奇波雷墨西哥燒烤 (CMG) 2012 Q3 法說會逐字稿

Good afternoon and welcome to the Chipotle Mexican Grill third-quarter 2012 earnings call.

All participants are now in a listen-only mode.

After the speakers' remarks there will be a question-and-answer session.

(Operator Instructions).

As a reminder this conference is being recorded.

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

Please go ahead.

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 third-quarter 2012.

It may also be found on the 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 new restaurant openings, comp restaurant sales increases, the timing and impact of potential menu price increases, trends in food costs and other expense items, effective tax rates, stock repurchase and/or unit economics and investment 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-K as updated in our subsequent Form 10-Q's for a discussion of these risks.

I'd like to remind everyone that we have adopted a self-imposed quiet period restricting communication 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 call.

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

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.

We are pleased with our results for the third quarter of 2012 particularly in light of continued uncertainty about the overall strength of the US economy.

During the quarter we posted a comp sales increase of 4.8% upon revenue of $700.5 million, an increase of 18.4% compared with the third quarter of 2011 adding up to a diluted earnings per share of $2.27 for the quarter.

With our results for the third quarter, we remain on pace to meet or exceed the guidance we provided at the beginning of the year in every area.

Specifically we are confident that for the full year we will see mid-single-digit same-store sales growth and that we will meet or exceed 165 new restaurant openings before the end of the year, at the high end of our previously announced range.

The performance of our business is driven essentially by two things.

Our unique food culture, where we look for the best ingredients from more sustainably raised sources and push ourselves to find better ways to prepare the food that we serve, and our unique people culture where we identify top-performing employees and develop them to be the future leaders of our Company.

We continue to make significant progress in each of these areas and our relentless focus on them is what drives the performance of our business.

During the third quarter we hosted our All Managers Conference in Las Vegas.

This event brought together an extraordinary group of over 2,000 of our folks including restauranteurs, restaurant managers, field leaders and regional and corporate support teams to share details about our vision, to share programs to help our managers run our restaurant even better, and to inspire and coach our managers to hire and develop a strong bench of future leaders.

What always strikes me the most when I spend time with our managers and particularly spending time with all of them at once, is the remarkable talent, passion, and commitment that exists within our ranks.

It serves as a stark reminder of the leadership we are developing and gives me great optimism that Chipotle's best years are yet to come.

Our food culture and our commitment to finding better ingredients and better ways to prepare the food we serve has always been one of the things that has made Chipotle different from other restaurants.

And we continue to push ourselves in both of these areas.

During the quarter we continued to expand our use of sunflower oil to cook our tortilla chips and taco shells instead of the soybean oil we had been using.

Not only do we think sunflower oil makes our food taste better, but it also is GMO free.

With California's proposition 37 on the ballot the subject of GMOs is becoming a bigger part of the conversation about food-related issues and we are pleased to be ahead of the curve looking for non-GMO options to replace the ingredients we use that are genetically modified.

Sunflower oil is now used in all of our restaurants except our Central region, and we expect to have it rolled out there in the coming months.

For other foods where we use soybean oil we are testing a GMO-free rice brand oil in all of our restaurants in New York City and are encouraged by how those tests are working.

If all goes well with that, we will look to expand the use of this oil, eventually allowing us to replace soybean oil entirely.

As we move into the fall, our local produce program is coming largely to an end as most of the country enjoys a growing season that spans from June through October.

That program has exceeded our expectations this year as we have used more than 14.5 million pounds of produce from local farms including Romaine lettuce, red onions, jalapeno peppers, green bell peppers, and oregano, greatly exceeding our goal of serving 10 million pounds of local produce.

We believe that the use of locally grown produce is the right decision for us in that it not only tastes better, but also supports local farming communities around the country and is consistent with our commitment to working with independent family farms whenever we can.

Helping people understand how our ingredients are raised and how they are prepared continued to be a dominant theme in our marketing this quarter.

Since the end of last quarter, our local marketing team has held more than 70 events nationwide including two of our signature Cultivate Food and Music Festivals.

In total, these events reach more than 1 million people with messages about our food and our commitment to cultivating a better world.

In particular, our Cultivate Festivals this year held in Chicago and Denver attracted more than 40,000 attendees and the feedback was overwhelmingly positive.

These day-long festivals bring together some of the nation's best celebrity chefs, local farmers and popular bands for a celebration of Chipotle's commitment to great tasting, responsibly raised food.

This year, along with a variety of special chipotle menu items, we served select items from our ShopHouse menu at both Cultivate events.

ShopHouse proved to be an incredibly popular event with long lines and rave reviews from customers throughout the day.

In addition to our ongoing local marketing efforts, we are once again preparing for our annual Boorito Halloween promotion.

Last year hundreds of thousands of people came to Chipotle dressed in family farm themed costumes to help raise $1 million for the Chipotle Cultivate Foundation.

This year we are broadening the appeal of the promotion by extending our offer of $2.00 burritos to people dressed in any type of costume.

This Halloween between 4 p.m.

and closing, people dressed in costumes can get a burrito, bowl, tacos or a salad for only $2.00.

Proceeds of up to $1 million will benefit the Chipotle Cultivate Foundation.

While Chipotle in the United States continues to be the focus of our growth strategy, we continue to explore the prospects for Chipotle international -- in international markets as well.

Before the end of the year we plan to open our first restaurant in Vancouver, Canada, and we hope to open in Germany sometime later next year.

Our other growth options, ShopHouse in Washington, DC, continued to perform well and ShopHouse was a big draw at both Cultivate events.

In fact, when I see how people are responding to ShopHouse it reminds me very much of the reaction I saw when I opened the first Chipotle.

While the concept is new to many people, there is a lot of excitement around the food and the flavors.

And people are eager to try the food and learn more about what we're doing.

So we think it is time to introduce ShopHouse to another market and plan to open the first ShopHouse in Los Angeles in the first half of 2013.

Like Washington, DC, we think Los Angeles will be a great market for ShopHouse.

It is a tremendous food city with a variety of international influences and we think ShopHouse will do well there.

Our first LA location will be in Santa Monica.

In the meantime, the second ShopHouse location in Washington, DC, is under construction and should also open early in 2013.

While we are certainly encouraged by the growth potential for Chipotle outside of the United States and for ShopHouse, it is important to remember that building the Chipotle business in the United States will be the primary driver of our growth for the foreseeable future.

Our commitments to improving our food culture and our people culture have never been stronger and our business results demonstrate the benefits of our unwavering focus in these critical areas.

This focus will not only allow us to achieve our vision to change the way people think about any fast food, but it will also allow us to deliver strong business results in the years to come.

I will now turn the call over to Monty.

Thanks, Steve.

Our All Managers Conference last month in Las Vegas was an amazing event.

Every other year, we hold this event together, all of our managers and field leaders together to discuss how we can best achieve our ongoing vision of creating an amazing food culture and people culture in this Company.

It was the third time we have held this event and the feedback from our restaurant teams is that this was the most effective and impactful event we have ever had.

The talent of our people, their enthusiasm and their optimism for their future and the future of Chipotle was truly inspiring.

In addition to our managers and their leaders, most people from our headquarters and field offices attended the conference this year as well as our Board of Directors and it seems all of them were amazed by the incredible managers we have and their optimism and exuberance about the future of the Company and the opportunity that exists for them and their crews at Chipotle.

After returning from the conference and visiting a number of restaurant, I am already seeing that the conference has had a profound impact not just on the managers who attended, but on the entire restaurant team.

Each group member I see can't wait to tell me how their GM came back more inspired and energized than ever.

And they tell me how inspired and motivated they are to create restauranteur cultures in all of our restaurants.

Most of the crew told me would confident that they will become a GM or restauranteur before the next conference and that they are excited to be part of this magical gathering that their GM has described to them.

The conference is designed for our managers and it is intended to share a clear vision with them that they can bring back to their teams to give them inspiration and direction for their continued advancement, and to make sure that they are aware of the excellent support available to them and their teams from our corporate staff.

Managers leave with new information to help them do all facets of their job better, inspired by the vision and with a clear understanding of their role in achieving it.

The rest of us leave inspired by the extraordinary passion and commitment we see among our managers and with greater confidence in our belief that we really are developing amazing future leaders for Chipotle.

It is truly a remarkable display of the power of the culture we are creating, a culture of top performers who are empowered to achieve high standards.

During the quarter, we interviewed 46 restauranteur candidates and selected 41 to become restauranteurs.

The highest selection rate we have ever had and a reflection that our culture is building still more momentum.

Year-to-date we promoted 131 new restauranteurs out of 153 candidates that we interviewed.

This represents not only more restauranteurs, but higher acceptance rate than last year.

Two thirds of our restaurants are now overseeing either directly by restauranteur or by a field leader who ascended from a restauranteur position.

The improving rates of acceptance in the Restauranteur program suggests our field leadership teams are getting better at identifying the qualities that make a restauranteur and also that the quality of managers vying for this lead position is improving all the time.

Because this is the engine that drives our leadership development, we are encouraged by the acceleration of leaders getting into the program especially since our standards are getting higher all the time.

In addition to the newly added restauranteurs we also expanded the roles of 69 restauranteurs during the quarter, allowing them to begin mentoring and leading other GMs to reached the level of restauranteur, thereby dramatically strengthening our build leadership teams.

Of course, these extraordinary leaders create fantastic dining experiences.

They provide exceptional customer service, cook delicious food, run sparkling clean restaurants and deliver better business results.

So it should be no surprise that we are seeing these top-performing managers and crews delivering better throughput as well.

As you know, about a year ago we began focusing on relearning and mastering the principles of great throughput because we knew that this was an area where we could provide an even better customer experience.

And in 2012, that effort has paid off as we have been able to grow the peak lunch hour comp faster than during the rest of the day.

That trend continued in the third quarter where we grew the 12 to 1 p.m.

-- in other words, peak lunch hour transaction comp faster than the overall transaction comp, and on average added an additional four transactions during the peak lunch hour.

In the quarter, we also saw our peak dinner hour transaction comp increase faster than the overall transaction comp.

So in summary, we are pleased with the progress we have made this year in growing the peak lunch hour and peak dinner hour faster than the all day comp, and we know that with continued focus in this area, our throughput can be even faster and therefore our customer service even better.

Moving to real estate.

We are pleased to report that we expect to hit or exceed the high end of the store opening guidance that we established at the beginning of this year of 155 to 165 new restaurants.

And the outlook for our ability to develop new restaurants in 2013 is very promising as well.

Specifically due to the strength of our state pipeline, we estimate that we are going to open between 165 to 180 new restaurants in 2013.

In 2012, [AML] locations are going to account for approximately 20% of our new restaurants and we expect about the same percentage of AML models next year.

For 2013 we expect to see an increase in the number of restaurants opening in new developments with about 43% of our new locations in new developments next year compared with 33% this year, which is an encouraging sign that developers are becoming more active again.

Of our 2013 openings, about 70% are going to be improving in established markets with the remaining 30% in new and developing markets.

Very similar to the mix that we had this year but more new and developing markets than we saw in 2011.

This balanced approach to managing our portfolio allows us to invest in restaurants with expectations of generating high returns while also introducing or growing the Chipotle brand in new and developing markets.

With stronger food and people cultures than we have ever had, better tools to help our managers work more efficiently and continued emphasis on improving the restaurant experience along with the strength of our unique economic model, we believe we are well positioned to provide consistently strong business results into the future.

I will now turn the call over to Jack.

Thanks, Monty.

Overall, we are pleased with our third-quarter results against a backdrop of moderate and uncertain economic growth, transaction trend remains stable from the second quarter and we were able to expand our restaurant level margins over last year.

We were also able to generate excellent operating margins as a result of our continued disciplined approach to running the business.

Our top-performing crew and management teams continue to do an excellent job delivering great customer service while developing our future leaders.

Our same-store sales were up 4.8% in the third quarter and our average sales volumes for restaurants that have been open for at least 12 months is over $2.1 million.

Overall sales for the quarter increased 18.4% to $700.5 million driven by new restaurant openings and a comp of 4.8%.

Year-to-date sales were over $2 billion, an increase of 21.5%.

The quarter comp was driven primarily by increased customer traffic along with a 1.2% increase in prices primarily from the menu price increase taken in the first quarter on the West Coast.

Our average check was lower than expected by about 60 basis points due to selling slightly fewer drinks and a slight decline in the relative mix of our larger iPhone, online, and fax orders.

Our to-go orders are higher this year than last year which may contribute to the fewer drinks sold.

But a more cautious consumer may also be a factor in both selling of fewer drinks and the reduction in these larger iPhone, online, and fax orders.

Overall our underlying transactions remained about the same as in Q2.

Year-to-date comps were 8.3%, primarily driven by increased traffic while menu price increases accounted for about 3.5% of the increase.

October underlying transaction trends so far are similar to Q2 and Q3, but keep in mind the final 30 basis points of pricing related to last year's increase will roll off and our two-year comparison is more difficult by 100 basis points as we compare to a two-year comp of 23.7% in Q4 versus a 22.7% comparison in Q3.

Unseasonably warm weather last December is contributing to the tougher comparison.

So Q4 comps are expected to be lower than Q3, and overall for the year we reconfirm our full year sales comp guidance of mid-single digits for 2012.

As we look to 2013, we expect comps in the flat to low single-digit range including the impact of any future menu price increases.

We don't have any specific plans to increase menu prices next year, but with inflationary expectations related to the summer drought looming, which I will talk about later, we remain up to the possibility of a price increase next year.

We opened 36 new restaurants in the quarter, bringing our year-to-date openings to 123 and total Companywide restaurants to 1,350 at the end of Q3 which includes one ShopHouse, five restaurants in London, fore in Toronto and one in Paris.

We expect to end the year with total new restaurant openings at or above the high end of our 155 to 165 opening range with AMLs representing about 20% of that total.

And we are also pleased to announce that for 2013 we expect to increase our new restaurant openings to a range of between 165 and 180 new restaurants.

Our new restaurants continued to perform very well, opening up with sales at the top of or above our communicated range of $1.5 million to $1.6 million.

Our unit economics for existing restaurants is the strongest they have ever been with average volumes over $2.1 million and with industry-leading margin, despite some uncertainty in the current economic environment.

Diluted earnings per share for the quarter was $2.27, an increase of 19.5%.

This includes about $1 million for bad debt expense related to general contractors who became insolvent before paying their subcontractor.

We were able to grow EPS at a slightly faster rate than sales as we delivered strong sales leverage in every line item except for G&A, which included about $5.5 million for our All Manager Conference in September.

Our operating margins were up 20 basis points while restaurant level margins were up 70 basis points compared to last year.

Year-to-date diluted EPS was $6.80, an increase of 37.1% over last year and, again, efficiencies from higher comps allowed us to leverage every line item on the P&L except for G&A, which on a year-to-date basis was up 20 basis points from last year due to a higher non-cash stock comp expense and the All Managers Conference.

Restaurant level margins year-to-date were 28%, an increase of 210 basis points.

Food costs were 32.6% in the quarter which is down 50 basis points from last year.

Avocado costs continued to be favorable due to a strong harvest and good supply availability.

Lower cost for avocado and cheese more than offset continued rising prices for chicken, steak, and rice on a year-over-year basis.

Excluding the impact of menu price increases our underlying food costs are up about 2.5% this year, which is better than what we expected at the beginning of the year.

On a sequential basis, moving from Q3 to Q4, we expect food inflation in the low single digits driven by higher dairy and meat prices resulting from higher feed and corn prices as a result of this summer's drought.

And as we look to 2013, we expect continued food inflation on top of the inflation we expect to see in Q4 in the low single digits as the impact from the drought continues to be felt from the weaker corn harvest, higher corn prices which will result in higher meat and dairy costs next year.

This expected inflation would be higher except that we are hopeful that avocado prices in 2013 will remain about the same as this year.

The unusually mild weather patterns this past spring have created conditions favorable for a larger avocado crop which should result in a strong harvest next year.

So the combined inflation in Q4 and next year is expected to be in about the mid single-digit range.

Should that kind of inflation materialize, we will consider a pricing freeze to help offset the impact.

The timing of any price increase will take into account a number of factors including the actual realized food inflation, our transaction trends, general consumer confidence and spending trends, and the competitive response to inflation.

In this is still uncertain economic environment, we will be patient and thoughtful about the timing and magnitude of any price increase.

Labor costs were 23.2% of sales in the quarter, a decrease of 10 basis points from last year.

Labor leverage was driven by the positive transaction comes along with the menu price increase and year-to-date labor costs are down 60 basis points.

[Average] costs for the quarter declined 10 basis points from last year and 30 basis points year-to-date due to higher average restaurant sales.

Other operating costs were 10.5% for the quarter, a decline of 20 basis points and year-to-date other operating costs were 10.2% down 70 basis points from last year.

Favorable sales leverage in the quarter was partially offset by higher marketing expenses.

Marketing costs were 1.4% in the quarter, up 30 basis points from last year and year-to-date were 1.1% or down 20 basis points from last year.

We expect marketing to increase in the fourth quarter to around 1.7% and our overall marketing will be about 1.4% for the full year in 2012 and should be about the same in 2013.

G&A was 6.9% in the quarter, 60 basis points higher than last year.

The increase was due to our third biennial All Manager Conference along with non-cash non-economic stock comp expense of nearly $14.5 million in the quarter and nearly $52 million for the year.

This is $3.8 million higher in the quarter and $19.6 million higher for the year compared to last year as the result of stock options issued at a much higher stock price.

As mentioned earlier, we also had about $1 million in bad debt expense in the quarter for general contractors who became insolvent before paying their subcontractors.

G&A in the fourth quarter will include $1 million related to our Halloween Boorito promotion and fund-raising event which will benefit the Chipotle Cultivate Foundation.

In 2013 we expect G&A as a percent of sales to be about the same as in 2012 while G&A next year will benefit by not having expense of our All Manager meeting.

That benefit will be offset by wage inflation and higher non-cash stock comp expense.

Of course, the stock comp expense will depend on the stock price at the time options are granted but assuming a similar number of options granted at a stock price similar to what we have traded for recently, we estimate the related accounting expense will be in the range of $70 million to $75 million compared to about $68 million this year.

We expect our effective tax rate for both 2012 and 2013 will be about 39%.

We are now $88 million into our $100 million stock repurchase program through today and over the past four years we purchased a total of $388 million of Chipotle stock at an overall average share price of $117.

As we are nearing the end of our $100 million repurchase, our Board of Directors recently approved the investment of an additional $100 million into Chipotle stock.

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 and Chipotle outside the US, will provide attractive value-enhancing growth investments in the future.

In the meantime we will continue to invest in our high returning domestic restaurant and we will continue to 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 lines.

(Operator Instructions).

Jason West, Deutsche Bank.

Jack, you went through a lot quickly there, Jack, and I just want to follow up on the commentary around the pricing versus inflation for next year.

First on the pricing, can you say if you guys are testing anything right now and what level you would be testing, and then on the inflation just want to confirm that year-over-year inflation for next year on the good side.

Did you say it was mid-single-digit?

If you could clarify it, thanks.

We are not testing any menu price increase right now.

What we want to convey is that it looks like inflation is upon us, the effects of the drought from this summer is going to impact us.

It is already starting to impact us in October.

We expect to see higher prices overall in the low-single-digit range moving from third quarter to fourth quarter and then on top of that we expect to see continued effects from the drought and the effects are going to be seen in higher dairy prices and higher meat prices.

And we think that is going to add another low-single-digit amount on top of the fourth quarter.

So overall when you looked from where we are right now into next year so there's 32.6% the cost that we saw in the second -- in the third quarter rather into next year, we are seeing somewhere when you add what we expect to see in the fourth quarter and into next year somewhere in the range of a mid-single-digit inflation rate.

And then in terms of the price increase, you know, Jason, we really want to see how things play out in terms of the economy, in terms of our transaction trend, in terms of actual inflation and in terms of what competitors do and how customers respond.

And once we have all that information, then we will decide whether and the magnitude and timing of what kind of price increase we might implement to help us offset some of this inflation.

Just to follow up on that.

How quickly could you move on price?

I mean, I don't know what amount of time you would need to test and evaluate the test.

Any historical averages on that?

Yes, it doesn't take us that long to be honest, but I will tell you we are going to be patient about it.

So if we see -- let's say we see inflation in a couple percent in the fourth quarter and a couple percent as we move into early next year, we are not going to be in a hurry to offset that.

We would rather be patient, we had rather see what happens with the economy, see what happens with consumer spending, see what other competitors do and how consumers respond.

So we can move quickly, but we are going to choose to not be in too much of a hurry.

We don't want to be the first ones out of the box we are trying to cover the effects of inflation.

So while we can move quickly, I think you'll see us be patient.

That's helpful.

Thanks.

Nicole Miller, Piper Jaffray.

Good afternoon.

My question was centered around the D&A of the brand, you know from the genesis to where it is today because a lot of other brands selling or offering the same cuisine are different, want to be like Chipotle.

But the one thing I've noticed that is different is customization.

So do you have any information how important the ability to customize at Chipotle is to your consumer?

And as that would differentiate you from other concepts?

Well, I don't know if we have any hard data that speaks to that, but I can tell you that when I opened the first restaurant 19 years ago the initial reaction was that it was a very limited menu offering and the people say you can't just have burritos and tacos.

But what customers soon came to understand was that we focused on just a few core items, chicken, steak, barbacoa, carnitas, beans, fajitas.

These kinds of things.

And it is the com -- the ability to combine not only for taste but for diet that keeps people coming back again and again and again.

And I think that is why you have such a high frequency at Chipotle.

It is because of that ability to customize.

So I think it is extremely important.

And as we expand the idea of Chipotle into ShopHouse, the exact same, the exact same idea applies.

And that is, we focus on making just a few different items for ShopHouse customers to choose from, but their ability to combine things to create different kinds of flavor is pretty vast.

So we think this idea of focus on a relatively narrow set of offerings, but have it be able to please a bunch of different palettes and a bunch of different diets is really important.

It also contributes to the success of the economic model.

Again, the more streamlined and focused your operation is, the stronger your economic model.

And this allows us to invest disproportionately relative to our competitors in our raw ingredients.

And of course this makes our food taste better and it also has a really great food with integrity story.

It also allows us to invest in our top performers.

So we think that this customization thing is really important.

You know and we do do some research into why customers come to Chipotle.

Taste is always the number one reason why people come.

But this customization as it turns out is always in the top four items.

So very, very important to our customers.

Very helpful.

Thank you very much.

John Glass, Morgan Stanley.

I wanted to just first start with the comp guidance for this year and next year.

This year mid-single digits, Jack, I appreciate you want to be conservative, but you could get to mid-single digits with negative comps in the fourth quarter.

So if you plug in like a 2 or 3 you get to like 7. So a 7 mid-single digits or what are you trying to maybe steer us toward in the fourth quarter more specifically?

Yes, John.

I mean in essence we have had that guidance throughout the year and so we just not changed it.

I think what is more important to focus on is when you are moving from the third quarter of 4.8 to the fourth quarter, the two things we see that are different between those two is, one, we lose a little bit of menu price that is about 30 basis points.

And it is a tougher comparison.

When we look at how we've recovered since the recession and we look at two-year comps and it is 100 basis points -- tougher comparison.

When we move from Q3 to Q4, those are the two things that I would take into account in terms of what we would expect in the fourth quarter.

So that should give you an idea in the fourth quarter.

We were not trying to say that there is any other kind of trend to take into account with that, just reaffirming our annual guidance.

And then next year flat to up a little bit.

And again I can appreciate that conservatism, but would that assume in your minds a negative comp in the first quarter and then sort of normalization in the back half?

Not -- I mean that's more precise than we are able to predict at this time.

What it really predicts is that we have seen kind of a leveling off of our transaction trends.

We are up about on a three-year basis since the recession is over, we are up in the 26%, 27% range and it looks like there is a little bit of slowing of consumer confidence.

And so when you project that into next year, it looks like it is a relatively flat or slightly positive, but I would say that that trend John we would see throughout the year.

Now the only exception to that and this might be what you are alluding to is the weather was extraordinary in the first quarter of last year.

So if we have a normal winter this year compared to an extraordinarily warm winter next year, I mean that comparison could lead to a negative comp in the first quarter.

Then just the last question is last quarter there was some controversy around new store productivity.

There was some fear around the fact that you were hiring some external managers to make up for a gap in your internal management structure.

Can you update on those two subjects specifically for the third quarter?

It sounds like you are still opening in a more normalized basis new versus existing markets versus last year, but maybe the comparison was trickier last year.

Maybe more stores in existing markets last year that made it harder in this quarter is more normal.

If you could comment on just quality of openings this quarter specifically and also that manager issue that you discussed last quarter and if you in fact went ahead with hiring those outside folks?

I guess I'll start with the manager part of it.

When we talked about -- I think there was some misunderstanding from my comments last time.

Because we've said for years how we hire the vast majority of our general managers from inside the Company and in fact that number is still 98%.

So roughly five out of five managers we hire come from the inside where that never used to be two out of five several years ago.

And so that is still happening and we have gotten wonderful, wonderful momentum of being able to train crew people into kitchen manager roles, in service manager roles, in apprentice roles and ultimately into general manager roles.

So that is going wonderfully well.

When I made the comment last quarter about sort of hiring some people from the outside, it was a very narrow focus of hiring just a few area managers.

These are folks who will oversee sort of the eight to 15 restaurant range.

But hiring some area managers.

And the reason we were doing that and we have done that, by the way.

We have interviewed, well, we looked at a great deal of resumes and picked just a few of the very, very top candidates.

And so, we hired a half-dozen of these area managers already.

And the purpose for doing that was simply to allow us to make sure that we are not overstretching some of the terrific field leaders who have come up from within our ranks.

We have a tremendous amount of upward mobility through the ranks right now.

We have in fact area managers which used to be -- all of our mid-management leaders used to be called area managers.

We have only 25 of those left and we have 33 of what we call team leaders who are folks who have either come up from restauranteur or folks who have become team leaders by virtue of developing for restauranteurs.

And we also have 37 apprentice team leaders and these are folks all of whom who have come up from restauranteur positions.

So the vast majority of our leadership in the field is already folks who have come up from restauranteur in ranks and usually folks who have come up from crew to restauranteur and then beyond.

So the amount of field leaders we have coming from within is extraordinary, and we are very, very pleased with it.

However, there's a few parts in the country, a few places in the country where the folks coming up through the ranks were asked to oversee a lot of restaurants.

People who had overseen four were quickly raised to where they were overseeing as many as 20 or 30 and in one case 40 restaurants.

You know, we want to be careful not to overstretch new leaders because we want them to continue to lead the restaurants in a way that is what we believe is most effective which is creating teams of top performers who are empowered to achieve very high standards.

If you stretch people too far, what happens is they tend to start getting a little overly busy where they are going around essentially swatting away at symptoms in the restaurants and not really able to diagnose and correct the underlying problem, which is that the team is not excellent in some of those stores.

So what we did is we've hired some area managers to make it so we don't overstretch a few of those field leaders.

So it's a pretty -- I brought it up last quarter because it's something that we keep a very close eye on and I wanted to express it to you all, but we are talking about half a dozen people we have hired.

We will hire a few more, too, opportunistically as needed.

With regard to the new store openings, we are very pleased with our new store opening volumes.

These new store openings continue to open at or above the $1.5 million to $1.6 million range that Jack has mentioned to you many times in the past.

And what's also important to notice with our new store openings is these new stores outcomp the rest of the field and so within a few years these restaurants are approaching our average store volumes which have tremendously strong unit economic -- unit economics and great returns.

So when we look at the mix this year versus last year, we do have more developing markets, but those are doing better than ever.

So this year, I guess next year -- this year and next year we are something like 70% of proven markets and 30% new and developing markets.

But those developing markets, which we used to say to you were in that sort of $1 million, $1.2 million range opening are now opening much much better at that sort of $1.4 million to $1.5 million range.

So that allows us to feel good and responsible about shifting some of our portfolio to that developing market range.

And finally with regard to A models, like I said earlier about 20% of the restaurants we plan to open or A models.

And those restaurants which have lower development costs are showing wonderful returns as well, because even though the volumes of those restaurants aren't as high as the traditional Chipotles we open, they are high enough to deliver a very, very high return equal or better than the return of our traditional stores when you take into account the lower development costs.

So we feel very good about our new store openings.

The portfolio is strong.

It has been strong throughout the year and we have confidence that it will remain very strong in 2013.

Thank you.

Alvin Concepcion, Citi.

Just wanted to follow up on the guidance for 2013.

Looking back the last three years when you provided guidance at this point in time it has either been low single digits or flat for the following year.

And you have significantly outperformed each year.

So it appears there has been a bit of conservatism in your approach to providing guidance at this point in the year.

Is there -- is your approach to providing guidance for 2013 any different than it has been in the past?

It is not any different, but what's different with our comp guidance and what other companies might do is we don't have like limited time promotion or gains or things where we can say, okay, we are going to advertise in some way where we can temporarily bring customers in and that is going to have some kind of impact on the comp.

And so every year, what we do is we take our current sales trends and we push them out into next year and assume that the trends don't get any better and don't get any worse.

And very often just the way the math is going to work you are often going to end up in a range that's in the guidance range that we always give which is in the low single digits.

This year we are getting in the flat to low single digit.

It is incombitant upon us to now find a way to try to change that [trim] line.

If the trim line doesn't change we are going to hit our guidance.

If the trim line gets worse we are going to fall short of our guidance.

If we can invite more customers in, if we can delight more customers so that they visit more often and bring friends, if we get some help from the economy, we will be able to beat that comp guidance.

But in terms of the math exercise we go through each year and the way we figure out what the guidance should be, the math exercise that we go through is the same each year.

Great, thanks.

And I wonder if you could comment on how you believe your market share held up this quarter versus last quarter given some recent concerns about competition, and in light of some competition and lower prices, what is sure level of comfort with the current menu offerings and in price point ranges at this point?

Well, I will comment on the sales trends and then Steve may want to comment about the menu.

But we are pleased with our transaction trends.

We still don't think the economy is in great shape.

We still think consumers seem to be a little bit cautious right now.

There's a lot of noise during the quarter about somebody taking market share away from us.

They did a lot of very, very heavy advertising.

A lot of the advertising was intended to attract our customers for obvious reasons.

But our transaction trends in the second quarter when none of that advertising happened were identical to the third quarter when there was very, very heavy advertising during the quarter.

So we are not seeing any kind of loss whatsoever in our -- in our transactions moving from us to any other competitor.

Having said that, it was the same Q2 to Q3.

We love to see more customers coming in.

We are going to do everything we can to make sure that we are focused on continuing to hire top performers, continuing to improve the taste and quality of our food, continuing to improve the dining experience at Chipotle's and hope that more customers will decide to visit Chipotle or existing customers will decide to visit more often.

I don't know, Steve, if you want to say something about the --.

Yes.

Could you repeat your question, please?

Yes.

Given some of this competition, they are promoting at lower prices.

I mean, what is your level of comfort with your range of offerings in terms of the menu and price points?

Sure.

Well, at Chipotle's we are doing something that is very, very unique in the world of quick-service.

And that is, we are bringing the elements of a real dining experience.

And on the kitchen side of that, that means we are buying really great raw ingredients, sustainably raised ingredients.

And we are preparing those according to classic cooking techniques and then serving them in an interactive format so that people get exactly what they want.

When I say interactive format, people go along the service line and pick and choose exactly what they want and how much of it they get.

So it is really is, it's really sort of unique to the world of fast food.

And we have had many imitators over the years.

People who recognize that there's value in this system, in this new fast food system that we created.

And perhaps some have argued that this is the new fast food.

But it is actually not a very easy thing to copy.

Lots of people copy the veneer.

For example one could try to offer a low-cost item of the Chipotle menu item, but maybe it would only on the surface appear to be similar.

When you dig down a little bit deeper, maybe it is very different.

If you look at our recent competitor who offered something that maybe looked similar on the surface, but yet -- and it contained, say, grilled chicken, yet that company do not have a grill nor do they have knives or cutting boards.

So how do they make grilled chicken and chop it up?

So when you look down and dig a little bit deeper, you realize that it is almost impossible for them to duplicate what we're doing.

And I think in the end, the customer can realize the difference.

And our customers love what we're doing.

We get comments all the time that they appreciate our commitment to really good ingredients so they are able to feed their families really wholesome food.

And I think this is not a trend that is going away anytime soon.

So I would just say be careful of those who have a lower-cost opportunity.

Look a little deeper to see what it is that they are really providing.

Thank you very much.

The customer is not easily fooled.

Steve Anderson, Miller Tabak.

Good afternoon.

Just a question, actually, on the -- on your expansion to some of the developing markets.

And I see you have good penetration in some of the urban and some of the college town markets.

As you go toward deeper into suburban markets is a drive-through an option that you have considered?

I see that some of your competitors in the fast casual space have adopted it.

Is it something that you would look into?

I would never say that we will never do a drive-through.

In sort of expanding the Chipotle concept as we go to new markets, the question always comes up should we try one with a drive-through.

And part of what part of what customers love is the ability to customize as I just explained earlier from a question by Nicole.

That is sort of very important to our customers in top reasons for why they like to come to Chipotle.

And a drive-through distances them from that.

So it doesn't seem like for the majority of our customers it's something that would be relevant.

That being said, it's certainly something that we could try in the future.

It's just not something that research about our customers and how we deliver the Chipotle experience it doesn't lead us to drive-throughs.

Thank you.

Michael Kelter, Goldman Sachs.

I wanted to ask, given the meaningful change in traffic trajectory that you have experienced since May, what strategic or tactical changes if any do you now plan to implement to adjust relative to maybe what you're planning before?

Well, I think that what we noticed is that when we are really on our game and have a great team of all top performers, and are cooking delicious food and providing an extraordinary customer experience, people love it.

And so while perhaps comps are off a little bit, I don't necessarily know that this is a trend and I would hate for us to do something that is off brand, something that customers wouldn't see as Chipotle.

But I think probably -- I think the best way to ensure that we continue to drive the business, to strengthen the brand, to continue to win new customers and get existing customers to come back more and more is to continue with our food with integrity mission, continue to explain to them the importance of sustainably raised food because that message is getting through; continuing to refine our marketing.

I think last year we had a major breakthrough in connecting with customers on an emotional level that hasn't been seen in marketing in many years with our back to the start video.

And now we have plans to do the same kinds of emotional connections but to add on traffic-driving parts to that marketing.

And so, I don't think you'll see any radical differences in what we're doing, but just continue to do the things that we think drive our business and the things that our customers love.

And maybe another way to talk about this maybe, your future planning sessions maybe, you're looking further out than just the knee-jerk to what is going on in one quarter or another, are you considering pursuing new traffic drivers like new menu items or extended hours possibly including breakfast, a step up in traditional advertising I mean?

And maybe if none of these are in the near-term horizon which might you pursue or what other things might you pursue before the others?

Sure.

Well as we talked and strategic sessions as you say, I mean we discussed all of those things and more, for sure.

But one thing that we are all very, very careful to do is to make sure that we continue to strengthen the brand and do things that support our mission, and to satisfy our customers.

Additionally, we want to make sure that we preserve our economic model because it is a very very strong unit economic model that helps drive the things that made us successful in the first place.

Making for better service through better people, and making for better food through better ingredients, it is certainly logical to look at things like breakfast.

The question is what would it be?

What would those offerings look like?

It's certainly logical to look at additional menu items, but what would they be?

You know, it was interesting.

A few years ago at the height of the recession we thought that perhaps we could offer some lower-priced menu items and so in a select couple of markets we did that.

What we've noticed is that people looked at those ads that were promoting the lower-priced menu items and went ahead and ordered their regular menu items.

Their regular full price for new items.

Customers at Chipotle tend to get the same thing over and over and over again.

They might tweak it here and there and slightly vary it, but I don't think our customers are necessarily looking for a radically new menu item.

So I would lean probably more toward something like breakfast if we were looking at expanding the menu that also extends the daypart.

None of these things are off the table by any means.

But if we do them, we will certainly do it with the same quality and the same attention to detail and, ultimately, with the goal of satisfying our core customers in a way that satisfies them during our normal opening times with the normal menu.

But then layering on opportunities, seating opportunities like ShopHouse and International are early ways to think potential growth opportunities in the future.

Thank you very much.

Larry Miller, RBC.

I just had two quick ones.

Jack, how should I think about restaurant level margins in 2013 if your guidance is zero to low single-digit same-store sales?

Well, at that level with inflation, margins are going to be under pressure.

So food costs are going to rise in the fourth quarter.

They are going to rise again next year.

That all by itself is going to have a negative hit on our margins.

And we talked about what it takes for example to what kind of comp do you need, transaction driven comp to drive [labor] leverage?

We -- I have always said, you need something in that mid-single-digit range.

And you can see that we had in this quarter, just a little bit of labor leverage when we had a mid-single-digit kind of comp.

So if we have low single-digit in our comp and we have inflation, that is going to put pressure on our margins.

Now keep in mind eventually it would be our intent to pass on the higher cost of doing business especially inflation through a menu price increase.

So but we are going to be patient at that.

So I would think of our business in terms of pressure on the margins from inflation, pressure on the margins assuming that we have these low single-digit comps and then there would be the opportunities sometime in the future when we decide, okay, the economy seems to be picking up, consumers seem to be confident others have increased prices; it looks like it is an okay time to raise prices.

We could recover that margin back.

So longer term, Larry, our margins as they are today are sustainable.

You know, in the short term I would expect there to be some pressure.

Okay, that's helpful.

And then how should I think about the [100 million plus] share buyback authorization?

Is that something that you would look to complete in 2013?

You mean the new one?

Yes, the new one.

Plus, you have some existing (multiple speakers) carryover.

Yes, it's not in our stock price base -- if the stock price remains under pressure, we will buy a lot more.

You may have noticed we bought a lot more in the last quarter than we did in two quarters before that combined, a lot more.

And not that we try to anticipate or we don't do daytrading per se, but we put in place a chart that allows us or results in us buying our stock back a lot more aggressively the lower our price goes and we are much more conservative when the stock price increases.

So I would not promise that we would finish the new 100 million before the end of the year.

It depends on the stock price, but you could expect us to be as about as aggressive if not more aggressive than you have seen in this past quarter.

Okay.

Great, and if I could slip in just one quick one actually that mid-single-digit inflation you are talking about for 2013 are you contracted at anything at this point?

How should I think about that?

Just a few things very, we have got our rice contracted through three quarters next year.

We have got some of our corn, just a small amount of our corn, not even all of our corn needs.

And that is about it right now.

So a very small amount is contracted right now.

Thanks a lot.

Appreciate it.

David Tarantino, Robert W. Baird.

Good afternoon.

Jack, first, a quick clarification question on the traffic in the quarter.

The same-store traffic, I think you mentioned there were some negative impacts so maybe could you clarify what the composition in the comp was traffic mix and pricing?

Yes in the quarter our comp was 4.8%.

We were about 60 basis points off on average checks.

So underlying traffic was about 4.2%.

That's helpful.

And I guess maybe another buyer for Cajun.

How did you see the trend progress as you moved through the quarter?

Was it pretty even across the various months?

It seemed like maybe you were running a little softer at the start of the quarter.

But how should we think about that?

No, we were pretty stable, David, I mean obviously nothing is a straight line, it bounces around a little bit.

But I would say it was pretty stable.

We had some trading day impact at the end of August, first of September.

August was a favorable trading impact at the end of the month, September was a negative.

But if you look at the weeks throughout the three months, they were relatively consistent.

We didn't see anything out of the ordinary in terms of trend.

The normal kind of choppiness, but I wouldn't say there was a trend where we were soft and then got strong.

I would say it was reasonably consistent.

Thanks.

That's helpful.

And then one question on the unit economics currently.

I guess maybe if you could give us an update on what you are seeing on the development cost side year-to-date and what your expectations are going forward.

And maybe if you could comment on your expectation for the returns for the new units that you've opened this year relative to recent years?

Yes, we expect our openings this year to average right round that $800,000 that we have seen for the last few years.

We hope that it will be similar next year.

There is some pressure next year, there is some inflation.

We are hoping we will be able to offset some of that.

So we are hoping next year that we will still be in the $800,000 range next year.

That might pick up a bit, but I don't have anything specific to give you on that.

But in terms of our openings.

When our restaurants open at or above the high end of the range and if you look at a couple of years of comps and our newest restaurants always comp the rest of our restaurants.

And as Monty mentioned our new restaurants within a couple of years of comp can pretty quickly approach our average unit volumes of -- today, they are $2.1 million.

But let's say, just to use a round number, David, let's say within a few years of comps they are in the $2 million range.

You are looking at the kind of margins we are generating in, call it in the if 20% range for example.

You are talking about a $500,000 cash flow on an $800,000 investment.

You are talking about the 60% return.

A better than 60% return.

That is what we expect with the openings that we are seeing this year.

Great.

That's helpful.

Thank you.

Matthew DiFrisco, Lazard Capital Markets.

Thank you.

Most of my questions have been answered, but except I just wanted to go into sort of looking at the comp and what has been driving the comp the last couple of quarters as far as the throughput initiatives.

How should we view that as far as when you now are going to be lapping it soon and you look at into '13.

Is this something that is multiyear and you can build upon?

Or is it pretty much when you look at the base and you look at the low-hanging fruit in your high-volume stores, have you sort of -- have we gotten optimization quickly and we have driven the traffic?

Or is that also something that could be playing into the more conservative guidance going forward I'm wondering.

Yes, I would start by saying it is really not something that is playing into our guidance going forward at all.

Throughput is, we see it as a key attribute of Chipotle's customer service.

And the better our throughput, the better the customer service.

When I talk about our throughput improvements and the fact that our lunchtime -- that is to say peak lunchtime and peak dinnertime hours having higher comps than the rest of the day, that shouldn't -- I don't want you to take from that that means that the throughput drove the comp.

Not the overall base comp in other words.

But if you look at happen was our comp during the peak lunch hour, for example, was more than a point higher than our comp during our overall comp Companywide.

And what that shows us is that we are putting more people through at lunchtime and the same thing was true at dinner.

We are putting more people through at dinnertime than before.

But that's despite the fact that the overall transactions for the day only went up by the amount of our stated [cook].

So if you look at the lunch hour for example where I said that we did over a point better on our lunchtime comp, we actually cannibalized from the 1 to 2 o'clock hour in order to do that.

In other words we put people through that might have historically gotten their lunch at 1.01 p.m.

We put them through at 12.58 p.m.

instead.

So that allows us to get that comp into the lunch hour.

What that means is our crews and restaurant managers are doing a fantastic job of delivering speedier service to our customers.

It does not automatically translate into a higher sales comp, but we believe over a period of time it will because we believe that it's better customer service, number one.

Number two, it gives our customers much greater convenience when they come into a restaurant, number two.

And then over time people who might have been more afraid of our long lines might get higher and higher level of trust that when they come to our restaurants during a peak hour that we will get them through quickly.

So we believe that will result in comp long term.

But throughput, faster throughput does not translate into an immediate sales comp increase necessarily.

That is something you have got to wait for.

But so your question is you asked the question about lapping comps.

I will answer it in terms of lapping throughput -- throughput comps.

Our throughput has been better this year than at any time in our history and that is an accomplishment that we are very proud of.

We think we can continue to get faster on throughput because there are restaurants that have long -- that still have long lines at peak lunch hour.

We are not going nearly as fast as we could.

In fact we think we have a lot of room to get better at throughput and all of our managers are, and crews are working hard on that right now.

And along those lines is there any sort of plan on capital investment or amount of stores that you could target that could put in a second line that also might be something to drive greater throughput that you haven't addressed yet?

We are really not interested in doing that yet just because our ability to increase throughput is so extraordinary.

We have got restaurants, our very busiest restaurants during our peak lunch hour that are doing more than 300 transactions per hour every single day like clockwork.

And yet we have restaurants that have busy lunches that are down in that sort of 100 range or 120 range that can easily speed up through working with our teams to get better at it.

So it's much more important for us to focus on the human aspect of it of getting better and better teams that are focused on throughput than it is for us to through technology equipment or an expensive second make line at the process right now.

And throughput is not a limiting factor at any of our restaurants in the sense that we have never shown that we can't go faster in order to accommodate those customers yet and we have never shown that our kitchens and physical facilities can't support that greater throughput.

So we are getting close to our potential in terms of what we're able to accomplish in our restaurants and so we wouldn't look to change the physical design of the restaurant at this point.

Excellent.

Thank you.

Thanks so much.

We are out of time.

We have gone actually over.

But we appreciate you for joining us today and we look forward to speaking with you next quarter.

Thanks a lot, everybody.

That will conclude today's conference.

Thank you all for joining us.