

So that's kind of the way to think of the different pieces.

The best scenario for us and really probably the whole industry is that consumers become more confident, they come out and they spend more, they visit our restaurants.

And if there is inflation that creeps in, we have both additional transactions and probably the ability for a modest price increase so that we can, to the best of our ability, hold on to our margins.

That's the way I would think about

That's great color.

Thank you.

And remind us, what price are you running on now for the fourth quarter that some rolls off?

Fourth quarter will drop from the 6% effective in the third quarter to 2.5%.

We are losing more than half of that menu price increase, and by the time we get to January 1, we'll be at zero.

Okay.

Just quickly on the A markets, if you take all this into consideration and you're going to be somewhere around maybe 900 stores at year end or over that, with this new model, what is the opportunity domestically now; and then give us a quick update on international?

Thank you very much.

First of all we are at 911 stores right now, Nicole.

So you're going to see it be quite a bit higher by the end of the year, because we were back loaded this year in the fourth quarter.

We'll be in sort of the 950-ish range without doing the math.

Your question also was about the total amount of stores that we can build.

We've been careful never to pin this down, because frankly we don't know.

We've always talked about sort of we can build thousands of them based upon the sort of penetration we have in our markets like Denver and Ohio and some other markets.

We are not sure if the A model strategy will just allow us to get to that number in a very responsible way with better returns; or whether it will actually increase the potential number, it's just too early to tell.

But either way, we think that we will have a much stronger business model going forth with the A model strategy.

And with international, we have Toronto running very, very strong.

We're very proud of the way we entered that market and we are actively--in fact, we have folks there right now looking for the next few sites there.

London will open up second quarter of next year and just in the final stages of securing our first deal there.

It's in an excellent trade area, we are very confident it's the right place to start in London.

We have our architectural plan largely complete and we are anxious to start construction soon.

Our next question is from David Tarantino with Robert W Baird.

Good afternoon.

Question getting back to the A-model strategy.

If you take a step back, could you talk a little bit about the genesis of that strategy?

Did you start thinking about that as you looked at the landscape and maybe you're running out of opportunities for those tier one sites; or is this something that was developed based on the slowdown in a broader commercial environment?

Thanks.

Really we look at the A-model as a way of strengthening our portfolio.

It does, we think, give us some additional opportunities to look at.

But primarily we look at it as a way to strengthen our unit economic model.

We've never been a company that's tried to grow fast for the sake of growth.

We've only grown as fast as we can find great real estate and great managers; and of course, while pursuing a strong unit economic model.

This is a way we see of just being more responsible in our growth not to chase growth in a way that's overly aggressive.

Great.

That's helpful.

Jack, a question on the inflation outlook for 2010 as a follow up to the prior question.

If you take the cost picture you are seeing today would you expect to see inflation or deflation in your cost?

There is a few items, David, that there is going to be deflation.

Unfortunately, those are some of the smaller items that we buy.

The items that we buy the most of, and that would be our meats and cheese in particular, there continues to be pressure on those items.

We've seen pressure on the business models, especially on the chicken, the beef, and the pork throughout this year; but there hasn't been the pricing power.

So the inflation that we thought would happen throughout this year never happened.

That pressure is still there.

I think eventually that's going to have to lead to some inflation next year.

When it comes, I think the the inflation that we would expect to see with those items with the meats and the cheese that I mentioned, will be somewhat offset by produce items and soy and rice and wheat, which all look like they are favorable.

But I would say the net-net is probably a low single digit inflation next year if I was going to have to predict right now.

Just to clarify, that's all commodity cost inflation.

How about the other costs that you are talking about on the restaurant?

That's all commodity.

That's all commodity.

David, our wage inflation I would expect that to be somewhere between the 2% to 3% range.

Thank you.

Those are the two major items, and then after that the next biggest item would be utilities, energy costs, which those look pretty good right now.

But I think the commodities and the wage, both are going to look like they would end up probably in that low single digit range as a net-net.

Thank you.

Our next question is from Jeffrey Omohundro with Wells Fargo.

Thanks.

First just a housekeeping question.

On the 2010 unit development, did you expect a waiting similar this year with a heavier second half of the year in terms of the number of openings.

Yes, I think you'll see it will be more even in 2010 in terms of our unit openings; but it will still be weighted heavier towards the end of the year.

Okay.

Then second on the marketing strategy and where you go from here, I'm curious do you go back to an agency review and really take a fresh start at this process or is it more incremental; do you think?

Let me back up a little bit to answer that.

We've tried a lot of different things in the last couple of years.

We have done two things really, really well in our 16 plus years history.

One is really creating a food culture that had extraordinary food and we can cook from scratch, according to classic cooking techniques.

And we have--the second part is we have this really empowered team of high performers that delivers great customer experience.

And I would say that those are our two really strong core competencies for the past 16 years.

And we have grown the business in a tremendous way without having marketing be that--be part of that core competency; and but we've also seem to get a very special message across at the same time.

I think what we've learned after trying a lot of things in the last couple of years, is that we have a very special the story that once people hear and understand, they become very attached to the brand.

And we have decided that we are going to focus our efforts so that our campaign coming out in early 2010 is focusing on that idea is good tastes good.

That we invest in high quality food so that we provide not only really great tasting food, but also food that you can be proud of.

Sustainably raised food, food that's helpful, food that you feel great about feeding your family.

That really is our strength.

And while we've had interaction with some good firms, we think that we have a lot of great internal marketing power right now.

So we don't feel the need to go back out to a new agency at this point, but rather to focus our efforts on our core competency, which is that food.

That's what people from, we are going to make that connection between buying great ingredients and delivering exceptional food.

Very good.

Thanks.

Our next question will come from Steven Rees with JPMorgan Chase.

Hi.

Thanks.

The labor leverage this year has been exceptional, especially over the last two quarters; and originally you sort of guided to not expect as much in the third quarter as you lapped some of the initiatives that began in the second half of last year.

Can you talk about where the upside was on the labor line versus your original expectations this quarter and how we should think about labor leverage in 2010 in a flat comp environment?

Yes.

Steven, on the labor leverage, we had talked about 100 basis points of that being recurring.

Frankly, we just got a little bit more efficient in the third quarter.

We put a matrix in place and the matrix is based on our best performers.

And our teams really hit and even beat that in the second quarter, and so although of the 140 basis points of leverage that we saw in the second quarter, some of that was inefficiencies from the year before that weren't in the third quarter of 2008.

But frankly, our teams, they raised the bar again.

They did another great job in the third quarter so they outperformed the matrix by even more.

We put the challenge out there based on our top performers, they met the challenge, and then they beat it again.

So that's really a tribute to how strong our teams are out in the field.

What is most important to note is as we move into the fourth quarter and then into the first quarter, we are losing a lot of the benefits because we are losing the pricing benefit, we're opening up a lot of stores in the fourth quarter, nearly double what we've opened in the fist three quarters.

Those typically open very inefficient from a labor standpoint.

We don't try to control labor tightly in the first month or two with our new restaurants.

The fourth quarter also is seasonally just--has lower sales and so our labor does tend to tick up in the fourth quarter anyway.

And then we move to the first quarter, we also--we've started to see labor leverage in the first quarter of this year and so we're going up against that.

The significant benefits that we've gotten and that we're proud of will really start to fall off pretty quickly here in the fourth and the first quarter.

Okay.

Then just in terms of--it sounds like the A-models are slightly lower cost.

Can you talk about your total CapEx level next year in 2010 versus 2009?

Yes.

It should be lower.

I think this year, depending on how many we actually get open before the end of the year, we expect this year to be in kind of the 130 to 135 million-ish range.

Next year we would probably be like in 125 million kind of range, again depending on exactly how many we open next year.

Okay.

Just finally the flat comp outlook, I assume that's a full year sort of goal.

Should we expect there to be any sort of progression throughout the year?

Does your model assume any sort of economic improvement sort of slightly negative first half, more positive in the second half, or are you expecting flat across the board?

I will tell you, Steven, it's really difficult to predict with that level of precision.

There is changes, depending on what the compares are from last year, but generally I would think if you are thinking of a relatively flat throughout the year; and then there might be trading day adjustments depending on how many Fridays and Saturdays you get in the month.

But generally it's kind of flatish throughout the year.

We are predicting no economic improvement and we're predicting that because we have not seen signs of any economic improvement.

Great, thank you very much.

Thanks.

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

Hi, good afternoon.

A couple of questions.

I think on the A-model sites, if I said that correctly, it might be helpful if you give us an idea of what a location would be.

I kind of understand your language, but not sure how to reconcile that with a Chicago site or a Washington DC site.

Okay.

When we go out and look for locations, like I said, we normally start with the tier one locations, which are the real high traffic count, a lot of daytime population.

Hopefully some residential, where we can--we generally start off focusing on a really, really strong lunchtime; but also the possibility of developing a really good dinner business so we can have a good balance to operation.

With the A-models, nothing too mysterious.

The fact is, we've done a lot of these tier two locations in the past.

It's just--they haven't been our primary focus.

When we open the stores in the $1.1 million range, that has been something that historically for us has been a bit of a disappointment for us, and we've talked about it that way.

That those are our weaker stores, or our weaker markets where we open doing a $1.1 million.

We got to thinking that there is really no need to look at those as low performers, it would be better to turn opportunities like that into high performing restaurants by taking advantage of lower occupancy costs, which are available particularly in this economic climate; but also in some of the what we'd call tier two locations.

But also our ability to develop them for a much lower development cost since these locations are going to be smaller in terms of square footage, usually 1800 to 2200 feet instead of our average now, which is 2400 to 2500 feet.

And with some things that we can do differently in the development, we can bring down the development cost quite a lot in that smaller square footage space.

Also, we have the lower occupancy costs that I mentioned, and finally we are able to operate them better and less expensively through a number of operational efficiencies that we have achieved.

So we've already begun working on the operational aspects of this in a number of our existing restaurants that are the lower volume sort of restaurants to prove out the fact that we can operate them more efficiently and it's working--it's working quite well.

Some of that is some of the labor efficiency that you've seen over the last month, and the last quarter.

So anyway, we are excited about the opportunity to keep doing this; but do it more deliberately and going in and developing them for the proper cost to make it a win right out the gate instead of something that we are sort of feeling is not our top performing restaurant.

I don't want to get ahead of anything but given that you have experience with these kinds of sites already, is it possible that you are kind of underestimating the return potential.

I would think that the sales could be a little bit better than you are eluding to and the margins a little bit better as well.

Frankly, yes, I think that right now what we are doing with the A-model locations is we are starting out using the A-models in our proven markets.

And as you know, the proven markets are those which have typically opened with a higher volume.

But keep in mind, we are going into those markets and going into tier two locations, which we would expect would have a lower opening volume.

That being said, are we wide open to and optimistic that there will be some upside surprise on some of these A-model?

Absolutely, yes.

And--but the important point is, we don't need that to be the case in order to really enjoy the returns that we believe we will get from these A-model sites.

Okay.

And then lastly, Jack, you've seen that traffic trend become a little bit less negative now for a couple of straight quarters.

Has that been kind of a consistent trend where things are firming a little bit for you, or is it just pretty volatile and that's just how the numbers shakeout at the end of the quarter?

Well, I think it's relatively volatile.

Although I would say that to the extent there has been gradual improvement throughout the quarters and throughout the individual months, it's really been driven more by the compares than it has been by trends.

When we just look at the trends and forget about the compares to last year, we generally have seen mostly a sideways trend.

If anything maybe a little softening, incremental softening as we've gone month to month or quarter to quarter.

Any of the improvement we've seen is more from a comparison than a strengthening of the consumer.

Thanks.

Our next question will come from Bryan Elliott, Raymond James.

Good afternoon.

I wanted to circle back and maybe follow up a bit on Sharon's question.

You spoke to sort of inefficiencies creeping in, in the traditional footprint.

And as I look at your numbers, it's really hard to see any inefficiencies, maybe you could give us an example or two of what those creeping inefficiencies with the old prototype were?

Sure.

Well, I will start with the kitchen.

Over the years as our--we went through a ten year period of double digit comps, and as we saw our volumes go up, we needed to react to those volumes.

So as we built new restaurants, we built them bigger.

We were cooking a lot more chicken and steak on the grill so we got a bigger grill.

In order for that to accommodate that bigger grill , you have to have a bigger hood.

In order to have a bigger hood, you have to have more make up air and have a larger air-conditioning on top.

In order to do that, you have to have more power coming to the building.

And there is a ripple effect where sort of everything sort of starts bursting at the seams.

And this resulted in greater and greater investment cost; but the investment cost was justified because our sales were going up.

But if we look at instead of getting bigger, getting more efficient through the use of technology and being more efficient in the way we lay things out so that there are fewer footsteps taken and things like this, we see that we can satisfy larger volumes and decrease investment.

I think one great example of this is our new grill.

We've switched to a more European plancha, which is a flat top grill as opposed to the grove griddle.

And we've reduced the size of it, we've reduced the amount of heat it puts off, it requires a smaller hood that has less CFMs and so on and so forth.

And there are many, many examples of this just in the kitchen

So the time and motion study footprint, that sort of thing is where the labor efficiencies can come in relative to the old model?

You just need fewer man minutes on the line?

No.

Bryan, really Steve captured the efficiencies.

We are very efficient from a labor standpoint.

But if the kitchen is smaller, it means there's less to clean.

If the hood is smaller, that means energy costs go down, the investment costs go down.

So it's really more in the design that's just added square footage and added more space to clean that we think we can find efficiencies.

Some of the other efficiencies that Monty talked about is just the fact that we can run a restaurant with one salaried manager instead of two.

And we're already doing that.

We've already taken this year, all of our restaurants that are below a certain volume, say $1.4 million so and we're running them with one salaried manager.

And they're running better because our best top performing people are empowered now.

They can do more, and people get excited when a service manager, for example, can step up and do some of the work than an assistant salaried manager would do.

So we are seeing great results from that.

But from the A-model standpoint, it's these efficiencies from the way we design them from the very first time we look at how big the kitchen needs to be and how big the grill needs to be that we expect to see some pretty significant benefits.

Okay.

That makes sense.

Thank you.

Our next question is from Jason West, Deutsche Bank.

Yes.

Thanks, guys.

Just another one on the new prototype and general store outlook or store opening outlook.

If you look at the numbers you are targeting next year 120 to 130, that's kind of a deceleration in the growth rate, obviously on a bigger base; and sounds like you guys are still very optimistic about new store productivity and the returns and you've got this new prototype that let's you go into more locations.

Why is the growth rate coming down to a 12% to 13% number.

There is a few things at work.

Number one, let me just back up again and say that we never been a company that's tried to grow for the sake of growth.

We really want quality growth.

If you look at the kind of stores that we opened over the last many years, we tended to open most of our restaurants--60% or more in new developments.

New developments--there are less new developments now, that was true in 2009.

It will be be true in 2010.

Maybe even 2011, because it takes a while for these things to come back on line.

Given this economy and given the inability of getting financing the insecurity landlords have in trying to find a good tenant mix and so forth, there is just not as many of these developments being built.

Since those were the majority of what we put our new restaurants in, that has created a decline in the number of really high quality sites that there are out there for us.

This A-model strategy does give us a way of taking advantages of--taking advantage of some of the opportunities that have arisen though in this climate where we can go into some existing locations.

Like I said, tier two locations or call them in between locations sometimes between two great Chipotles, there is a market where we might not want to have entered just because there wasn't a new development that we thought was going to drive very, very high sales volume.

But now we can--we believe we can be very confident in going into situations that have lower sales volumes and still have a very high return on investment.

Now keep in mind that when any of us, Steve, Jack, or me are talking about lower sales volumes; we mean sales volumes that are at or above the average store sales of our major competitors.

So these aren't low--low sales volume stores; and frankly; we sort of got tired of talking about them as being our lower performing stores, because we realized that there's plenty of sales in those restaurants for them to deliver a great return.

But because of the fact that we had developed so many restaurants with extraordinary sales levels, we had we sort of gotten our unit economic model perfected if you will or very, very efficient at those high sales volumes; and we realize now that there is an opportunity.

And that opportunity is to go in and really focus on making the lower volume openings very, very efficient so that the unit economics of those is also exceptional.

That's what's allows us to maintain our growth from an absolute unit level, although I understand it's decreasing as a percentage.

But we really don't target a certain percentage of growth in terms of new restaurants every year.

That's just not the way we do it.

We grow as fast as we can find great real estate.

As fast as our managers and crews in the field are developing, so that we can hand these new restaurants to a very, very competent crew and as long as we can produce a great unit economic story.

With this A-model approach, we think we can do all of those things.

Okay.

Thanks.

We will take your next question then from Greg Ruedy with Stephens.

Hi.

It's Joshua Long on for Greg.

I just wanted to see if you wouldn't mine elaborating on how--what you learned in the first menu test and how that's been implemented in the new expanded test that you talked about earlier in the call?

Sure.

Of all the things that we've tried, we realize that the big opportunity is the kid's menu.

And I guess what is really exciting about the kid's menu is, well it brings in lots of kid's and families; but really it's very easy to implement because there is really nothing new on the menu.

It's simply putting a kid's choices of different things onto a special tray that's compartmentalized just the way kids like to eat it.

It's really cool.

I see kids going through the line with their parents.

Their parents will hold them up and they are pointing at the different things and helping to serve themselves, and it's a really great way for kids to interact and learn the Chipotle system and learn about choosing the kinds of foods that they like to eat.

So we are expanding this to another handful of cities.

And if it does well, which we expect it will, we will continue to expand it.

But I think the big news here is that while it's a new item, if you will, in that we hadn't had it before, there is nothing really that you have to add because it's just using our existing ingredients.

It's very, very efficient.

It sounded as though the smaller or the lower priced items weren't getting as much usage as you might have expected.

Have you seen more impact just from the presentation or the language that you used on the menu board rather than lower or offering more variability in the price points?

I think that's, if I'm understanding you, I think that's the answer.

I think that people saw the message that we have lower priced items.

I think maybe people just saw a message, a Chipotle message, which drove in traffic.

Once they were there, we noticed that they ordered the regular sized burritos or order of tacos or bowls that they normally order and not that they were ordering the smaller things.

Okay.

Thank you.

Due to time constraints, we will take our final question from Paul Westra, Cowen and Company.

Great.

With most of my questions already answers, just two quick ones.

Jack, did you mention anything about the share repurchase plan and where do you stand on that?

No.

Well, we finished the last one, Paul.

So we don't have any current plans.

Our main focus--we finished the last one in--early in the quarter, in the third quarter.

And then really turned our focus to getting the share conversion across the finish line.

Once we get that done, which we'll just go through the mechanics of that, have our shareholder meeting, get that done; we are open to considering another share purchase plan.

I just want to point out that we don't consider ourselves to be a mature company that will just roll from one plan to the next.

And anything we do with a share purchase plan will be done in a very opportunistic way.

The one we just finished earlier this quarter, the $100 million plan was really opportunistic.

We bought at an average price of $54, and it was really a no brainer.

And I think to the extent that we decide we've got excess cash in this environment and think it's prudent to return some of that cash to shareholders, I think we will do it in a very opportunistic way.

But we are certainly open to it.

In fact, we'll take all we can carry at $52.

At $54 we'll buy another $200 million.

Last one, obviously we're all looking forward to the overseas, or London opening.

Any--what the plans there would be, would you look to another country first or another location?

How swift would you do that, or once it's open in the second quarter.

Well, certainly I think the biggest opportunity is if London opens strong to start opening more locations in London.

But we've always said that we think that going into the top three countries into UK and Germany and France would be our strategy.

Everything goes well, you would expect that we would go into those locations next.

Thanks.

Congrats.

Thanks Paul.

Thanks a lot Paul.

With that, this does conclude today's conference call we would like to thank everyone for your participation.

Thanks, everyone.