奇波雷墨西哥燒烤 (CMG) 2009 Q4 法說會逐字稿

Good afternoon and welcome to the Chipotle fourth quarter and full year 2009 earnings conference call.

All participants are 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 now like to turn the conference over to Chipotle's Investor Relations Director, Kate Giha.

Please go ahead.

Hello, everyone, and welcome to our call today.

By now you should have access to our earnings announcement, released this afternoon for our fourth quarter and full year 2009.

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

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

These forward-looking statements will include discussion of our marketing strategy and advertising plans for 2010, our real estate strategy and number of restaurants we intend to open, projections about restaurant comp sales and transaction trends, new restaurant development cost, and other statements of our expectations and plans.

These forward-looking statements are based on information available to us today, and we are not assuming any obligation to update them.

Forward-looking statements are subject to risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements.

We refer you to the risk factors on our annual report on Form 10-K for 2008, as updated in our subsequent 10-Qs and in the Form 10-K for 2009 that we will file in the next couple of weeks for a discussion of these risks.

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

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

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

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

On the call with us today are Steve Ells, our Founder, Chairman & 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 to Steve.

Thanks, Kate.

Throughout the year we have remained focused on those elements of our business that improve the experience we provide our customers, specifically working to increase the use of our premium quality ingredients from more sustainable sources, to refresh the design of our restaurants, to improve our marketing strategy and the way we communicate with our customers, and to bring the Chipotle experience to more and more customers through our expansion.

Our continued focus in these areas allowed us to deliver impressive financial results for the year.

For the year, revenue increased 14% to $1.518 billion, with comparable restaurant sales up 2.2%.

Our restaurant level operating margins for the year were just about 25%, up 340 basis points from the previous year.

The highest we have experienced as a Company.

Net income for 2009 increased 62% to $126.8 million, leading to diluted earnings per share of $3.95, an increase of 67% over 2008.

On our quest to serve Food With Integrity, we have been working to increase our supply of naturally raised beef.

As of today, more than 60% of all of our beef is naturally raised, but we expect to have 100% of our barbacoa, our spicy shredded beef, coming from these more sustainable sources in the coming months.

We have also been working hard to find pasture-raised dairy farms that can provide enough milk for our cheese and sour cream, for us to move to 100% pasture-raised dairy, and we expect to approach or clear that hurdle by the end of the year.

This would be another first for Chipotle, as no other national restaurant company is using all pasture-raised dairy.

These Food With Integrity developments come on top of the many other milestones we have achieved over the last several years, including serving more naturally-raised meat than any other restaurant company, being the only national restaurant company with significant commitments to local and organic produce, and becoming the first national restaurant company to serve dairy products made from milk from cows that are never given the synthetic hormone, RBGH.

In 2009, we began opening restaurants with a new design, and you can expect to see more of this new design in 2010.

Like our menu, which uses simple ingredients in uncommon ways to create food that is more extraordinary, the design of our restaurant draws on a pallette of basic building materials that uses them in thoughtful and innovative ways to create an environment that is more interesting and that says something about the food we serve.

The new design uses more environmentally friendly building materials and energy efficient systems.

It is less cluttered than the old design, and has smaller, more efficient kitchens than we have in our older restaurants.

We expect this new design will be simpler to construct, and will cost less than our old look, further improving our new restaurant economics.

At the beginning of 2009, we hired our first ever Chief Marketing Officer to help us improve our marketing.

Today we are poised to launch a new advertising campaign that will speak more directly to Food With Integrity and our food culture, but in a tone that our customers will recognize as Chipotle.

This campaign will appear in print, outdoor, on radio, and online in markets around the country beginning in the second quarter.

In addition, we are developing a loyalty program that will reward our best customers, but also provide another tool for us to educate our customers about the things that we do that make us different.

We will also be introducing new packaging in our restaurants in the coming months.

The new design incorporates messages on all the bags and cups, giving us additional opportunities to help educate the customers and empower them to help share our story.

Our new marketing strategy has been a long time in the making, and we feel like we have a really great approach now.

We also continue to make use of other components of our marketing program, including PR to help us tell the story.

On that front, we began 2010 with a segment on the Oprah Winfrey show, reaching some five million people as part of a larger conversation about issues in food.

This appearance promoted an increase in curiosity about Chipotle and our Food With Integrity efforts, which we saw in both our restaurants and through visits to our website in the days immediately following the segment.

Many of the comments came from people who were not familiar with Chipotle and our story, and we have more non-traditional marketing components lined up throughout the year.

Lastly, we will continue to focus on thoughtful expansion this year, with the newest piece of that being our first opening in Europe, which will be in London in May.

While we describe our entry into Europe as introducing the Chipotle brand and beginning to build a team of future leaders there, we expect the seeds we plant today to turn into growth opportunities for us in the future.

With that in mind, we are actively searching for additional sites in London, and have also begun to look for locations in Paris and other cities in Germany.

To aid our development in Europe, we have moved Rex Jones, who has been serving as our Chief Development Officer, into the role of Executive Director of Real Estate, focusing solely on international expansion.

Rex has more than 10 years of international real estate experience, and is uniquely qualified to help us expand in overseas markets.

Bob Blessing, who had been serving as our Restaurant Support Officer, will take the role of Chief Development Officer.

We firmly believe that we remain on the right path to continue to grow Chipotle in a way that is responsible, both in terms of pursuing our vision to change the way people think about and eat fast food, and increasing shareholder value.

And we remain focused on these few key drivers of our business in the right way to move forward.

I will now turn the call over to Monty.

Thanks, Steve.

I am really proud of the results we achieved during 2009, as these are difficult economic times, and frankly, our results far exceeded what we thought was possible when the year began.

And while the financial results themselves are impressive, what is most satisfying to me is how we achieved these results.

We didn't begin the year planning to deliver record margins, but our top performing restaurateurs demonstrated that they can run better restaurants, cook and serve better food, provide better service, and lower labor costs at the same time, by ensuring that their team was comprised of only top performers.

And when our top performing restaurateurs set this example, our general managers quickly followed their lead.

We don't use any tricks or memorize statements to coax our crew into providing good service, but our managers look to hire only people who are happy and energic, ambitious and hospitable, respectful and conscientious.

So providing great customer service and treasuring each and every customer who visits Chipotle comes naturally to them.

Likewise, we didn't start the year demanding that our rate of internal promotions to manager increased from 60% to 85%, but again, by hiring only top performers at the crew level, our stronger bench of talent naturally stepped up to take on 85% of the new manager positions.

It is incredibly satisfying for us to see what a high performing and power team of restaurant managers and crew can accomplish.

They hire and develop our future leaders, run great restaurants that are always clean and organized, proudly serve great tasting food made from the very best ingredients, treat our customers to the best service and the best overall dining experience they can, and they do all of this while running an efficient and successful business.

So of course, we are pleased with the financial results, but it is even more pleasing to know that it is our special people culture that is enabling these results.

That empowered, talented leaders can set the bar even higher than we thought possible.

That we have an anxious and excited bench of future leaders that are ready to run each new restaurant as it opens, and that this special people culture is still growing, so we can expect it to be even better this year than last.

The central piece of this special people culture continues to be the restaurateur, and this role is so important, that Steve and I still interview every single restaurateur candidate.

Today we have 155 restaurateurs around the country, running great restaurants with top performing crews and setting the example for all other managers to follow.

These 155 restaurateurs are now mentoring 91 additional restaurants, so their influence now directly reaches almost 250 restaurants, or over 25% of our current restaurants.

But they really influence all of our 956 restaurants, as they provide a real life example and inspiration for all of our managers.

Every Chipotle manager you meet is either already a restaurateur or working hard to become one someday soon.

Our field support continues to evolve, with the restaurateur as the primary focus.

Where we used to have area managers supervising seven or eight restaurants, that position is slowly being replaced by a growing class of team leaders, who have a proven track record of developing restaurateurs, and oversee anywhere from 12 to more than 20 restaurants today.

And because our team leaders have earned their position by developing many restaurateurs, and because they knew how to leverage the talents of the restaurateurs, they are able to oversee more restaurants.

So this strong people culture that we are building is intensely focused on developing restaurateurs, on empowering those restaurateurs to influence more restaurants, and recognizing and rewarding field support staff who are most effective in developing restaurateurs.

This approach to managing our restaurants allows us to leverage our best leaders, increase their influence throughout the Company, and build better teams.

It also allows us to be more confident that we can grow our Company successfully, as we know that each new restaurant is more likely than ever to open with a strong team in place.

This will be the foundation of our Company in the coming years, as we want all of our future leaders coming up through the ranks from manager to restaurateur and beyond.

We've always said that we will grow only as fast as we can find great managers to run our restaurants, and great real estate.

And while our restaurateur program has helped us secure the first part of the equation, we are also working to supplement and improve our development pipeline through the addition of our A model strategy.

We already have very strong unit economics for new restaurant openings, and we believe the A model strategy will enhance overall new restaurant economics, allow us to enter what we call tier two trade areas in proven markets with greater confidence, and ultimately allow us to be more aggressive in our developing and new markets.

As a reminder, an A model is a fully-functioning Chipotle, with a full Chipotle menu, so a customer who walks in to an A model would enjoy the same dining experience as they would in any other Chipotle.

The restaurants will tend to be a little smaller than average, and the investment costs, occupancy costs, and operating costs will be lower than a traditional Chipotle, but the food and service will be identical, and the restaurant's trade dress will be unmistakably Chipotle.

In 2010 we expect about 25% of our openings will be model A restaurants, and all of these openings will be in what we call tier two locations in proven markets.

Tier two locations are not new to us.

We have developed a whole lot of them in the past.

But while they have generally performed well, we have sometimes been reluctant to develop as many of them as possible out of a concern that the demographics may not support the investment.

But the A model allows us confidently penetrate these locations in proven markets with expectations of very high returns.

Limiting A model development to only proven markets this year, will allow us to perfect the strategy from a design, construction and operating standpoint, without taking on unnecessary risk.

Ultimately though, A models in new and developing markets, where our new stores average around $1 million to $1.1 million in first year sales, will generate higher returns than we experience today in those markets, and will allow us to grow more aggressively.

Keep in mind that our closest competitors are delighted when they open stores at volumes of $1 million to $1.1 million, whereas historically we have been hesitant to add many more restaurants in these markets until the sales have ramped to higher levels.

Our first two A models opened last month, and have exceeded our expectations so far in terms of sales, as well as initial investment.

In the past, with our traditional investment and operating model, we would have struggled with the decision, and may have passed on these deals because the demographics and population counts are not as strong as we would typically see, but as an A model, these sites became no-brainers from a return standpoint.

So our A model strategy not only enhances our return expectations, but it allows us to aggressively pursue additional deals in proven markets today, and soon will allow us to be more aggressive in penetrating new and developing markets as well.

A model, along with our strong pipeline of future managers currently being developed, causes us to be very optimistic about our growth prospects.

I will now turn the call over to Jack.

Thanks, Monty.

We are very proud of the effort and the results delivered by our restaurant teams and support staff during 2009.

And while we are pleased with these overall financial results, we are even more pleased with the strong position we are now in as we look to the future, both in 2010 and beyond.

The food we serve is the best it has ever been, as we continued our focus on investing to source high quality, sustainably-raised ingredients.

Our people culture is as strong as it has ever been, resulting in a better dining experience for our customers, and a strong bench of future managers.

Our unit economics for both existing and new restaurants are the strongest ever.

And we are pursuing strategies including A model, a new advertising strategy, and the introduction of Chipotle in Europe, all of which make us even more optimistic about what lies ahead.

While we cannot influence the state of the economy, we can and have taken steps to make a stronger and better position for a bright future.

Looking back at 2009, our restaurant level margins were 24.9%, a 340 basis point increase from the prior year.

These margins are the highest we have ever achieved, and higher than any other restaurant company of our size that we are aware of.

These margins are attributable to our great business model, where we focus on just a few things but do them better than anyone else, combined with a strong people culture, where top performers not only run great operations, but they also run a strong and efficient business.

More importantly, we are able to deliver these industry-leading margins, while investing in more expensive, high quality raw ingredients, and with affordable menu prices, so everyone can enjoy our great tasting food made with these premium ingredients.

Revenue for the fourth quarter increased 12.2% to $387.5 million, and increased 14% to just over $1.5 billion for the year.

Revenue growth for the quarter and for the year was driven primarily by new restaurants, along with comps of 2% for the quarter and 2.2% for the year.

The menu price increase we took in the fourth quarter of 2008 drove the comp, adding 2.4% in the quarter and 6% for the full year.

It has now been over a year since we have taken any price increase in any market, and in some markets it is approaching two years.

And though we believe we have pricing power relative to our competitors, with the current chain, food inflation outlook, we don't have any current plans to increase prices.

Now of course, our stance may change depending on food inflation or to fund future Food With Integrity investments, but based on our current industry-leading margins, and the uncertainty with the economy and consumer confidence, we are in a good position to be patient about menu prices.

In the fourth quarter, though we lost about 3.5% effective pricing from the third quarter, our comps held up pretty well at 2%, and transactions turned slightly positive for the first time in several quarters, and they continued to be slightly positive into January.

February sales trends haven't been impacted so far by the severe winter weather, and as uncertainty remains with the state of economy, we have retained our previous comp guidance of flat for the full year.

EPS for the quarter was $0.99, up 90% from last year, and for the year EPS was $3.95, up 67% from 2008.

Restaurant level margins were 24.5% for the quarter, and 24.9% for the year, up 340 basis points for both the quarter and year.

The positive effects of the menu price increase, along with efficiencies in labor, were partially offset by deleveraging from fewer transactions to drive this margin expansion.

Food cost for the quarter decreased 200 basis points from 2008 to 30.1%.

The decrease was mainly driven by the impact of the 2008 menu price increase, along with lower relative cost for avocados, beef, cheese and rice, for which prices increased dramatically during 2008.

For the year, food cost decreased 170 basis points to 30.7%, driven mainly by the menu price increase.

Labor improved 90 basis points for the quarter, and 100 basis points for the year, compared to 2008, as our restaurant teams continue their focus on hiring and retaining only high performers, allowing our restaurants to run better and more efficiently than ever.

As we enter 2010, we expect this labor leverage to end or even delever slightly for the year overall, as we lap labor efficiencies from 2009, and due to wage inflation.

For the quarter, occupancy costs decreased 40 basis points to 7.8%.

As you may recall, the fourth quarter of 2008 included 70 basis point impact from a one-time $2.6 million non-cash straightline rent charge.

Without this charge in 2008, occupancy would have increased by 30 basis points.

Increased occupancy cost continue to be driven by higher average rents, as proportionally more new restaurants are opened in more expensive trade areas.

With only 25% of our openings in 2010 expected to be A models, which should have lower average occupancy cost, we do not anticipate occupancy leverage in 2010, as the majority of our new restaurants will continue to be open in more expensive areas with these higher rents.

For the year, other operating cost decreased 80 basis points to 11.5%, fueled by the impact of the 2008 menu price increase, and lower marketing and promotional expenses in 2009, as we pulled back on our marketing efforts while the new strategy was being created.

While marketing comps were about 1.4% of sales in 2009 , we expect return to investing about 1.75% of sales into marketing for 2010.

For the quarter, G&A decreased 50 basis points from the prior year to 6.5% of sales.

This decrease was the result of continued cost management, and the 2008 menu price increase, and was partially offset by higher bonus accruals.

We anticipate no G&A leverage in 2010, as we are planning to hold our biennial all managers conference in the third quarter, which will add about $3 million to G&A, along with higher anticipated stock comps.

Restaurant closures for the year decreased 30 basis points from 2008.

Write-offs were higher in 2008 because of the replacement of the service line in 126 restaurants, along with an impairment charge related to the closing of one restaurant.

Our effective tax rate for 2009 was 37.9%, and that's down 60 basis points from the prior year, and this decrease in the 2009 rate was primarily the result of a one time adjustment for prior period meals and entertainment deductions, and deductions related to food donated during the year.

We anticipate our tax rate for 2010 will be about 38.5%.

We opened 45 new restaurants in the quarter, and 121 restaurants for the full year, for a total of 956 restaurants at year end, and we continue to expect to open about 120 to 130 restaurants in 2010, with about 25% of those expected to be A models.

Our development costs have hovered around $900,000 for the past five years, but our focus on more efficient design and build out, combined with taking advantage of our growth while many others have pulled back, has allowed our average new restaurant cost to decline to around $850,000 for those restaurants opened in 2009, further strengthening our new restaurant economics.

A model restaurants opened in 2010 should help us reduce that average investment even further.

And assuming our A model strategy plays out as expected, we would expect 2010 average development costs of around $800,000, and expect total capital expenditures for the year in the $115 million to $120 million range.

And at that rate of CapEx, we fully expect to fund our growth from operating cash flow, complete the $100 million buy back we announced in November, and still increase our cash balance by the end of the year.

We know the best way to enhance shareholder value is to invest as much as possible in our high return growth, and though growth opportunities and new developments have declined in the past two years from the affects of this economy, strategies such as A model and introducing the Chipotle brand in Europe, will provide additional high return investment opportunities in the future.

In the mean time, as we generate more cash than we are able to reinvest in our growth, we will opportunistically return value to shareholders through share buy backs.

And through February 10, we have repurchased just over $15 million worth of common stock, at an average price of just under $85.

So thanks for your time today.

At this time.

we would be happy to answer any questions you might have.

Operator, please open

Thank you.

(Operator Instructions).

And our first question comes from Jeff Omohundro from Wells Fargo Securities.

Thank you.

My question relates to the change in the dairy strategy.

I wonder if you would elaborate a little bit more about the opportunities you see communicating this move to the customer base.

And in light of a generally rising dairy cost environment in 2010, do you contemplate engaging in longer term contracts, perhaps it could smooth out some volatility this year in dairy?

Thanks.

Jeff, this is Jack.

I will comment on any pricing strategy, and then I'll let Steve talk about the pasture rate and how we might communicate that.

We, historically, Jeff, have locked into dairy prices pretty much every year, when the year began we would lock in.

We have not locked in this year, and that's primarily because we are trying to move where we -- basically where we source our dairy, and we want to move to these farms that would supply our pasture-raised, and so we are watching the market very closely.

We are working with these local farms and these local co-ops, and we think that we will be able at some point in the future be able to lock into some kind of pricing agreement.

But as of right now, we are really paying a spot rate, and will continue to do that until we feel like we have solidified the entire supply of dairy from pasture-raised.

Yes, and Jeff, the pasture-raised dairy, we believe, is better in a number of ways.

We believe that pasture-raised dairy tastes better, we believe that it is better for the animal, we believe that it is a way of farming that is more in line with our broader Food With Integrity vision.

The way we communicate Food With Integrity is, we are going to see more of that in our marketing starting in the second quarter.

There isn't a contemplated marketing message specifically directed at dairy, but part of the marketing message is that Food With Integrity, we think, makes for better tasting food.

And we have been improving the quality of our raw ingredients over the years.

So, while one might not taste the difference when, for instance, we go from 30% organic beans to 40% organic beans, one does taste the difference over the years, when you are systematically improving the quality of all of the ingredients.

And so, while it is typical in fast food that the quality has degradated as people try to find cheaper and cheaper ingredients, we at Chipotle are doing something completely different.

We are actually improving the quality year after year in this systematic way.

So our message, that by investing in these high quality ingredients will make for better tasting food and more sustainably-raised food, I think is the key point here.

Thanks.

Our next question comes from Jason West from Deutsche Bank.

Yes, thanks.

I wonder if you guys could talk a little bit more about the marketing plans.

What is the new message going to look like.

And I did miss the first couple of minutes of the call, so you may have covered this, I apologize.

And what is the typically, the kind of return you would get on an increase in your marketing budget, it looks like about 30 basis point increase in 2010.

Would you expect to see a material comp lift out of that?

Thanks.

Sure.

Well, I won't go into too much detail, because it will be repetitive for most of the listeners, but the marketing that you are going to see coming out in the second quarter, is focused on Food With Integrity, and why Food With Integrity is important in that we think it makes for better tasting food.

We also think it is an important story about sustainability.

And we think it creates a tighter bond, a more genuine bond with our customers, because we care deeply about what we eat.

And I will let Jack talk about the returns.

Yes, Jason.

We expect when we invest that we will always get a return, when we invest in a new restaurant, when we invest in Food With Integrity, and when we invest in marketing.

Now, it doesn't mean we would expect to invest in marketing and then expect on day one, or month one, to see that return.

But if we are effective with our marketing strategy, and we feel like we are communicating and connecting with our customers in a way that they will understand Food With Integrity, we would expect that we would see an increase in our transactions, an increase in existing customers that don't really know or understand Food With Integrity, to come more often.

So we would expect that over time that we would see higher sales and we would get a return.

We always expect to get a return, but we think about it strategically.

And so it won't necessarily happen day one, but we look for a return, sure.

Our next question comes from Sharon Zackfia from William Blair.

Hi, good afternoon.

I think there was a comment in the press release where Monty indicated that he was optimistic that margins could be largely sustained in 2010.

And I am just wondering, is that on a flat comp as in your guidance.

And then separately, how do you feel about labor?

You obviously saw a lot of leverage this year.

Do you think you will be able to maintain this, do you expect some inflationary element there?

Can you walk us through that?

Yes, Sharon.

We do think that, when we say that we think that the margins are largely sustainable, there is not anything in the margin that is a one trick pony, where we were able to capture it in 2009 and can't repeat it.

Now, there are a few things to keep in mind, like marketing, for example.

We spent 1.4%, we will spend a little more, so that will nick us a little bit.

And if we don't get a comp, and we don't raise prices, we will have wage inflation that will creep in, as well.

But we have menu, we have pricing power, so to the extent things like inflation creep in, either on the food cost line or in labor, we think that when we decide it makes sense, when we decide that customer confidence is such that we can raise prices just to keep up with the competitors, just to keep up with inflation, that we can do those types of things and hold onto these types of margins.

And in the case with marketing, similar to what I said before, we expect as we invest in marketing that we will get a return and eventually will get a comp there.

We think that largely these margins, we can sustain them.

Now, it doesn't mean we will sustain them each and every quarter, it doesn't necessarily mean that we'll sustain it for the full year of 2010, but strategically, these margins are things that our business model would allow us to hold on to.

Our next question comes from David Tarantino from Robert W.

Baird.

Hi, good afternoon, and congratulations on great results.

Thanks, David.

Question, Jack, just to clarify.

On the comps for Q4, could you break out the traffic and mix components for the quarter?

Yes.

Overall, David, we had about 2.4% menu pricing, so we had a 2% comp.

We also lost -- we lost about 1% or so, on average check, so we didn't get the full 2.4% in the average check, so transactions actually did turn slightly positive during the quarter.

Okay.

And the comment you made on February, or on quarter to date.

Are you running slightly positive traffic, including the negative impact from weather?

My comments, David, were in January, we ran slightly positive transactions and then we hit the severe snowstorms in February.

It is not possible for us to tell what the sustaining underlying trend would be.

We have to let the weather clear and then see what happens.

We are encouraged by the fact that traffic turned positive in the fourth quarter, and continue to see slightly positive transactions in January.

We fully expect when the weather clears, hopefully we will see a decent trend return in February.

And then, just one more question on this front.

On the mix, if I recall correctly, you are cycling the initial downturn in the mix that you had last year.

Would you expect the mix to be negative in 2010, or neutral once you cycle the impact you have seen?

I would expect it to be neutral, David.

We think the mix was very, very slight.

The mix caused us, just in a couple of areas, check size, drink size, and other, caused us to lose about 1% of the pricing.

We think it was mainly driven by pricing.

As of right now, from what we have seen so far as we looked into January, I wouldn't see any net effect from the mix, at all.

I would see it being neutral.

Okay.

Thank you very much.

Thanks, David.

We will now go to John Glass from Morgan Stanley.

Hi, thanks, can you either remind me or clarify what you expect the AUVs again are going to be on the model As or the A models, and maybe what you have experienced, and more broadly, I'm just trying to understand the relationship you think is going to occur between AUV growth and comp growth this year if 25% of your openings are in these new tier two, which may have lower volumes but higher returns, and additionally you are still opening in new markets.

Will that put additional pressure on AUV's versus prior years?

Can you maybe talk to what that differential between comp and AUV growth might be in 2010?

Yes, John.

We don't expect that we will see and that you will see any change in our new opening trends, at all.

We have been opening for years now at about this $1.350 million or $1.4 million, that has been made up of a composite of about three-fourths or so of our openings, or two-thirds of our openings in the proven markets and one-third in the new and developing.

We don't expect that mix to change meaningfully during the year.

All of the A models are going to be in the proven markets, so we expect them to be at about the same level as they have been in the past.

We don't think there will be any degradation at all.

If it plays out that way, then we should see increasing in returns this year.

As we see, at those same levels, our investment costs decline, our operating costs decline, our returns actually should increase this year.

Now, in terms of what we saw in the first two, I mean it's only two of them, Monty, I don't know if you want to comment about the first couple that opened up?

So far, for the two A models that are actually opened and operating, we were pleased that the development costs were well below $700,000, and the volumes at these locations are at or even slightly above our average new store opening volumes.

Again, it's in the early days still, and much could happen, but so far we are very pleased because the openings have held up very, very nicely, especially considering that these are deals we would have passed on, it is delightful to see they are going so well.

I want to clarify, these new model A's you expect to open at the higher, the $1.35 million, not the $1.1 million in the newer markets, right?

That's right.

We expect when we talk about our 2010 openings at this time next year, we fully expect to, overall for the portfolio, to still be in the $1.350 million, $1.4 million.

And the A models we expect to be in that same kind of range, and the first two so far, so good.

Even beyond that, in the grand opening phase where we first opened up and lots of new customers came in, our sales for a few days there were way, way, way above that, which tells us the A model as expected, does not in any way restrict volume.

Thank you.

Our next question comes from Matthew Difrisco from Oppenheimer & Company.

Hello.

This is Jake Bartlett in for Matt.

I have a quick question on development and on preopening first.

It looks like preopening was lower in the fourth quarter.

Is that a level, about $700,000, down from $900,000 last year.

Is that a trend that should continue, or how should we model that?

It is down quite a bit, Matt.

I think it averages about $67,000 to $69,000 per opening this year.

Last year I think it was more in the $85,000 range.

Most of that, about two-thirds of that, or so, is rent, and 90% of the rent is straightline, non-cash preopening rent.

It is an accounting calculation that we make, and we charge that at preopening, but it doesn't cost us anything, so that will vary depending on where we are opening.

As we open up more in areas like New York City, Boston, and Philadelphia, generally the preopening costs are going to increase.

This year it just happened the mix of what we opened up didn't have significant preopening rent.

So, we think going forward, that we think that will probably stay, hopefully closer to that lower level, but keep in mind, our cash preopening costs are generally about $25,000 to $30,000.

That's preopening costs like marketing, it's training, it's training evolved into labor that we pay for, as well as the food that we cook, and we will give away for free just as part of a training and the marketing approach.

That generally stays constant in the $25,000 to $30,000.

When you see it fluctuating from $67,000 or $69,000 up to $85,000 and back and forth, all of that is due to this preopening non-cash rent calculation.

Okay, that's helpful.

And then looking at the labor line, in the switch you made from using team leaders versus area managers, can you quantify the benefit that that's given you on the cost line?

To quantify exactly what team leaders are doing for us versus area managers?

Just trying to figure out exactly where the cost savings -- how much that saves you in terms of labor expense.

I guess I don't know exactly how to quantify it.

I can tell you, area managers, if you look at six years ago or so, they only managed 5.4 stores each, and as these restaurateurs are leveraged and as we use the restaurateurs to mentor a whole bunch of additional restaurants, our team leaders can oversee a great deal of extra stores, so now we are at almost 13 restaurants per area manager/team leader.

Right now there are still area managers and there are team leaders, but as a class they are managing 13 stores each.

So obviously there is a G&A benefit, I am not sure exactly if we can quantify it.

Jack, do you know?

No.

I think what you have to look at Matt, is, everything we do is to run the business in a very disciplined way.

You have seen us improve our G&A as a percent of revenue every single year since we went public, even before we went public, I would say that this contributes to that disciplined way of running the business.

But if you think about this only from a cost standpoint, that is really way too narrow.

The biggest benefit we get by moving towards team leaders is, team leaders develop people, they develop restaurateurs.

Those restaurants run better, so if we didn't save a dime, we would do it.

We would hire team leaders and we would reward them, because they are better at developing restaurateurs.

That is frankly the bigger benefit, much bigger than the cost savings.

Okay, makes sense.

Last question about the marketing expense.

You are going to add some overall expense for the full year next year, but how about the quarterly trend?

Will it be much more in the second quarter when you launch the program, then stay at a constant level?

How should we model the quarterly fluctuations in the marketing as a percentage of revenue?

That is hard to predict.

I think it is reasonable to expect that it will ramp up in the second quarter when we launch, stay up in the third quarter and probably stay up in the fourth quarter.

We are being very flexible, remaining very flexible in terms of what we commit to and how much we will invest and how many markets and the like.

So, we want to leave ourselves room to move that up and down as the year unfolds, and as we figure out what we love and what we want to tweak.

All I can tell you at this point we expect it to be overall for the year in the 1.75% range, it should ramp up in the second quarter for sure, but other than that, I would rather not say what we think it might be quarter to quarter.

And then just to clarify, for the fourth quarter, was it about 1.3% of sales?

About 1.2% in the fourth quarter, but remember, that was up from the prior year, we were under 1%.

So it was actually higher than the prior year, but less than what we spent overall for the year.

Thank you very much.

Our next question comes from Greg Ruedy from Stephens.

Hi.

Yes, thanks.

I was wondering if you have been able to slice the occupancy rates at retail centers that will have the MO versus your existing boxes, meaning, are there more dark spaces where you are going in with the A model, and what is the opportunity to force to negotiate landlords to invest in those A model centers?

There are certainly a lot more dark spaces around maybe than before, but we are still looking for very high quality real estate, with even these tier two locations.

Our real estate strategy hasn't changed a great deal with regard to how we look at these sites.

We are looking for very high quality sites as we always have.

We have found that, of course, we are able to negotiate better lease rates and have better occupancy costs at the A model locations, and frankly, that's what makes them more attractive than they otherwise would be.

In regard to our normal locations, non-A model locations, the competition for those locations, especially given that there are so few new developments coming out of the ground, has remained very sturdy.

We haven't actually seen occupancy costs in those locations come down much at all.

These tier two locations that we are targeting for A models, typically we are looking for smaller sites, a little bit smaller in terms of square footage, and given some of our new efficiencies that Steve mentioned in the kitchen and the dining room, and the way we design and build these restaurants, we are very comfortable building them in smaller sites.

And in fact find that that is a really great way to run our restaurants.

That takes something out of the occupancy cost, and also something out of the development cost that allows us to run these with such superior returns.

Thanks.

Thanks, Greg.

Our next question comes from Joe Buckley from Bank of America.

Thank you.

Question again on the margins.

Jack, you mentioned nothing hitting the margins that was not sustainable in 2009, but the price increase was pretty large.

Are you looking at lower food cost in 2010 to kind of give you the confidence that the margins can be sustained without pricing?

Well, Joe, when we talk about largely sustainable, we are talking at more of a strategic level.

I want to clarify that.

It is not that they will for sure sustain, and they may not sustain, quarter to quarter.

But to the extend food inflation creeps in, we have pricing power.

We have as much, if not more pricing power than our competitors.

In fact, John Glass helped us prove that.

We always felt that we had been saying that, but he did a report a few months ago and compared our price and competitors, and saw that there was pricing power in our restaurants.

We feel like to the extent that food inflation does creep in, and by the way, right now the outlook looks pretty tame.

It looks like inflation will be relatively modest, if there is much inflation, at all.

But when it creeps in, we think we have as much, if not more ability to raise prices, so that makes it sustainable.

If we felt like we had no pricing power, and we felt like inflation was going to creep in and we had to just hold the line, we wouldn't be able to sit here and tell you that we had largely sustainable margins, so that is how we think about it, Joe.

My question is actually the other way, are food costs running down year-over-year as you enter 2010?

We do see a number of things that are down, but we see some things that are up.

It looks like avocados will get a break this year, because last year was the third year after California had a freeze, and believe it or not, we had three years worth of supply pressure and pricing pressures on avocados.

Barring any problems with weather or pests or something like that, it looks like avocados, we might get a break on.

Meats, look pretty good right now, but I'm telling you, those industries want to raise prices, to the extent that there is any demand that shows up in the economy, there will probably be inflation there.

Cheese is a little bit more expensive, but things like rice and soy and some of our produce is a little lower.

When we look at it all, Joe, it looks like it washes out to relatively flattish.

Yes, maybe there is an opportunity to tip down a little bit here or there, but and we also want to invest in Food With Integrity.

We want to move towards pasture-raised.

We want to increase the naturally-raised barbacoa, we want to increase our local programs.

There is always things we are going to do to strategically invest, as well.

Overall, we look at relatively tame investment, we look at we've got pricing power.

We think we can sustain those margins.

I wouldn't bet that the food cost is going to go down further without a price increase.

I wouldn't have bet on a margin increase, if that is what you are saying.

Okay.

Last question.

You mentioned a loyalty program.

Is that part of the new marketing effort, and could you elaborate a little bit on what that might look like?

We are not ready to talk about specifics of the loyalty program.

Yes, it is part of the new overall marketing strategy, and I think a good way to think about this loyalty program is that it will leverage our customers, in that we will engage them in a way that they will learn more about the details of Food With Integrity and be more inclined to share those details with other people, to help spread the word.

That is all part of the loyalty program.

It is not a simple buy 10, get the 11th free kind of a thing.

It is a much more engaging program.

It has different levels of participation based on the strength of the customer and how often they use it and things like this.

But we are not really ready to -- all the details have not yet been flushed out yet, but that is something that is in the works right now.

It is very exciting.

Okay.

Thank you.

We will now go to Bart Glenn from DA Davidson.

Hi.

Thank you.

I had a follow-up to Joe's question regarding food cost.

When we think about relatively moderate inflation, should we be viewing Q4 as the baseline, or should we think about that as kind of where food costs come in for the entire year?

Right now I would look at maybe 4Q with, we might bump up a little bit.

There is some things that might bump up a little bit.

I don't think we will -- based on our outlook, I don't think we will bounce up as high as the overall for the year.

The overall for the year was 30.7% , so I hope we will be closer to the 30.1% that we were for the

Okay.

Thank you.

Thank you.

Our next question comes from Robert Derrington from Morgan Keegan.

Thank you.

Steve, it has always seemed like a terrific opportunity for your brand to try and share the message of your Food With Integrity, but one that a lot of consumers didn't always appreciate.

As you tested the marketing around your business, were you able to bring in more non-users, or were you able to increase the frequency of your existing users?

Well, I don't know that we measured it -- that we broke it down like that.

But I can say that this new marketing campaign will talk more about Food With Integrity in a way that we haven't done before.

And sort of some anecdotal stuff that we have seen lately, especially after the Oprah show, we have been getting lots of comments both in store and on the website, that this idea of Food With Integrity is very important to people.

We have seen a lot of people who have not eaten at Chipotle before.

So, I think it is going to go to both.

I think it's going to help bring in new people, and I think it's going to strengthen the bond with existing customers who didn't necessarily know that Food With Integrity was part of the Chipotle program.

It certainly seems like a huge opportunity for the brand, if in fact, you can convince more folks of the quality of what you serve.

We absolutely agree, and we want to be very careful that we deliver this message in a way that is relevant to folks.

One last question, if I may.

Jack, on the restricted stock expense, can you give us some kind of color on where it shook out for 2009 and the direction for 2010?

For 2009, it was right around $15 million.

And I don't know how much it will go up, because our comp committee is yet to set that.

They will be meeting in the coming weeks to go ahead and set that.

Just looking at a similar grant with a much higher stock price, and even if the grant is reduced, because of the cost of the grant, from an accounting standpoint is higher, you are adding in a layer of grant this year.

The grant we are taking off from 2007 is a very small piece that you are taking off.

It is going to be higher, for sure.

I hesitate to say a specific number.

What I can tell you, though, is we did take into account what it could be, and that along with the $3 million cost of our conference in the third quarter, we still think that we can hold our G&A as a percent of sales flat next year.

Your team has certainly earned it.

Thank you very much.

We will now go to Steve West from Stifel Nicolaus.

As you think about London opening in May, in the second quarter, can you talk about maybe some lessons learned from the Toronto store, and how those will maybe effect your direction and how you open London and maybe Paris and follow on stores.

Do you foresee any earnings impact, any material impact to the second quarter as a result of that?

I think the lessons go well beyond Toronto.

I think the approach we are using, we are going to open up London and Europe with the lessons that we have learned over the last 17 years.

And, so, I think what is really exciting is that we are going in with our new trade dress, our improved trade dress, we are going in with our new philosophy about smaller, super efficient kitchens.

We are going in with a philosophy that we are going to be using sustainable building materials and low energy consumption appliances.

We are going to go in with a team that has been, that comes out of the restaurateur program.

These are high energy, empowered folks who came up through the system.

They are going to be hiring crews who will be the future leaders of our European expansion.

So everything we have learned from the last 17 years, we are going to open up a really good Chipotle.

Additionally, there is great availability of sustainably-raised raw ingredients.

And we have been working for the last year or so finding great growers of really, really, top notch food.

I would say you are going to get a top notch experience from the very beginning, and we are really excited to see these stores open in Europe.

And Steve, just on the impact, you won't see any impact.

We are not adding infrastructure.

We did not add it in Canada, we are not going to add it in London.

The idea of putting an empowered restaurateur-type person into open up the first restaurant and then start hiring future leaders by hiring great crew, you don't need to hire these layers and layers of people to oversee that.

It won't be the typical venture into international where you are bleeding money for a long time because you have infrastructure and you have to grow rapidly to cover that infrastructure.

We are really adding virtually no infrastructure, and it has worked exceptionally well in Canada, to the point where within the first few months we are actually net profitable up in Canada.

Okay.

Great.

One last question.

As you start to roll out the new menu boards with the children's menu and some of the other things going on there, any you've seen maybe an incremental impact to the test markets.

Is that incremental impact, if you were to see that for the national roll out, is that in your flat guidance, or would there maybe be upside to that number if you see the same results?

Well, at this point, the kid's menu, it really isn't part of our guidance in the sense that we haven't seen a measurable increase in comp sales from our kid's menu.

Sort of anecdotally, we have noticed that in some of the restaurants where we sell the most kid's meals, do have a slightly better comp than those restaurants that sell fewer kid's meals.

And also on the comments we get from our customers about the ease of use, and they're likelihood to come to our restaurants more, we are very bullish that it is going to be a positive for us, but we have been running this test for a little while and there is not an obvious comp benefit.

We have not baked that into our guidance, but except insofar as we have a number of markets that have already been serving the kid's meal for a while.

Okay.

Thanks.

Our next question comes from Thomas Forte from Telsey Advisory Group.

Great.

Thank you very much.

I had two questions.

One was, can you talk about -- this is also on some menu innovations you are testing, where you stand today with soup as far as the potential to roll that out on a broader basis, how the breakfast test is going in Dulles.

And then also, can you explain if you go to 100% barbacoa, naturally-raised, what does that mean for your total beef percentage that is naturally raised at the end of 2010.

And when you increase the Food With Integrity on the milk and cheese-related products, should we anticipate that you will also increase prices as you have with the naturally-raised beef, chicken and pork?

Jack, do you want to tackle the end questions first?

Yes.

On the barbacoa, we are at about 60% or in the low 60% right now for beef, and that includes both steak and barbacoa.

We serve a lot more steak than barbacoa.

When we get up to 100%, we will be probably in the 70% to 75% range of all of our beef will be naturally-raised, in that kind of ballpark.

In terms of increasing the price on the pasture-raised dairy, it is really too early to tell.

Right now, 30% of all of our dairy is already pasture-raised.

It is not segregated like some of our meats.

It is actually co-mingled, such that 30% of our natural supply is pasture-raised.

The issue really is, there are a lot of these farmers who are doing things right out there.

There are a lot of farmers who are raising their cows the way we would like to see them raised, and providing the milk we would like to have.

There is a lot of issues though in bringing that milk into our restaurants, whether it be distribution, or just the difficulty of going into one farm, picking up milk, skipping the next three, going to the next one, picking up milk and skipping the next two.

So it is difficult right now to say what the pricing on that is going to be.

Some farmers will tell you that the pricing of them to raise the cows sort of the natural way is actually as or more efficient than not.

Other farmers will tell you there is a premium associated with that.

So it's really too hard to say at this point what the pricing to us is going to be of going over to pasture-raised dairy.

When we went over to RBGH free sour cream and cheese, we did not raise prices, even though we felt that that was a very significant milestone for Chipotle.

The reason that we didn't raise prices is that it cost us more but not much more.

We don't use Food With Integrity as an excuse to raise prices, we only raise prices with regard to Food With Integrity when it is necessary to maintain margin.

If it is possible, and we are hopeful that it will be, to go over to 100% pasture-raised dairy in a way that is not significantly more expensive, then we would try to pass on that benefit to our customer and remain accessible.

You have to remember, a key part of our Food With Integrity strategy is to make this great quality food and these great quality raw ingredients accessible to everyone possible.

That is why you see, as Jack mentioned, that we have so much pricing power, and as John Glass' report said we were 10% to 15%, I am sorry, 5% to 10% priced under our competitors according to his study, and that's even though they don't have Food With Integrity.

We already know we could be priced higher and that we have the power to do that, and we haven't done it for the very important reason that we want to remain accessible.

Long story short, we may raise prices when we go over to 100% pasture-raised dairy, but it's too early to tell, and we will do our very best not to.

And in terms of the soup, if we were to roll that out, I think we see that it should be a seasonal item.

During the very cold months, it would probably be something that would be attractive to customers.

When it is warmer, we do not sell much.

I think it is pretty obvious why.

On breakfast, again, in the very, very, early stages, too early to tell, Dulles is just starting to ramp up its sales with the opening of the train there in the new wing of the airport, so we are going to get a lot more information in the coming months on that.

Great.

Thank you very much.

And that is all the time we have for questions at this time.

I would like to turn the conference back over to our presenters for any additional or closing remarks.

Thank you, very much, everyone.

We look forward to speaking with you in April.

Thanks, everyone.

Thank you.

This concludes today's presentation.

Thank you for your participation.