奇波雷墨西哥燒烤 (CMG) 2010 Q1 法說會逐字稿

Good afternoon, everyone.

Welcome to the Chipotle first quarter 2010 earnings conference call.

(Operator instructions) After the speaker remarks there will be a question and answer session.

I would now like to introduce Chipotle's Investor Relations Director, Kate Giha.

Please go ahead.

Thanks so much.

Hello, everyone, and welcome to our call today.

By now you should have access to our earnings announcement released this afternoon for our first quarter 2010.

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

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

These forward-looking statements will include discussion of our international expansion plans and A Model restaurant strategy, as well as projections of comparable restaurant sales trends, the number of restaurants we intend to open, expected trends in various costs in our business, and other statements of our expectations and plans.

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

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

We refer you to the risk factors in our annual report, on form 10-K for 2009, as updated in our subsequent 10-Q for discussion of these risks.

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

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

For the second quarter, it will begin June 1, and continue until our second quarter release in July.

On the call with us today are Monty Moran, Co-Chief Executive Officer, and Jack Hartung, Chief Financial Officer.

Steve Ells, our founder, Chairman, and Co-Chief Executive officer, is traveling out of the country and couldn't be with us today, so I'll turn the call right to Monty.

Thanks, Kate.

Steve asked me to pass along a few things and his absence, so I'll start with that.

Our performance during the first quarter is something that all of us at Chipotle should be proud of.

But more importantly, we are proud that during the toughest economic times our entire company remained focused on serving the best food made from the finest ingredients we can find and providing extraordinary service to each customer who visits Chipotle.

And now as the economy appears to be improving, those efforts are beginning to pay off, with more customers visiting Chipotle more often.

And because our restaurant managers and crew are the strongest they have ever been, we are confident each additional visit will be a terrific experience for our customers.

Steve has focused a lot of his attention on our first European restaurant which is on track to open in London next month.

He personally selected the restaurateurs who will move to London and introduce the Chipotle brand there.

He also has been active in seeking and finding great local ingredients and is delighted to report the food he has cooked with these ingredients is delicious.

Steve has used London as an opportunity to take a fresh look at many of the things we do in our restaurants including design.

We are opening in London with a great site and a compelling new design and we have already started the process of hiring and training a team of top performers.

So, Steve is excited and optimistic about the opening and we are confident that this is the first step in what well eventually become a successful European growth opportunity for Chipotle.

Steve has been working with Mark Crumpacker, our Chief Marketing Officer, on our new ad campaign called Straight Talk, which was launched this month.

The new campaign speaks more directly about our food and our commitment finding more sustainable sources for all of the ingredients we use, but does it in a way that isn't too serious or preachy.

It is true to our brand and personality, while addressing a subject we believe in and we think our customers are becoming more curious about.

These ads are now running in markets around the country in print, outdoor, radio and online.

We think this new campaign is the start of a deeper more compelling message to our customers about what we do at Chipotle to serve the best tasting, most responsible food we can.

We continue to believe that the more our customers know about where the food we serve comes from, the more appreciative and loyal they will be to Chipotle.

Shifting gears a bit, those of you who have listened to us a lot have probably picked up on the fact that we work hard to focus on the few things that we think are the most important to our business.

One of these major areas of focus is on building a team and culture of top performers.

It's for that reason that you have heard me talk on nearly every earnings call about this high performing people culture we are building.

Of course, it's far more difficult to measure and articulate the progress we have made with our culture each quarter than it is, for example, to report on our costs, our margins, or our earnings growth.

But it is clear this culture and our top performing restaurant teams are a major factor in driving sales growth, strong margins and earnings growth.

Our strategy of hiring only top performers and developing them into effective leaders while maintaining the discipline to remove low performers has had a dramatic impact.

We are preparing and cooking better tasting food, providing better customer service, and generating better financial results.

Our elite managers, the restaurateurs, remain the central element of this high-performing culture.

During the first quarter, we interviewed over 30 excellent managers and from them selected 20 new restaurateurs, bringing the total number of restaurateurs to 163.

Many of these 163 restaurateur are mentoring more than one restaurant, such that over 300 restaurants, or about a third of our current restaurants, are now being led by this elite group.

And because of the prestige associated with the restaurateur position, all of our managers are working to get there.

And since they all know that the way to achieve that role is to run an amazing restaurant experience and to create a team of high performing crew, the influence of the program is literally affecting all of our nearly 1000 restaurants.

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 creates the foundation of our company for the coming years, as we want all of our future leaders to come from the crew ranks.

It is also how we plan to build our culture from the ground up as we enter markets in Europe.

It's incredibly satisfying for us to see what a high performing and power team of restaurant managers and crews 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.

To further demonstrate our commitment to developing our managers from within and to give them additional tools to develop their crews to become future leaders, we are going to hold our second biannual all managers conference this summer.

This conference will focus on such things as what makes a restaurateur, so all our managers know exactly what is expected of them to join this elite group.

It will also demonstrate the importance of our people culture and how our teams of high performers are so important to advancing our food culture.

And our business model enables us to do all of these extraordinary things.

We believe that helping our managers better understand how all of these pieces fit together will help them continue to understand the importance of their role and how that contributes to our overall vision of changing the way people think about and eat fast food.

So, of course we are pleased with our performance, but it is even more pleasing to know that it is our special people culture and our teams of top performers that are helping us produce these results.

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

That we have anxious and excited future leaders that are ready to run each new restaurant as it opens and that this special people culture is still growing and providing us with the leadership that we'll need to keep pace with our growth.

While our people culture and our ability to develop managers from within is a key factor in our ability to grow, so is our ability to find great sites for our restaurants and to find efficiencies in the way that we build them.

Our A Model strategy is designed to do exactly that; supplement and improve our development results.

And while we were all very confident that the A Model strategy was the right strategy, we are even more pleased to report that it is working.

Through the first quarter we opened five A Model restaurants with average development costs well below $700,000 and much lower than our overall average development costs which were about $850,000 last year.

While these restaurants have only been open a short time, we are very encouraged by their initial sales which, despite opening with lower development costs and lower operating costs, are on par with traditional new restaurant openings.

Remember, an A Model is a fully functioning restaurant with the same menu and service model, so our customers won't notice the difference between an A Model restaurant and any other Chipotle.

These restaurants tend to be a little smaller and the design is a little simpler.

And the investment costs, occupancy costs and operating costs are lower than the traditional Chipotle, but the (inaudible) and the customer experience remain unmistakably Chipotle.

This year, we expect that 25% of our new openings will be A Model restaurants with all of those being in proven markets.

Limiting A Model restaurants to proven markets this year allows us to refine the design and operations with no risk.

Ultimately, we will also build A Models in new and developing markets as well and their lower costs will allow us to generate higher returns at current volumes and enable us to grow more aggressively in those markets.

Our new A Model strategy gives us another reason to feel very optimistic about our future.

And having a culture which continues to attract and retain top performers gives us the comfort that these new restaurants will provide the best customer experience possible.

We are confident 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 of changing the way people think about fast food and in increasing shareholder value.

And we know that remaining focused on these few key drivers of your business is the key to our continued success.

I will now turn the call over to Jack.

Thanks, Monty.

We're extremely pleased with our results for the first quarter and we're encouraged to see that signs of consumer confidence and consumer spending, in general, are improving over a tough consumer environment over the last couple of years.

Our restaurant managers and crew work very hard to treasure each customer that visited Chipotle during this tough environment and those efforts are paying off as new and existing customers visited Chipotle more often so far this year.

While 2010 is off to a good start, we remain cautiously optimistic about the remainder of 2010 as unemployment remains high and consumer confidence is not yet back to pre-recession levels.

As we entered the recession, we remained committed to our vision of changing the way people think about and eat fast food and strengthening our people culture.

As the economy begins to improve, we are more committed than ever to follow this same course.

While the effects of the economy caused some companies to stray from their strategies, we continued to invest in better ingredients, continued to invest in and advance our people culture, continued to invest in bringing the Chipotle experience to more people by opening profitable new restaurants, and we did all this while strengthening our business model.

Revenue for the first quarter increased 15.6% to $409.7 million.

Revenue growth for the quarter was driven primarily by new restaurants, along with a comp sales increase of 4.3%.

The comp was driven mainly by increased traffic as we have not had any menu price increase for over a year now.

Based on the improved traffic trends, we are raising our comp guidance from flat to an expected comp increase of mid single digits for the full year.

Diluted EPS for the quarter was $1.19, up 53% from last year.

Restaurant level margins were 26.1% for the quarter, up 260 basis points from last year.

The efficiencies from comp restaurant sales growth and continued labor efficiencies drove the margin expansion.

As we discussed in the last call, we believe our industry-leading margins are largely sustainable in 2010, though they will fluctuate due to factors such as the timing of expenses, such as ad spending, as well as food inflation.

Food costs for the quarter decreased 80 basis points from last year to 30.2%.

The decrease was mainly driven by lower costs for rice, avocados, and cheese.

We expect food costs to increase slightly during the year, primarily in the second half, due to modest commodity inflation enabled by increased consumer demand.

Labor improved 100 basis points for the quarter, driven mainly by continued efficiencies in our labor-scheduling matrix which was fully implemented in the second quarter of last year.

These gains were partially offset by wage rate increases.

For the rest of 2010 we expect little or no labor leverages.

We fully (inaudible) efficiencies gained from the labor-scheduling matrix started in the second quarter of last year and as wage inflation creeps in.

For the quarter, our operating costs were historically and artificially low for us.

They decreased 80 basis points from last year to 10.7%, fueled by lower promotional and insurance expenses and overall cost containment initiatives.

But we spent only 1.1% of revenue on marketing, while we expect to spend around 1.8% for the full year.

So as a result, we expect to deleverage this line during the rest of the year as we invest in on you new marketing campaign.

G&A decreased 30 basis points from last year to 6.4% of sales.

The decrease was the result of the comp sales growth partially offset by higher stock-based compensation.

We anticipate no overall G&A leverage in 2010 as we hold our second bi-annual all manager conference in the third quarter which will add about $3 million to G&A, combined with a $6.5 million increase in our stock comp expense to about $22 million for the full year in 2010.

We opened 20 new restaurants in the quarter, for a total of 976 restaurants at quarter end.

Our new restaurants continued to hold up well, opening with sales in the $1.350 million to $1.4 million range.

We expect to open 120 to 130 new restaurants in 2010, with about 25% expected to be A Models.

We still anticipate our 2010 development costs will be around $800,000, with the A Model investment expected to be under $700,000.

So, with our margins and the comp up, the investment down, and opening sales holding up well, we' are a re better positioned than ever to add to shareholder value as we open new restaurants.

As a reminder, we began a $100 million share repurchase in November, 2009, and through April 16, we have repurchased nearly $30 million worth of common stock at an average price of just under $100.

So, thanks for your time today.

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

Operator, please open the line.

(Operator instructions).

We'll hear first from Jeffrey Omohundro with Wells Fargo Securities.

Thank you.

I wonder if you could update us on store productivity initiatives, particularly those around throughput at some of your busier markets?

You had shared with us in the past some initiatives around handhelds and such.

I'm just curious if you would update us on the progress on throughput?

Thank you.

Yes, Jeff, on throughput, to be real blunt, we sort of took our eye off this ball a little bit over the last couple of years.

What happened first, of course, is as we went into the recession, our throughput numbers fell off a little bit and we sort of expected that that was appropriate that they should fall off, since our transactions were lower than they were before, and especially during the peak lunch hours since that was driven more by the business customer that comes during lunch.

So, those numbers fell off a little bit.

You know, as we have looked at it over the last six months or so, basically what we have decided is that they fell off a little more than they should have, though.

And so we have been talking to our teams in the field and our regional directors and we all realize that this is something that we need to continue to put our focus back on.

Over the last couple of years, we have done a great job in scheduling better and making sure we have the right numbers of people working at the right times.

But, there is a lot of additional focus that we are now bringing back to the basic elements of throughput, which are having all of our people in their place at the peak hours, making sure that we are not doing food prep, and other tasks that can be accomplished before the peak hours during those peak hours, but instead, that we have all hands on deck for the peak hour.

So, that is one thing we are working on.

Another thing is, we are wanting to make sure that we have the proper deployment and having the exact right people in the right places during the busiest times of day.

When I say that we have taken our eye off the ball, our throughput is not way off.

Right now, our throughput is about four transactions off per peak hour of where it was in 2007 when we were sort of at our best during the busiest times at lunch during the week.

But we take that pretty seriously.

Because in most of our restaurants at the peak hour of lunch there is an opportunity to continue to speed up our service and by doing that, give better customer service, which we believe will add somewhat to our overall comp.

Because we do have some people walking way from the back of our lines again, especially as we get toward our busier time of year.

So, it is a huge area of increased focus right now and I think it is exactly the right time to return our focus to that important initiative which, beyond helping us financially, is also one of the key elements of good customer service at Chipotle and something that really sets us apart from our competitors.

Thank you, and congrats on the strong quarter.

Thanks very much, Jeff.

Our next question comes from John Glass with Morgan Stanley.

Hi, thanks.

Jack, I think in the last call you said your January was off to an okay start, but then, February -- there was a lot of weather and traffic -- I think you'd indicated went negative or something to that effect.

So, can you just trace the progress of comps this quarter, given how strong you ended up on the quarter?

And if you are willing to talk about April, that would be helpful as well.

Yes, John, we did see our transactions turn positive at the end of last year and continued into early January.

Weather did interrupt the trend in early February.

But, we did start to see -- at the time of our call in February -- we did start to see some homage and helping at the end of January and into February, but that momentum was interrupted pretty suddenly by the weather.

After the call, once the weather subsided, and we return to normal weather, we were pleased to see that the momentum continued.

After the call, once the weather subsided we returned to normal weather we were pleased to see the momentum continued.

So, if you didn't have the weather, I would say we saw underlying momentum begin in late January/early February, picked up again in late February, continued into March, and then are holding those levels into April.

So, the momentum underlying the weather, which was certainly choppy, at the time, allows us to say -- to increase our comp guidance for the year to the mid single digits.

You know, we are cautious with that, John, because this is kind of a newfound trend that we are seeing, not just in our business, but with the consumer in general.

We are cautious because unemployment is still high, and consumer confidence, while higher than a year ago, isn't quite where it was a couple of years ago, but we are really pleased with the trend, we love the momentum, and while we won't say what the number is, so far into April, what we saw in March did continue into April.

And so we are pleased about that.

Would you be willing to say what weather hurt you during the quarter?

You know, I think it washed out to not be much of a net impact, John.

What happened, was, once the weather subsided, we saw some nice strength and then it leveled off from that.

That is what we have seen at Chipotle.

When we have a snow day in a market, we lose a day or we lose a lot of sales in that day.

When the weather clears up, we actually overperform for a day or a couple of days.

It is almost as if people that weren't able to visit Chipotle while the weather was bad kind of make up for that in some way when the weather improves.

I would say when it nets -- it nets to something overall for the whole of the quarter to be not overly material is our take on it.

And then, finally, is the type of commodity inflation that you expect in the back half of the year, is that material enough to cause you to rethink pricing?

Or is that manageable in the context of your current traffic?

In other words, are you going to take pricing or need to take pricing in the back half on or can you get by without it?

I think the food inflation that we're seeing, John, seems manageable based on what we know today.

We don't anticipate taking any kind of specific pricing, certainly not related to the inflation that we see.

We're still thinking food inflation will be somewhere in the low single digit range and that would be in the second half of the year.

We do have some plans to try to roll some additional food of integrity in certain markets, but even those -- we'll probably do that with either no or very modest price increases.

So, I would expect for the year not to see any benefit from menu price increases for us.

Now, having said that, if things changed, if food inflation changes, we certainly have the ability to, but I think we'll be patient before we rush into a menu price increase if we start to see food inflation.

Great.

Thank you very much.

Thanks, John.

Next we'll hear from David Tarantino with Robert W.

Baird.

Hi, good afternoon and congratulations on a great quarter.

Hey, David.

Thanks.

Thank you.

I have a question about your development outlook.

And given that you think you are seeing signs that the economy's improving, and you are seeing excellent returns on the A Model strategy, are you thinking now that you might look at accelerating the unit growth?

As you look out into 2011?

Well, yes, David, we have always said we will grow as fast as we can find great sites and as fast as we can grow great teams in order to run those locations.

Right now in terms of the development outlook, a couple of years ago, the vast majority, something like 70%, of our new restaurants were in new development.

You know, when you look at last year, or even two years ago, that began to fall off.

Last year it fell off a great deal as many fewer developments were coming out of the ground.

So, last year, it was even fewer.

And now it is probably only a third of our new sites that are new developments.

I just recently spoke with our chief development officer about this exact issue.

Are they seeing any additional pickup in the amount of new developments?

And the answer is, not yet.

And even when we do begin to see that some of these developments are underway, obviously there is a pretty substantial lead time, probably a year or so, before those begin to materialize.

That being said, we have talked a lot about our A Model strategy and the fact that that strategy tends to go more into the Tier 2 location and into existing real estate, not as often in new developments, although sometimes there are new developments.

And the A Model strategy, we are all feeling very good about it right now, very bullish about it as a way to help us supplement some of the number of locations that we may have lost due to fewer new developments coming out of the ground.

So, we are obviously going to keep our eyes open and really work hard to find as many good locations as we can in 2011 and beyond.

And that work's underway now.

So we'll hope to have some good news on that front, but it is too early to say.

Later this year, probably after the third quarter release, we will talk to you a little bit about what our plans are for unit growth in 2011.

Sounds good.

I guess just a quick follow-up on that.

Is there anything from a human resources or staffing perspective that would give you pause in accelerating the growth rate?

Or is it just a matter of finding the right real estate?

Well, you know, right now, we do not believe that the human resources issue is a limiting factor.

Our teams are stronger than ever.

I will say that we are -- our ratios on the mid management level are -- we have about 12 stores per area manager or team leader.

Whereas five years ago, that was six stores per area manager and team leader.

It was never our intention to increase that ratio, although we did predict it would increase as we got a team of all high performers in those mid management positions.

The restaurateur growth has been steady.

The restaurateurs that we have are steadily taking on additional stores as they become -- or two or three or four -- or what we call apprentice team leaders -- and we are starting to see more people move toward those positions where they are overseeing more restaurants.

Those moves, David, are really what give us the confidence that we are going to be able to oversee as many restaurants as we can build, so long as we continue to produce restaurateurs at the rate that our field teams are telling me.

They predict we will be able to continue to grow to add additional restaurateurs.

So, this restaurateur program really is the foundation for how we are going to gain confidence that if we are able to accelerate our unit growth that we'll be able to run them properly.

At this point we do not see that as a limiting factor.

Makes sense, thank you.

Next question from Nicole Miller with Piper Jaffray.

Good afternoon, and great quarter.

Thanks, Nicole.

Talk to us a little bit about what you are seeing competition, direct or indirect, within just the (inaudible) convenience segment and where are you getting this traffic from?

You know, the great question, Nicole.

Because it seems like, just in reading retail reports, you know, apparel reports and some of the larger retailers and looking at restaurants, it seems like almost all the news in the last month or two has been positive.

So, it looks like the consumer is out spending again.

It looks like consumer confidence, from all the different resources we have seen, consumers are more confident today.

Dramatically more confident today than they are, especially one year ago.

So it seems like people are out just spending more money.

So, we kind of feel like we did the best we could while consumers were more timid about spending money.

Making sure they got a great experience every time they visited Chipotle.

That is what we talked about with our restaurant teams all the time -- is that a consumer is making a very important decision to keep Chipotle as part of their budget when they are spending when times are tough and we feel like that is paying off.

I don't know if we are doing maybe better than average or about average, but generally, consumers are spending.

And our experience has been over time, when more customers, new customers or existing customers, come to Chipotle more often and if we do a great job serving great tasting food in a great environment with great with great throughput and great customer service, that tends to lead to even more comps and that is why we have had years of very strong comps until it was interrupted by this environment.

So, in short, generally, the consumer environment seems to be improving and we are taking our fair share of those extra dollars.

Got you.

And then Monty, I know it's just going to be one store here in London in May, but could you just talk to us a little bit about the sourcing and then you said the design is different -- how?

And then, how big is a team?

Do you have to have a regional manager yet in or just a GM?

Who is that team and how does that work?

Yes.

The way we are going to open in London, Nicole, is very, very unusual.

Although for us it will be consistent with the way we opened in Toronto.

As you recall, we opened in Toronto a couple years ago and we did that without adding any infrastructure at all.

To be specific, we do not have a single employee working in Canada who is not a restaurant employee.

And that restaurant has been run the entire time by a restaurateur, and he has built a fantastic team and when all of us have gone up to see the operations in Canada, they've been fantastic.

In London, we are going to proceed in much the same way, with a restaurateur opening the restaurant, although there are actually going to be a couple or actually three restaurateur-level employees going over to London to open that restaurant, all of whom will work in the store for some time, but also, all of whom will participate in helping with the sourcing, the hiring, the training -- all of that.

So, it is a little bit more of a broad team over there.

But everyone going to London will be a store level employee.

There will be absolutely no "corporate infrastructure." So, that is very unusual the way we are going to open there.

But, given how we opened in Toronto, we are confident that is exactly the right way to do thing.

To go into London, build a very strong team and use that team to expand in Europe should London prove to be successful and should we be able to find additional locations that we are interested in.

And also, we have mentioned in a call or two ago that Germany and France are sort of on our longer term radar screen.

We are interested in learning more about proceeding in those countries, and that's another reason why we are sending a little bit more talent over to London initially.

Because one or more of those people would be available to go help initiate a new restaurant operation in Germany or France.

In terms of sourcing, our teams have been going over to London for quite sometime.

Steve has spent a lot of time going over to London and actually visiting a number of different suppliers, and distributors, and the news that has come back -- and I have not been part of those trips to suppliers over there -- but the news that's come back is that Steve has told me the food he finds over there is wonderful food.

In fact, he thinks it is going to be easier to find more "food with integrity" in the UK than it is here in the states because it is such a focus in Europe, generally.

You know, for instance, here we tout the fact we have rBGH-free cheese and sour cream.

In Europe there really is no alternative because rBGH, is not something that is acceptable in the dairy supply or rBGH is not used on animal that are used to produce dairy.

So, that is one example, but there is a higher level of awareness about hormones and antibiotics, about local sourcing, about organics and all of that in Europe.

So, we are excited that we think the sourcing is going to be really is going to be advantageous to us over there.

Another point, though, with regard to sourcing is that we are going to be cooking everything from scratch in that restaurant.

Steve has spent a lot of time with the team over there, making sure we can cook everything from scratch.

And so, therefore, we do not need to deal with commissaries at all in Europe initially, which means we are going to be able to buy even from very small suppliers and it gives us a great deal of flexibility to go exactly where we want to find exactly the right ingredients to open Europe in a very entrepreneurial way, but in a way that is also very forward on food with integrity.

You mentioned the design.

The design in London, again, Steve approached that as an opportunity to do something new.

Although it is not going to be -- if you went over there and saw the new design it is going to be very consistent with what our new Chipotles look like, and there is a few of those now in the United States, particularly a couple in New York City, that Steve has been personally involved with.

In picking that design, Steve worked with an architect in England, and kind of approached it from a very new -- took a very new look at that and some of those ideas actually came back to the states and became part of what our new design will be here.

So, it is pretty consistent with what our new design in the United States will look like.

Thank you.

You bet.

Thank you, Nicole.

Our next question will come from Jill Buckley with Bank of America Merrill Lynch.

Thank you.

A couple of questions.

On the marketing, Jack, I think you mentioned the full year will be 1.8%.

I wanted to verify that will be the full year spend?

Or will that be kind of the spend for the next three quarters?

And with respect to the marketing, how broad will it be?

What percent of the store base might it cover?

And how many markets will you be doing radio in?

All right, Joe.

Right now the marketing is rolling out in basically 30 major markets.

There are some of those markets, about half of those, where it will be a particularly robust sort of integrated campaign and those markets are the ones where we typically have the greatest density and where it makes the most sense -- where our advertising dollar goes the furthest.

You know, I think Jack mentioned in his statement that our marketing for the quarter came in at 1.1%.

Obviously that was artificially low and the reason it was, was that we were continuing develop our new marketing campaign and of course that has just rolled out.

Too early to tell you what its affects are, but it's pretty clear that we expect our marketing budget to drift upwards substantially so that it will average out sort of to 1.75% for the year.

And given the fact that the first quarter was 1.1% , obviously that means it will be ahead of those numbers going forward.

Most of the marketing so far is radio, outdoor, and billboards and so forth.

The radio did just start playing.

And so too early to tell what the effect of that is.

And we'll look forward to telling you more about that next quarter.

But the marketing is generally designed to be to talk a lot about food with integrity, but it is going to be different than it has been in the past.

Because in the past we have been left direct with those messages in an effort to be sort of irreverent, fun and not very preachy.

We are still trying not to be preachy, but we are going to make the messages much more clear.

Essentially what we are trying to do is raise the awareness of the public about food with integrity, but do so by talking also about the thing they are most concerned about, which is taste.

I know Steve talked in the last call about this concept -- or this moniker for our marketing plan which was, "tastes good, is good." The point of that is that the we want to create a tight relationship in our customers' minds, between the very high-quality ingredients we are using and how careful we are in sourcing our ingredients, and taste.

So we are trying to link those things in the customer's mind.

So, in essence what we are doing is talking about all the things that are important to us like sustainability, environmental stewardship, animal welfare, healthfulness, but doing all that in a context which makes it clear that our priority and the result is great taste.

So we hope that that will be effective, we'll learn a lot from this, and hopefully, we'll begin to create a greater -- still greater -- volume with our customers as they realize all the things we are doing to change the way Americans think about, and hopefully the world thinks about and eats,

Thank you, could you also give us an update on the kids' menu?

And if you have any new or different thoughts about exploring breakfast?

The kids' menu and breakfast.

Right now, with regard to kids' menu, during the last call I told you that that would roll out by the end of the year.

We are still on track to do that.

Right now, the kids' menu is rolled out in Wisconsin, Denver, Sacramento, Phoenix, Tucson, Utah, most of Texas -- Austin, Houston, and Dallas -- and also in Boston.

We plan on rolling it out to the rest of the country the next big tranche of restaurants that will adopt the kids menu will take place on or about June 1.

And the reason it takes a little bit of time to do that is that it is very important to train our teams in the field as to how to prepare the kids' meal, how to talk about the kids' meal, and to make sure that we are from an operational standpoint, excellent at executing the strategy.

So it doesn't otherwise negatively impact the operation.

In terms of the effect of the kids' meal, the kids' meal was during its initial weeks, about 2% to 3% of our transactions in the markets where we are -- that we are in now.

But recently, it's trended up more toward 3% to 4% of transactions, without any particular marketing strategy dedicated to it.

So, we are pleased to see that our customers seem to be appreciating it, enjoying it, and using it more often.

It is also a nice thing, because our kids' meals do carry with them a much higher ticket average.

I guess probably something like 70% or 80% higher than our average ticket otherwise.

You had another question.

I don't want to forget what it was.

It was on breakfast, but with the kids menu, do you think some of that business is incremental?

Can you tell what part of it is incremental?

You know, Joe, that is really, really tricky to see right now.

We have looked at it carefully and we just can't be sure that we can attribute any particular comp increase to the kids' meal.

You know, the stuff we hear anecdotally from our customers and through our managers would indicate that our customers are very pleased we have this option.

They feel much more comfortable ordering.

It makes them feel much more welcome to bring families.

So we do think over time this will be a positive thing for us, but I can't tell you that we can attribute a certain amount of comp growth to it at this point.

With regard to breakfast, Joe, we are still running breakfast in our Dulles Airport location.

We really don't have a goal of rolling that out anytime soon.

We continue to learn from what we are doing in Dulles and we are just going to watch that for awhile.

As you know, we had to do that at Dulles.

Or I should say we didn't really have to serve breakfast, but we had to serve food at 7;00 a.m., so we thought it was a nice time to go ahead and proceed with offering something a little different more in the line of a traditional breakfast with eggs and potatoes and chorizo and so forth.

So, we are pleased with how it is working in Dulles.

Our customers seem to really enjoy it and you know we are getting a steady and decent flow of business at breakfast.

So we do think it is a possibility that in the future it could be a strategy for us.

But at this point, we have a lot of other things to focus on.

You know, with our current domestic and now international efforts.

Okay.

Thank you.

Thank you.

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

Hello.

Hi, Sharon.

Hi.

Actually it is Tonya in for Sharon.

I just had a quick question.

We realize it is early, but what is your read on the restaurant contribution margin differential between the A Model and the traditional locations?

Like 50 basis points?

100 basis points?

Could you just give us an idea?

Well, it is really early, so I don't think we could specifically say what the restaurant level margin difference would be.

I can tell you, if you are talking about a comparable volume, like right now they have opened up at really similar or the same volume as our traditional restaurants have opened.

If they continue at that, if you compare an A Model restaurant to a traditional non-A Model restaurant at the same volume, A Model will be higher for sure.

Because it has lower occupancy costs.

It's also got lower operating costs.

How much lower?

Too early to tell, at this point.

The other thing about A Model is what A Model allows us to do is, right now we are only opening up in proven markets.

But in the future, probably sometime next year, we'll also begin to open these up in some new and developing markets as well.

And what is attractive about that is, new and developing markets have historically opened up at lower volumes.

They have opened up at about $1 million to about $1.1 million.

And we don't like the margins that we see with our traditional restaurants in these new and developing markets and so we don't open very many restaurants at those sales levels.

With A Model, we do expect margins in -- even at those lower volumes -- that maybe aren't as high as our 26% or mid 20% margins, but somewhere maybe in the 20% range at lower volumes.

The high teens or 20% range, which, based on the much lower investment, we can generate a very attractive return in those.

And so, of the either way, the A Model at either lower volumes is going to generate higher margin than we have gotten in those low volumes in new and developing markets in the past.

And in our proven markets where we are opening up at similar sales volumes, we do expect higher margins in A Model, but too early to say exactly what that differential might be.

Okay.

Thank you.

Thank you.

Our next question will come from Matt DiFrisco with Oppenheimer.

Thank you.

Just looking at the opening schedule left -- the 100 to 110, Monty, I think you said in one of the responses to the last couple of questions back, that the environment still remains -- I guess you need the pipeline a little longer on this.

How do we stand as far as the development of that?

Is that going to be even throughout the next three quarters?

Or is it going to be somewhat like last year back-end weighted?

And I just want to know, can you tell us where the 25% of the A Model in your existing markets, where primarily they will be going in?

Yes, well, we have said we are going to open 120 to 130 this year.

Obviously, I've have now opened 120 of those.

The weighting this year will be heavily toward the third and fourth quarter, the back half of the year, in terms of when we open our restaurants.

The A Models are going to be opening up throughout that time, with about probably four or so opening next quarter, and then about a dozen in the third quarter, and maybe eight in the fourth quarter, sort of range.

And so, those will be again strewn sort of throughout the year with the rest of the openings.

What markets would those A's be going into?

Well, they are going into our proven markets.

So our proven markets are the ones where we have been conducting business for a long time and where we have got, where we are trying to get as many site as we can.

And of course most of our markets are proven markets and most of our development is in proven markets.

But those are markets -- Denver and DC, and Dulles, Houston, Chicago, Phoenix, and we are focusing on those markets just to reduce the risk of -- as we open these, we want to open them with a greater chance of success going after Tier 2 locations.

Obviously, we are meeting with a great deal of success now and it gives us a lot more of a bullish outlook on how how these might contribute in the future in developing and you are markets.

Okay.

And Jack, just last -- on the marketing expense when I think the question was -- the 1.8 you confirmed is for the full year is where you are going to work your way towards as a percent of sales.

Is that evenly, -- I didn't get if it was clear or not that that was evenly going to be expense now for the next three quarters as well?

Or did Q2 also have a couple of weeks where you really didn't jack it up yet?

No, we are going to step it up for sure starting the second quarter.

We can't commit it will be even through the last three quarters, Matt.

I think if it was even, it would be roughly around 2% or so.

But we want to remain flexible.

We are going to talk to our customers.

We are going to do customer research, find out which of these ads really connect.

We might move some dollars around, we might accelerate some dollars, we might defer some dollars.

So we want to stay very flexible on that.

I think if you were going to just plug something in, I think if you assume it is relatively even through the last three quarters, I think that is kind of fair and as the quarters unfold, we'll tell you more about it.

But, generally we need to spend an average of about 2% for the rest of the year and we'll spend probably in that ballpark for each of the last three quarters.

Okay.

Thank you very much.

Thanks, Matt.

(Operator instructions) We'll hear next from Greg Ruedy with Stephens.

Thanks, good afternoon.

In term of the first quarter results, can you talk to average check if the consumer is getting more confident?

Are you seeing drink and attach rates lift and how much of that is baked into your new guidance of mid single digit same store sales?

Thanks, Greg.

Check was stable.

If anything, it was slightly up, a few pennies up.

I wouldn't -- nothing material to report on that.

The single biggest thing that drove the check to be up a little bit was the group size is a little bigger.

Intruding into that is the fact we have our fax and our online sales had grown as well.

So, there is more group sales that are driving this.

And our fax and online sales, those are generally the biggest checks that we have.

That is a group of people in an office building that are going to get together and order, fax in, or through online or even through an I-phone, they are going to send their order in and those are typically somewhere around 80% to 100% average higher check.

There is more of that.

More people are buying food, ordering food, in more of that business kind of meeting setting.

So, check is up just a little bit -- a few pennies, I would say -- and it is driven by more of the group size than anything else.

Right, that is helpful.

Switching to the advertising -- I think a year ago you rolled out the new menu tests and part of the emphasis there was to educate the guests that they can tailor the experience, maybe order a la carte.

Is any of the new advertising expenditure going to be directed toward that education factor, or is it still really going to be needed to be generated by the restaurateurs and the frontline employees?

Really, Greg, it is going to be the latter -- by our restaurateurs and restaurant in employees.

We did that menu test in Denver and, in fact, it is still going on.

Where there are more variety and a la carte and single tacos and all that.

You know, that test, there are aspects of it we really liked and one of the things falling out of that is the kids' meal is a success.

Single tacos is something that has been very successful.

But, our trying to organize the items in different ways in order to stimulate the customer to make different choices, people, when we interviewed them, really liked that and they were appreciative of it.

And they felt like we were taking care of him and so forth, but the reality is, they ordered exactly the same stuff they have always ordered, and continued to order entrees and not really pick from the a la carte menu.

So, that part of the menu will not be something we will be rolling out nationally.

And we are going to be counting mostly on our restaurateurs and our store-level employees to be communicating with our guests to letting them know the kinds of variety that they can have in the restaurant.

It is very tricky to accomplish on a menu to teach those lessons, but we are going to continue to do it at the store level for sure.

All right.

Thanks.

You bet.

Thank you.

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

Yes, on the commodity side, can you guys tell us what the inflation or deflation was in the first quarter?

And you mentioned things are starting to move up a bit.

What exactly are you seeing moving up?

And what do you have sort of contracted for the year?

Versus depending more on the spot markets?

Thanks.

Yes.

The inflation -- 80 basis points -- you know, Jason, that is probably a net -- some things cost a little more money.

Many things cost less money.

But when you net it all together, that is probably about a 2.5% inflation, effective inflation, in the first quarter.

We have just a few very small items contracted, like rice.

You know, and these are items that are contracted at least through three quarters.

That would include rice, it would include soy oil, it would include corn through three quarters, and we have locked in our pricing for the tortillas for the full year.

And that's it.

And typically we're not able to lock in very much of our ingredients.

The other thing that we have historically locked in has been cheese.

Cheese we have not locked in.

We have been paying at the spot market and one of the things we are doing with cheese is we are trying to move our supply to a more pasture raised area.

So, we are moving toward different costs and different farmers that are supplying the milk to make the cheese and sour cream and so, for that reason, we decided not to lock in.

And we also felt like the spot market was frankly, more attractive.

So that led us to continue to work off the spot market as well.

And so the first quarter you said inflation of 2.5%?

Or deflation?

Deflation.

Sorry.

Deflation?

Okay.

Yes.

Sorry.

We'll move next to Paul Westra with Cowen & Company.

Great.

Good afternoon, everyone.

Hey, Paul.

Just a quick question, you know, just to give us an idea of how broad-based the comps and recovery has been.

Not just geographically.

I'm actually also curious now about new versus kind of more mature markets.

And more precisely, if you can talk a little bit about those classes opening up during the down turn, maybe in '07/'08 that didn't quite open up as much.

Are you seeing, maybe, the ramp that never happened was delayed and is occurring now?

Yes, Paul.

First of all, geographically, the comp is very broad-based.

We saw a change in trend, really across the whole country.

And I would say the only spot that may be lagging a bit, but it is picking up nicely as well, is Texas.

Texas entered the recession a little later.

Their unemployment seemed to surge a little later than others, but even in Texas we're seeing a nice comp range, so it is very, very broad-based across the country.

It is also returning largely to -- in terms of layering of opening -- it is largely returning to the comp trends that we saw before the recession.

Meaning our newest restaurants are comping very healthy.

And even our oldest markets are still positive.

So when we look at the oldest, most mature markets, they are slightly positive.

You look at the newest restaurants, and the newest markets, and they are comping at really, really attractive comps.

In fact, some of these markets we have called developing for quite awhile, their comps look really attractive to the point where we are thinking they may be promoted from developing to proven maybe sooner than what we had once thought based on the surge in sales.

So, it is very broad-based.

It is very healthy across geography and across the layers of openings.

Okay.

And then pricing in mid single digit comp assumes zero pricing changes --

That's right.

Our comp guidance assumes no incremental menu price increasing.

Okay.

I guess the most important question is when you two guys are going to get on Oprah.

When we get what?

Get on Oprah Winfrey.

Oh again, you mean?

Did you see the first time we were on?

Yes.

That was a big impact.

Yes, you know the best thing about that, Paul, we had a lot of people visiting our website and a lot of people visiting our restaurants that were curious about where their food comes there.

So, Oprah brought this curiosity to mainstream America and that is wonderful.

That is something you can't do in advertising.

But she has such credibility, and she's got such a large audience that she brought this curiosity to people and people brought that curiosity to our restaurant.

And our managers are really well equipped to talk about where our food comes from.

So that was a neat little opportunity for Chipotle and Steve.

So, if she invites Steve or any of us again, yeah we are going to hurry up, get on a plane and go see her.

,

It was really nice to see -- I mean, Steve got a chance to get to know Michael [Paulen] much better during that time, too, and obviously Michael was very impressed with Steve and Steve's vision for changing the way the world thinks about and eat food.

And, obviously, his endorsement as Steve being one of the pioneers that is going to change food on that show was something that we felt was a pretty nice achievement, a nice moment for us.

Okay, congratulations on a great quarter.

Talk to you later.

Thanks a lot.

We'll hear next from Brian Elliott with Raymond James.

I think the quarter could have been better, but to

Bryan should visited more often.

No, I'm obviously kidding and all my questions have been asked and I'm too stupid to remember what the get out of the queue button is, so I'll pass it back to you.

Thanks for your honesty, Bryan.

That is all the time we have for questions.

I'll turn the conference back to our speakers for additional or closing remarks.

Thanks so much for joining us.

We look forward to speaking with you next quarter.