奇波雷墨西哥燒烤 (CMG) 2011 Q4 法說會逐字稿

Good afternoon and welcome to the Chipotle Mexican Grill fourth-quarter 2011 earnings call.

All participants are 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 begin your conference.

Thank you.

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 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 sale increases, food cost trends, margins, effective tax rates, return on investment, investment costs, capital expenditures, and shareholder returns, as well as other statements of our expectations and plans.

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

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

We refer you to the Risk Factors in our Annual Report on Form 10-Q and 10-K, as updated in our subsequent 10-Q's for a discussion of these risks.

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

I'd like to remind everyone that we've adopted a self-imposed quiet period, restricting communications with investors during that period.

The 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 on March 1 and continue through our first-quarter release in April.

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.

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

I'm pleased with our fourth-quarter results and our performance throughout 2011.

In a year where we saw only modest improvement in the economy, along with pressure from rising commodity costs, we were able to grow our revenue 23.7% to $596.7 million during the fourth quarter and 23.6% to $2.27 billion for the year.

We posted same-store sales growth of 11.1% during the quarter and 11.2% for the full year.

And our restaurant level margins were 26.1% for the quarter and 26% for the full year -- among the highest in the industry.

Our performance is a direct result of our continued focus on just a few things.

Strengthening our food culture, which is aimed at finding the very best ingredients we can; our ongoing quest for more sustainable sources for all of our ingredients that we use; and our commitment to preparing food in our restaurants using classic cooking techniques; and our people culture, which is stronger than ever, as our top performing employees continue to develop into inspiring future leaders of our Company.

While our primary focus is on building the Chipotle brand in the US, we're making small investments now in what we believe will become potential growth opportunities in the future.

To this end, we plan to open a second ShopHouse restaurant in Washington, DC market later this year.

ShopHouse Southeast Asian Kitchen is a product of our belief that Chipotle's success has never really been about serving burritos and tacos, but rather it's due to our commitment to serving the best-tasting food prepared using classic cooking techniques, building restaurant teams of top performers who are empowered to create a unique and special restaurant experience, and designing restaurants that are functional, appealing and that say something about the food we serve.

Like Chipotle, ShopHouse embraces all of these ideals.

We're pleased with the performance of the first ShopHouse since it opened in September.

While we're still working to perfect the concept, it reminds me very much of the first Chipotle when it originally opened.

Many current customers aren't quite sure how the system works or what to order when they first come in, and sometimes have issues with flavor combinations or the level of spice in their food.

But they like it.

And from the very beginning, you see that the customers are coming back week after week.

So we've decided to open a second restaurant, which should open sometime in the second half of this year.

We're also continuing to see future growth opportunities in Europe.

In September, we opened our second restaurant in London on Baker Street, and have two more under construction now, both of which are slated to open during the second half of the year.

Our first restaurant in Paris is set to open this spring.

Monty and I just visited Europe last month to get a sense of how our restaurants in London are doing and to check on the status of Paris, and to spend time with our talented teams there.

While it's very early in our development in Europe, we both saw some very encouraging things during the trip.

The restaurants in London are running extremely well.

The food is as good as our best restaurants here in the US.

The crews have been developed by two of our restaurateurs and provide us the future leadership we need to open additional restaurants, and the experience our customers are enjoying is extraordinary.

As of the end of the fourth quarter, all the meat we served in our restaurants was naturally raised, coming from animals that are never given antibiotics or added hormones, and raised in a humane way.

More than a decade ago, this was a first for a chain restaurant to begin serving pork from pigs raised in open pastures or deeply bedded pens and without the use of antibiotics.

That began our quest to find more sustainable sources for all of the ingredients we use.

Today, we're the only national restaurant company to serve all naturally raised meat.

And it is one of the ways we are changing the way people think about any fast food.

And we'll continue to work as hard as we can to address supply shortages that sometime result in our serving conventionally raised meats in some markets.

During the last quarter, we also completed the roll-out of brown rice to all of our restaurants.

We believe that brown rice is a great option for our customers, offering the nutritional benefits of whole grain and flavors that fit well with the rest of the items on our menu.

Since completing the roll-out, our customers seem to agree -- as the brown rice now accounts for about one-third of all the rice we serve.

We're also making progress in our efforts to better educate customers about food culture and the things that make Chipotle so unique.

Our Back to the Start short film, the animated piece that shows a farmer's journey from more sustainable farming to a more industrial one, and then back again, has been viewed online about 4.5 million times.

Through its run on nearly 10,000 movie screens nationwide and from YouTube, it has been seen more than 26 million times.

And it's making an impression on those who have seen it.

According to our research, nearly 80% of theater attendees recall seeing the spot, with 84% saying they found it relevant.

79% of the people who have seen it said that they found it persuasive.

It's also won praise from the New York Times, Adweek Magazine and others.

Because we think this film is a great way to connect with people in a way that's powerful and authentic, we're continuing to explore other ways that we can use it.

During the quarter, we also used our annual Boorito promotion as an opportunity to connect our customers to issues that we believe are important -- this time, the place of family farms in America.

Historically, Boorito was a promotion that amounted to being a giveaway to customers if they came into our restaurant dressed as their favorite Chipotle menu item.

In 2010, we recreated the promotion to give it a philanthropic twist, and to better use it as an opportunity to educate customers about important issues in the food system.

We continued in this philanthropic direction this past Halloween, asking customers to dress in costumes inspired by the family farm, and offering them a burrito, order of tacos, a salad or a bowl for $2 at any of our restaurants after 6 p.m., with the proceeds benefiting the newly-created Chipotle Cultivate Foundation.

This foundation was created to expand upon our tradition of support for family farms, sustainable agriculture, and programs that educate the next generation of farmers.

Through the program, we contributed $1 million to the Foundation -- $1 million -- which made substantial -- and made a substantial donation to the Farm Aid organization, and will make additional grants and awards beginning this year to help create more sustainable, healthful, and equitable food future.

Finally, we're in the process of expanding our Farm Team Loyalty Program.

We started off slow with only our managers inviting our customers into the program.

Starting slowly has helped us refine the experience.

After positive feedback from the members so far, we're going to expand the program by allowing our current Farm Team members to invite a limited number of their friends into the program.

We're also expanding the program by introducing a light version for Facebook and other platforms as a way of allowing a larger number of customers to participate in some aspects of the program.

Remember that Farm Team is not a frequency-based program like most restaurant loyalty programs, but rather is about identifying our most loyal and passionate customers, educating them more about what we do, and giving them tools to help them become ambassadors for the brand.

We believe that the pieces are in place for us to continue to change the way people think about and eat fast food.

The strength of our food and people cultures continues to grow.

We're doing a better job of educating customers about the important characteristics that distinguish Chipotle from other restaurants, and we are seeding opportunities for future growth in ways that are consistent with our culture and our business model.

We believe our focus in these key areas will allow us to continue to deliver solid results for our shareholders throughout the year and into the foreseeable future.

Now I'll turn the call over to Monty.

Thank you, Steve.

Maintaining such a strong focus on the things that are most important to Chipotle's success requires great discipline.

We're re glad to see that by maintaining this focus, we continue to produce strong results.

By continuing to improve the critical areas of our business, particularly our food culture and our people culture, we are raising our standards to new levels all of the time.

The quality of our food is the best it has ever been, as is the quality of our people.

For example, the quality of the restaurant experiences we are seeing during our restauranteur interviews today is far better than ever before.

This group of extraordinary leaders continues to raise the bar in every facet of our operations -- better customer service, faster throughput, cleaner restaurants, and crews of empowered top performers that give us great confidence that our future leaders are already among us.

As our managers aspire to become restaurateurs, they know that the key ingredient is a team of all top performers.

And more today than ever, both our GMs and our field leaders know that while building a strong team takes a lot of effort, it need not take a lot of time.

And as they work towards quickly building stronger teams, they are raising their standards both in terms of who they hire, as well as who they allow to remain on their team.

They've also raised their expectations about how quickly they can elevate a team of high performers to the restauranteur level.

During 2011, we added 102 new restaurateurs, and we now have more than 240 restaurateurs overseeing nearly 40% of our restaurants, including their home restaurant and other restaurants that they mentor.

And if you include field leaders who have come through the restauranteur program -- in other words, those that were promoted to apprentice team leaders, team leaders, or team directors -- we have about 264 restaurateurs today.

And about 60% of our restaurants are now overseen by these extraordinary leaders.

We continue to be amazed at how these empowered top-performing leaders continue to raise the bar far beyond even what we thought was possible.

For example, one of our newest restauranteurs, Flora Silva, became a restauranteur on just the second day after opening a brand-new Chipotle restaurant.

This is something that none of us thought was possible; but this GM taught all of us a lesson.

She came from a restauranteur store herself, and had a strong vision for what a winning team looked like.

Weeks before her new store opened, she spent days on the sidewalk in front of her new restaurant interviewing candidates for crew positions.

She carefully selected only the very best candidates -- people who had the characteristics to be great and who were committed to becoming leaders at Chipotle.

Once she had selected her team, she trained each of them in an existing Chipotle, and then invited all of them to her apartment to explain to them her vision for her restaurant, and to watch videos from the 2010 All Managers Conference to be sure that each of these people understood Chipotle's unique culture.

She made a commitment to each of them to help them grow, and carefully described exactly how they would be able to become managers and future leaders at Chipotle themselves.

At the same time, she secured a commitment from each of them to devote themselves fully to becoming part of a restauranteur store very quickly.

When I went to visit this new restaurant, it was not to make Flora a restauranteur.

In fact, I was just stopping by to -- stopping in to meet the team.

But the level of talent, inspiration and empowerment of the team was terrific, and it was clear that the team deserved to be recognized as a restauranteur team.

I tell you this story to illustrate the level of commitment that our managers have, as well as to show their level of creativity and discipline when it comes to insisting on having an elite culture.

I also tell you this to demonstrate that we are better equipped today to hire and train great teams and build great cultures, because of the excellent example that many of our top managers set for us.

Flora's example is one of many, with similar lessons that all of our aspiring restauranteurs can benefit from.

As the year progresses, we expect to see many more similar stories from these remarkable managers and emerging leaders.

Beyond restauranteurs, we're also continuing to see examples of people making their way from the restaurants into broader leadership positions.

One recent example is Matt Scheiman, who began working with Chipotle as a General Manager in 1999.

In his most recent position as team director, Matt has been directly involved in the development of more than 45 restauranteurs, six apprentice team leaders, five team leaders, a team director, and even a regional director.

We recently divided our Northeast region into two regions and the North -- one called the Northeast and one called the mid-Atlantic, and promoted Matt to be the Regional Director in the Northeast, where his amazing ability to develop people and create an extraordinary team will ensure our success well into the future.

While our culture is well-known to our current crews and managers inside Chipotle, it isn't necessarily as familiar to people outside the Company.

So we are in the early stages of implementing a new recruiting strategy.

This strategy is aimed at improving the pool of potential applicants by helping them understand what our current crews and managers already know -- that we're a company with a special culture that provides tremendous opportunity for our top performers.

This strategy, which we're rolling out in March, includes a new HR software system that provides better analytics to help us target the very best applicants available, along with a strong emphasis on communicating and marketing the opportunities at Chipotle, to help potential applicants understand our culture and the unique opportunity that comes with building a career here.

We will also be relaunching our employee referral bonus program and adding more field recruiters, as well as expanding our recruitment efforts on college campuses and with veterans.

Through this strategy, we expect to get even better applicants, so that we can continue to improve the quality of people that we are hiring, even as we accelerate our growth this year.

Of course, the outcome of all these efforts will be better customer service and a better restaurant experience.

One of the central aspects of good customer service at Chipotle is better throughput.

In our last call, we acknowledged that in spite of higher unit volumes and some new training tools, we had not made significant improvements in throughput during our lunch and dinner hours since reaching our peak in 2007.

Since we began to reemphasize this important aspect of our operation, we have seen an improvement in transactions during our peak lunch hour.

So whereas our sales comp was growing slower during peak hours, and faster during non-peak hours during the last several quarters, our recently renewed emphasis on throughput has helped improve the percentage of our comp that comes from the peak lunch hour.

As we indicated on our call last quarter, we are accelerating our new restaurant development this year as well, with plans to open 155 to 165 new restaurants.

While this is more restaurants than we have ever opened in a single year, we are confident with regard to this plan -- not just in 2012, but over the next couple of years as well.

Our real estate pipeline is stronger than ever.

And because we have broadened the universe of potential sites to consider -- largely because of our A model strategy -- we are confident that we remain in control of our own destiny in terms of growth.

As we look out over the next two years, I think we are well-positioned to continue to find great sites, particularly if we see an uptick in the amount of new developments being built.

But we are well-positioned to continue our strong growth, even if new construction remains slow.

By continuing to improve our people culture, the quality of applicants coming to Chipotle, and the strength of our real estate portfolio, we are more confident than ever in our ability to continue to open and operate great restaurants at a healthy pace this year, and in the coming years.

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

Thanks, Monty.

We're extremely proud of the results that our restaurant team has delivered during the fourth quarter and for the entire year in 2011.

Our managers continue to delight our customers by hiring top-performing crew and empowering them to make each customer's dining experience truly special.

Our financial results continue to be driven by a focus on strengthening our food culture, our people culture, and our business model.

And while we're pleased with these financial results, we're even more pleased with the strong position we are in as we look to the future, both in 2012 and beyond.

We're proud to report our sixth consecutive quarter of double-digit comps since the economy began to recover, with a comp of 11.1% in the quarter.

Our average restaurant sales now exceed $2 million for the first time.

Sales in the fourth quarter increased 23.7% to $596.7 million, driven by new restaurant openings and the 11.1% comp increase.

The comp was driven mostly from increased traffic, while higher menu prices added about 4.9%.

For the year, sales increased 23.6% to $2.27 billion, and the comp for the full year was 11.2%.

Menu price increases helped the full-year comp by 2.9%.

And as we mentioned on our last earnings call, we still haven't seen any noticeable resistance to the summer's price increase, either in average check or in transaction trends.

Our comps held up well in the fourth quarter despite a tougher comparison to Q4 of 2010, and we had a comp of 12.6%.

The unusually mild weather in December, compared to winter storms in 2010, added about 1% to our Q4 sales comp.

January sales comp started out quite strong, as the mild weather continued into the first few weeks of 2012.

And now that more normal winter weather has arrived in most of the US, we're seeing more normalized sales trends similar to the fourth quarter trends before the unseasonally warm December.

We face tough comparisons in 2012, as we will compare against double-digit comps from 2011 in each quarter -- the first time we've done that since before the recession.

And in the second half of the year, we'll compare against two years of double-digit comps, including the price increase we took last summer.

While we have no plan for a systemwide price increase, we do intend to raise prices in the Pacific region.

As we've mentioned in the past, California has very high costs of doing business, yet our menu prices there are below those of most of the rest of the country.

The Pacific price increase will have only about a 1% impact on the Company once it is completed by the end of the first quarter.

As a result of this increase, along with our expectations that our focus on throughput will begin to help the comp in the spring when our sales are the highest and our lines are the longest, by increasing our comp guidance to the mid-single-digits.

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

As a result, we now expect new restaurants to open in the $1.5 million to $1.6 million range.

A models continue to perform well, with sales just below traditional sites, but with much higher returns.

We opened 67 new restaurants in the quarter, bringing our year-to-date openings to 150, which exceeded the high end of our guidance range for 2011.

We ended the year with total companywide restaurants of 1,230, which represents a restaurant growth rate of 13.5% for the year.

As we said during the last earnings call, we plan on increasing our new restaurant openings in 2012 to a range of 155 to 165 new restaurants, with A models representing about 30%.

We expect that these openings will occur a bit more evenly between the quarters in 2012.

Diluted earnings per share for the quarter was $1.81, an increase of 23.1%.

Efficiencies from higher comps and a price increase were largely offset by higher food costs.

Restaurant level margins did increase by 20 basis points to 26.1% for the quarter.

Food inflation for the quarter was 9% -- much higher than the 4.9% effective run rate for the menu price increase.

Earnings per share was $6.76 for the full year 2011, an increase of 19.9% over 2010.

Again, efficiencies from higher comps allowed us to leverage nearly every line item on the P&L, except for food, which, for the full-year 2011, was up 190 basis points from 2010, and G&A, which was up 10 basis points from 2010.

Restaurant level margins year-to-date were 26%, a decrease of 70 basis points.

Food costs were 32.2% for the quarter, up 120 basis points from 2010, but sequentially were lower than third quarter.

We were pleased to see food costs improve from the third quarter, due to lower avocado costs in the fourth quarter, as we shifted away from the expensive and undersupplied California avocados, and begin harvesting avocados from Chile and Mexico.

Food costs also benefited incrementally by about 10 basis points from previous menu price increases fully realized during the quarter.

Food inflation overall in 2011 was about 9.3% before adjusting for the menu price increases taken during the year.

While we're cautiously optimistic we'll see more reasonable prices in 2012 for avocados, dairy, and produce, we expect these benefits will be more than offset by higher costs for our beef, chicken, rice and beans.

Beef costs will be especially challenging, due to protracted supply shortages, despite recent reductions in grain prices.

Additionally, during the fourth quarter, we reached a milestone of serving 100% naturally raised chicken and steak, and will continue to seek opportunities to invest in higher quality ingredients where we can.

Overall, we expect food inflation in 2012 will be around mid-single-digits, starting from the 32.2% we saw in the fourth-quarter.

Labor costs were 23.8% of sales in the quarter, a decrease of 100 basis points from 2010.

Labor leverage is driven by higher sales volumes and by the menu price increase.

And year-to-date, labor costs are down 80 basis points from 2010.

Occupancy costs for the quarter [and] the year declined by 50 basis points from 2010, due to higher average restaurant sales.

Other operating costs were 11.5% for the quarter, an increase of 30 basis points, due primarily to a greater investment in marketing.

Year-to-date, other operating costs were flat at 11.1%.

Marketing was 1.6% in the quarter compared to just 1.1% in the fourth quarter of 2010.

We invested more in marketing during the quarter -- animated film Back to the Start, which played in theaters around the country and on YouTube, allowing over 26 million people to see this film.

We also hosted our first-ever Cultivate event in Chicago in October.

We feel strongly that we are connecting with customers and prospective customers in an emotional and authentic way through these kinds of marketing investments.

While marketing was about 1.3% in Q1 of 2011, we expect it will be in the 1.5% to 1.6% in Q1 of this year, due to planned marketing activities.

Overall for 2012, we expect to return to our historical marketing expense range of around 1.75%.

G&A was 6.4% in the quarter or 40 basis points higher than 2010, due to higher non-cash stock compensation expense.

The non-cash, non-economic stock comp expense was about $9 million in the quarter and $41 million for the full year in G&A.

This is $5.3 million higher in the quarter and $20 million higher during the year compared to 2010, purely as a result of stock options issued at a much higher stock price, which results in a much higher calculated accounting charge.

Sequentially, G&A was up 10 basis points in the fourth quarter compared to Q3, as a lower relative stock comp expense was more than offset by our charitable contribution from our Boorito event and from higher non-qualified benefit plan expenses.

The non-qualified benefit plan is an unfunded, non-taxed qualified plan, and the expense comes from equalizing the investment earnings of participant accounts.

We plan to hedge our unqualified plan expenses by setting up and funding a trust during 2012.

For the year, our underlying cash G&A, adjusting for the higher non-cash stock comp expense, is lower as a percentage of sales as a result of our constant efforts to grow our underlying G&A at a slower rate than our sales growth.

In 2012, we expect to continue to manage underlying G&A -- our underlying cash G&A to grow at a slower rate than our sales growth before the impact of the non-cash stock comp expense and before the cost of the biannual All Manager Conference.

Including both these items, the non-cash stock comp and the cost of the All Manager meeting, we expect G&A as a percentage of the sales in 2012 will be about the same or slightly higher than in 2011.

As a prospective, if a similar number of options were granted this year at the current stock price, the accounting charge for non-cash stock comp would increase by about $25 million, due to the higher stock price.

Our effective tax rate was 38.5% for the year and 39% for the quarter.

The higher tax rate is due to a higher estimate of state tax rates, as states are getting more aggressive in disallowing certain deductions, and as we earn proportionally more in higher tax states.

For 2012, we expect the effective tax rate to increase further to 39.3%, principally as a result of the higher act not continuing, and the work opportunity tax credit and the R&D credit, which have expired and, as of today, have not been renewed by Congress.

We've now nearly completed the most recent $100 million stock repurchase program at an average price per share of $239.

Over the past three years, we've purchased a total of $300 million in our stock at an average overall share price of $98.

And we're pleased to announce that our Board of Directors has authorized an additional $100 million stock purchase program.

Our average development costs were about $800,000 in 2011 and we expect them to remain around $800,000 in 2012.

With these investment costs, combined with strong opening sales and a strong unit economic bottom, we expect to continue to deliver attractive cash-on-cash returns on our new restaurants.

Capital expenditures totaled about $143 million in 2011, net of landmark credits, primarily related to new restaurants, along with continued reinvestment in existing restaurants.

And in 2012, we anticipate CapEx will be in the range of $150 million to $160 million, net of landlord credits, and the majority of which will relate to new restaurant construction.

We were able to increase our total cash and related investments by $235 million during the year.

That was even after investing $143 million in capital expenditures net of landlord credits for new restaurants -- mostly for new restaurants -- and repurchasing stock totaling $64 million.

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

We're confident that the growth options we're seeding today, including ShopHouse, Chipotle in London, Toronto and Paris, will all provide attractive value-enhancing opportunities in the future.

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

Thanks for your time today.

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

Operator, please open the lines.

(Operator Instructions).

David Tarantino, Robert W.

Baird.

Jack, I just wanted to clarify a couple of points you made on the recent comp trends and just get your thoughts on what's driving that trend.

So, first of all, on the comment about trends sort of settling in once you got past the weather, if you could maybe clarify what you meant by that?

And is it still running in that sort of low double-digit range, even when you factor out the weather?

And then secondly, the comp trend has stayed very strong despite very difficult comparisons.

And I was just curious to know your thoughts on whether you think some of that is being driven by some of the internal factors, like marketing and throughput, or if you think the consumer environment is starting to look a little bit better?

Okay.

Yes, David, on the comps, this is always a choppy time of year to look at the trends and sort through what's happening, because you're trying to sort through winter weather, either mild or extreme this year, than compared to last year.

And so when we do that, and we start to see kind of normal winter weather this year compared to relatively normal winter weather last year, it does look like our trends are returning back to very strong, kind of in that very low double-digit range.

So, for example, if you took the 1% that we got out of the fourth-quarter, would be right at about a 10% or a 10.1% or so.

And that's more in line with what it looks like the underlying trends are.

Now in terms of our comp trends remaining strong, they have remained strong.

We think the comparisons are going to get tougher, David, because we're still, right now, comparing against just one year of double-digit comps.

And we've got two more quarters to do that.

So if you go back a couple years to 2010, in the first quarter of 2010, we were -- we had a comp of about 4%.

Second quarter, it was a little over 8%.

And so we're kind of looking at it as those are relatively easy comparisons because it's not two years of double-digit comp.

So we think that, as we get out into the second half of the year, that's where we'll see whether we can climb over two years of double-digit comps.

We have a nice history of doing that for 10 years before the recession, and we just don't know how things will look in the second half of the year.

And we also compare it to the price increase in the second half of the year.

In terms of are we seeing anything specific in our comps from marketing or throughput, I would say, no, there's nothing noticeable that we're seeing that's directly attributable to throughput or marketing.

We think that that marketing is definitely helping our cause.

We definitely think that it's allowing people to discover why Chipotle's special wire food and how we source our food is different than any other restaurant company.

We think that the loyalty is likely to increase as a result of our marketing effort.

But in terms of seeing a change in our comp trend line from marketing or throughput, we're not seeing that yet.

Great.

Thank you.

Michael Kelter, Goldman Sachs.

Sure.

I had two questions.

The first one, on the productivity gains that you guys have been referencing, are you seeing an increase in traffic at the stores in which productivity gains are significant?

Or are people just shifting back from the shoulder periods to peak lunch?

I mean, is it -- are you seeing anything that leads you to believe this is now going to drive up traffic at those particular stores?

And then on a separate kind of unrelated note on the marketing, the customer card and some of the other stuff that you guys are doing and investments you're making, do you see any of them as being meaningful in 2012?

Or at this point, just kind of rotating around different things you're doing, tweaking things, playing with things -- nothing is really going to move the needle?

Are you getting really confident about anything in particular?

Well, Michael, I'll try to answer the throughput question.

And I mean, Jack pointed out that it's hard to label the throughput as being -- that we can attribute much of the comp trends to the throughput at this point or the change in throughput.

You know we have seen some encouraging signs.

We brought our focus back to this a quarter or two ago and in the second -- in the fourth quarter of 2011 versus the previous year's fourth quarter, you know we saw very encouraging results -- particularly in December, where we saw that our throughput was faster in December than the previous December, and even quicker than it was during our best work in 2007.

So, that's nice to see.

And it was -- our throughput in December was the fastest we've ever had.

And so far, we don't see any that that's falling off in January, which is terrific.

You know, we think that we're going to continue to be able to do that.

It's really all just getting ready for game time, which is April, May, June, July, when our -- when seasonality dictates that we have a lot more people coming into our restaurants.

And that's really what we're doing is making sure that our teams are aware of exactly those things they need to do, to drive great throughput, and they're ready to do it when those lines get really, really long.

Because that's the time when we really need lunch -- peak hour lunch and peak hour dinner to be able to contribute their fair share to our underlying comp.

The percentage of our comp that is attributable to our peak lunch hour in December also increased over the previous month, and also increased over where it was the fourth quarter of the year before.

So that was another nice thing we saw, is that we were able to get the lunch hour to contribute sort of more of its fair share to comps.

So that was a sign that also encourages us.

Again, we want to be careful -- we're optimistic, we feel really good about it; it seems like our re-emphasis on this important initiative is leading to some really great results.

But again, game time is April, May, June July, when the traffic really returns and that's when we want to -- that's when we'll really judge, grade ourselves on how effectively we've improved on this really important initiative.

So we're optimistic for now.

We've seen some clear benefits, but will we be able to pull those off when it gets real, real busy?

We believe we will but that remains to be seen.

The second question -- maybe you'll have to repeat that one.

Or did you hear it, Steve?

Yes -- no.

So, Michael, I think that we've done some things that have really made an impact marketing-wise.

And if you think about our marketing, we really want to deepen our relationship, develop a deep relationship with our customers.

And what I mean by that is, is really allowing them to understand what differentiates Chipotle and what makes it special.

And I think over the years, we've learned that quick sort of advertising blips about the facts of Food With Integrity don't accomplish that.

But over the past year or so, we've developed things like the Farm Team, the Cultivate event in Chicago, the video Back to the Start, which really all are designed to develop a relationship, an emotional relationship with our customers.

And it's working.

We get great response.

Our research indicates that we're really connecting with our customers and they're finding reasons to appreciate Chipotle more, beyond just great tasting food and value and convenience.

And it's these things -- it's marketing this way that I think is more sustainable long-term.

It's not about a marketing blitz or a limited time offer that might provide a blip or move the needle, as you say, in a jerky way; rather it's something that's calculating and sustainable, and I think, again, really means something to customers -- especially our customers.

Thank you very much.

Paul Westra, Cowen and Company.

You there, Paul?

Sorry, I had mute on there.

(multiple speakers) I just actually had a follow-up question on the marketing spend.

Jack, I think you said 1.75% for this year in '12.

What was it for the full year of '11?

And obviously, given Steve's comments, it sounds like you're getting a good return on that investment.

Is that a number that should creep up or down looking out beyond 2012?

Yes, you know, Paul, it was lower in 2011.

It was in the 1.4% to 1.5% range.

And so we've been underspending the last couple of years, and we've really kind of changed almost everything about our marketing.

And we feel really good about the steps we've taken.

We feel really good about this film that Steve talked about.

And the more people that see it, the more people are really connecting with that film in a special way.

You know, this Cultivate event, which we had in Chicago last year, and we plan to do another event or two like that next year -- are totally different things.

They've never been done before by Chipotle.

We're not aware that anything has been done like these by any companies in the past.

And so, as we're finding our way and finding successes connecting with customers with these efforts, we now are feeling like we want to do more of them.

So I would say we've underspent the last couple of years and we want to return back to kind of the 1.75%.

We don't have any expectations of needing to go past 1.5% to fully invest in the marketing activities that we're thinking about right now.

Great.

And just one more question.

I'm curious from you guys' perspective, especially with your unique people skills.

What do you think the impact of the Health Care Reform Act, if it is implemented in its current law in '13, have you looked at that?

Would that affect you as a company, maybe how it will affect you differently than maybe the industry?

Yes, Paul, we have looked at it.

We haven't spent an extraordinary amount of time on it, just because there is enough uncertainty; hopefully, some of which will be resolved this year.

It would have a meaningful impact on us.

It would have an impact on, we believe, every restaurant company, including us.

And so we're not prepared to talk about the specific dollar amounts, but it would mean taking virtually all of our crew that work a certain number of hours and offer them insurance.

And we, today, have an insurance -- a limited insurance program that we offer to our crew.

Most of our crew choose not to pick that up.

And so we would go from very few of our crew being involved in a voluntary program to requiring -- to us being required to provide insurance to all of our employees.

So it would be a pretty significant change to our business.

Great.

Thank you.

Jason West, Deutsche Bank.

Yes, thanks.

Just want to follow-up on Monty's comments around some of the HR initiatives and trying to bring more people onboard.

I mean, should we read anything into that around your ability to hire good people these days.

I know you've had some issues with turnover earlier in 2011.

If you could just kind of update us on where you guys are there.

Yes, it's a great question.

And it's funny, we actually just -- when we sort of putting together our comments, we all discussed about how maybe someone would think that there was something to read into that.

So I'm glad you asked.

You know, we did have higher turnover last year.

We hired a lot, a lot, lot of people last year.

And underlying question that you guys might have is, are you still able to find really good people?

And the answer is, yes, we are.

And we found that more and more people are coming our way.

We are interviewing more and more people.

We're hiring more people, but we're able to be more selective because of the greater number of people coming our way.

But when you start to look at the pool of people who come our way and why they come our way, we have not been very strategic about that, historically.

People just get to know us and friends tell friends and -- or we put out advertisements on craigslist or other sort of message boards, both electronic and paper, and people come in.

But we haven't really been that strategic about it.

And we did a little bit of research mid-year towards the end of the year, to find out what the perceptions were of some of these people -- you know, people who were looking for jobs in the quote/unquote, "quick service or fast casual industry." And what we found is that their perception about what the job at Chipotle was all about was the same for Chipotle as it might be for even quick serve restaurants, fast food restaurants.

In other words, they didn't think that it was that much of a great job.

They didn't know what opportunities were available to them.

They didn't know much about what kind of culture we have.

And we think that our company is such an extraordinary place to work, and we all feel like that's so obvious, that sometimes, I think we become maybe a little bit insular and don't understand the fact that the rest of the world doesn't know that.

So once we found that out, we've been very -- we've tried to become more strategic.

And in doing so, we're putting -- I talked to Mark Crumpacker, our Chief Marketing Officer, some time ago, and said, "How can we market to potential employees?

Not just customers; and help them understand what we're about." And we put a team of people together who looked into that.

And so that pushes design really just when you're hiring 30,000 people a year or so, you want to make sure that the candidates you hire -- the pool of applicants that you're hiring from is the best it can be.

And we think that we can improve that substantially by being a little bit more strategic, by doing some marketing and doing other things that I mentioned during my comments.

So no, nothing to read into it in terms of us having a particular problem with it.

We haven't had a problem with it.

But we do think we can get much, much better.

The bottom line is that today our standards are much higher for who we have in our general manager positions.

They are higher for who we have in our apprentice service manager and kitchen manager positions, and likewise we want them to be higher in terms of the entry-level people that we hire, so that we can have a much stronger group of future leaders.

And have the greatest odds of having the team of all top performers throughout the entire country.

Okay.

Thanks for the color.

Joe Buckley, Bank of America Merrill Lynch.

I had two questions.

Monty, your comments about the expansion and the goal of opening 155 to 165 stores in 2012.

You mentioned something about over the next several years as well.

I guess I was curious as to your thinking that 2013 and 2014 expansion would be in the same absolute number range.

Well, you know, I really wasn't trying to pencil in any number range for that.

We'll give that much later in the year.

I guess, first and foremost, I was wanting to express a great deal of confidence in the guidance we've given of 155 to 165 for this year, because our real estate pipeline and the quality of the real estate that's in that pipeline is really terrific.

And that's, I think, evident in some of the comments Jack made with regard to the strength of our new store openings, and the quality of the restaurants that we've been able to open throughout the country and throughout all the regions, and in proven and developing markets and new markets.

So we feel really good about the pipeline of real estate.

I think the A model strategy has given us a lot more flexibility, and frankly, a lot more creativity in the way we look at real estate.

So sometimes, for instance, even when we go into a market and looking for A models -- you know, in other words, go into a market that perhaps is off the beaten path or something that we wouldn't have really looked before, we go in there looking for A models, but -- and we find them.

And that helps us.

But in addition to finding A models, sometimes those searches are helping us -- are leading us to open traditional Chipotle's that we may not have earlier considered.

And the very, very strong openings we 'e having are showing that that more progressive approach is a good approach.

And so, that gives us a great deal of confidence in opening the stores we're going to open in 2012.

And we do think that there is -- we have a high degree of confidence that we'll be able to continue to have a very strong pipeline in future years of restaurants to choose from, you know, even if the amount of new developments remains pretty anemic, as it is today -- that being about 30% of our restaurant -- of our new restaurant mix right now.

So yes, not trying to tip our hat to what we're going to do really in 2013 or 2014, but we do feel very confident that we're able to get really strong and fairly numerous real estate portfolio.

Thank you.

Jack, just one more on the food cost inflation for the year.

How does it flow?

What are you expecting for food cost inflation the first quarter?

And is there a big difference first-half versus second-half?

Yes, Joe, I don't know that I can give you a precise reliable answer, but we think that if you start with the 32.2% in the forth quarter, we think this mid-single-digit inflation that I talked about will happen throughout the year.

So if it happens evenly throughout the year, I mean, that'd be orderly and it never happens that orderly.

Mid-single-digits is somewhere in that 150, 160 range or so, and it might be 40 basis points or so each quarter.

That might be one orderly way to do it.

And again, it's not likely to be that orderly, but that might be one way to think about it.

We don't think it's going -- it's certainly not going to hit all in the first quarter.

We don't think it's all going to be backloaded either.

So probably somewhere in between.

Thank you.

Sara Senatore, Sanford Bernstein.

I just wanted to follow-up on a couple of the comments you made about the new development.

First of all, the fact that these are so high, is that anything to do with where you're developing them?

Obviously, I know you seem to be everywhere now in New York City.

I guess the question is, is there any -- is there real variance across geographically or in new versus developing markets, in terms of essentially the need in economics?

And then I have one more follow-up.

Yes.

The answer is that our new store openings are consistently excellent throughout all of our proven markets throughout the entire country.

So we don't see weakness in a particular region and strength in a particular region; we're just very happy with how they're opening everywhere.

Of course, there is, and always has been, a significant difference between how we open in the markets that we call proven markets and the markets that we call developing markets.

You know, so that remains true today.

So there is a significant difference between that.

But even in the developing markets, we're very happy with our openings.

We're very happy with the comps that we're showing as those stores mature.

And we're very happy with our ability to take more risks in those markets with our A model strategy; otherwise to continue to move them towards becoming proven markets themselves.

Great.

Okay and then just for the follow-up, can you (multiple speakers) -- yes.

Can you just give me a sense -- you mentioned on throughput, how it will be really kind of the rubber will hit the road in the spring.

Can you give a sense -- I think in the past, we've heard you say average transactions in your peak hour is something like 110.

Can you just give me a sense of how that might vary between the really peak months April through July, and then what would just come through with winter?

Yes, I mean, you know, it softens in winter so that our average -- our peak hour transactions are sort of more in the 100 range during the winter months.

And during the summer months, it's historically gotten up sort of more in that 110 to 115 range.

So that gives you an idea of what the difference is in terms of the peak hour averages.

And obviously, with this coming spring and summer season, we hope to set some new records in those areas, because of our new emphasis on this and our excellent restaurant teams.

Great.

Well, good luck to you.

Thank you.

Jeffrey Bernstein, Barclays Capital.

First, just, Jack, just a clarification and then I had a separate question.

But on the commodity basket in the last quarter, there was some confusion in terms of the laddering of the commodity inflation through the year.

And I think you just made a very telling and clarifying comment.

But just to make certain -- I mean, at the end of this year in kind of that [32.2] range, I know you guys don't think about it year-over-year but rather sequentially through the year.

But understand then that perhaps in the first quarter, if everything was orderly, which obviously it usually isn't, but we should assume like 40 basis point increase each quarter, so that we would push into the mid-32s and the high 32s and low-to-mid 33s sequentially, as we move through the four quarters.

And does that take into account the fact that it sounds like you've seen perhaps some recent easing in the commodity inflation basket?

And then I had a follow-up.

Yes.

We have seen some easing, Jeff, but the easing has been like in the produce and the dairy items.

We've seen easing seasonally because of avocados.

But when we look ahead, we think that's going to be offset by inflation, higher costs, in mostly our meats, beef in particular, as well as with our rice and our beans.

And so, overall, we think that the easing is going to be more than offset.

We think that that's going to have -- by the end of next year, it will have kind of that mid-single-digit inflation impact.

And I think you're thinking about it right, that there would be a piece of inflation in the first quarter, another piece additive in the second, another piece in the third.

So by the time you get to that fourth quarter, we would expect somewhere in that mid-single-digit inflation on top of the 32.2% that we saw in the fourth quarter.

That would be a reasonable way to think about it.

If, in fact, it is orderly.

Of course -- which is not likely, I guess.

And then just separately on the sales driving initiatives, just wondering if you can give any kind of update specific to the menu board, whether it be pushing to a protein beyond your core, whether it be shrimp or otherwise; or whether there's any update on thoughts around breakfast, as you've had success in the airport tests.

So just wondering if we could think about expansion of the menu board behind its current state?

Well, Jeff, as you know, for the last -- it will be 19 years come July, we've had basically the same menu.

And we've had one 10-year period of double-digit same-store sales growth.

And we're now in another pretty strong period of same-store sales growth double-digit.

And I think one of the reasons that we continue to grow so strongly is because we continue to improve our core offerings, which is what people come for.

You know, we have experimented here and there with a new menu item.

We've tried soup.

We tried chili.

We've tried smaller menu items, single taco, things like this.

But it seems that people keep coming back for their chicken burrito or their barbacoa tacos, or whatever it is that they've landed on.

And the thing that I think keeps people coming back is that we have a commitment to improving the quality of the food.

Not only the taste of the food, but the impacts on environment and health and animal welfare.

And these messages are becoming more and more relevant with people.

So I think we've done a very good job staying focused, which makes the food taste better and allows us to have this very, very efficient economic engine, which has allowed us to invest disproportionately back into the quality of raw ingredients and our top-performing people.

And so I think it's a good system and I don't see that there's any reason to add something like a shrimp tacos or rollout breakfast now.

In fact, maybe something like that could even be detrimental to the model.

Although, that being said, now and again, we experiment with stuff.

Great.

Thank you.

John Glass, Morgan Stanley.

If I could just quickly revisit first the throughput question.

I think, Monty, you said you're now having more comps coming from the peak hour than non-peak, but you never quantified that.

So at the prior peak in '07, was that therefore 100% of your comp or virtually all of it coming from that?

And what did it reduce to?

And what do you think you can get it back to, as a proportion of your total comp growth in this spring, let's say?

No, no.

Yes, if I said that, I did not mean to say that, so let me clarify it.

When we look at our comp, you can break it down through every single hour of our business, from the time we open to the time we close.

You can look at how did we do from 11 a.m.

to noon this year compared to last year?

How did we do -- well, you can also look at how we did from 3 o'clock to 4 o'clock in the afternoon compared to last year.

And if you look at every one of those hours and break it up, and you take the total, that total is the store's comp transactions.

What we do is we look at that and break it down, and just kind of find out where is the comp coming from?

We've never had a time where 100% of the comp difference came from just the peak lunch hour.

That's not what happens.

I mean, typically, it's moving from one part of the day to another.

Over -- in fact, during 2010 and '11, we found that a lot of our comps came from the off- hours -- you know, these sort of what we call shoulder hours, that aren't the peak lunch, that aren't the peak dinner, but where people are either knowing that we have a long line at lunch and choosing to come later in the afternoon, or just more people are coming to our restaurants generally and we're able to serve them then quite easily, because the lines aren't as long.

In terms of measuring throughput, one thing we like to look at is how much of a contribution to our overall comp can we accomplish during the peak lunch hour when lines are very, very long, and where we might otherwise have to turn people away.

In other words, lunch can be a bottleneck, and it's possible theoretically that you could have a store comping quite well that has no comp coming from the peak lunch hour.

Some of our stores showed that, in fact, they have a slow comp at the peak lunch hour, even though their overall comp is pretty good.

We don't want that to be the case, because we know that lunch is a very favorable -- very, very favorable place from which to mine additional sales.

Because if we eliminate the line at lunch through greater speed, we know there's more people behind those folks who will come and eat at Chipotle.

And that's great.

So what I said was -- or what I tried to say, so, let me clarify -- is that in December of 2011 versus October of 2011, we saw -- and versus earlier months in 2011 -- we saw an increase in the amount of the comp that was coming from that peak lunch hour.

It was contributing more of a share to the comp, if you will.

So it's not that that's where it's all coming from.

Every -- in fact, when we look at the analysis, every single part of the day, every single hour of business, showed a positive comp and was making a positive contribution to the overall comps.

Again, hypothetically, it's very possible that one part of the day could be negative on comps.

You know, you could be slower at lunch, and lunch could be driving a negative [2] comp and the store could still be doing an 8% comp.

That's not the case.

Every single part of the date was positive and lunch was comparatively more positive than it had been in previous months, which leads us to believe we're doing a pretty good job.

And then my question was really how much more can you quantify the increase in the lunch comp, or contribution of the total comp coming from that peak hour versus prior?

How much did it improve?

Well, you know, we're real hesitant to go there because we're talking about a very short period of time and it's very much a moving target.

So, I'd rather not get into the actual details of those numbers until we have the season under our belt, and then I can start discussing with you guys what we're seeing in terms of numbers month over month.

Okay.

And then just one final question.

At what stage do you begin to put people in Europe and the UK, for example, that aren't in the restaurants?

Are you at the stage where you might start putting someone in advance to scout locations or source food?

How much investment do you think over the next, say, two years do you plan there?

Well, we already have someone on the ground devoted to development.

Rex Jones, who was our Development Director before Bob Blessing took over as Chief Development Officer, is now on the ground there in Europe, and has been involved since the first lease that we signed there.

In terms of sourcing of food, our two restauranteurs are actually doing the sourcing of the ingredients and, in many cases, going directly to farms to meet farmers, develop relationships -- much the same way we did with farmers here at Niman Ranch and other places too.

We don't anticipate we need to have anyone on the ground to be in the purchasing department for the next couple of years at least, because the supply chain is actually -- it's been relatively easy setting up these supplies.

So, again, a lot of autonomy on the shoulders of the restauranteurs, but they're doing a great, great job.

And we will open up the subsequent restaurants there, having the managers do a lot of this work that the current ones are doing.

Thank you.

And ladies and gentlemen, that does conclude today's question-and-answer session.

I'll turn the call back over to management for any additional or closing remarks.

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

Thank you.

Ladies and gentlemen, that does conclude today's conference call.

We thank you for your participation.