奇波雷墨西哥燒烤 (CMG) 2010 Q4 法說會逐字稿

Good afternoon, and welcome to the Chipotle Mexican Grill fourth-quarter 2010 earnings conference call.

All participants are now in a listen-only mode.

After the speaker's remarks there will be a question-and-answer session (Operator Instructions).

As a reminder, this conference is being recorded.

Thank you.

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

You may now begin your conference.

Thanks, Carla.

Hello everyone, and welcome to our call today.

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

These forward-looking statements will include projections of the number of restaurants we intend to open, restaurant development costs, comp restaurant sales increases, food cost trends, stock comp expense and effective tax rate as well as other statements of our expectations and plans.

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

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

We refer you to the risk factors on our Annual Report on Form 10-K, as updated, and our subsequent 10-Qs, for a discussion of these risks.

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

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

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

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

And with that, I will now turn the call over to Steve.

Thanks, Kate.

We believe that our performance continues to be driven by our focus on doing just a few things but doing them better than others.

Among the areas where we continue to focus our attention are on building a people culture that is based on recognizing, empowering and rewarding our top-performing people; and our quest to serve the best-tasting food made from ingredients from more sustainable sources and prepared using classic cooking methods.

These two elements of our business are the cornerstones of our efforts to change the way people think about and eat fast food.

Since we first started serving naturally raised meat more than a decade ago, we have made considerable progress in our effort to find better, more sustainable sources of all the ingredients that we use.

In 2010 we used more than 75 million pounds of naturally raised meat -- meat from animals that are raised in a humane way, never given antibiotics or added hormones, and fed a pure vegetarian diet with no animal byproducts.

This year we expect to use 100 million pounds of naturally raised meat.

We are also making progress on our efforts to source organically grown produce.

Right now about 40% of all the beans are organically grown, as is over 75% of our cilantro.

And we continue making progress with this as well.

This year we will also buy beans that are grown in a very special way, a way in which -- that reduces the negative impact on soil and soil erosion, helping to preserve this very precious resource.

As compared to most farming methods today, growing beans using this conservation tillage method improves soil conditions, reduces erosion and helps preserve the environment in which they are grown.

As we start to develop relationships with these farmers, we expect that about 5% of our beans will be grown using this method this year.

We believe that it is important for dairy cows to have access to pasture rather than spending much of their time in confinement as most dairy cattle do.

In the fourth quarter of 2010, 76% of our cheese was made from milk from cows that were given regular access to pasture.

While we have been using sour cream and cheese that are made with milk from cows that are not treated with synthetic growth hormone -- rGBH -- in 2011, Chipotle will be serving 100% pasture-raised cheese by year end, all of which is made from milk from cows that have daily access to pasture.

And we will also be working towards serving 100% pasture-raised sour cream as additional supply becomes available.

Since beginning our efforts to serve locally grown produce in 2007, we're making great progress here too.

In 2010, we raised the bar on our local program by buying produce from farms within 350 miles of our restaurants.

Even with this more rigorous standard, we were able to serve more than over 9 million pounds of locally grown produce in 2010, exceeding our goal of 5 million pounds and achieving a threefold increase over the prior year.

And we look to serve even more locally grown produce in 2011.

We are looking at every ingredient we use with an eye toward getting them from better, more sustainable sources.

But we're also working harder to educate our customers about why we think this is so important to us.

We believe that the more our customers understand this, the more it will deepen their trust in Chipotle.

In 2010, we realigned most of our marketing to speak to Food With Integrity and help our customers understand the decisions we make about the food we serve and the reason we make those decisions.

Our research has shown that these efforts were effective in associating Chipotle with Food With Integrity.

In particular, we saw significant numbers of people associating Chipotle with such things as trying to improve the nation's food supply, serving naturally raised meats, using ingredients from animals that are never given artificial hormones, using organic ingredients and serving ingredients from local farms.

In 2011, we will continue to focus our marketing on differentiating Chipotle based on our commitment to serving Food With Integrity.

But we will include specific programs to educate our very best customers in order to make them informed evangelists.

This year's marketing programs will include traditional advertising, including outdoor, radio and print; increased in-store communications about Food With Integrity; a loyalty program that will reward our best customers for their knowledge and understanding of Chipotle, rather than simply rewarding visits, as most loyalty programs do; increased social media programs to educate people about Food With Integrity; and our first coordinated national event based on Food With Integrity.

With the US Chipotle business healthier than ever, and the people in place to make sure that it stays that way, it allows us to consider potential new growth opportunities for the future without distracting the core business.

In 2010, we opened our first European location in London.

We also opened our second Toronto restaurant.

We've been able to open these restaurants with very little overhead and a tremendous amount of confidence because they're being operated and -- they're being opened and operated by Restaurateurs.

They are introducing the Chipotle brand in these new markets, building teams to provide the leaders that we will need to expand, developing relationships with local suppliers and providing exceptional customer service.

We have so much confidence in how we are establishing Chipotle in these markets that we're looking for additional locations.

In fact, we plan to open our first restaurant in Paris later this year, and are looking for additional locations in London as well.

We're also looking to test how the Chipotle model will work with other cuisines.

I have always believed that our model -- using sustainably raised food cooked according to classic cooking techniques in an open kitchen; served in an interactive format so that customers get what they want, not only for taste but for diet too; and all wrapped up in an environment that says something about the food -- this model can work with other kinds of cuisine as well.

And our plan to open an Asian restaurant this year is a chance to prove this theory.

And like our expansion into Canada and Europe, we will open this new restaurant with one of our Restaurateurs as we look to build this concept (technical difficulty) the same people culture that we have used at Chipotle.

We believe that our continued focus on a few things that really drive our business, combined with our efforts to test future growth opportunities, positions us well in the long run and will allow us to continue to provide exceptional value for our shareholders.

I will now turn the call over to Monty.

Thank you Steve.

2010 was a special year for us.

We're proud of the financial results we achieved for the year.

But more importantly, we're proud that we delivered these results while advancing our Food With Integrity mission, as Steve discussed, and while strengthening our people culture.

Our people culture continued to allow us to hire better people and develop these top performers to provide a terrific restaurant experience and to become our future leaders.

Nothing is more gratifying than seeing people who are fulfilled, happy and excited working at our restaurant.

And it really makes me happy that more and more of our people are feeling this way each year at Chipotle, because I know our customers will be treated to a terrific experience when our restaurant crew and managers are happy and excited about their future with us.

I never get tired of working to build a culture here which is all about recognizing and developing high performers.

It's exciting to see that as our people grow, it will dramatically improve every aspect of our business.

Each year we provide better service, cleaner restaurants, higher sales and better tasting food.

And as our business grows and improves, it allows us to build more restaurants and to provide more and more opportunities for our people.

I have said many times that we are developing the future leaders of the company from within the ranks of our crew.

While this is happening now more than ever before -- and it is very inspiring.

More and more of our leadership positions are being filled by people who started with Chipotle as crew.

So what used to be our dream is now our reality, as every day we're more high performers and roles were they have greater and greater impact on our business, and on the restaurant experience we provide our customers.

Our culture is personified best by our Restaurateurs -- our most elite managers who have demonstrated the ability to run great restaurants and to develop people within the ranks of their crew to become managers.

Steve and I promoted 72 managers to Restaurateur during the year during the year after interviewing these excellent candidates and their crews throughout the country.

As you may remember, our Restaurateurs are paid bonuses for each crew person that they develop into a general manager.

Well, when we began this program in 2006, we promoted 46 Restaurateurs and paid bonuses of just $10,000.

Five years later, 2010, we finished the year with 181 Restaurateurs and paid them bonuses for developing managers totaling nearly $1 million.

Today these Restaurateurs, along with Restaurateurs who have been promoted into mid-management positions, are overseeing more than half of our restaurants.

And because all of our managers are working hard to become Restaurateur, this program is improving the quality of all of our restaurant operations.

But our culture does not stop with our Restaurateurs.

Increasingly, we have people who started working with Chipotle as crew, and after reaching the Restaurateur position are empowered by expanding their proven leadership through multi-unit or even regional leadership positions.

Once a manager becomes a Restaurateur they may be asked to mentor an additional restaurant.

And if they're able to build a special culture in that additional restaurant, they might oversee a third and then perhaps even a fourth restaurant.

And if they can do that effectively and develop another Restaurateur in their patch of four, they are then able to become an apprentice team leader.

This is a very elite position, and we're pleased to say that while we started 2010 with not a single apprentice team leader, we now have 15 of them throughout the country with the promise of many more to come this year.

Nearly all of these apprentice team leaders come from crew.

And they are excellent at developing Restaurateurs and creating great restaurant experiences.

We have even promoted two of our former Restaurateurs, [Leslie Rotel and Saul Flores], to the very senior position of Team Director, overseeing significant numbers of restaurants and large leadership teams.

These moves are just some of the examples that show us that our strategy is paying off and that we are developing the kind of culture that will set us up for a great future, not just at the restaurant level but also at the mid-management and senior management levels as well.

All of this gives me confidence that we're developing stronger future leaders than ever before.

And it is reassuring to know that as we build our next 1000 restaurants, and as we begin to enter more locations in markets outside the US, that we have many talented emerging leaders who will be ready to provide a great Chipotle dining experience to each and every customer in every new restaurant we open.

It is also clear to me that our special people culture provides many more benefits than developing our future leaders, as critically important as that is.

Our top-performing managers allow us to own and operate our own restaurants without having to resort to franchising.

What this means is that Chipotle retains the financial rewards of running our own restaurants, which allows us to invest confidently in our future growth and also provide huge career opportunities for the top performers among our teams.

Also, our Restaurateurs and the managers who are working to become Restaurateurs run better restaurants prepare and cook better food and provide better customer service, all of which result in better customer loyalty and higher sales.

Our top performers also run more efficient businesses, including lower labor costs than most other restaurants, even though we do so much prep and cooking from scratch in our restaurants, because these ambitious top performers simply get more done with fewer resources.

And empowered top-performing managers need less supervision, which means our mid-management ratios have increased from one mid-manager, or area manager, overseeing six restaurant six years ago, before we began the Restaurateur program, to about 14 restaurants per mid-manager today.

So this has contributed to our G&A efficiencies each and every year.

While our restaurant teams have been busy hiring and developing our future leaders, our development team has been doing a great job finding great new restaurant sites for these future leaders to operate.

Our development pipeline is the strongest that it has ever been in part because of our successful A Model strategy.

We opened 36 A Models last year, all of them in proven markets, which generated sales nearly as high as our traditional openings.

But with a much lower investment cost at under $700,000, and lower occupancy and operating costs, the return potential of our A Models is much higher.

With the early success of A Model, we're pleased to be able to expect an increase in our openings from 120 to 130 the past two years to a range of 135 to 145 in 2011.

Roughly a third of our openings will be A Models in 2011.

And we will even begin to open some of these A Models in developing markets.

Though developing markets typically open with lower average volumes and build over time, the lower investment and operating cost of the A Models should produce better financial results than our traditional openings in developing markets.

As a reminder, customers visiting an A Model restaurant will not notice a difference.

They will be treated to the same dining experience and the same great service and same menu as they would enjoy in any other Chipotle.

Before turning the call over to Jack I want to briefly address some of the press coverage you may have seen recently about an immigration inspection in Minnesota.

There's not a lot to share with you about the inspection.

But what I can tell you is that despite our extensive efforts throughout the country and in Minnesota to scrutinize employees' documents and properly complete all I-9s for all new employees, we did have to remove employees from our restaurants in Minnesota because the documents they provided turned out not to be valid.

As you can imagine, this has been disruptive.

We had to hire hundreds of new employees.

And we're in the process of training these new employees to provide a great Chipotle experience to our customers in Minnesota.

We also received a similar notice of inspection for our restaurants in Virginia and Washington DC, and we are in full cooperation with ICE officials there.

This is not been an easy process for anyone involved.

But we're navigating our way through it, and we're learning as much as we can so that we can avoid this sort of disruption in the future.

I will now turn the call over to Jack.

Thanks, Monty.

We're extremely proud of the results that our restaurant teams delivered during the fourth quarter and for the entire year of 2010.

While achieving these strong results is quite an accomplishment, what is more important is that our food culture, our people culture and our business model are all the strongest they have ever been.

Our economic model has emerged from the recession with the highest average restaurant sales, the highest restaurant margins and the highest cash-on-cash returns we've ever enjoyed.

We will continue to focus on and invest in further strengthening our food culture, our people culture and our economic model as we continue toward our vision to change the way people think about and eat fast food.

Sales for the fourth quarter increased 24.5% to $482.5 million which is driven by new restaurant openings and a comp increase of 12.6%, mostly from increased traffic.

For year sales increased 20.9% to $1.84 billion, which again was driven by new restaurant openings and increased comp growth of 9.4%.

Our comps held up well throughout the fourth quarter, but have been pretty volatile so far in 2011, with extreme weather throughout much of the country.

While we believe the underlying transaction trends are healthy, we do compare against progressively tougher comps each quarter, and therefore we reiterate our guidance of low single digit comps for the full year of 2011.

Our average restaurant sales increased to $1.84 million for the 12 months ended December 31, 2010.

The strength of our comps and our new restaurants entering the base at higher levels has helped drive the increase.

Our new restaurants have historically opened between $1.350 million and $1.4 million, and most recently have been opening at or above the top end of that range.

Diluted earnings per share for the quarter was $1.47, an increase of 48.5% from prior-year.

EPS in the quarter benefited by $0.03 as a result of a non-recurring catch-up adjustment for state unemployment tax refunds and a FICA tax credit related to the Hire Act during the quarter.

EPS was $5.64 for the full-year 2010 an increase of 42.8% from the prior-year.

Efficiencies from higher comps, which were partially offset by higher food costs, drove restaurant level margins to 25.9% for the quarter, an increase of 140 basis points.

That includes the 30 basis points attributable to a nonrecurring benefit on our labor line for state unemployment tax refunds and a FICA tax credit I mentioned earlier.

For the year restaurant level margins increased 180 basis points to 26.7% largely driven by efficiencies related to the comp growth.

These margins far surpass the record-level margins we delivered in 2009, and are directly the result of our focusing on doing just a few things better than anyone else, along with top-performing managers and crew running great restaurants and running an efficient business.

Food costs were 31% during the quarter, which was up 90 basis points from last year and up 40 basis points versus the third quarter.

Prices for avocados, beef and cheese were higher in the quarter, which were partially offset by decreases in rice and corn.

Commodity inflation has continued to push our food cost higher in 2011 already.

And we expect continued inflationary pressure on many of our ingredients, especially chicken, beef and avocados, during the year.

Though we have contracted for most of our corn for our salsa for the year, reports of continuing or even worsening supply shortages of corn will only add to inflationary pressure on the meats that we serve.

Using the fourth-quarter food cost of 31% as a starting point, we anticipate additional overall food cost inflation will likely climb to the mid single digits during the year.

In addition to the growing underlying food inflation, we're in the process of sorting through the impact of recent freezes in Mexico and Florida, where our tomatoes, green peppers and tomatillos are currently grown.

The cost of these items has surged threefold as a result of severe crop loss, which, if we remain fully supplied, would increase our food cost by over 200 basis points.

Over the next few months until the Florida harvest season resumes normal production, we will evaluate the quality and quantity of tomatoes, green peppers and tomatillos available and make sure we only serve high-quality produce that our customers have come to expect from Chipotle.

And during this time, we may experience shortages or surging food costs or both.

So it's obvious that food inflation is real.

And it appears it will get worse before it gets better.

But what is not obvious is the exact timing and magnitude of inflation on the items we serve, how much is sustainable versus driven by temporary conditions such as weather; and perhaps most importantly, what is the appetite our customers have to absorb these higher costs.

While we continue to believe we have as much if not more pricing power than other restaurants, we plan to hold off on any menu pricing decisions until later in the year which will allow us to see how inflation plays out on a sustained basis and allows us to see how consumers react to price increases from other restaurants and grocers.

Labor cost decreased 90 basis points to 24.8% in the quarter and 70 basis points to 24.7% for the year.

The decrease for the quarter and the year was a result of labor leverage driven by the comp increase along with the 30 basis points in the quarter of nonrecurring benefit mentioned previously.

Occupancy costs decreased 80 basis points in the quarter to 7%.

For the year, occupancy costs were 7%, a 50 basis point decrease from the prior year.

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

Other operating costs were 11.2% for the quarter, a decrease of 70 basis points, driven by comp growth and reduced promotional expenses due to a change in how our Boorito Halloween promotion was run.

Historically all customers who came into our restaurants dressed as a burrito or really anything close to a burrito on Halloween received a free burrito.

This year, customers who came in as a horrifying processed food item received their burrito for $2.00 with the proceeds benefiting the Jamie Oliver Food Revolution.

The lower promo costs in the quarter contributed to about half of the 70 basis point benefit.

Marketing was 1.1% for the quarter, and 1.4% for the year, both of which were relatively flat compared to the prior year.

We anticipate our marketing spend will back return to historical levels, or around 1.75% of sales, during 2011.

For the year, other operating expenses were 11.1% which was 40 basis points lower than the prior year, and similar to the quarter, the decrease was driven by comp growth and a decreased promotional expense partially offset by higher credit card fees.

G&A was down 50 basis points for the quarter to 6%.

(technical difficulty) decrease was driven primarily by the higher comp growth.

Though G&A included an additional $1 million charge for the Boorito charitable contribution to Jamie Oliver's Food Revolution, it was more than offset by a reduced stock-based compensation expense related to performance shares which vested late in the third quarter.

For the year G&A was 6.5% of sales which is flat to last year.

The leverage resulting from the increased comp growth was offset by the impact of higher stock-based comp, the biannual all-manager meeting and hiring more employees.

We anticipate non-cash stock compensation to be around $40 million in 2011 which is almost $18 million higher than 2010.

Though stock options are not granted until later this month, this expected higher non-cash charge is directly attributed to the issuance of a similar number of options at a much higher stock price.

Our effective tax rate for 2010 was 38.1%.

And in 2011, estimated annual effective rate is expected to be slightly higher at 38.3%.

We plan on opening between 135 and 145 new restaurants in 2011, with about 30% being A Models.

Most of the A Models in 2011 will open in proven markets, while we will explore opening a few A Models in developing markets.

Our openings, similar to past years, will be weighed more heavily towards the second half of the year.

Our inventory is strong.

However we will likely open only about half of the restaurants in the first quarter this year compared to the first quarter of last year.

But we will catch up in the second quarter.

Our development costs came in around $795,000 for 2010, which is the lowest average development cost we've had since before we became a public company over five years ago.

The lower cost of A Models, which continue to cost under $700,000, along with our more efficient new restaurant design, combined with better negotiating leverage due to the economy, have allowed us to reduce our investment costs over the past few years.

As we continue to open A Model restaurants and incorporate the new design elements in all of our new restaurant openings, we anticipate our development costs to remain consistent or perhaps slightly below the $795,000 in 2011.

With our lower investment costs combined with higher opening sales, higher margins and a better, more efficient design, our new restaurants are the best they have ever been, in every way.

For the year, we expect total CapEx cost to be around $130 million to $135 million primarily related to new restaurants along with continued reinvestment in existing restaurants.

As a quick update on the status of our current $100 million stock repurchase, through today we've repurchased around $38 million worth of stock at an average price of about $176 per share.

During 2010, we generated cash flow from operating activities of $289 million.

We invested $113 million in capital expenditures, mostly for new restaurants.

We repurchased $126 million of our stock.

And we still were able to add $80 million to our cash reserves.

We continue to believe that investing in high-returning restaurants remains the best use of our cash.

However, we will continue to opportunistically repurchase our stock to enhance shareholder value.

Before I conclude, I want to share with you how we think about our business, and in particular our margins over both the long-term and the short term.

We tend to think about and plan our business strategies with a very long horizon, knowing we have thousands more restaurants to open in the US, not to mention our potential outside the US, and our opportunity with other restaurant concepts following the Chipotle model, as Steve discussed.

Our success so far and our success going forward is largely built on creating customer loyalty by serving great tasting food made with high-quality ingredients raised with respect for the environment and the health of our customer, prepared and served by ambitious energetic top-performing crew and managers.

And this dining experience our customers have become loyal to must be wrapped in a business model which allows us to generate attractive returns while remaining affordable or easily accessible to our customers.

And so far we've achieved a great balance of remaining affordable, generating industry-leading margins and returns, while continuing to invest higher-quality, premium-priced ingredients.

We know our approach has a potential to add significant shareholder value for a very long time.

While on the short term we face challenges to our model, including growing commodity inflation, inefficiencies related to retraining hundreds of new employees in Minnesota, as well as severe winter weather across most of the country, longer-term we believe our margins and our returns are largely sustainable.

Inflation in particular could be at least partly if not wholly offset by [immediately] raising prices.

But we have worked hard to regain the strong transaction comp momentum, and with tougher comparisons ahead of us as we progress throughout the year, we're not in a hurry to risk interrupting those trends by raising prices in what might be a fragile consumer.

In addition, while difficult to predict with certainty, we expect commodity inflation will steadily increase our food costs during each of the next two or three quarters.

So rather than strike preemptively by raising prices now, we plan to hold tight on our menu pricing until the second half of the year, both to allow our transactions to hold as strong as possible, and to allow us to fully see the timing and magnitude of sustained inflation, even though this means our margins will be pressured over the next few quarters.

Longer-term, assuming we possess the pricing power with our customers we think we do, we continue to believe our margins and returns are sustainable.

Thanks for your time today.

And at this time we would be happy to answer any questions you may have.

Operator, please open the lines.

(Operator Instructions) John Glass, Morgan Stanley.

Thanks very much.

I have two questions.

First on the labor issue in Minnesota, is there anything that would be different about the way you hire and document workers in that state versus other states?

And maybe if you can talk about why wouldn't this become a systemwide issue for you?

And are you just going to practically address that, preemptively?

And Jack, can you quantify when you talk about hiring and retraining workers, what the -- is there a way to look at it on a per-restaurant or a per-person basis, that cost?

Yes, John, with regard to labor in Minnesota -- you know, everywhere in the country we have always taken immigration compliance very seriously.

We have made significant investments of time, energy and money for many, many years.

We have a very strict policy against hiring anyone who is not authorized to work in the United States.

We have extensive training of our general managers and our HR professionals to review documents to detect forgeries and to properly complete the I-9 forms.

We have an anonymous call line.

We have a full-time layer who is Director of Compliance.

We have a guidebook that we provide to all the managers after their training -- and the training is ongoing, so that they're always updated.

So we've always taken this stuff very, very seriously.

We're certainly, based on what happened in Minnesota, going to work to make our programs even better and learn what we can from it, including implementing a paperless I-9 system to reject I-9s which are not properly completed, and use the Minnesota situation to get better.

Again, this is a new situation for us -- to find out that there were a significant number of undocumented workers in Minnesota.

And we're working with ICE and with a number of experts and professionals to make sure the disruption that occurred there is not something that takes place in the future for Chipotle.

And, John, on the labor piece, we're still working on that.

We're still training.

I can tell you there's lots of extra people in a restaurant, kind of like a new store.

It feels like we have a lot of new employees like we would in a new store.

And in most of our restaurants that means we may have as many as 20% to 30% more crew hours or more hours in total in those restaurants.

So it's pretty significant training effort going on in Minnesota itself.

Across the country, that ends up being maybe an extra 20, 30 basis points or so of extra costs.

And if we again use new stores as a guide, that is likely to level off over a couple -- a few month period.

And John, I might add, I was -- this is Steve -- I was in Minneapolis on Tuesday and Thursday of this week visiting a number of restaurants.

And while this situation has been very difficult on the team out there, I will report that they have hired a really great new team.

And as Jack says, it does feel like the feeling you would get in a new Chipotle.

And the quality of the service ramps up very quickly over the few weeks since they get together to provide what most customers are accustomed to as the typical Chipotle experience.

So I was very pleased with the hard work and the results of hiring the new teams out there.

They've done an exceptional job.

And it really shouldn't be a surprise, I guess to us, their ability to hire such high-performing new crews, because over the past few years, our culture of developing the highest performers and identifying those kinds of people who are high performers has gotten much, much better.

So I was quite pleased with the results of their very, very hard work and want to congratulate them.

If I could just ask one more.

Jack, you talked about a 31% food cost in the fourth quarter as being a starting point.

Were you inferring that you could see it go up by a couple of hundred basis points in the first half before it starts to settle in?

Or before you take pricing?

Is that what you were thinking?

Well, I don't know about -- there's a couple of things that I was talking about, John.

One, there's kind of underlying inflation that we're all seeing, we've all seen, over the last several months.

And it seems like, if anything, it is heating up not cooling down.

That feels like from the 31% that there is the likelihood that that is going to step up over the next few quarters to something in that mid-single digit kind of inflation.

And then in addition to that, we have got this weather-related, which we hope is a temporary situation, a couple month situation, where if we can remain fully supplied with tomatoes, with tomatillos and green peppers, the prices of those have tripled.

And that could add 200 basis points all by itself.

That is something that we view as something more temporary and that we hope will last for a few months and then kind of level off.

But underneath all of that, John, we do see kind of that mid-single-digit inflation on top of the 31.

And we see that kind of stepping into our food costs over the next two or three quarters.

And from a pricing standpoint, yes, we would like to see that play out.

We would like to see, does the weather effect on the items that I just mentioned, does that play out and kind of return to normal?

Does the underlying inflation on our meats -- does the impact of corn have kind of that mid-single-digit level?

And then after we get a sense for all of that, that is when we're going to take a price increase.

And it is likely in the second half of the year.

Thank you.

Michael Kelter, Goldman Sachs.

Just following on this part of the conversation, maybe you could help.

You mentioned you are locked on corn for your salsa.

But maybe you could parse out what other things have you locked or bought forward versus what floats with the market?

Michael, we're not able to lock that much.

In addition, to corn we did lock most of our beans.

We've locked our tortillas for most of the year.

We locked some of our aluminum needs for the year.

But the massive majority of what we buy, which are the meats, the avocados, we're not able to.

There's just not an ability to lock.

We have in the past decided to lock cheese.

That is something that we have been able to lock in the past.

We haven't locked that.

We have been floating with cheese as well.

So the vast majority of what we buy is subject to the spot rates.

Thanks.

And then one other thing, if your comps have been driven mainly by traffic, 10% or so traffic, I'm wondering if maybe you are running up against any capacity issues at the lunch day part?

Or if there's still some slack in the system and you'd still be able to continue at this rate for the foreseeable future?

The answer is really no.

There really aren't any constraints.

And in fact if you look at our comp this last -- in the fourth quarter, more of the comp came from lunch than it had in recent quarters before that where most of our comp was driven at lunch and dinner -- excuse me at dinner and at other times of the day.

So for the first half of 2010, in fact the first three quarters of 2010, we had a dramatic difference between the amount of comp driven at dinner and other times a day rather than at lunch.

And lunch was by far the weakest.

Dinner and other times of day still are very, very strong.

But lunch has caught up a lot.

So what that would tell us is, obviously, lunch is the most constricted busiest time of day for us, where people are expecting a very fast experience and very fast throughput.

And yet we've been able to expand the comp dramatically during the lunch hour during the fourth quarter along with those healthy comps we had in the fourth quarter.

So no capacity issue in that sense at all.

Also our throughput has during the fourth quarter of 2010 held up better than it has held up in any prior year.

In other words, throughput usually follows seasonality.

And so we're fastest during the second and third quarters and slower during the first and fourth quarters and our traffic falls off a little bit.

And this year, our throughput during the fourth quarter held up very, very nicely, so that it is about the same on average as it was during the busiest times of year, the second and third quarter, which really pleases us and shows us that our teams in the field are more and more comfortable with producing great throughput; such that I think we will see those numbers hopefully get even better as traffic picks up during the middle of 2011.

And so really, really no restriction at all.

Thank you very much guys.

David Tarantino, Robert W.

Baird.

Hi, good afternoon and congratulations on a great year (multiple speakers).

Jack, just a question on the quarter-to-date trends that you mention.

You said they've been volatile.

Can you give us a sense for maybe the magnitude of the weather impact?

Or maybe said differently, maybe the -- have comps settled in below the double-digit run rate?

Maybe if you can give us some direction on that, that would be helpful?

You know -- and David, it is really, really hard to tell.

I would describe it as a roller coaster.

Because not only are we seeing severe weather this year, you might remember at about the same time in early February, we saw severe weather last year.

And so we're seeing really wild swings market by market across the whole company.

There is nothing that tells me that the underlying trends have gotten any worse or any better, David, that's about the best that I can read from it.

What I can tell you, though, is that as we go against tougher comparisons I expect our comps to level off.

And so that is the best read we can get from it.

No weakening; no strengthening; but very, very, very volatile.

That's helpful.

And then I guess a follow-up to that.

You keep mentioning that you expect your comps to get softer as you cycle some of the tougher comparisons.

Yet you cycled a little bit tougher comparisons in the last couple of quarters in a row, and comps have gotten better each quarter.

So I am wondering what maybe is driving your thought process on why they might slow as we get out into maybe Q2 or three?

Well, the real challenge, David, is, okay, we're going up against a 4 for the first quarter but then an 8.7 in the second.

That steps up quite a bit.

And then we compare against an 11 and then a 12.

So second half of the year is a very, very tough comparison.

And so the only kind of reasonable comparison is really the first quarter.

Other than that it is a tough year.

So we're very optimistic, very happy, with the transaction momentum, happy with the way that our teams are staffing and running restaurants, happy with the customer response so far.

Everything looks good.

But we are just fresh, kind of climbing out of this recession, and so we just -- it's kind of a new pattern that we have now got to build going up against these very, very tough numbers.

And we hope we will climb above them and have -- you know, look back on it and say, with no trouble comparing to them.

But right now looking ahead a couple of quarters to 11s and 12s tells us that it is going to be pretty tough math for us.

Great.

Thank you very much.

Jason West, Deutsche Bank.

Thanks guys.

Just a quick clarification and then a couple of questions.

Jack, you mentioned the 20 to 30 basis points on the potential labor costs.

Was that just related to the Minnesota issue?

Or is that if you have to make some changes nationally?

That is just related to Minnesota, but it is an impact at the company level.

Right, okay.

And is there a sense yet if there's going to need to be some national changes in rehiring and things?

Or is it just too early to say?

It's very much too early to say.

We're working, obviously, like I said, with consultants and experts, and certainly with the individuals with the Department of Homeland Security to make sure that we're doing everything just as well as we can.

Okay, got it.

And then on the quarter the preopening looked a little low, if I have the number right, in front of me.

Was there anything unusual going on there, or timing wise?

No, Jason, what I would do is, I would look at -- it is more representative to look at kind of the full year.

Because we had so many openings during the year that some of those preopening costs might've spilled into an earlier quarter.

And so it is not unusual for us to have our preopening quarter to quarter maybe move up and move down.

Overall for the year the cost was in total about $60,000 per restaurant.

I think that is a fairly good number to work with.

And keep in mind, of that number, of the $60,000, only about $22,000 to $23,000 of that is real preopening cost, meaning some marketing expense and training expense, things like that.

Most of the rest of that number is a non-cash straight-line rent.

It is literally a journal entry.

But including the non-cash non-economic journal entry, it is around $60,000 per store -- I think is a better measure.

I think the fourth quarter was $40,000.

And that is artificially a little bit low because of the very high number of openings during the quarter.

Okay, that's really helpful.

And then last thing, just in terms of the new concepts, the Asian concept, any more color in terms of where we can see that?

And is it open yet?

And any more color you guys can provide there would be great.

You could only see it if you discovered the secret test kitchen location which we are not disclosing at this time.

I know, seriously, it is coming along very, very nicely.

I'm very happy with the development of the food.

And we're starting construction very soon.

And it should open mid-summer.

But beyond that we're not giving any other details, other than to say that we really are paying close attention to what has made the Chipotle model very successful.

And we are applying those things to the new concept that will make for a strong economic model that will allow us to invest in sustainably raised food and enable us to invest in top performers.

So other than that, though, I don't think there's anything new to report.

Okay, thanks guys.

I thought I'd give it a shot.

Sharon Zackfia, William Blair.

Hi, good afternoon.

Two questions.

I guess on G&A, Jack, I heard all of the things that impacted it this year.

But if you could give us some sort of barometer on how much you expect G&A to grow?

Kind of going forward, should we expect leverage in 2011 -- is a 20% rate of SG&A growth kind of the normal we should expect?

And then secondarily, as you have had -- I want to say close to a year in London now but I might have lost track -- what learnings do you have from London that you take with you to Paris as you enter Paris later this year?

Okay.

I will answer G&A and then I will let Steve talk about London.

You know, Sharon, G&A, whether we get leverage or not depends on the comp.

If we can do a comp in the low single digits, which is our guidance right now, I would expect us to be -- G&A as a percent of sales to be relatively flat or slightly up.

If we are fortunate enough to push past that guidance throughout the year we can gain a little bit of leverage, but I wouldn't say very much leverage.

And the things that are helping us in G&A this year is, one, we don't have the manager conference; two, offsetting that is, we have a higher non-economic, non-cash stock comp that will be included; but then kind of offsetting that the other way is we have -- we pay bonuses based on performance.

And this year we pretty much beat every single performance measure, from a comp standpoint, from new-store-sales standpoint, from an op income standpoint.

And so the bonuses were higher this year as well.

So all those things kind of washed together that I think we can get -- stay pretty flat in kind of a low to mid-single-digit kind of comp range.

And if we push above that, that's when we would start to see G&A leverage.

And then in terms of European expansion, we opened London with a Restaurateur who operates very autonomously.

And in fact, he operates that restaurant much in the way that I operated the very first Chipotle.

He does not rely on a commissary; rather cooks everything from scratch on-site, and has hired a team that he believes can be part of the future leadership team that will continue to grow out of Europe.

And I've spent time with these folks and I believe he has done a very, very good job.

The restaurant has been really well received.

It is an exciting restaurant.

It has a great buzz.

Customers from London, and really from all over, since it is such a dynamic international city, are enjoying the offerings.

We feel very confident that that model is appropriate for opening Paris also.

So we have a second Restaurateur who will be opening Paris later in the year much in the same autonomous independent way that the first restaurant opened.

He has actually been spending -- the Paris guy has been spending a lot of time in London and will be using that as a stepping off point for additional training.

So again, just a cautious slow start in Europe, realizing that most of our growth potential is here in the United States.

But we are seeding Europe in a very thoughtful way and have had really good results.

Okay, thank you.

Jeffrey Bernstein, Barclays Capital.

Hi, this is Sophia Siddiqi filling in for Jeff.

Just pigging-back off of that question, it seems like the results from Canada and UK are still very encouraging, so I just wanted to get a sense of what your thoughts are on future international expansion.

So, specifically, potential unit growth timeline?

And how long before international units become a meaningful contributor?

Thanks.

You know, I guess the best way to answer that is, it's not a growth strategy still.

And so what that means is, we don't have a timeline for any kind of meaningful store opening plan.

We don't have a timeline for when it will be meaningful to the business.

All of our -- kind of our benchmarks, or our milestones, are based on people development, are based on relationships with suppliers; built on customer response to Chipotle.

Did they get Chipotle?

Did they like Chipotle?

And those are the things that we're focused on.

And frankly if we do that really well over the next two years, it will turn into a growth story.

But right now we're not thinking about any kind of timeline with any kind of scheduled, meaningful growth.

Okay.

And then just separately, I know you talked about the first coordinated national event for Food With Integrity in your prepared remarks.

Can you just comment a little bit more about the details on that?

Sure.

Well we're actually not going to comment on the specific details.

But in a major city in the United States, an event that will be a really great venue for talking about Food With Integrity and actually setting up cooking demo stations where we can feature our food, and even some of the farmers who are responsible for raising that food in a very interactive way.

I think it's going to be really exciting.

And it just goes to strengthen the already great momentum that we've started to build around talking about why it is important to source sustainably raised food, and how that not only contributes to better tasting food, but also why it is important for the environment and for animal welfare and all of that.

Again it is just a way to reach out more broadly and develop a stronger relationship individually with customers.

Sounds good.

Thank you.

Bart Glenn, D.A.

Davidson.

Thank you.

I was just curious if you have any thoughts on when we might see some of the new food innovation across the system, both the tortilla as well as the brown rice?

Thank you.

Sure.

Again, as I mentioned at the last -- at a conference not too long ago, we're going to start to introduce more whole wheat into our tortillas.

But rather than just flip the switch and have a brand-new tortilla overnight, we're going to introduce, slowly, more whole wheat.

We started off London operations with a brand-new recipe that has a higher amount of whole wheat.

And we think it is a delicious tortilla.

We think it is so good, in fact, that we ought to be serving this tortilla in the United States.

So over time we will slowly adjust our recipe until it is the same as the London tortilla.

What is exciting about it besides that it has more whole wheat is that it has no preservatives.

And that is very, very exciting.

It falls into the sort of Food With Integrity mission that we have.

In terms of brown rice, we're going to be serving brown rice alongside white rice now, and that will be an option.

And in some of the test stores where we have done so, we noticed that brown rice is very, very popular, and in fact has in many cases been more than half of the customers choosing brown rice.

So we think it is an awesome opportunity to let people have a little bit more variety at Chipotle and do something that a lot of people consider more helpful.

Thank you.

Matt DiFrisco, Oppenheimer.

Thank you.

You've talked -- I'm a little confused, a little bit, on the margin picture.

I heard a lot about how the new A Model looks very promising, good volumes and lower on the investment cost and easier to operate longer-term.

However, there was a lot of sort of warning on the margin front in 1Q or in the first half of '11.

And you have not only difficult comp comparisons but you have some substantially historically high industry-leading restaurant margins.

I'm curious on how you want us to view that as far as lapping those in the environment where you might have some near-term commodity pressures as well as the Minnesota labor retooling?

Well, the way I think it is most appropriate to think about it, you know Matt, is think about it in terms of our model.

Because that's the way we think about it.

And think about it in terms of -- what is the potential, what is the ability, for our model to sustain and even build on the margins and the returns that we have today?

And our ability to sustain or even build on the margins and returns we have today is as likely or as possible as any restaurant company out there.

Because there is nothing that is artificial, nothing that is temporary in our margin today.

Having said that, there is inflation.

And we haven't had to raise prices in over two years in most of our restaurants.

And inflation means at some point we're going to have to pass on those higher costs to our consumers.

We're just going to be patient about doing that.

And so during the first quarter and during the second quarter and maybe even for part of the third quarter, I would expect that food inflation is going to creep in.

It's going to creep in at that mid-single digit range.

We're also going to see some higher costs on a temporary basis over the next couple of months due to the freeze that we talked about in Florida, Mexico.

And if we stayed 100% of supply, which we're not sure if we will be able to, or will want to stay 100% of supply of tomatoes, of green peppers and tomatillos, that could add for a couple months a couple 100 basis points.

And then we've got pressure from labor.

But that has been running maybe in that 30 -- 20 to 30 basis points in Minnesota.

We expect that to level off.

So those are the things that I think are going to put pressure in.

But we think about -- and I would encourage you to think about -- what is possible on more of a sustained basis once we get through all of these short-term pressures.

And we consider ourselves to be in a position of strength to not have to rush to increase prices because of inflation.

And we're going to take advantage of that strength.

We're going to, because we have the highest margins in the industry already.

And we don't have a franchise model where franchisees are anxious about inflation eating into their cash flow.

We're going to take advantage and see how the consumer responds.

And if the consumer responds well, we know we have as much pricing power as anybody out there.

Okay, thank you.

Joe Buckley, Bank of America Merrill Lynch.

Just a couple of questions.

You've referenced the loyalty program.

And [it appears to be] -- give us a little more details about that and the launching of that program?

Sure.

The loyalty program starts in April.

And, again, it is not a typical loyalty program where a customer is rewarded by say coming in 10 times and getting the 11th for free, or something like that.

This is a program where we're asking our managers to invite our very best customers in; by inviting them to participate in learning more about Food With Integrity.

And as they demonstrate their knowledge and share their knowledge about Food With Integrity, we reward them.

And we may reward them with things like free food or some of our clothing items or things like this.

And it's a way to really get customers to participate in sharing the specialness of Food With Integrity; the importance of sustainably raised food.

If you look back on the history of Chipotle and how we have really grown the brand, so much has come from word-of-mouth and customers bringing in their friends, and new customers, and sharing the specialness of how you order and the food and how it is cooked and things like this.

So we think this is a way to really continue to build the brand by strengthening people's knowledge about what makes the food taste so good and why sustainably raised food is important.

And just a question, how many stores in Minnesota were impacted by the labor issue?

And has there been anything initiated yet in the DC, Virginia area, or are you just [subject to ventures] there?

I'm sorry, I missed the last part.

You said how many stores were affected, and what?

How many stores in Minnesota, then in the DC, Virginia, market?

What exactly has gone on so far there?

Well, in Minnesota, we have 50 restaurants.

And this notice of inspection we received was not particular to any restaurant, but rather was a notice of inspection for all Chipotle restaurant-level employees in the state of Minnesota.

So it had an effect on almost every restaurant because we lost a lot of good people.

And obviously now we're mending from that, and all the stores remained open.

And we've been able to hire great teams to replace the teams that we lost.

But so we're on the mend from that.

In terms of DC and Virginia, there are a similar amount of restaurants in that market.

And we just -- right now, what's happened is, we received a notice of inspection, which means that the Department of Homeland Security and ICE asked us to give them the documents for all of our employees in those states and they're looking at those documents.

So we don't know if and when they might get back to us.

And we certainly don't know what the results of their investigation will reveal.

But we're going to work closely with them to make sure that we determine the extent of any problem that may exist in DC and Virginia and go from there.

Okay, thank you.

That does conclude our question-and-answer session.

At this time it is my pleasure to turn the call back over to our speakers for any closing or additional remarks.

Thank you so much, everyone, and we look forward to speaking with you next quarter.

Ladies and gentlemen, that does conclude our conference call for today.

Again, thank you for your participation.