奇波雷墨西哥燒烤 (CMG) 2010 Q3 法說會逐字稿

Good afternoon and welcome to the Chipotle Mexican Grill third quarter 2010 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded today.

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

Please go ahead.

Thanks, Tara.

Hello everyone and welcome to our call today.

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

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

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

These forward-looking statements will include projection of the number of restaurants we intend to open, restaurant development costs, comp restaurant sales increase and food cost trends as well as other statements of our expectations and plans.

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

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

We refer you to the risk factors in our annual report on Form 10-K as updated in our subsequent 20-Qs for a discussion of these risks.

I want to remind everyone that we have adopted a self-imposed quiet period restricting communication with investors during this period.

This quiet is on the first day of the last month of the first quarter and continued to the next conference call.

For the fourth quarter, it will begin September 1 and go until February.

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

And with that I'll turn the call over to Steve.

Thank you, Kate.

Our performance continues to be driven by our focus on doing just a few things but doing them better than anybody else.

We're building a food culture that allows us to serve great-tasting food made from sustainably raised ingredients typically found only in high-end restaurants and high-end grocery stores.

We're also creating a people culture that attracts and empowers only high-performing employees, which results in creating an extraordinary dining experience for our customers and allows us to develop our future leaders from our existing restaurant crew.

These things are at the center of our mission to change the way people think about and eat fast food.

As we approach the end of the local growing season in much of the country, we're pleased to report that we have exceeded our own goals.

While earlier this year we estimated that we would purchase about five million pounds of local produce during the year, we've actually purchased about 8.2 million pounds, far exceeding our goal for the year.

Local produce is just one part of our commitment to serve the best food we can, made from ingredients raised with respect for local family farmers, their land, their workers and livestock.

Buying local produce contributes to the great taste of the food we serve, which keeps customers coming back.

During the quarter we also made progress rebuilding our supply of naturally-raised chickens.

Earlier this year, all of our chicken was naturally-raised.

Unfortunately, due to the continued sales growth, we reached a point where we could buy only enough naturally-raised chicken for about 80% of our restaurants.

We've made strides in finding additional supply and expect to be able to supply naturally-raised chicken to 85% of our restaurants in the fourth quarter.

And we hope to be back to 100% naturally-raised chicken during the first half of 2011.

Food with integrity is an important journey and we'll always be looking to improve where our food comes from and how it is raised.

I feel good about the progress we've made over the years and about our ongoing commitment to sourcing sustainably-raised ingredients.

But we know we can and will do even better, and our customers will become more loyal to Chipotle as they learn more about where their food comes from.

Our marketing approach is designed to help our customers discover more about where food comes from through fun yet informative advertising events, as well as through increased emphasis on our public relations.

We've spoken on previous calls about making food with integrity a more prominent part of our advertising and to align more of our marketing around this important component of our business.

Our research shows that we are increasing our customers' awareness of our commitment to food with integrity and its effects on the taste of our food.

Most recently, we have redesigned our annual Boo-rito Halloween promotion so that it provides a better platform to educate our customers.

In the past, Boo-rito has been a promotion that encourages our customers to dress as a Chipotle burrito on Halloween and we would reward them with a free burrito.

We still believe that this is a fun promotion, but feel that the time is right to redesign it to better educate customers about food and our food philosophy.

This year we're inviting customers to come dressed as a horrifying processed food product for Halloween and offering them a burrito for $2.

We'll donate all of the proceeds, up to $1 million, to Jamie Oliver's Food Revolution, a program that educates and inspires people around the country to eat fresh, unprocessed foods in schools, at home, in their community and in restaurants.

This partnership with Jamie Oliver is mutually beneficial, giving a stronger voice to Chipotle and given our commitment to food with integrity, but also extending Jamie's voice to help his Food Revolution reach new people.

Another important development is occuring with the design of our restaurants, which I have always said should complement the dining experience and say something about the food we serve.

Our original design has served us well over the past 17 years and about 1,000 restaurants.

But as our food and our people culture have evolved, our restaurant design has stayed largely the same as the very first restaurant I opened 17 years ago.

Until now.

Earlier this year, I talked about a new restaurant design I was working on with an outside architect.

We were early in the process then and we had many elements of the new design in just a few restaurants, but I was excited about the possibilities.

We've continued to refine the new design, which uses more environmentally-friendly materials, includes a smaller kitchen with more efficient equipment and incorporates a more thoughtful use of design elements in a less-cluttered manner.

All of this results in an even better dining experience for our customers.

I'm pleased to report that we now have 26 restaurants with the new design and all of the new restaurants, including model As, are being designed with the new approach.

Based upon the early results so far, our customers seem to love the new design.

Our new dining room lighting package uses 40% less energy than our old one, and changes in kitchen equipment allow us to use a new exhaust system which uses 20% less energy.

We expect the new design, along with our model A strategy, will contribute to our ability to further lower our new restaurant investment in 2011.

So, this new design seems to be an early success in every way so far.

Continuing our focus on just -- continuing to focus on just a few things and doing them better than anyone else is allowing us to grow our business, open new restaurants, reach new customers and develop greater loyalty among our existing customers.

Collectively, these things contribute to strong performance for our shareholders.

I'll now turn the call over to Monty.

Thanks, Steve.

It's been two months since our all-manager conference in Las Vegas, which was our opportunity to spend time with the leaders who create the special culture in our restaurants.

Again, it is this culture that is the foundation for the excellent financial results that we are reporting this quarter.

I can still feel the energy and excitement that our managers brought to that conference and I feel it every time I visit our restaurants.

I spent most of the last two months visiting restaurants throughout the country and sitting down with our managers and crew.

I can tell you that our people culture is the strongest it has ever been and I can feel the momentum is growing even stronger.

This becomes obvious when I talk to crew members, who describe their managers not as a boss, but as a mentor and a leader.

It's also obvious when customers come up to me in our restaurants feeling compelled to tell me a heart-warming story about how the restaurant team served them or made them feel special when they needed it the most.

These customers literally describe our employees as a second family and describe Chipotle as a second home.

It just isn't what you'd expect to hear when visiting a restaurant, let alone a fast food restaurant.

So it doesn't surprise me that the genuine connection that our restaurant teams are making with our customers is leading to increased customer loyalty and a return to double-digit comps in the third quarter.

I'm very proud of this culture we're building, where managers are evolving into leaders and where our top-performing crew are excited and confident about the bright future that they have with Chipotle.

This strong and growing culture not only drives the financial results we're seeing today, it also allows us to grow with confidence, knowing that we have a bench of strong future leaders.

It means that we don't have to resort to franchising and can grow with only Company-owned restaurants, both in the US and internationally.

This means our future leaders can count on the opportunities being there when they are ready.

And it also means we can keep the financial rewards from what we are building and reinvest those in Chipotle to enhance shareholder value and continue on our mission to change the way people think about and eat fast food.

Today, more than 90% of our restaurant managers are promoted from crew, which means our top performers experience constant reminders about the potential that they have with Chipotle as they see the people around them becoming leaders.

The cornerstone of our culture remains our restaurateur program, which rewards our most elite managers who are best at developing crew members into future leaders.

Right now we have 171 restauranteurs.

With many of them overseeing more than one restaurant, this group of extraordinary leaders is now directly overseeing more than a third of our restaurants.

But more importantly, they serve as an example to all of our 25,000 employees, helping to develop top performers into powerful leaders for the Company.

We also continue to advance our real estate strategy to better prepare us for future growth.

We are doing this by aggressively seeking out excellent new restaurant locations in our proven, developing and new markets, as well as by continuing to add model A locations in our proven markets.

During the quarter, we opened 22 new restaurants, bringing the total number of new restaurants this year to 67.

Five of these openings were A-models, bringing the total number of A-models to 15.

At the close of the third quarter, we had a total of 1,023 restaurants and we still expect to reach our goal by opening between 120 and 130 total new restaurants for the 2010 calendar year.

We are very happy with the performance of our new restaurant openings this is year.

We continue to open these restaurants at or above the high end of the $1.35 million to $1.4 million range we have spoken about, and out A-model locations continue to open with volumes only slightly below our traditional restaurant openings.

In 2011, we expect to escalate our rate of restaurant openings, in part because of our move to include A-model locations in the mix, and in part due to our real estate managers finding success in their efforts to aggressively seek potential sites in existing developments.

As you know, new developments provided the majority of our sites just a few years ago, but the recession has significantly curtailed those, which has caused us to intensify our efforts to find the very best existing developments that we can find.

These efforts have paid off and we are pleased to tell you that we plan to increase the amount of new restaurant openings in 2011 to 135 to 145 new restaurants, up from the 120 to 130 restaurants this year.

We expect about 30% of those new restaurants next year will be A-models.

Recall once again that our A-model locations offer lower development, operating and occupancy costs, which allow us to operate in areas with lower densities but still generate superior returns.

Some of next year's A-model openings will be built in developing markets and we'll have occupancy costs which are a little higher, as in those markets we expect to open these restaurants in tier one trade areas.

We believe that our continued focus on developing our food culture, as Steve spoke of, and our people culture, along with finding improvements in how we run other elements of our business, including improvements in our marketing and our real estate strategy, will keep us positioned well for longer term growth.

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

Thanks, Monty.

We're proud of the results we achieved in the third quarter, and while the quarter provides an encouraging snapshot of our financial trends, what's more important is what's driving these results -- the strengthening of our food culture, our people culture and the business model.

These are significant competitive advantages we have worked hard over the years to create, and we'll continue to focus on strengthening these advantages even further.

We know that having empowered top performers serving great-tasting food made from high-quality, sustainably-raised ingredients will attract loyal customers to Chipotle and allow us to deliver attractive financial results.

And while our food, our people and our business model are the best they have ever been, they can and they will get even better as we continue to pursue our vision to change the way people think about and eat fast food.

Our sales for the third quarter increased 23% to $476.9 million, which is driven by opening new restaurants along with a comp increase of 11.4%.

The comp, along with continued strength with our new restaurant openings, resulted in our average restaurant bind exceeding $1.8 million for the first time.

The comp was primarily driven by increased traffic during the quarter.

The average check did increase slightly, around 1.4%, with about 0.4% of the check increase due to a small price increase from the second quarter rollout of additional naturally-raised barbacoa and steak, and 1% of the higher check is due to increased group size per check as our fax and online sales have move slightly past pre-recession levels.

For the year, sales increased 19.7% to $1.35 billion, which was again driven by new restaurant openings and a comp increase of 8.3%, and the comp increase for the year also was driven mostly by traffic.

Our comps accelerated in late July, and they held at that higher level throughout the quarter, giving us our first double-digit comp quarter since early 2008.

Comps have continued to hold up well so far in October, although we will begin to differ against tougher transaction trends in the fourth quarter of last year.

Our comp transactions turned slightly positive in the fourth quarter of 2009, while transaction comps were down about 2.5% in Q3 of 2009.

Now, based on our strong comp trends, we have updated our 2010 comp guidance from mid-to-high single-digit comps, to an expectation of high single-digit comps for the full year.

As we look to 2011, we expect comps in the low single-digit range, which assumes these trends will continue but level off each quarter as we compare against higher comp trends.

Diluted EPS for the quarter was $1.52, an increase of 40.7% from last year and $4.18 for the first nine months, an increase 41.2% from last year.

Efficiencies from our higher comps drove restaurant level margins to 27.7% for the quarter, an increase of 220 basis points.

Our margins also benefited by about 40 basis points due to an accrual adjustment to our medical insurance and an unemployment tax refund, which we do not expect to reoccur in the fourth quarter.

For the year, restaurant level margins increased 180 basis points to 26.9%.

These margins are the highest we've ever delivered and, to our knowledge, are the highest in the industry.

Food costs were 30.6% for the quarter, which is down 20 basis points from last year.

Prices for avocados, corn, rice and chicken were slightly lower in the quarter, which were partially offset by increases in barbacoa and streak due to the continued rollout of naturally-raised beef.

We continue to expect modest increases in our food costs for the fourth quarter as we continue to invest in increasing our supply of naturally-raised chicken and as prices for avocados increase, due to a Chilean freeze.

As we look to 2011, we will continue to invest in our Food with Integrity initiative, and we express inflationary pressure on many of our ingredients, especially chicken, beef, pork and avocados.

As a result, we anticipate overall food cost inflation in the low-to-mid single-digit range for 2011.

In the quarter, our labor costs decreased 70 basis points to 24.2%, and a 50 basis point decrease to 24.7% for the year.

The decrease for the quarter was a result of labor leverage driven by the comp increase, as our restaurant teams did a nice job recapturing some of the labor leverage lost in Q2 along with the 40 basis point accrual adjustment I mentioned earlier, which we don't expect to continue in the fourth quarter.

Occupancy cost increased 70 basis points in the quarter to 6.7%, and for the year occupancy costs were 7%, a 40 basis point decrease from last year.

The decrease for both the quarter and the year was mostly driven by leverage from the higher average restaurant sales.

Other operating costs were 10.9% for the quarter, a 50 basis point decline, driven by lower liability insurance, along with leverage from the comp growth.

Marketing was 1.4% for the quarter and 1.5% year-to-date, which were both flat compared to last year, and we anticipate a similar marketing expense in the fourth quarter.

However, we do expect an additional G&A charge of up to $1 million in Q4 as we execute Boo-rito 2010 and that $1 million will be donated to Jamie Oliver's foundation, as Steve discussed.

G&A was up 70 basis points to 7% for quarter and the increase was driven by the impact of the biennial all-manager conference and higher stock-based compensation.

As Monty mentioned, the conference was a huge inspiration and we look forward to another great gathering in 2012.

For the year, G&A increased 10 basis points, driven by higher stock-based comp, and the all-manager conference.

As Monty mentioned, we plan on opening between 135 and 145 restaurants in 2011, with about 30% of those being A-models.

Most of the A-models in 2011 will open in proven markets, while we'll explore opening a few A-models in new or developing markets.

For 2010, we had previously discussed our development costs being right around $800,000.

As we move to open a larger percentage of A-models and incorporate the new design elements Steve talked about into all new restaurants, we anticipate our development costs to decline in 2011 to under $800,000.

Early in the quarter, we completed our second $100 million buyback and began our third $100 million buyback.

Through today, we've repurchased almost $24 million worth of stock under the current buyback plan, at an average price of around $154 a share.

Our total buybacks of $224 million over the past two years have been at an average price of around $80 a share.

While we believe that investing in high-returning restaurants remains the best use of our cash, we will continue to opportunistically repurchase our stock to enhance shareholder value.

At this time, we'd like to open up the line for any questions you might have.

Operator, please open the line.

Thank you.

(Operator Instructions).

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

Hi, good afternoon, and congratulations on great results.

Hi, David.

Thanks.

The first question I have is on the development outlook for next year.

And I think it's nice to see the pace going higher, but was wondering if there was any thought to taking it even further than that, and if so, or if not, what the limitation to that growth rate might be?

Is it still real estate, or is it people-related or something else?

Well, yes, thanks, David.

This is Monty.

It's really -- the limitations are really both.

But generally, we've said we'll open restaurants as quickly as we can find great real estate, and run those restaurants with great managers.

In 2007, 70% of our restaurants were built in new developments.

In 2010, 70% of our new restaurants were built in existing developments, that is to say only 30% were built in new developments.

So, we've seen a giant decline in the amount of new restaurant space being built, and that we can lease, and so that's been a substantial -- it's curtailed our ability to build as many restaurants as we otherwise would have built.

That being said, we've felt that we've had a lot of success both through the A-model, which allows us to go into tier two trade areas and other sites that we had formerly not been considering.

And also we've worked very hard and our development team has done a great job in working with brokers and new brokers.

And also, our real estate managers working very hard to find a whole lot of sites, existing locations, that meet our criteria.

So, we've been able to increase the amount of sites we're going after during a time when we would otherwise have had to decrease them if we continued with the model the way it had been, of going into -- of 70% of our stores being in new developments.

So, we're pretty pleased at the ability to expand at all at this point, and we're very pleased with that.

Could we go faster?

Well, sure, if more new developments are coming out of the ground, and if we find more great sites or if we continue to be pleasantly surprised by the success of our A-model strategy even in developing markets, in addition to the proven markets where we're going full steam ahead, that would help us to add restaurants.

Also, as the economy gets better and there's more developments coming out of the ground, that will help us to add restaurants.

But right now we are finding as many high-quality real estate sites as we can find, and so I suppose that is some limiting factor for us.

In terms of the people that we need to run great restaurants, as I said during my opening remarks, we feel better about our pipeline than we've ever felt before.

That being said, there is -- this uptick in the amount of restaurants we plan to build will require a lot of new leadership, and as our restauranteurs -- the number of restauranteurs increase, and as some of our restauranteurs are becoming what we call apprentice team leaders, which allows them to oversee a lot more restaurants, we feel better and better that the leadership will be such as to be ready and be able to run great restaurants when the economic situation changes, and we're able to find even more real estate sites.

So yes, we're optimistic that we'll be able to increase that number at some point, but it's just too early to tell what that will be and when, David.

Great.

Thank you.

And one more.

On the cost outlook, Jack, you mentioned low to mid single digit type commodity inflation for next year.

Could you talk a little bit about how you're thinking about pricing, and your willingness to take it at this stage?

And maybe think more broadly about your pricing power, if you could comment on that as well.

Yes, Dave, we feel good that we have pricing power.

It's been two years now since we've raised prices in most of our markets.

We know that others have raised prices, and so we think that we have as much if not more pricing power than other restaurant companies out there.

And so we're prepared, if needed, David, to raise prices, but we're going to be patient about it.

We don't have any predetermined plans to raise prices.

I think what we'll do is watch what happens with inflation, see if the inflation, as we expect right now, if it comes into play, does it hold on, does it accelerate.

But I think we'll want to be patient, let that play out a little bit, see how the consumer responds to price increases of other competitors.

And then if need be, if it looks like inflation is indeed going to hold, if it looks like price increases are generally being accepted by consumers, then we'll be prepared to increase prices, if need be.

But I think we'll be patient, and watch things play out a little bit before we rush into it.

Great.

Thank you.

Thanks, David.

Moving on to Jeff Omohundro with Wells Fargo Securities.

Thanks.

I wonder if you could update us on menu innovation, and some of the new efforts you've been working on in terms of breadth.

Thanks.

Yes.

For the past 17 years, I think you can see that the menu has stayed largely the same.

And one of the things that allowed us to have such spectacular results is that we've been constantly working on improving the very few things that we've done.

We've also noticed that because the food tastes so great and it's relevant to people, and because people can mix and match and make many, many combinations out of our offerings, they are able to satisfy their desires, not by having new menu items, but instead by having better and better quality food year after year.

We think it's really, really important to stay focused.

That being said, we have looked at a soup.

We call it pasole, and it's a delicious soup, and that's coming back into a couple of markets on a limited basis this fall.

We're also experimenting with breakfast at our Dulles airport location.

We did that because the lease requires that we serve breakfast, and we have breakfast burritos and tacos made with scrambled eggs and chorizo and crispy potatoes.

But in the future, I would look to most of our menu innovation and development coming from better quality ingredients, sustainably-raised ingredients, food with integrity, things that people are really starting to become more concerned with these days.

And as I look around and look at all the other restaurants out there, I don't see people meeting the demand like Chipotle is in this respect.

And I think it's one of the reasons that we see such strong comp growth.

And it's something, again, that we need to stay very diligent about, and focus on just a few things and then continue to improve in this focused menu.

Thanks.

And much like last year, it looks like Q4 will be pretty heavy in terms of the pace of unit openings.

Could you give us a little update on that, and did some move from Q3 into Q4?

Thanks.

You're wondering about the pace of openings during 2010?

The Q4, the number in Q4, specifically.

Oh, okay.

Well, yes, we're still guiding towards 120 to 130 for this year, so that means it would be 53 to 63 restaurants that we would need to open in the fourth quarter in order to hit that guidance.

And we're confident we're going to hit that number.

We have many sites being built now, and everything is on course to do that.

Thank you.

Thanks, Jeff.

And from Deutsche Bank, we'll move on to Jason West.

Yes, thanks.

Just wanted to get a little more detail on the updated A-model trends.

I know you guys have a few more under your belt now, have had a little more time to look at what's going on as you open those and see how they mature.

Can you talk about what the opening volumes or new unit volumes are on those on average, versus the rest of the system, and maybe what the margins look like as well?

Yes, well the volumes in our A-model restaurants, as I mentioned during my opening remarks, are just sort of slightly below what our traditional restaurants are doing in terms of opening volume.

So, we're very, very pleased with that because obviously, when we came up with this strategy, part of the reason the strategy was appealing to us is that it was going to allow us to go into tier two trade areas where we had a lower level of confidence of achieving the very, very high sales numbers as quickly, and still derive wonderful unit economics from those markets.

So, since the volume is higher than we expected, and is almost as high as our traditional locations, and since the development costs, operating costs and occupancy costs are all substantially lower than our traditional locations, obviously it follows that the returns on those are very, very good.

And both margins and the return on investment are excellent.

Okay.

Thanks.

And then just quickly on London, if you could give us an update on sort of how that's going?

Is it progressing in line with your targets, et cetera?

I'm sorry, can you repeat that?

On the London store, just an update on how that's performing versus where your targets were internally?

Yes.

The London store is actually doing very, very well.

Our sales are strong, and we see sales building month after month in that restaurant.

I'm especially pleased, though, with the team that we've built there.

I think it's a very, very high-performing team from where our future leaders will come, as we continue to expand in the UK.

I'm very, very proud of the food that we serve there.

We've been able to source extraordinary raw ingredients, and I think are delivering an experience that is on par with some of our best restaurants in the United States.

I think it's performing well within our expectations, if not better.

And we're bullish on finding more sites, and we're actively looking for sites now in the UK, as well as Paris.

Thank you.

Moving on to Matt DiFrisco from Oppenheimer.

Thank you.

Can you give us a little bit more detail as far as the smaller prototype, when you do put that out there and you have a little bit less on the volume, almost close to the normal volume that you do off the traditional store, how does labor look?

Is that also significantly lower as absolute dollars as an expense going through that store?

Yes, it is because we typically run those restaurants with only one salaried manager.

The crew labor, though, is similar for the same volume.

So if you take an A-model location and a traditional location, and if they have a similar sales volume, the crew labor will be in the same ballpark.

It might be slightly less in the A-model because it is a smaller restaurant, and it does require a little bit less effort in terms of maintaining that restaurant.

But crew labor is at least in the same ballpark between the two.

But the big difference on the labor line is going to be, we typically are going to run the A-model with one salaried manager, not two.

And then also on the occupancy line, without too much of a representation already of that smaller store format, you've done a great job of getting even more leverage even above and beyond what your sales were.

So, it looks as though, as far as absolute dollars per operating week, you've brought that down in the last two quarters.

Is there something going on where the site locations that have opened in the last couple of quarters, have you renegotiated leases, or are you at points now where your sales volumes are so strong that -- well, I'm just trying to figure out what is in that occupancy cost number that is deflationary in the last two quarters.

Well, it's a combination.

It's mostly sales.

And so, we don't generally get sales -- we don't get leverage on the occupancy line if we have low single digit comp, like we had last year, for example.

With these kind of comps, high single digit like we had in the second quarter, and then low double digits this quarter, we do see -- typically see occupancy leverage.

You won't see the rent decline quarter-to-quarter for existing locations because of straight line rent.

The economy requires that we basically straight line rent, and so you won't see that we're actually spending less on existing sites.

New restaurants are coming in because of the A-model and because, in general, there's a little bit of softening even in our traditional new restaurants where occupancy on those are coming in a little bit more favorable.

And then [cam] is a little bit of a better story this year as well.

We had a little bit higher cam last year.

But the biggest single driver with our occupancy leverage is sales.

Sales comps will drive leverage.

No, I understand that, obviously, with the phenomenal comp that you have.

But with the cam and the lower mix, potentially, of some of these, both A and the traditional store, with rents being down, do you expect that to -- with the visibility around the stores that are going to open in the fourth quarter, and what you probably have in the first half of 2011, do you expect that trend to continue?

Well, it depends on the comp.

If we can do a low single digit comp, I would expect the leverage to continue.

If the comps level back down to low single digits, then I would expect that we'll see no leverage or maybe even deleverage like we saw last year.

Okay.

Thank you.

Okay.

Thanks, Matt.

And from Morgan Stanley, John Glass.

Hi, thanks.

I wanted to go back to the restaurant opening question, and maybe turn it around and challenge you.

In the last three years, your unit openings in the first three quarters have slowed.

Each year you've opened fewer and fewer.

And so, what gives you the confidence, or what gives you the rationale to actually accelerate new opening next year.

I understand you want to, but why can you do that if you haven't been able to in the last three years, see that kind of acceleration, at least in the first three quarters.

Well, I guess I wouldn't look at it -- we wouldn't look at it as the first three quarters.

We sort of look at that, how many great sites can we get.

Obviously, the amount of great sites we could get was challenged over the last couple of years, not during any quarter, but just as a result of the economy and as a result of developers not building buildings.

So, that was a challenge.

We answered that challenge in a few ways.

Number one is, we really took a hard look at what our best proven markets look like, and did what we could do to encourage our real estate managers and brokers to take a hard look and really find the best sites they could in those markets despite the fact that there weren't new developments.

And they've done a marvelous job of doing that, and so we have more to show because of that.

Also, the A-model strategy is working very well, so we're going to -- we estimate that about 30% of our stores next year will be A-models.

Now, those wouldn't have been there at all.

So that gives us confidence as well.

And of course, overall, the thing that gives us clear confidence is that we -- most of these deals for 2011 are deals we know about.

Deals that exist.

We have the inventory.

So, we have a high level of confidence in reaching that 135 to 145 number.

So, yes, it would be nice if it were spread evenly throughout the quarters, but unfortunately we really can't look at it that way.

When we find a great piece of real estate that's going to become a great Chipotle restaurant, and we can manage it with a dynamite manager, we're going to do it no matter which quarter we have to open it in.

And it sounds like you can find sites you need.

I guess that's my question was, you haven't been able to actually open them, and are you saying that opening them -- the pace of openings has been more about availability, or more about your man power ability, or your ability to actually open the site once you have it?

In other words, what is slowing you down?

No, it's been about availability.

Our system here, our corporate infrastructure, if you will, and our real estate and development team and our team of brokers are doing fine.

It is not maxed out.

It is not the reason why sites are fourth quarter loaded this year and last.

That's a function of availability, and a function of when the deals are coming in.

When a deal comes in, and has to go to lease and once the process starts, it takes a lot of time for that process to take place.

It's about a year.

And so, if you find one this time of year, you're going to do well to get it open at around this time of year next year.

So, it's really a function of availability.

That's helpful.

And then, your average unit volumes are now at an all-time high.

Is through-put becoming an issue again?

In other words, is that becoming a limiting factor to continuing to comp, or in the past you've talked about some initiatives to improve through-put but nothing seemed to be a silver bullet.

Is there anything new on that front?

Well, I guess what's new with through-put is that we're doing wonderfully with it again.

And what I mean by that is, in 2007 our through-put peaked, and as the economy slid a little bit through 2008 and 2009, our through-put also declined.

I think when we gave an honest look to why through-put declined in 2008 and 2009 though, it was not just the economy, although that was a significant reason.

It was also because I think that we took our eye off the ball a little bit, and we weren't doing as well as we should have, even given the state of the economy.

And so, like I mentioned a couple of quarters ago, we really started challenging our field teams coming into the busy season of the year to really keep an eye out and perform this very, very important part of our customer service, really, really well again.

And I'm pleased to report that through-put is now as good as it was in 2007, and roughly speaking, it's at an all-time high in terms of how quickly we're putting customers through our restaurants.

And that's great because that's one of the most important differentiators of Chipotle as a concept than other concepts, and so we're very, very proud of that.

However, when you mention it being a limiting factor, or are we bumping up against sort of, the best we can do, I would say absolutely not.

The very best through-put we have in the country, which is in some of our urban locations during a peak lunch hour with a business customer who knows what they want and knows how to order, we're achieving 350 transactions per hour on a fairly regular basis in some of the our fastest restaurants, and yet the average nationwide right now is 114 transactions per hour.

Well, why is it so much lower?

Well, the biggest answer is that there are a lot of restaurants that don't have a line out the door through all of lunch, and so they can't achieve those numbers.

But there are still a number of restaurants that do have a line out the door, and can achieve those sorts of numbers that aren't yet doing it.

And there are some reasons why stores are faster and not as fast, such as the type of customer, whether there are a lot of large parties, whether they're just wanting one burrito and they're hurrying out of there or whether they want to customize their order.

So, a lot of it is out of our control.

But most of it -- or a great deal of it is within our control, and we know what we need to do to get better.

And so, while there isn't really a silver bullet, there are a lot of operational skills that we know how to do and that our very good managers know how to do and that they can get better at as they continue to secure better and better crews and train their crews.

So, we think that there's a lot of room for us to improve through-put as our volumes continue to increase, and that there really isn't a limit anywhere in the near future.

Thank you.

Next we'll move on to Sharon Zackfia with William Blair.

Hi, good afternoon.

Hi, Sharon.

Jack, I'm curious if you could quantify if you choose not to take price next year, what that commodity pressure would translate into from a basis point standpoint?

Yes.

To give you an idea, if we had 3% inflation, for example, Sharon, that'd be roughly 100 basis points, 90 to 100 basis points on the food line.

Okay.

And then separately, I'm just curious, I just actually visited your location in London, and it looks fabulous, but there were some, I think, questions about the size of the offerings, and whether that might need to be tweaked.

And perhaps some other protein offerings.

And I'm just fundamentally curious, as you look at that market, and I know you're looking in France and Germany, if there might be alterations to the menu as you go forward?

Well, Sharon, could you be more specific about the offering size?

Sure.

Well, I mean, we heard you might need a smaller tortilla for the burrito, for example.

That the English thought the burrito was large.

Well, I have not heard that as an overriding or common comment.

We hear the same kinds of comments that we hear in the US.

Some people think that the offerings are too large, and some people think that the offerings are too small.

And I think that's an opportunity for us to educate the customer about the flexibility of our menu.

There isn't a one-size fits all approach at Chipotle.

I often get this question about calories in the burrito, also.

And the answer is that our burritos don't have a set number of calories.

And so it's our responsibility to educate the customer, especially in a new market like London, that the customer is in control and can dictate how much of the different ingredients he or she chooses goes into their burrito or bowl or order of tacos.

People who want a lighter meal often go with a salad with some grilled meat and a salsa, or maybe one taco or maybe two tacos.

People who want a heartier meal will get a full burrito and load it up.

So, I think, we hear comments from customers all over the country and in London, some people say the portions are too small, some too big.

And when we hear these comments a lot, we know that we can do a better job explaining the system to folks that we are very, very flexible, and they can get exactly what they want.

Not only for portion size, but also for taste.

Okay.

And then lastly, I think the marketing spend for this year as a percent of sales is a little bit lower than you initially expected.

Is that just because sales are so much higher, and you didn't have a chance to adjust the budget?

Should we expect it to be more in the 1.7% to 1.8% of sales next year again?

Sharon, that is the main reason, is that marketing puts together a budget before the year begins, and we didn't plan on the comps that we're experiencing today, and yet marketing has stayed to the original budget.

So that's the main driver of why we're spending right around 1.5%.

All right.

Great.

Thanks.

Thanks, Sharon.

And from Barclays Capital, we move on to Jeffrey Bernstein.

Hi, this is Sophia Siddiqi filling in for Jeff.

My question is related to marketing.

I'm just wondering what your thoughts are on the timing of a broader national campaign, whether it's on radio or TV or anything else?

Well, again, we are not ready, I don't think, now or -- we're really not contemplating any sort of a national TV kind of a rollout.

I think our current marketing campaign, our straight talk campaign, which is an unconventional way to show that Chipotle is an unconventional brand, is winding down.

And we've just completed our post-wave research, and our initial results of that research show that we've reached customers, and that they understand things about food with integrity more than they did before the campaign.

So, that's very, very encouraging.

So, I think we want to continue to do things like that.

Also, next year we're going to do our take on a loyalty program.

We've decided that we don't want to do a typical loyalty program, where you buy ten and get one free, but instead we want to have a program that's invitation-only.

Invitation to our very best customers.

And reward those customers by increasing their knowledge of food with integrity, and their ability to spread that word.

Again, this is a very special program that I think builds the brand in a way that's consistent with the way we serve food, which is very, very customizable.

The food with integrity message is one that's difficult, I think, for mass marketing.

And instead, we want to try to find ways to get people to talk about us, and share Chipotle's specialness word-of-mouth.

And so, this non-traditional way of looking at not only the loyalty program, but the way we talk about our marketing, I think, is something that we're more interested in than more of a typical mass marketing approach.

Thank you.

Moving on to Tom Forte with Telsey Advisory Group.

Great.

Thank you.

Congrats on a great quarter.

Thank you, Tom.

I had two questions.

One was on sales trends, and one was on your Food with Integrity program.

First on Food with Integrity, what was your percent of naturally-raised chicken in the third quarter, and I think last quarter you indicated that because it wasn't 100%, there was a benefit to food costs.

What was the similar figure for the third quarter?

Tom, we were about 80% naturally-raised chicken in both quarters.

And we haven't disclosed what the difference in food costs.

What I can tell you is, we expect it to increase to around 85% in the fourth quarter, and then hopefully get to 100% in the first half of next year.

And the guidance that I gave in terms of expecting low to mid single digit inflation next year, basically it took into account getting us to 100% naturally-raised chicken.

So, it's kind of ground into that number, but we haven't disclosed and won't disclose exactly what that premium is.

And frankly, the premium changes as well, because the naturally-raised chicken that we buy and then commodity chicken, while the prices of both will fluctuate, they don't always fluctuate together.

In fact, they often fluctuate in opposite directions.

Great.

And then on sales, is there anything in particular, day parts, really strong lunch, dinner, weekday, weekends, anything on the sales front to offer additional insights on the very robust comp?

Nothing significant.

It was really very broad-based across all parts of the day.

It was also very broad-based in terms of markets across the country.

Thank you.

Thanks, Tom.

From DA Davidson, we'll move on to Bart Glenn.

Thank you.

Yes, I was curious, in terms of the timing of store openings for next year, can you provide any additional color on that?

I can't be very specific.

I can tell you that the timing will be sort of similar to the way it was this year, and it will be fairly loaded towards the second half of the year and particularly the fourth quarter.

Thank you.

And then just one follow-up question.

In terms of the Food with Integrity campaign, it's great to hear how well that's resonating with customers.

I was just wondering, have you tried to quantify what sort of benefit you might already be seeing in terms of sales?

We don't see, Mark, we don't see anything directly attributed to Food with Integrity.

There's lots of reasons why customers come and visit our restaurants.

The first and foremost, they love the taste of our food.

They don't know that the reason their food tastes so good is largely due to Food with Integrity.

But so -- how many customers know about Food with Integrity, and how many come back because of Food with Integrity?

We don't have anything to tell us that that's a significant amount.

But because it contributes to great-tasting food, high-quality food that our customers love, certainly it is, we believe, a key reason.

Our marketing efforts are now designed to help educate, cause our customers to be more curious about where their food comes from and why it tastes so good, and we think that's going to build customer loyalty even greater than it is today.

Thank you.

And from B of A, Joe Buckley.

Thank you.

A couple of questions as well.

First, kind of the flip question on the food inflation.

I know you said 3% inflation would give you 90 to 100 basis points of pressure if you took no price.

So, is that the price you would have to take, like 90 to 100 basis points, to offset a 3% inflation rate?

No.

If you want to hold the margins, Joe, you have to take 3%.

You have to take 3% to (inaudible)?

If you want to hold food costs, I should say -- if you want to hold food cost to be the same.

Now, if you take 3%, that holds our food cost the same, and that would push a slightly higher margin.

You probably need about a 2% or so to hold your margin alone.

But typically, if we're going to try to offset inflation, inflation is 3%, we would typically -- if we're going to raise prices at all, we would look for something in the same ballpark as inflation would be, so somewhere around a 3%, and that would hold our food costs about the same.

Okay.

And if all costs kind of stayed -- well, that assumption, Jack, means that you're expecting some inflation in the other costs as well?

If everything but food stayed flat, would that still be the answer, or would it be more like a 1% increase?

Well, it would be less.

And I don't know if it would be as low as 1%.

Maybe it'd be somewhere between 1% and 2%.

But we know, Joe, that if you have 3% inflation on food, we typically have inflation on our labor line of somewhere between 2% or 2.5% as well.

So, if you have 3% on food, you're likely to have something in that ballpark across many of the other line items, and so that's why we think of it in terms of, if there's food inflation in the 3% range, if we'd consider taking a price increase, we'd probably be in the same ballpark.

Okay.

And then, given the magnitude of the late 2008 price increase, and recognizing that it was a different time, but you did run negative traffic for four quarters after that.

So, would your approach be to take price a little quicker or a little smaller increments, and maybe more frequently?

Joe, we don't have any predetermined approach.

Our preference would be to raise prices only when we have Food with Integrity news, and that's what we've done for the most part over the years.

What happened in 2008 is, we didn't happen to have new Food with Integrity news.

At the same time that food inflation was spiraling out of control, and we did find ourselves falling behind on price increases as competitors were increasing prices significantly.

And so we do feel like we did have to take a fairly sudden and a fairly significant increase.

We certainly would like to avoid that.

So now we have to balance how we do this, where we'd like to hold on to our pricing power to invest in Food with Integrity, but we're also going to carefully watch inflation, so that if inflation does seem to creep in and it's sustainable and customers seem to be absorbing it, we would like to leak out smaller price increases than do a big giant increase all at one time.

Okay.

And just in general, the higher level of store level profit margins that we've seen over the last seven quarters now, including this one, where the margins were terrific, are you thinking those margins are sustainable going forward?

Well, there is -- other than the 40 basis points I mentioned, which were non-recurring in my comments, there's nothing, Joe, that's not sustainable in our margins.

And so, if we continue to run our business in a very disciplined way, if we continue to generate comps, and comps as you know generate very attractive incremental margins, there's nothing in our margins that I can tell you is especially high right now just because of something we're seeing in 2010 and won't see in the future.

So, as long as we can continue to run the business the way we have, in a disciplined way, continue to see some comp growth, and we typically need something in kind of a mid single digit, a 4% to 5% or so range, generally with normal inflation to hold onto our margins, we have the ability to either hold onto or even grow our margins as much as anybody in the restaurant industry.

Okay.

And just one more, just on the developments -- well, maybe a couple of sub-questions as I'm thinking about this.

So, for the A-models, you have 15 open, I think you're targeting 25% of this year's total, so should we expect 15 plus A-model openings in the fourth quarter?

More or less, yes.

Maybe something more like 23% total.

Okay.

And then, when you talk about existing development versus new development, are you talking about markets or are you talking about sort of -- construction and development.

No.

We're literally talking about the difference between new construction or a remodel of an existing space.

Okay.

So the existing ones are remodels or conversions that exist --.

You got it.

Exactly right.

Thank you very much.

Thank you.

And ladies and gentlemen, our last question will come from Larry Miller of RBC.

Yes, this is Robert Sanders in for Larry.

Had a question on your low single digit to mid single digit commodity guidance for next year, and just curious if you could talk around any contracts that you may have in place.

And also, your experience with the dynamics between the naturally-raised market and the kind of standard market.

In times like this, when there is inflation across the board, do you see the naturally-raised market outpace it, just be in line, or like you alluded to earlier, go the opposite direction?

Thanks.

Yes, we've locked a few items for next year.

We've locked in our beans.

A good part of our beans for most of the year.

We've locked in corn for most of the year, and we locked in rice as well.

Those are the three things that we've locked in for most, if not all of next year.

And then in terms of naturally-raised versus commodity, they really don't necessarily move in the same direction.

The things that cause both of them to either move up or move down is -- like grain prices, for example, corn prices, if corn prices are going to increase, that's generally going to cause both naturally-raised and commodity meats to go in the same direction.

The things that cause them to move in different direction is just supply and demand.

That typically, our arrangements with our suppliers is more based on a business model, allowing their business model to work and allowing our business model to work as well.

And generally, supply imbalances generally don't have the same impact as world supplies might on the commodity market.

And sometimes there are exceptions to that, but those are generally things that cause the two to move in different directions.

So, in terms of predicting our inflation for next year, we're looking at all of the same things that you guys are, and a lot of the inflation seems to be driven by the feed costs, by the grain costs, and those things generally tell us that our meats are going to inflate as well.

Okay.

Thank you.

Okay.

Thanks, Robert.

And that is all the time that we have for questions today, ladies and gentlemen.

We thank you for your participation in today's conference.

Thanks so much.

Thanks, everyone.

Thanks, everyone.

Thanks.

And ladies and gentlemen, you may now disconnect at this time.