奇波雷墨西哥燒烤 (CMG) 2011 Q3 法說會逐字稿

Good afternoon, and welcome to the Chipotle Mexican Grill third-quarter 2011 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.

I would now like to introduce Chipotle's Director of Investor Relations, Alex Spong.

You may being your conference.

Hello everyone and welcome to our call today.

By now you should have access to our earnings announcement released this afternoon for the third quarter 2011.

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 as defined in the securities laws.

These forward-looking statements will include projections of the number of restaurants we intend to open, comp restaurant sales increases, food cost trends, margins, effective tax rates, and shareholder returns, as well as other statements of our expectations and plans.

These statements are based upon 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 these forward-looking statements.

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

I would like to remind everyone that we have adopted a self-imposed quiet period restricting communications with investors during that period.

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

For the fourth quarter it will begin on December 1 and continue through our fourth-quarter release in February.

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

With that I will now turn the call over to Steve.

Thanks, Alex.

I am very pleased with our financial performance during the third quarter, but even more pleased with our continued strengthening of our food culture and our people culture, as well as the stronger bond that we are creating with our customers as they begin to care more about where their food comes from.

All of this gives me great confidence that we are on our way to achieving our vision of changing the way people think about eating fast food.

We talk about food culture at Chipotle instead of talking about new food products.

We do this because of our philosophy of constantly working to serve better tasting, more wholesome food, and that leads us to improve every ingredient we use.

In order to achieve these improvements we evaluate how our ingredients are raised or grown, improve our recipes and cooking techniques, and improve our kitchen equipment, all with the objective of serving better tasting food made from sustainably raised ingredients.

Though I don't have time to talk about all the food improvements that we are currently pursuing, I do want to highlight two changes that happened during the quarter.

First, we have made some changes to our green tomatillo salsa that we think may get even better tasting than before.

We have increased the percentage of roasted tomatillo we use in the salsa, and are roasting the tomatillos longer in order to mellow the tangy flavor of the raw tomatillo and balance the spiciness of the salsa and improve the consistency.

We are using larger vegetable cuts, so that the new version of the green salsa is thicker and chunkier than it was before.

These changes have made this salsa illustrate how we are always looking at how we can change the food we serve to make it better.

The second food-related improvement I want to highlight is our rollout of brown rice.

We are now serving brown rice in addition to white rice in about a dozen markets around the country, including New York, Denver, Chicago, Washington DC and Seattle, among others.

Like our white rice, the brown rice is seasoned with fresh lime juice and freshly chopped cilantro, but also offers the nutritional benefits of a whole grain.

And it has a delicious, nutty flavor.

Though we have done very little marketing about the brown rice, customers are responding well and are selecting the brown rice nearly one-third of the time.

We expect to have brown rice in all of our restaurants by the end of the year.

Of course, we are also continuing to make progress in our quest to expand the use of naturally raised meat.

Already we expect to use 100 million pounds of meat from animals that are raised responsibly, and never given antibiotics or added hormones.

And hope to move closer to serving all naturally raised meat in the coming months.

I would also like to tell you about a couple of marketing initiatives that have taken place since the last earnings call.

One recent effort that I am extremely proud of is a short film that we have created called Back to the Start.

If you have not had a chance to see this animated film, I encourage you to visit our website and click on the link and take a look.

The animation is accompanied by Willie Nelson covering the Coldplay song, The Scientist.

And the video illustrates the dilemma farmers have faced in industrial farming that has displaced more sustainable farming.

It is connected with people on an emotional level far beyond what we could have imagined when the project began.

The video has already been viewed online more than 1.7 million times on YouTube alone.

And is now being shown on about 10,000 movie screens nationwide before the feature films, where we expect around 20 million people to see it.

The video has provided a wonderful opportunity for people to discover and become more curious about how their food is raised without being preachy or overcomplicating the message.

But don't take my word for it, really go see it and decide for yourself.

We also just completed an important event, Cultivate Chicago, which celebrated music, food and family farms.

Cultivate Chicago had cooking demonstrations by some of the country's best-known chefs, featured artisanal foods, educational demonstrations that showed the difference between industrial farming and more sustainable farming, and performances by a number of great bands.

More than 16,000 people attended this first-time event, and media coverage of the event reached a much larger audience generating nearly 32 million impressions.

We believe the event gave us an opportunity to connect with customers in a profound way and provide the opportunity to educate them about many of the things that make Chipotle so unique.

We are planning to do the event again next year and it will most likely be in Denver.

These are two great examples of how we want to engage our customers and prospective customers in a meaningful way, allowing them to discover at their own pace where their food comes from as opposed to simply advertising [ask] people.

We have always believed that if people discover where their food comes from the more they will appreciate what we do at Chipotle.

Another way we are trying to engage our customers in a deeper, more meaningful way is with our Farm Team loyalty program, which is now up and running.

Unlike most loyalty programs in the restaurant business, Farm Team is not a frequency program.

There is no buy 10, get one free punch card.

Instead the program is designed to reward a member's knowledge about Food With Integrity and the lengths Chipotle goes to in order to improve our food culture.

The more they learn and the more they share with what they have learned with other people via social media, the more rewards they earn.

While most loyalty programs aim to get as many of their customers into their programs as possible, the Farm Team program is designed to attract a smaller number of very loyal customers who have the potential to be spokespeople for the brand.

So far we have had very -- so far we have been very selective in extending invitations to prospective Farm Team members.

We have deliberately started slowly to be sure the program is working before we ask our managers to invite more customers, but we expect the membership to grow to around 25,000 or so by the end of the year.

We have recently received research regarding the effect of our Unlimited Time Only campaign which ran earlier this past summer.

The campaign where we wrapped burritos in gold foil to call attention to the great ingredients we use.

The results were encouraging, demonstrating that this marketing connected with people in a meaningful way.

Highlights from the campaign include a 19% increase in Chipotle's advertising awareness in a very crowded category.

94% of those who saw the campaign got the message about the better quality ingredients we use.

We also saw significant increases in consumers saying that Chipotle is a brand they love good, that they can feel good about eating at Chipotle, and that Chipotle is a leader in the industry.

All of this just demonstrates that our efforts to allow people to discover where our food comes from and how it is raised are working.

And combined with providing a great dining experience to each customer who visits, this is leading to increasingly informed loyal Chipotle customers.

I also wanted to mention that we recently formed the Chipotle Cultivate Foundation, a nonprofit foundation with the objective of supporting people and organizations working to make improvements in the areas of animal welfare, family farming and in educating the next generation of sustainable farmers.

The Foundation's vision and activities are consistent with our efforts to support sustainable farming.

And the first significant effort will be with our upcoming Boorito promotion where we hope to raise $1 million in our restaurants to benefit the Foundation and Farm Aid.

Finally, during the quarter we opened our new ShopHouse Southeast Asian Kitchen in Washington DC.

The ShopHouse menu includes a bowl of rice or noodles, a choice of meat or tofu, an array of vegetables, curries, sauces and various garnishes.

Additionally we offer a delicious banh mi sandwich with freshly baked bread with your choice of meat or tofu.

All of this is served in the Chipotle format where food is cooked to the line and customized to each individual customer.

The restaurant has been open for about a month, and I am very encouraged by the quality and taste of the food, the service and the overall customer experience.

And the customers so far just love it.

Some customers have commented that it is a bit too spicy, which is exactly what I heard when I opened the very first Chipotle 18 years ago.

What I love is that these customers tell me that it might be too spicy, while they devour every bite of their meal.

I'm convinced that Chipotle's success is not necessarily because we serve tacos and burritos, but rather because of our commitment to making great tasting food with sustainably raised ingredients, using classical cooking techniques and in open kitchen and served in an interactive, customizable and very efficient way.

ShopHouse provides an opportunity for us to test this idea and see how our model works with another cuisine.

We have no specific plans for additional ShopHouse restaurants at this time.

We will continue to perfect this restaurant, develop a strong team and assess its unit economics.

Also during the quarter we opened our second restaurant in London in early September on Baker Street.

Also construction continues on our first restaurant in Paris, which is slated to open late in the fourth quarter.

Our aim in Europe right now is to establish the Chipotle brand, develop relationships with key suppliers and build a people culture that will provide us with the leadership that we will need to grow over the coming years.

We will continue to carefully nurture these future growth opportunities, but our primary focus and excitement remains on Chipotle's significant remaining domestic growth potential.

I will now turn the call over to Monty.

Thanks, Steve.

We have been delighted to see that our continued focus has led to another strong quarter of growth for Chipotle.

Our performance is the result of our relentless focus on building a culture that allows us to develop restaurant management teams that provide an exceptional dining experience.

They do this by empowering teams of top-performing crew members to deliver very high standards in terms of delicious food, great customer service, and protecting Chipotle's unique economic model.

Our restaurateurs continue to lead the way in developing these excellent restaurant level teams.

And our entire team of field leaders is totally focused on developing as many of these elite managers as possible.

Every restaurateur has demonstrated the ability to select excellent people and to develop them into our future leaders.

As we continue to make progress identifying restaurateurs and bringing them into the program, the reach of these great leaders continues to grow.

As of now we have about 253 restaurateurs, including 23 former restaurateurs who were promoted to apprentice team leader or team director positions.

But our restaurateurs have a much greater reach than these numbers would suggest.

More than half our restaurateurs now oversee more than one restaurant, and nearly 60% of them now directly -- and nearly 60% of all of our restaurants now directly benefit from the leadership of our restaurateurs.

As we continue to develop restaurateurs we are seeing the benefits to our entire people culture.

You'll recall that restaurateurs are paid a $10,000 development bonus for each crew member that they develop into a manager.

In the first nine months of this year we have paid more on people development bonuses than in any entire year before -- more than $1 million so far.

While our people development is as strong as ever, we still have room to improve the quality of our restaurant operations, and particularly our throughput.

Frankly, we feel like we have not emphasized enough the importance of this measure during the last two years as the recession caused our transactions to soften.

As our transactions have picked up again, our throughput has increased, but not as much as we would like.

This last year we have created some great tools to help with proper deployment and scheduling, both of which are essential to allowing us to have all hands on deck during the peak lunch and dinner hours.

These tools have helped, but what we have recently realized is that we've not done enough to teach our restaurant teams the basic techniques of proper throughput that we taught so well back in 2006 and 2007.

In our restaurant we realized that we needed to remaster these basic techniques.

In other words, while we have done a great job of making sure that we have enough people ready to serve customers during our peak hours, we now need to make sure that these people have the techniques and skills necessary to really create speedy service.

Again, that is not to say that we don't have good throughput already.

It is just that it is not nearly what it could be given the fact that our restaurant are the busiest that they have ever been.

Today with higher average restaurant volumes, more top performers among the ranks of our managers and crew than ever before, and better tools such as the prep and deployment tool and the menu link scheduling tool, we should be doing even better.

So for the remainder of 2011 and 2012 we will be actively focusing on throughput again, recognizing the huge impact that this effort can have on our customer service and the overall experience that we provide.

We are also redirecting the efforts of our field leaders to help further improve upon our people development efforts.

To this end we held a field leadership conference in Las Vegas during the third quarter.

The goal of this conference was to teach our field leaders better techniques to help them quickly develop top performers into restaurateurs.

As evidenced by the strong growth of our restaurateur program, these field leaders have done a good job developing their teams already, but we believe that a shift in strategy will allow them to do even better.

Historically our field leaders have spent most of their time in their restaurants directing their store managers the crews to correct issues they see during their visits.

Our new strategy involves using those same issues to diagnose what the underlying problems are, so that our leaders can create lasting change in their restaurants.

In other words, we're working to make sure that our field leaders show our restaurant managers how to create high-performing teams that are empowered to achieve high standards without the need for constant feedback from their leaders.

To do this our leaders need to clearly understand what a restaurateur is and create a vision by which each of their managers can attain this elite position.

They need to be able to clearly articulate the vision and then empower their teams to achieve it.

And while it is difficult to work to create the special Chipotle culture, we are more encouraged than ever as many of our recent restaurateurs have demonstrated the ability to reach this level very quickly once they have a clear vision of what they need to do to get there.

And this group of leaders knows that when they achieve their goal, there is a huge opportunity that awaits them.

Just what is that opportunity?

Well, in 2012 we plan to open between 155 to 165 new restaurants, more than we have ever opened before in a single year.

With our new restaurant opening volumes higher than ever we will need more top-performing managers and crews to be sure that we are providing the kind of dining experience that our customers expect of us as we accelerate the pace of our growth.

Our opening plans are going to include about 30% A model locations, which continue to keep pace with our traditional openings in terms of sales, but with a lower cost structure.

Our continued use of this strategy will allow us to open restaurants with confidence in additional trade areas, while strengthening our unit economic model.

As Steve mentioned, our growth in the coming year will continue to be driven by expansion of Chipotle in the United States with about 75% of our 2012 openings planned for proven markets and the remaining 25% planned for new or developing markets, including Nashville, Albuquerque and Vancouver, among others.

We believe that focus and discipline are at the core of Chipotle's success, and that our continued focus on those things that drive our business will allow us to provide strong returns for our shareholders and position us well for future growth and continued success.

I will now turn the call over to Jack.

Thanks, Monty.

We are very pleased with our financial results in the third quarter as our ongoing focus on building a strong food culture, a special people culture, and a unique and strong unit economic model continue to lead to better financial results.

By creating an extraordinary dining experience and serving delicious food made from the finest ingredients available and in an affordable format, we continue to attract new customers and build stronger loyalty with our existing customers.

And as people become more curious about where their food comes from, they appreciate Chipotle even more and they're changing the way they think about and eat fast food.

Despite some uncertainty among consumers about the macroeconomic environment, we are pleased to report our fifth consecutive quarter of double-digit comps since the economy began to recover last year, with a comp of 11.3% in the quarter.

Overall sales for the quarter increased 24.1% to $591.9 million driven by new restaurant openings and the 11.3% comp.

The quarter comp was primarily driven by increased customer visits, while the menu price increase added about 4.6%.

As a reminder, about 3.5% of the increases is from the menu price increase which took effect during the quarter -- during the third quarter, while about 1.1% is due to the increase taken in the first quarter on the West Coast.

Comps were higher than the 10% we saw in the second quarter despite a tougher comparison against an 11.4% comp in the third quarter of last year as the menu price increase more than offset the tougher comparison.

While we're very pleased with another double-digit comp in the quarter, we continue to see the lowest comp of the day during our peak hours, which is an indication that we have an opportunity to serve even more customers during peak hours with better throughput.

We know we can do a better job of scheduling and deploying our teams more efficiently, completing the prep on time, and always have a dedicated expo and linebacker during peak hours, which will lead to better throughput and a better experience for our customers.

As we had hoped, we did not see any noticeable resistance to the menu price increase either in the average check or in the transaction trends.

Our customers have usually responded well when we raised prices, and they believe their dining experience at Chipotle is a great value.

But we always want to remain accessible to our customers, and so we work very hard to earn pricing power with our customers, and we will always be patient and thoughtful whenever we decide to raise prices.

For the year sales increased 23.6% to $1.67 billion, driven again by new restaurant openings and a comp increase of 11.2%.

Year-to-date, menu price increases added about 2.3% to the comp.

We are also seeing our sales trends in dollar terms continue to hold up into October.

But keep in mind the comparison of the fourth quarter is tougher as we go against a 12.6% comp from last year, and we will only pick up an incremental 20 basis points remaining from the third quarter price increase.

So we do expect a lower comp in Q4 compared to the third quarter.

Overall for the full year we are increasing our sales comps guidance to low-double-digit comps from the earlier range of high-single- to low-double-digits.

As we look to 2012 we expect comps in the low-single-digit range as we compare to double-digit comps for the full year for the first time since before the recession.

We opened 32 restaurants -- new restaurants in the quarter, bringing our year-to-date openings to 83 and total Companywide restaurant to 1,163 at the end of the third quarter, which includes ShopHouse, two restaurants in London and two in Toronto.

We expect to end the year with total new restaurant openings at or above the high end of our 135 to 145 opening range, with A models representing about 30% of that total.

We are also pleased to announce that for 2012 we expect to increase our new restaurant openings to a range of 155 to 165 new restaurants.

Our new restaurants continue to perform very well, opening with sales at the top of or above our communicated range of $1.4 million to $1.5 million.

Restaurants opened at least 12 months now have an average restaurant sales of $1.973 million, which is the highest level ever.

Our unit economic potential for both new restaurants and existing restaurants is the strongest ever, despite the current challenging effects of rising food inflation.

Diluted earnings per share for the quarter was $1.90, an increase of 25%.

We were able to grow EPS at a slightly faster rate than sales, despite much higher food costs as we delivered strong sales leverage in every other line item except for food.

Despite 250 basis points of higher food cost, operating margin was up 30 basis points, while restaurant level margins were down just 100 basis points compared to last year.

Year-to-date diluted EPS was $4.96, an increase of 18.7% from last year.

Again, efficiencies from higher comps allowed us to leverage every line item on the P&L, except for food, which on a year-to-date basis was up 230 basis points from last year.

And restaurant level margins year-to-date were 25.9%, a decrease of 100 basis points.

Food costs were 33.1% in the quarter, up 250 basis points from last year, despite the menu price increase in the quarter.

Avocado costs rose even more than expected, though we were pleased we were able to stay supplied with great tasting avocados from California longer than expected.

As we mentioned during our second-quarter call, California avocados were in short supply this summer, resulting in much higher prices and a shorter harvest season than normal.

Higher meat costs, primarily chicken and beef, also added to higher food costs, driven by higher feed prices.

We have also seen higher prices for our cheese and sour cream.

The menu price increase helped to offset some of this food inflation, benefiting food costs by about 110 basis points compared to the second quarter, and by about 140 basis points compared to last year.

We expect food costs should improve slightly in the fourth quarter as we benefit from lower avocado costs as we source from Chile and Mexico.

This benefit will be offset by continued inflation in meats, as well as higher prices for corn, rice and other miscellaneous ingredients.

But we are hopeful that the net will be a food cost in the fourth quarter in the mid-to high 32% range.

Without the price increase our underlying food costs are up about 10% so far this year, much worse than we expected when the year began.

As we look to 2012 we expect food inflation to continue, but we hope it will moderate and fall into a more normal range, perhaps in the mid-single-digit range.

Projected higher corn prices and other grains are expected to put continued upward pressure on meat and dairy costs well into next year.

Labor costs were 23.3% of sales in the quarter, a decrease of 90 basis points from last year.

Labor leverage was driven by the menu price increase and higher sales volume.

Our top-performing managers and their teams of all high performers continue to result in an efficient labor model delivering a great dining experience.

And year-to-date labor costs are down 70 basis points from last year.

Occupancy costs in the quarter declined 40 basis points from last year and 50 basis points year-to-date due to higher average restaurant sales.

Other operating costs were 10.7% for the quarter, a decline of 20 basis points.

And year-to-date our other operating costs were 10.9%, down 10 basis points from last year.

These reductions were primarily driven by lower marketing costs, along with better sales leverage.

Marketing was 1.1% for the quarter and 1.3% year-to-date, which were both less compared to last year.

We expect marketing to increase in the fourth quarter to around 1.75% as our animated film, Back to the Start, plays in theaters around the country, and as a result of the Cultivate events Steve talked about, which took place earlier this month in Chicago.

While overall our marketing will be about 1.5% for the full year in 2011, we expect to return to our normal marketing expense of around 1.75% in 2012.

G&A was 6.3% in the quarter, 70 basis points lower than last year.

And recall that last August we held our second biennial all-manager conference, which will also occur in 2012.

The conference cost around $3.5 million in 2010 and will cost an estimated $4.5 million to $5 million next year, as we expect around 2,000 managers and support staff to in attendance.

G&A also includes non-cash, non-economic stock comp expense of nearly $11 million in the quarter and nearly $33 million for the year.

And this is $4.5 million higher in the quarter and $14.5 million higher for the year compared to last year, all as a result of stock options issued at a much higher stock price which results in a much higher calculated accounting charge.

Our underlying cash G&A, adjusted for the benefit of comparing against the conference and adjusting for the higher non-cash stock comp, is low as a percent of sales as a result of our conscious ongoing efforts to grow our underlying G&A at a slower rate than our sales growth.

Our annual Boorito promotion and fundraising event will add about $1 million to G&A in the fourth quarter, which will benefit the Chipotle Cultivate Foundation and Farm Aid.

In 2012 we expect to continue to manage underlying G&A to grow at a slower rate than our sales growth before the impact of the non-cash stock comp and before the cost of the all-manager conference.

As a prospective, if a similar number of options were granted next year, with a strike price equal to the current stock price, the accounting charge for non-cash stock comp would grow by a similar amount as this year or around $20 million.

For 2012 we expect our effective tax rate to increase from 38.4% this year to 39.2% as a result of the higher (inaudible) continuing, and assuming the Work Opportunity Tax Credit and the R&D credit, which typically have been renewed each year, are not renewed for 2012.

We are now $77 million into our $100 million stock repurchase program through today at an average price per share purchased of about $220.

Over the past three years we purchased a total of $277 million in stock at an overall average share price of $93.

While we continue to generate more cash from operations [than] we invest in the Chipotle business today, we are confident that the growth options we are seeding today, including ShopHouse, Chipotle in London, Chipotle in Toronto and soon Paris, will provide a attractive value-enhancing growth investments in the future.

In the meantime, we will continue to invest in our high-returning domestic restaurants, and we will opportunistically repurchase our stock to enhance shareholder value.

Thanks for your time today.

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

Operator, please open the line.

(Operator Instructions).

Joe Buckley, Bank of America Merrill Lynch.

Can I ask just on the low-single-digit comp guidance for 2012, just how you're thinking about that in terms of transactions and check, given the price increase you will start the year with on a year-over-year basis?

With the current price increase that we have already taken, that will roll into next year.

And assuming that we continue to see no resistance, we expect to get probably right around 2% from that.

And so the low-single-digit comp guidance, we would expect that we get a little bit more, maybe 1% or 2% more from transactions next year.

Keep in mind every year when we do this we take a look at next year and the low-single-digit is what we will achieve if we don't change the trendline.

Of course, we are always trying to do things like with improved throughput and with improving the quality of our ingredients, including the taste of our food.

We are always hopeful that we will be able to change that trendline, but going up against a double-digit comp from this year, if we are not able to, we would end up in a low-single-digit category, and that is how we have done and always done our comp guidance for the next year.

Okay, and then just one more question.

On the throughput comments can you talk about some of the bottlenecks you see or some of the opportunities to improve the throughput, what changes you would make -- is it on the production line, is it -- or is it something different?

For starters, obviously, what we want is a team of all top performers.

And you want -- especially during your peak hours of lunch and dinner, you want to have every single person on the line be someone who is experienced in the position that they're working, and able to do it very quickly and efficiently while giving great, great customer service, great eye contact, great communication with the customer.

In order to make sure that we have those folks on the line, obviously, we want as many restaurateurs as possible, and that is our top priority.

But what we have been working on last year a lot was to make sure that our scheduling and our deployment were everything that they could be.

And in other words we wanted to make sure that we had -- that we did not use too many hours of labor in the morning or before dinner in preparing all of our ingredients.

We wanted to use the right amount of labor then so we had plenty of hours left to have peak deployment during our busiest times of day at lunch and dinner.

So we worked on that quite a lot and we have improved in those measures, although there is still a lot of improvement yet to go.

But when you do get all the people you need ready to work during the peak hours, the question is, A., are they absolutely the right people for the right job at the right time.

B., are they all deployed on the line and not distracted by anything else like doing prep work that they shouldn't be doing at that time.

And that is what we are working on now.

Some of the key things in terms of bottlenecks are we have always found that the process of cashing people out has been the slowest part of our line.

But the biggest thing you can do to make sure to cash people out quickly at the cash register is to make sure we have an expo, an expediter, which is the person who stands between the person who rolls the burrito and the person who rings up the customer.

And that person takes care of all sorts of miscellaneous things such as putting the food in a bag if it is to go, or making sure to cover the burrito bowl or put it in a basket, get you drinks if you want a drink, and so on and so forth.

So that person minimizes the distraction on the cashier, so the cashier can focus on ringing out sales and eliminate that bottleneck.

Another bottleneck can be -- or another great driving force for great throughput is when you have someone terrific at the tortilla press.

That is the person who first -- is the first one to welcome the customer, and speak very clearly to the customer and establish the pace for the customer and make sure that they know exactly what the customer wants and begin to communicate that down the line to the next person.

If you have someone great at tortilla, they tend to really push a great speed and a great flow down the line and establish the expectation for the customer that we are able to get them through quickly.

So those are two key points, but, really, every single person on the line is very important.

And we know how to generate this great throughput.

A final thing that we need to do is always have what we call a linebacker working on the line during peak hours.

The linebacker is often a general manager or service manager and is someone who walks behind all the crew people on the line, making sure that each of them has everything they need to do their job.

For instance, making sure that all the bins of food are full, making sure that the line is wiped down and clean, making sure that they have spoons and other serving utensils that they need without having to bend over to pick them up or turn around and distract their attention from the customer.

What we found in looking at our restaurants now is we have these top, top performing crews and terrific managers, but sometimes we are neglecting some very basic blocking and tackling when it comes to throughput, such as having a dedicated expediter at all times during off-peak hours, plus having a linebacker dedicated during all those times.

And if you have just those two positions and great people in every position on the line, you're going to achieve some really terrific throughput.

And our fastest restaurants are doing that every day right now.

We just have to make sure that the rest of them catch up.

Thank you.

John Glass, Morgan Stanley.

Just first on food costs, I just want to clarify if, that we see that 5% or a mid-single-digit inflation next year, combined with the pricing you took this year, do food cost ratios sort of stay flat with this year or are you able to leverage the food cost in that formula?

Can you just maybe be a little more precise about food cost ratios (multiple speakers)?

Yes, sure.

It is still early to know exactly what food cost is going to look like next year and so we are seeing the same things that you guys are.

I would think in terms of -- we hope that our food costs will normalize a little bit in the fourth quarter.

Avocados were extremely high.

They were the highest we have ever paid for avocados in about five years or so.

But that was not as much sustained inflation-driven as much as it is -- it was a light season.

And growing avocados is cyclical, and so we would hope that avocados would return to a more normal harvest next year in California.

So if you assume that our food cost return to more normalized costs in the fourth quarter, we hope that would be somewhere in that mid-32% range to the high 32% range, and then we think inflation of somewhere in the mid-single-digits on top of that.

So we don't think that there is anything that we see with what we're buying today that we will see leverage.

We don't see that what we're buying today is going to be less than what we're paying today.

So we see, frankly, food costs continue to rise, not decline.

So just to be clear, mid-single-digit food cost with a mid-single -- slightly less than mid-single-digit price increase at least for the first half of the year equals flattish food costs from the fourth quarter into the first half, at least, of next year.

Is that the right way to look at it?

No, I would say that if inflation of 5% creeps basically on top of our, let's call it, somewhere in the 32 -- mid-32%'s to high-32%'s, when the full 5% is in that would be, call it, 150 basis points or so.

If that happened throughout next year we might see 150 added basis points by the fourth quarter of next year.

And if it happens evenly throughout the year, we would have a little bit in the first quarter, a little bit in the second quarter, etc., etc.

Now as you know, inflation never happens that linear -- you know, in a linear way that way.

It jumps up and then comes back, jumps up and comes back.

But I would think of it in terms of a 5% on top of what we see in the fourth quarter.

Then just to clarify, the tax rate increase, you are assuming this if the higher rate -- if the [higher act] does not get renewed and an R&D credit doesn't, but they normally do get renewed.

I'm confused as to why you would assume that they are not if they normally do.

Well, it is all political.

If they can -- at the last minute at the end of the year if they can get these things approved then our tax rate would be slightly higher, maybe 20 basis points higher, but we would pick up, instead of raising by 80 basis points, it would only rise by 20.

And we're just throwing it out there, because Washington will need to get their act together.

They will need to approve these things, and if they don't, we wanted everyone to know what the impact on our tax rate would be.

Got you, okay, thank you.

Nicole Miller, Piper Jaffray.

My question is, as you add new things to the menu, for example, the brown rice and make that available, are you able to figure out how much that drives frequency of existing guests and how much you are able to get new guests in the door?

I don't think that adding something like brown rice adds a measurable new stream of customers right away.

But I think what it does, I think it starts to develop a connection with our existing guests, letting them realize that now there are more options, especially more options on the health side for someone who is concerned about perhaps eating more whole grains, something like this.

So I think that when they decide what they might want for lunch or dinner this health component, this new flavor component, might make them think about coming more often.

I also think it shows to our customers that we are concerned about creating a dining experience that is something that is good for them that they can eat frequently.

Fast food used to be a treat in this country a few decades ago, and it has become people's everyday eating.

But the quality of the food has not changed.

It is not necessarily something that is appropriate to eat every day.

And we want to make sure that we are including things like whole grains that are a part of everybody's daily healthy diet.

And so I think over time it will help drive more customers in and bring people back more often, but it is not something that is measurable right away.

That makes sense.

That is something we were hearing anecdotally as we spend time in the restaurants, so thanks for the perspective.

(Operator Instructions).

Jason West, Deutsche Bank.

Just, Jack, I wonder if you could clarify a little bit of the comments on the more recent trends.

You talked about the tough compare.

Could you say if you guys are still running in the double digits, just slightly below or is it the slowdown been a little more significant than that?

It is -- really we are seeing the -- when we look at trends just from month to month and week to week and adjust for seasonality they're holding up just as well in October as they did in September and as they did throughout the third quarter.

What we are seeing though as we go against just tougher comps from last year, we are seeing a slight downtick.

Still right around the double digits, but a little more than 100 basis points lower.

But it is 100% explained by the fact that we're going up against a little bit more than 100 basis point tougher comparison to last year.

So no -- I would call it no change in dollar trend either up or down, but just a slight adjustment to the comp because of the tougher comparison.

Okay, that is helpful.

And then just could you guys give us an update on the labor investigation while we've got you here?

Just kind of where do we stand?

Have they moved that to more of a national overview yet?

Are we still just looking at the two markets?

And any thoughts on what we may get some resolution there.

Obviously, we continue to cooperate with the government officials in their investigation.

The scope of the investigation hasn't particularly widened, and we are producing, have been producing, a whole bunch of corporate documents.

But we don't have any reason to believe that they are widening the scope of the investigation.

And according to our team of attorneys and so forth, they tell us that it is going very well and that they feel good about the investigation.

And in terms of when it will wrap up, it is just very hard to say.

We don't have any visibility on when it is going to wrap up, but we are hopeful that it will be before too long and we can put it behind us.

Jeffrey Bernstein, Barclays Capital.

Just two questions.

First as a follow-up to that restaurant margin question as we look to next year, balancing the food cost component of it.

It sounds like you're talking about 2% price at this point and 5 points of mid-single-digit inflation.

I am just wondering is the goal in your mind to protect kind of the restaurant margin that we see in this year in 2012, or do you think of it more as a balance based on the traffic trends and therefore margins go up, margins go down?

But I am just trying to gauge whether or not -- if you see inflation higher than that whether you would take pricing with the goal being to actually mitigate the pressure and protect the margins.

Long term we believe that a restaurant margin that we have seen over the last couple of years is certainly sustainable.

We think we, depending on our comp, if we have strong comps we can expand that margin, we have said in the past.

There is nothing about our margin even though it is in the highest in the industry right now -- as we generate significant comps we can generate as much leverage, if not more, than other companies out there that are at a much lower margin.

And so we think the record margins we have seen, especially last year before food costs had spiked, we think over time that is sustainable.

Now we're not really interested in trying to protect margins quarter-by-quarter.

We know inflation is volatile.

We know it has been up and down this year.

We've got things like avocados, and those are things that will happen.

And they will be more cyclical and we would rather wait and see how those play out before we make menu pricing decisions.

One clarification to that food cost question.

We don't have plans right now to increase prices next year, but we have pricing power.

We know the menu price increase that we took in the summer this year.

We did not spend all the pricing power.

We went out and looked at each of the markets and look at what competitors were charging, we had room to increase the prices even more, but we thought that was a fair price increase.

We thought it would get our margins back to within striking distance of what they were the year before, but we wanted to be thoughtful and remain accessible to our customers.

If inflation continues, at some point we will be in a position to, and we will increase our pricing to make sure that longer-term our margins are sustainable.

Got it.

And then just a follow-up on the kind of comp trend question.

It doesn't seem like you're seeing any change into your run rate, and it seems like we have seen that actually two-year rate improve over each of the past few quarters.

I know you can always tweak your guidance for next year as you move through the year, but it would seem like you just lapped a double-digit comp with a double-digit comp.

I'm not sure why if you were to sustain this two-year run rate that we are seeing right about now why it would even fall to that low-single-digit range unless there is a different way to think about it.

But just from a two-year basis it would seem sustainable.

Well, the two years that you're looking at right now, the first year of that year is comparing against 2009, which we did 2% comp for the year.

So you got the first year where we started -- our comp started to surge was last year.

And the comparison got tougher last year, but two years ago we had a 2% comp.

Last year we started our double-digit.

Now we are double digits on top of double digits.

So I think the challenge is going to be can we do a third year, which is what we are going to be faced with as we get into the middle of the year.

The comparisons are a little -- the two-year comparisons are a little more favorable early in the year.

We have got the pricing increase early in the year.

But as we get to the back half of the year next year we're going up against two years straight of double-digit comps.

So that is where the challenge really is.

Understood, thank you.

Alvin Concepcion, Citi.

Your story unit guidance calls for an acceleration in openings next year.

I am just wondering what you are seeing out there in regards to availability of sites and if you're seeing availability of sites improve?

We are really not seeing a lot more new developments than we have during the past two years.

So our ratio of new developments and our remodels of existing developments is going to remain about the same.

That is to say it is going to remain the same as it has been over the last couple of years where it has been more in that sort of 35% new development, 65% renovations.

As we have told you before, about four and five, six years ago that number was flip-flopped and about two-thirds of our stores were coming from new developments.

So we are really not seeing particularly more new developments.

What we are able -- we have got a lot of confidence based on our new store openings and based on our A model strategy that we can be fairly aggressive, certainly in all of our proven markets and even take some chances working on some A models in our developing markets in order to continue to get more new restaurants.

So that is what we have done for next year.

And we are very optimistic that we're going to continue to have terrific openings next year, even at this increased pace of growth.

Great.

And then I think previously in the past you have talked about needing something in the range of a mid-single-digit same-store sales with normal inflation to maintain or grow margins.

Is there anything different in that dynamic as you're looking at 2012?

There is not.

I would say we need the mid-single-digit just to maintain our margins when you have normal inflation.

Now normal inflation, it depends on if food inflation is in the 3% to 4% range that is kind of normal.

If it is in the 6%, 7%, 8%, 9%, or 10% range that is not normal.

And just like you are seeing this year even though we have had very strong comps, even though we have had leverage on every single line item, our leverage, at least at the restaurant margin level, on a 11% comp we can't overcome 250 basis points of higher food costs.

Now that is effectively 12% inflation if you compare it to the third quarter of last year.

So largely in this environment it largely depends on what food inflation is for the year and in each individual quarter.

Great, thanks a lot.

Bart Glenn, D.A.

Davidson.

I was just curious, my understanding was the West Coast when they received the initial price increase that was just sort of catch up with national pricing based on the cost structure.

Now would the intention be to still have an additional wave of price increases to catch them up to the rest of the nation?

I haven't decided yet.

One thing, by getting them off cycle they had a price increase in 2010 around the second quarter, like in May, the May/June timeframe, and so by increasing again in March we did accelerate that a little bit, and so we will continue to monitor prices out there, monitor transactions.

And we haven't made any short-term decisions on whether we're going to raise prices again, but our long-term objective would be to continue to take steps to allow California pricing to catch up, because it is very expensive to do business out in California.

And for their prices to -- while they are closer to a typical Chipotle market across the country, they are still a little bit behind.

There are at least within a few percentage points so they're at least in the ballpark now.

Thank you.

Larry Miller, RBC.

I wanted to circle back to the throughput commentary.

I was hoping maybe you could share some metrics -- you have done that in the past where you talked about -- I guess, labor efficiency per hour, maybe that is not the right one, but number of people you could serve per hour, and kind of where you're at and where you think you can get to, or any kind of metrics you could put around that.

And then I also had another question if you would let me.

Thanks.

I guess to be more specific, right now at our peak hour on Fridays at lunch we're doing about 110 transactions in an hour.

That is this time of year, which, of course, is a slower time of year then the April, May, June, July time where we have even more transactions coming through the door.

Our very best year ever was 2007, where that number was 112, so we are 2 transactions off of where we were then during our peak hour.

So one could argue that is pretty darn good throughput, but we we also look at when we analyze this is a few things.

Number one, we have more transactions now coming through our doors than we had in 2007, higher volumes, but more importantly, more transactions.

And we have better restaurant teams.

We have a lot more restaurateurs.

Well, we have about 240 more restaurateurs.

We have much stronger field leadership, and we have much more impressive people joining us in the crew ranks than ever before.

So we believe we have all the ingredients to have much, much better throughput than we have had ever in the past, and we won't be satisfied until we accomplish that.

All of the regional directors were in a meeting here in Denver just recently where there was a primary point of discussion.

And all the regional directors believe solidly, as do all of our field leaders, that we can get much, much better in throughput because we know how to do it.

And it is funny, we got bogged down a little bit, I think, in late 2008 and 2009 with just kind of watching the recession and dealing with trying to do everything we could to keep transactions solid and coming in.

But now -- in 2010 we focused more technically on throughput in terms of getting tools in place that would allow us to make sure that we had all the labor we needed during peak hours to do what we know we can do.

And now I think it really comes down to just simply doing what we know we can do with those teams.

And given the fact that we have had significant turnover since 2007, we are really talking about re-teaching that which we know how to do to a lot of people who, while terrific, might not know the techniques well enough.

So we don't think it is going to be particularly difficult to really improve throughput, it is just something that now we have to turn our full focus on in the rest of this year and throughout next year.

Okay, that is helpful.

I was just curious if you could expand on that.

Maybe -- you say you think it can be higher than you all believe because of some of these things you have been working on.

Any order of magnitude?

And am I right when I just do the quick math that you only do roughly 5 to 6 people per day, so if you get a few more in per hour that is about 1 point in traffic comp.

Is that right?

Yes, that is right.

We have about 500 transactions per day per restaurant, and so if we can get 5 more through that would be 1%.

The question is, is that percent an incremental addition to our customers or would those people have waited or would they have walked away?

We believe that our lines are long enough during our peak hour, particularly lunchtime, that people are walking away from the end of the line.

If we can shorten that line, and create even more of a reputation for being very, very quick, speedy, the people will either choose to stay in line or be less intimidated by the lines than they might be today.

So we think it is -- that there will be an incremental benefit of people staying in line and us increasing the overall amount of transactions per day in our restaurants.

And certainly something like 5 a day or 1% would be something that is highly achievable in my mind, and hopefully we will be able to do better than that over the next few years.

That is very helpful, thanks.

I was just curious, you gave us -- with the 2012 unit growth you gave us the mix of existing versus new markets.

You also gave us the mix of A models versus traditional.

Do you have any sense of -- sort of, you know, any sense of the numbers that might be what you would call large urban markets and smaller urban markets?

Most of our -- if you're talking urban, meaning real urban, like New York, Chicago, San Francisco, something like that, that is a relatively small number of our openings.

Typically it is in the 15% to 20% range.

I would expect our openings next year would not vary from that very much, so most of our opportunity is more in the suburban.

And when I say that, we have 100 restaurants in Chicago, but it is maybe 20% or so of those already in downtown Chicago.

The rest are in what you might refer to as Chicago metropolitan.

And then, finally for me, what are -- Jack, if you could expand on that -- what are the differences, if there are any, in urban-level volumes, as you describe them, and suburban-level volumes, is there anything material difference in volumes?

Well, it depends.

Sometimes in an urban restaurant, like let's say it is in downtown Chicago in the Loop, will be very, very busy at lunch.

Do among the highest lunch that we will see in the whole country, but then do very little on the weekends, and so they might end up being an average or below average restaurant.

If you can -- if you can envision a store now in Manhattan, where you have not only got a lot of offices, but you have got residences nearby as well and then shopping on the weekend, that can be not only very, very busy [being] lunch during the week, but you've got dinnertime, you've got weekend, and that can be much, much, much higher.

I would say generally our urban restaurants are a little higher volume.

But our very highest volumes in the country are -- more of them are not urban.

So if you look at like our top 20, for example, more of the top 20 are -- I would consider to be not urban restaurants, if that helps.

It does, yes, thank you.

Thanks a lot.

I will move on.

Thanks.

John Ivankoe, JPMorgan.

Actually, I think somewhat of a follow-up on that.

Could you discuss the A models?

I think 30% again, if I heard that right, in 2012.

And since the units were -- in 2010, 2011 were achieving kind of average unit volumes, I guess, relative to the bigger units, could you discuss what you have learned from those from, I guess, a productivity perspective?

And I guess importantly why there is not even a higher mix of those units in the new unit development considering it is a lower investment cost?

That is a great question.

We have learned a tremendous amount from our A model strategy.

One thing we have learned is that there is a tremendous amount of pent-up demand for what we are doing throughout all the markets where we are -- especially all the proven markets where we have an established group of restaurants.

So we were delighted to find that in going into these sort of less Main-on-Main set of locations, these sort of between -- tweener locations, that we were able to get huge volumes out of those locations.

And we build these restaurants very carefully from a cost standpoint, and knowing that we had a much better operating and occupancy costs -- knowing that we could get away with volumes not as good as our traditional restaurants.

What we found was that volumes -- the sales volumes very nearly kept pace with our traditional restaurants, which meant that our return on investment was better than our traditional restaurants because of the lower cost structure.

So we learned a tremendous amount about the amount of pent-up demand.

We have gained more confidence that we can go to places where we had hesitated to go earlier.

And I think, also, very importantly, we learned a lot of lessons that we are able to apply now in terms of the cost structure to the rest of our restaurants, in other words, to our traditional restaurants.

In terms of why we wouldn't build more of them, the answer is we would.

It is really based upon how many of these we can find.

When we look at the traditional locations, which still account for approximately 70% of our new restaurants those are great, great opportunities for us.

The only way to increase the amount of A models we would do as a percentage would be to think about decreasing the amount of traditional restaurants, and there is no reason to do that, given the fact that those are still a wonderful business model.

So I would say we are out there aggressively -- in our proven markets we are aggressively finding all the A model sites we can and all the traditional sites we can and the balance just happens to fall out in that sort of 30% range.

So it is not that we are sitting here with a clipboard deciding 30% is the right number of A models, it is just a question of what the opportunities are, what the inventory is out in the marketplace, and where we decide that we are able to put new restaurants.

Everyone, that appears that is all the time we have for questions today.

At this point I would like to turn the conference back over to management for any additional or concluding remarks.

Thanks for joining us today, and we look forward to speaking with you next quarter.

Thanks everybody.

Thanks, everyone.

Thanks.

Ladies and gentlemen, that does conclude today's presentation.

We do thank everyone for your participation.