奇波雷墨西哥燒烤 (CMG) 2012 Q4 法說會逐字稿

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

All participants are now in listen-only mode only.

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

(Operator instructions).

As a reminder, this conference is being recorded.

Thank you.

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

You may begin your conference.

Thanks, Angela.

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 2012.

It may also be found on our website at chipotle.com in the investor relations section.

Before we begin our presentation, I will remind everyone that parts of our discussion today will include forward-looking statements as defined in the securities laws.

These forward-looking statements will include projections of the number of restaurants we intend to open, comp restaurant sales increases, food costs trends, effective tax rates, investment costs and capital expenditures as well as statements regarding potential menu price increases and other statements of our expectations and plans.

These presentations 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 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.

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

I would like to remind everyone that we have 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 next earnings conference call.

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

On the call with us today are Steve Ells, our Chairman & 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 fourth quarter of 2012 as well as our performance for the full year.

While higher-than-expected food costs impacted our earnings, our top-line performance for the quarter was strong with a comp sales increase of 3.8% and total revenue increasing 17.2% to $699.2 million, adding up to diluted earnings per share of $1.95 for the quarter.

Results for the full year met or exceeded the guidance we've provided in every area, including a comp sales increase of 7.1% for the year and total restaurant openings of 183, 60 of which were open in the fourth quarter.

Our strong openings and comps drove revenues to $2.73 billion for the full year, an increase of 20.3% over 2011, and diluted earnings per share of $8.75.

The continued strength of our performance is a direct result of our focus on the most important things that drive our business, primarily our unique food culture and unique people culture.

With regard to our food, we are always pushing ourselves to find better, more sustainable sources for all of the ingredients we use and to refine our preparation and cooking techniques so that we are offering our customers the very best-tasting food weekend.

And with regard to our people, we continue to develop a culture where we systematically focus on identifying top-performing employees and develop and empower them to become the future leaders of our Company.

Through this culture, we are ensuring that we have the talent and leadership we need to continually improve our existing restaurants and to open new restaurants with the highest of standards.

Through this special culture, we're providing leadership opportunities for all who join the Company.

Heading into 2013, we are launching a new catering program to give customers a different way to experience Chipotle.

Catering is now available throughout the Colorado market and will be rolled out to all of our restaurants nationwide in the coming months.

Our catering menus are available for groups of 20 to 200 people and include everything customers need to make their own tacos and bowls, including the choice of responsibly raised meats, cilantro lime rice, pinto or vegetarian black beans, fresh salsas, house-made guacamole, cheese and sour cream.

It has been exciting to see people enjoy Chipotle catering for the first time when they realize they have the chance to serve themselves through the smaller version of the Chipotle line and create their own special meal with exactly the combination of ingredients and portions they want.

Even though our customers appreciate that they can customize their meal when they visit Chipotle, this is their first hands-on experience serving up our delicious ingredients.

For customers who want a smaller option, we are also offering a chips and salsa spread, which includes guacamole and a variety of salsas.

Or, for smaller and more streamlined catering orders, customers can choose our burritos by the box option, which allows them to mix and match their choice of chicken, steak, barbacoa, carnitas or vegetarian burritos.

These burritos come with white or brown rice along with black beans, fresh tomato salsa and cheese.

Burritos by the box include chips, tomatillo green chile salsa, guacamole and sour cream.

We have also created a new menu item called Sofritas which will be available in our San Francisco Bay Area restaurants for the first time next week.

Sofritas is a delicious and flavorful vegetarian option made with shredded organic tofu.

It is braised with roasted tomatoes, chipotle and poblano peppers and a blend of aromatic spices.

We will explore options for expanding Sofritas to other markets based on customer reaction in the Bay Area.

We will keep you apprised of our progress with both Sofritas and catering as we progress throughout the year.

Our marketing this year will continue to focus on building the Chipotle brand and will also include heavier emphasis on driving traffic and encouraging trial than it did in the past year.

Marketing programs this year will include a significant ad buy in many of Chipotle's markets beginning in March, including radio, print and outdoor.

Additionally, we have significant, well develop local sales building plans in 25 of our best markets.

We will strengthen our brand and develop a deeper relationship with our customers through our successful, nontraditional marketing techniques.

This year, we will continue to build our signature Cultivate event series by hosting events in Chicago, Denver and San Francisco.

And following up last year's successful Back to the Start animated short film, we are developing new content programs that will continue to strengthen the Chipotle brand and that spark conversation and important issues relating to food.

We continue to plant seeds for future growth opportunities with our international expansion and with ShopHouse.

Currently, we have 12 international restaurants and one ShopHouse.

Of our international restaurants, 5 are in Canada, where we started almost 5 years ago; 6 in London, where we started over 2 years ago, and 1 in Paris, which just opened last year.

In 2013, we plan to add to our international portfolio with 4 more restaurants, 1 of which will be in Germany.

We currently have one ShopHouse in Washington DC and plan to expand there with one more restaurant in the second quarter and open our first in Los Angeles, also in the second quarter.

Our focus on our international expansion has been introducing the Chipotle brand, establishing relationships with like-minded suppliers and developing leaders to support our expansion.

We continue to run all of these restaurants without significant infrastructure under the leadership of a few restaurateurs while hiring and developing empowered teams of top performers to support potential future growth.

I would like to compare our international expansion approach to the way we look at growth in the United States.

Growth in the US has been done with what we call our portfolio strategy, where the majority of our new restaurants are opened in our proven markets.

Proven markets are those where the Chipotle brand is well known and where we can accurately predict how well new restaurants will perform.

Investing in these proven markets has provided strong and reliable returns and has allowed us to allocate a portion of our capital to new markets and to developing markets, knowing that these markets may not currently be as strong as our proven markets, but with confidence that they will develop and transition into proven markets.

This happens as the Chipotle brand becomes better known and accepted.

As we apply this same portfolio strategy to international, all of our markets outside the US today would be considered new markets where the Chipotle brand is still being discovered.

Canada has been open the longest with our first restaurant opening in Toronto almost 5 years ago, and Toronto is well on its way to being considered a proven market with volumes similar to those in the U.S. and with margins and returns not far behind.

London was our second international market, with our first London restaurant opening about 2.5 years ago, and 4 of the 6 London restaurants have been open less than a year.

And while we are proud of the team and the Chipotle restaurant experience in London, our awareness there is still quite low.

And so our London volumes are much lower than our restaurants in the United States and Canada.

We recently completed a research study in London to help us better understand customer perceptions about our brand and about our competitors.

The results from this research show that customers who have visited Chipotle really like the food and the overall experience, but the research also indicated that unaided awareness of Chipotle among fast casual diners is very low -- only 1%, compared with 16% for Pret A Manger, or 23% for McDonald's.

Aided awareness for Chipotle is only 34% as compared with 97% for McDonald's, 94% for Subway and 91% for Pret A Manger.

The top reason listed for not visiting a Chipotle was lack of a known location.

Given our low awareness, it is not surprising that our sales in London have started out slow.

However, this is very reminiscent of our initial entry into many new US markets.

It's also important to note that research also indicated that customers are hearing about Chipotle via word-of-mouth at nearly twice the rate than our direct competitors.

We find this very encouraging as it also mirrors our trends in the US and suggests once people visit Chipotle, they become loyal customers.

Moving forward, we plan to increase our marketing efforts in London in order to increase awareness of the Chipotle brand and encourage customers to visit.

While Paris is still very new, we are encouraged by the customer feedback so far and we we'll learn more as our second restaurant opens early this summer.

Our non-Chipotle growth seed, ShopHouse in Washington DC, continues to perform well and reminds me very much of the first Chipotle when I opened it almost 20 years ago.

Customers immediately notice that it's very different from the typical Asian offerings out there, much in the same way that they noticed that Chipotle was different than their typical Mexican restaurant experience.

And I am encouraged and excited about the potential because of the strong customer loyalty we are starting to see.

I think it is already showing that Chipotle's long-term potential isn't just about burritos and tacos, but rather is about the possibilities of serving great-tasting food made with great quality ingredients prepared according to classic cooking methods and served in an interactive service format.

We will leverage our top performing field teams to open the second and third ShopHouse's that are under construction in Washington DC and Los Angeles, both of which are slated to open during the first half of this year.

While all four of our growth seeds are currently considered new markets following our portfolio strategy, I'm most encouraged by Canada and ShopHouse so far and feel that they are the two most likely to move on to proven markets status in the near or medium term.

France is still very new, and it looks likely that London will be a developing market for a while, until our awareness is raised there.

We believe that all of these seeds that we have planned from international expansion in Toronto, Vancouver, London and Paris to ShopHouse will all be successful.

Even though we are unable to predict when a market will reach proven status, this strategy of planting a few high potential seeds and then investing more over time based on things like how well the team is performing and the quality of the food and the experience and the awareness and sales of the restaurants is a great way for us to ensure that we're developing growth options for the future while being responsible and thoughtful with how and where we're investing today.

I will now turn the call over to Monty.

Thank you, Steve.

We continued to make significant strides in the development of our people culture during the quarter and throughout the year.

And then as the year came to an end, we promoted two special leaders, both of whom have had tremendous impact on our culture and will help us accomplish even more in the coming years.

Gretchen Selfridge, who previously served as Regional Director of our Rocky Mountain Region; and Mike Duffy, who is our RD for the Pacific Region, are now both restaurant support officers.

Both Gretchen and Mike started as general managers when we had just a handful of Chipotle's, which is a great indication to all of our current crew and managers about what's possible at Chipotle.

Through these promotions, all of our restaurants around the country are going to benefit from Gretchen and Mike's extraordinary leadership and ability to develop restaurateur cultures in their restaurants.

Their track record in leading teams to develop restaurateur cultures is unmatched at Chipotle.

Gretchen began her career at Chipotle as a general manager in 1996 and became a regional director in 2001.

Since the beginning of our Restaurateur program, Gretchen's region has developed 129 restaurateurs.

Her passion for getting to know her people and inspiring her team is a model for many future leaders at Chipotle.

As an RD, Gretchen and her team oversaw hundreds of general managers, and I am certain that Gretchen can tell you personal stories about each and every one of her managers.

Mike also began working at Chipotle as a general manager in 1996 and moved up quickly.

In 2005, he took over a struggling Pacific region, and under his leadership it has become one of our most successful regions.

Mike truly understands our people culture and has been very successful building our culture in the Pacific region, leading the Company in restaurateur development in both 2011 and 2012 and having among the strongest field leadership in the country.

As restaurant support officers, all of our restaurants and field leadership teams will benefit from Gretchen and Mike's leadership, as they are two of our leaders who have been most involved in building our people culture.

Now, Gretchen, Mike and Jack Hartung will all join Steve and I interviewing restaurateur candidates so that we can keep pace with the heightened level of restaurateur development that we are seeing in our ranks.

We believe the time is ripe for these terrific leaders to become more actively involved in the restaurateur sign-off process given their demonstrated ability to identify these cultures and also lead them.

The strength of our field leadership has allowed us to grow without having to add new layers simply by expanding the span of control of new and established leaders.

Instead, we have been able to develop new leaders and expand the scope of their leadership to allow us to effectively manage our growth without complicating our structure with unnecessary layers.

We continue to accelerate the development of managers to restaurateurs.

In 2012, we promoted more than in any other year, finishing the year with 190 new restaurateurs as well as 210 R-plus promotions.

Similarly, we are seeing a higher percentage of candidates being promoted to restaurateur than ever before, more than 86%, which tells us that our field teams better understand what makes a restaurateur and the quality of our managers in our restaurants is getting better all the time.

During the fourth quarter alone, we promoted 59 new restaurateurs out of 67 candidates interviewed, a selection rate of 88%.

We also promoted 43 R-Plus's, 8 apprentice team leaders, 9 team leaders and two team directors, and one of our team directors has committed to open all 8 of his new restaurants this year at the restaurateur level.

My hope is that I will hear from other team directors that they have similar expectations for their new restaurants, as I'm finding that our new managers who are promoted from a restaurant to a restaurant don't know any other way to open a new restaurant than to open it with a team of top-performing, empowered teams who achieve high standards -- in other words, a restaurateur culture from the very first day.

We are pleased that all of these metrics of internal promotion far exceeded pace from the fourth quarter of 2011 when we had 25 new restaurateurs promoted with a selection rate of only 66%.

The strength of our people culture and the cultures we are building in individual restaurants is paying off for us a number of ways.

Our restaurants are running more efficiently and our unit economics are strengthening, but we are also providing better and better customer service and throughput.

The reason for this is simple.

Empowered top performers do a better job.

Even though the fourth quarter is slower than the second and third quarters, our emphasis on throughput continued.

We are able to add an average of three transactions per peak hour compared with the fourth quarter of 2011.

On Fridays, typically our busiest day of the week, transaction rates were up one transaction per 15-minute interval during peak hours.

The number of transactions per day in our restaurants increased 3.4% over the fourth quarter of 2011, and for the full year they increased 5% over 2011.

But it's important to us that the percentage of transactions during our peak hours, that is to say, between 12 and 1, lunchtime, and between 6 and 7 for dinner outpaced the all-day rates in 2012, demonstrating that our throughput ability during the busiest times is improving more than it would simply due to the increase in people coming through our doors.

While comps decelerated a bit throughout the year, our managers and crews continued to pay attention to throughput, recognizing that better throughput provides a better customer experience that our customers really appreciate.

As we head into our busiest month seasonally, we will continue to emphasize throughput with our managers and crews and believe that we will see additional improvements at that time as restaurant volumes increase.

Turning to our real estate development plans, things are looking very strong.

We've been able to find great sites for new restaurants, which allowed us to open more restaurants in 2012 than the high end of the estimates that we provided for the year.

Additionally, our new restaurants are opening at very favorable volumes, giving us tremendous returns on invested capital.

With strong real estate performance in 2012 and a slight recovery in new construction, we are confident in the guidance that we have provided to open 165 to 180 new Chipotle's this year, with about 40% of these restaurants opening in new developments, up from 30% at the low in 2010.

This year, nearly 20% of our new restaurants will be A model locations, which you will recall are full functioning Chipotle's, but with lower occupancy costs, lower operational costs as well as lower development costs, making them very attractive locations for us.

This part of our real estate strategy has helped us to find great locations while providing attractive returns, given the lower cost associated with these sites.

It gives us a great sense of optimism heading into 2013 that the culture in our restaurants is accelerating quickly enough to allow us to continue to grow terrific restaurant operations and the type of dining experiences that will continue to create significant demand for new Chipotle restaurants.

Looking over the first part of this year, I think it's entirely possible that we may name around 150 new restaurateurs by midyear, given the extraordinary leaders that are coming up through our ranks.

This bodes very well for our future.

I will now turn the call over to Jack Hartung.

Thanks, Monty.

We are extremely proud of the results that our restaurant teams delivered during the fourth quarter and for the entire year of 2012.

And while achieving these strong results is quite an accomplishment, what is more important is that our food culture, our people culture and our business model all continue to get stronger.

Sales in the fourth quarter increased 17.2% to $699.2 million, driven by new restaurant openings and a comp increase of 3.8%, which is driven mostly from increased traffic.

For the year, sales increased 20.3% to $2.73 billion and the comp for the full year was 7.1%.

Menu price increases, mostly from an increase taken in 2011, helped the full-year comp by 2.8%, and our average restaurants and now generates sales over $2.1 million.

Our underlying comp transactions were also 3.8% in the quarter, that we had 90 basis points of price in the fourth quarter related to the Pacific price increase from last March.

That was offset by fewer drinks as more customers ordered their meal to go, and by slightly smaller group size as our larger online and fax orders were down slightly from the previous year.

We will face harder comparisons in the first quarter as we will lose two days, or about 200 basis points of comp due to leap day and Easter.

And in addition, we are comparing to mild winter weather in the fourth quarter of last year, when we benefited by an estimated 100 to 200 basis points.

Our new restaurants continue to perform well, opening with sales at or above the high end of our communicated range of $1.5 million to $1.6 million.

We opened 60 new restaurants in the quarter, bringing our year-to-date openings to 183, which exceeded the high end of our guidance range for 2012, ending the year with 1410 restaurants.

As we mentioned during our last earnings call, we plan to open between 165 and 180 new restaurants in 2013 and we expect these openings will occur relatively evenly throughout the year.

Diluted earnings per share for the quarter was $1.95, an increase of 7.7%.

Restaurant level margins decreased in the quarter by 150 basis points to 24.6% as food costs increased by 130 basis points over Q4 of 2011.

EPS was $8.75 for the full year 2012, an increase of 29.4% from 2011.

Efficiencies from higher comps allowed us to leverage nearly every line item on the restaurant P&L except for food, which for full-year 2012 was up 10 basis points compared to 2011.

Restaurant-level margins for the full year were 27.1%, an increase of 110 basis points.

Food costs were 33.5% in the fourth quarter, up 130 basis points from 2011 and sequentially higher by 90 basis points from the third quarter.

This represents higher than expected inflation of 2.8% over Q3 and about 5% over Q4 of 2011.

The inflation was driven by higher beef and cheese costs as well as slightly higher costs for our salsa.

While food costs increased faster than expected in the fourth quarter, they leveled off a bit in December, so we're optimistic that food inflation will be relatively modest over the next few quarters or so, and overall we expect our food costs in 2013 will be in the 33.5% to the 34% range before the impact of any menu price increase.

While we have made no decision on a menu price increase for this year, the inflation we have seen so far makes it more likely that a price increase may be warranted, but we will monitor trends such as additional inflation going forward, our comp trends, general economic and consumer confidence trends; and, based on these factors, we will make a menu price decision later this year.

Labor costs were 23.9% of sales in the quarter, an increase of 10 basis points from 2011.

Labor delevered slightly as wage inflation, including promotional increases, more than offset any leverage from the comp.

For the full year, labor costs were down 40 basis points from 2011 due to leverage from the higher comp of 7.1%.

Other operating costs were 11.5% in the quarter, which was flat compared to 2011, but that was up 100 basis points sequentially from Q3.

Higher marketing and promotional activity in the quarter accounted for most of the sequential increase.

For the full year, other operating costs were 10.5% or down 60 basis points compared to 2011 on favorable sales leverage.

Marketing was 1.8% in the quarter compared to 1.6% in the fourth quarter of 2011.

We invested more in marketing during the quarter, which included our Cultivate event in Denver, as well as some new content programs we are working on, which Steve mentioned.

While marketing was just 1.3% of sales in 2012, we expect it will be closer to our historical rate of about 1.7% of sales in 2013.

G&A was 6.2% in the quarter, 20 basis points lower than 2011, due to favorable sales leverage.

For the full year, G&A was 6.7% or 10 basis points higher than 2011.

The non-cash, noneconomic stock comp expense was $66 million for the full year, of which $64 million was included in G&A.

Stock comp expense for the fourth quarter included in G&A was about $12 million, and this is $3 million higher in the quarter and $22.4 million higher for the year compared to 2011, and this is a result of stock options issued at a much higher stock price, which results in a much higher calculated accounting charge.

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 result of our continuing effort to grow our underlying cash G&A at a slower rate than our sales growth.

In 2013, we expect G&A as a percent of sales to be about the same or perhaps slightly less than in 2012 as the benefit from not having the expense from our all manager meeting will be offset by higher non-cash stock comp expense.

Based on today's stock price, total non-cash stock comp expense for 2013 is estimated to be in the range of $72 million to $77 million, assuming a similar number of options are granted.

Our 2012 effective tax rate was 39.3% and is 80 basis points higher than in 2011, primarily as a result of the hire act expiring and several credits not reflected in our 2012 tax rate, including the work opportunity tax credit and the R&D tax credit.

These credits were renewed by Washington for 2012 and 2013, but they were not approved until January 2013, which prevents us from adjusting our accounting tax rate in 2012.

As a result of these credits being approved, we estimate our annual effective tax rate for 2013 will be about 38.5% with the first-quarter tax rate being lower by approximately 100 to 150 basis points when we recognize those 2012 tax credits in our first-quarter tax rate.

Each of the remaining three quarters will have a higher tax rate with the overall rate for next year estimated to be about 38.5%.

We were opportunistic with our share buybacks in 2012 and have invested about $229 million buying back our stock since January 1 of 2012, up until today.

During the first six months of 2012 we repurchased about 74,000 shares or about $29 million, and then from July 1 until today we invested another $200 million to repurchase about 683,000 shares.

We still have about $80 million remaining on our current $100 million authorized share buyback and our Board has already approved an additional $100 million.

Over the past four years, we have invested over $520 million to repurchase our stock at an average share price of $135.

In 2012, our average development costs in the US were about $800,000 and capital expenditures totaled about $187 million in 2012, and that is net of landlord credits of about $10 million, primarily related to new restaurants along with continued reinvestment in existing restaurants along with other Company initiatives.

In 2013, we anticipate CapEx will be around $200 million, again, net of landlord credits, the majority of which relates to new restaurant construction.

In addition to our normal reinvestment for existing restaurants, we will invest in initiatives such as converting our restaurant lighting to LED, completing a few major remodels from our old design in New York to our current design.

And, we plan to upgrade the planches, or our grills, in many of our restaurants this year.

We were able to increase our total cash and investments by $79 million during the year, even after funding the opening of 183 new restaurants and repurchasing stock through our share buyback agreements totaling over $200 million.

We continue to believe that investing in our high returning new restaurants remains the best use of our cash and we are confident that the growth options we are seeding today, including ShopHouse and Chipotle in London, Toronto, Paris, Vancouver and beyond, will provide value enhancing growth opportunities in the future.

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

So 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) Joe Buckley, Bank of America Merrill Lynch.

Thank you.

Could you run through the year-over-year changes in marketing?

I got the percent of revenues expectation, but just the number of markets where you will be active this year versus last year.

And how are you defining moving towards more transaction-driven or traffic-driving marketing?

Joe, I will clarify in terms of the marketing spend.

I think you caught that; we do plan to spend more.

Historically, we have spent about 1.7%, but the last couple of years, as we have been trying different marketing initiatives, we have under-spent that amount.

Last year, we spent about 1.3%.

Next year, we do expect to get closer to that 1.7%.

But then your other question was about which markets we plan to focus on and where we intend to invest our marketing dollars.

Is that the follow-up to the other question?

Yes, if you want to talk about where, that would be great.

But just in terms of the percentage of the store base that would be covered by more active marketing programs and how you are defining that.

I think the best way to answer this without getting into a very, very detailed discussion is we cover all of our restaurants, 100% of our restaurants.

But in larger markets where we have got a lot of restaurants and where it is efficient to buy media, we will do the full complement of media, which we are going to do some of that, as Steve mentioned, in March in, I think he said, 25 of our markets.

And in those markets we are going to invest in billboards.

And if it's efficient, we will do radio, we will do some print as well.

We can't do that in some of our smaller markets, or where it's very expensive to buy the media.

So in those markets we'll do local store marketing.

For sure we might do -- we also will invest in social media as well.

And so each of our markets have a unique marketing strategy, depending on how many restaurants we've got, how efficient it is to buy the media and based on needs, how well our brand is recognized, how loyal the customers are.

And so our marketing plan is going to be customized market by market.

And how does that 25 markets where you do the full complement to media compared to what you did in 2012?

It's more.

I don't know offhand.

We had done a number of markets this past year, but we are going to be doing more of that kind of marketing in 2013.

And so that, Joe, explains -- that's where part of our additional investment from 1.3% to 1.7% is going to be, to -- providing more coverage of that kind of billboards and radio and the like in more of our markets in 2013.

Okay, and the call to action -- how are you defining that?

The what, can you say it again, Joe?

Well, you communicated that you are going to get more traffic focused with the marketing, and I'm just curious how you define that versus what you have done historically.

So a lot of that has to do with the creative, Joe.

In years past, a lot of our marketing, or I would say most of our marketing, was what we called brand building market, which -- brand building marketing, which spoke to Food With Integrity, the quality of the restaurant experience, the way we're different, things like that.

Mark and his team have made a concerted effort to actually create devices.

For instance, in the new short films and shows that are currently under production, the ones that were similar to Back to the Start have components which will direct people online to get engaged and to take opportunities of going in for some kind of a promotion -- a buy-one, get-one, something like this; where in the past we left that opportunity on the table with Back to the Start, where there wasn't a transaction-driving component.

So I think you are going to see more things like that, that actually push people into the restaurants, rather than just talk about brand building in general.

Okay, that's helpful, thank you.

David Palmer, UBS.

With regard to marketing, is that something that you would use in particular to support catering, for example?

Yes.

Catering marketing is going on in Denver as we speak, and certainly, that is very much directed at getting people to go into the restaurants and try it.

It specifically talks about how it works, come in and try it, what you can expect the experience to be.

So, yes, that's definitely marketing that is getting people to actually go in and place their catering order or place it online.

I'm sorry if I interrupted there, but I was just thinking about in the marketing and the brand awareness, there's often a phenomenon where certain chains get up to a certain scale in an individual market, and the fact that they get up to that scale in and of itself and that brand awareness, just by the number of locations, helps the comps.

Are you finding that you get up to a certain amount and just adding that extra layer of marketing, whether it be billboard, can keep that above-average market awareness curve going the right direction?

Is that essentially what you are doing here in certain developed markets?

It's certainly not the main intent of this marketing catering.

The main intent is to introduce people to catering.

I think because it's so heavily marketed and because this is really new news in a very well-developed market, I think you are going to have the effect of just helping to bring renewed awareness to Chipotle in general.

And our hopes would be that, yes, that would help drive traffic.

I think that would be an offshoot event.

Thank you, good luck.

Andy Barish, Jefferies.

Question on just the comp direction so far year-to-date.

Should we look at it as if we take the fourth quarter trends and take out the 2-point trading day shift?

Is that the way you guys are thinking about the start of the year?

I wouldn't do it that way, Andy, and here's why.

We started a trend -- I like to look back to 2009 as our baseline year.

That was during the year of the depths of the recession.

During that year, we had four quarters of 2% comp.

We started our sales increase, we started our recovery from the recession in the first quarter of 2010 and then built sales in the second quarter and the third quarter, so they were higher in Q2 of 2010 and then higher in Q3, and then higher in Q4.

Then the next year, we did a double-digit comp and then we continued double-digit comps for -- I think it was seven quarters.

So you had this stair-step building quarter by quarter by quarter for 12 quarters, over the last three years, and now we are starting 2013 comparing against all three of those years.

So we have some very, very tough comparisons.

I wouldn't look at the 3.8 that we did in the fourth quarter and say that's our starting point.

I would look at it as we are comparing now against 3 years' worth of comps in the first quarter, and as a total, it's almost 30%.

We are up almost 30% in the last three years.

When you look back over the four quarters and you look at a three year comparison, since we have recovered from the recession, this quarter is going to be our toughest comparison of all.

And it's the toughest for the reasons I mentioned in my prepared comments, where we had extraordinary mild winter weather last year and so we had a very high comp on top of a very high comp from a year before.

We benefited from an extra day last year.

And in addition to those two tougher comparisons, we're losing a day this year with Easter.

So I'm not quite sure how to tell you what the first quarter, how it will turn out, to be honest.

But I wouldn't start with a 3.8.

I think it's going to be a tougher hill to climb than starting with 3.8.

Okay, thanks.

And then one quick clarification just on the food costs -- so again, the starting point of the fourth quarter, the 33.5%, am I correct in saying that food costs will run in that 33.5% to 34% until we see your next pricing action?

Well, yes, that's exactly right.

That's what our hope is.

The inflation that we expected hit us is harder and faster than we thought it would in the fourth quarter.

But now as we look ahead, it looks like we will stay in the range you mentioned, 33.5% to 34%.

It looks like it's going to stay in that range for a few quarters.

So we don't have any specific plans to do a menu price increase.

I wouldn't expect that we will even consider doing something in the first half of the year.

So I think the earliest we might do something would be mid-year.

But as long as inflation stays in that range, we will get through the next few quarters, and then we will look at what the outlook for inflation in the second half of the year, what the economy looks like and what our transaction trends look like, and then we'll make a pricing decision at that time.

And then just finally, real quick, what was the salsa issue that hit you guys in the fourth quarter?

Well, we had two things.

One, we bought more of our white corn.

We have been moving away from the yellow corn into white corn.

And so there's a little bit of a premium -- not a big amount, but that contributed to it.

And then we actually had to source some of our tomato salsa from the West Coast during the quarter just because we were having trouble keeping up with supply for some of our East Coast restaurants.

And so we had to pay a premium just to get some of the tomato salsa from the West Coast to the East Coast.

So that was more temporary.

The white corn is going to be more of an ongoing premium that we will pay to continue to source white corn.

Thank you.

Michael Kelter, Goldman Sachs.

So the food cost question, at 33.5% of sales, it's the highest it has been in any quarter in recent history.

And the guidance, 33.5% to 34%, is in line to higher than that.

Why are you letting yourselves get behind on pricing?

What is the reticence to keep up with inflation, and especially in light of previous comments you guys have made about your belief that the elasticity for the Chipotle brand is limited?

Why wait?

Because, Michael, the most important thing to us right now is to build customer loyalty and to build transaction momentum.

The thing we would rather not do, as we saw our transactions level off last year, and we are happy with a 3.8% transaction growth, but that's one of the lower transaction growths that we have seen over the last three years.

So what we don't want to do is, during a time when the economy seems to be okay but not great, and it's not clear what is going to happen as we hit this next -- you know, the debt ceiling crisis, and how people are feeling with their payroll tax increasing; we would rather be more patient.

We would rather see what happens with the economy, what happens with our transaction trends.

And if we are a little a to the game in raising prices, that's okay, because as soon as you raise prices, the margins for our model bounce right back to where they can and should be on a going-forward basis.

So the headline is, we don't want to risk interrupting transactions -- or causing transactions to soften during a time like this.

That's why we would rather be more patient.

Very helpful.

And then the other thing was on labor costs, which -- I've been looking; they are roughly flat as a percentage of sales over the second half of 2012.

So I guess if same-store sales stay in their current range and now the Affordable Care Act flows through within about a year or so, might labor costs actually start to delever from here unless comps meaningfully reaccelerate?

Yes.

We need -- without considering any increase in healthcare costs, we have always talked about we need a mid-single digit transaction-driven comp in order to just hold onto our labor line, and you saw that play out during the quarter where we had a slight increase, 10 basis points, so let's call that basically flat, with a 3.8% comp.

If we had a slightly higher comp, maybe 4.5%, it probably would have been exactly flat.

And that's consistent with what we have said really over the years, that we need a mid-single digit comp.

But the reason for that is, when it's transaction-driven, we need to add labor hours.

We actually have a labor chart that has a prescribed number of hours to add as we add additional transactions.

And so when you get that mid-single-digit comp or so, you won't delever or you won't lever labor.

To the extent that we have additional costs with healthcare next year, that will cause our labor costs to go up.

Now, we think that the first year, Michael, it won't be that big an increase.

We think 2014, because the penalty for employees not opting -- our plan right now is to offer insurance to qualified hourly employees.

But the penalty for employees not electing insurance is so low and the cost of them electing insurance, their cost, is so high, we think it's likely that most people won't elect it.

So we think our cost in 2014 is not likely to be that extreme.

We think that those costs are likely to hit us more so in 2015 and 2016 as that penalty begins to increase.

Thank you very much.

Paul Westra, Cowen and Company.

Just on your CapEx budget, can you just give us a little bit more detail?

I know you outlined a little bit extra spending here.

But, obviously, CapEx looked to be up about $13 million in the year, yet you might have even less openings.

And kind of back into what maybe incremental cost is for the grills.

Could you give us any more color of how many remodels you will be doing; and, on the grills, what impact they might have on expenses?

Do you have a payback for the new grills, or is that a quality investment?

Yes.

We've got, Paul -- we are putting on a similar number of openings; it's in the same kind of ballpark.

But, yes, we are going to spend an extra about $13 million.

The grills are going to be, depending on how many we replace, a few million dollars.

It could be in that $3 million, $4 million, $5 million kind of range.

There's an extremely favorable payback.

These new grills not only produce better-tasting food, they are easier to maintain.

But the utility usage on these new grills is dramatically improved such that we can get a payback within a matter of a few years.

So those make a ton of sense.

Same thing with the LED lights, that will cost us a few million dollars as well.

We have no choice because we have to get rid of the old bulbs and we have to move towards LED.

The old bulbs just won't be available.

They have stopped manufacturing them.

And those will have a payback as short as the grills, maybe even shorter.

It could be that we get a payback on those as short as one year.

So these investments make a lot of sense for a lot of reasons.

And then we are going to do a few remodels.

These are a handful in New York where these are some older restaurants where we went into a very old building, very tough from a construction standpoint.

And the building is not holding up that well, and it's our old look.

So we are going to invest in remodeling those restaurants.

I would not expect us to be doing a bunch of major remodels every single year.

That's a matter of a few million dollars that we are going to invest in upgrading a handful of restaurants in New York.

And how many stores have the new grill, as of now?

Oh, God, I think it's -- it's a handful.

Right now.

Yes, it's a handful.

Steve and his culinary team have been working with this girl for quite some time now, and it's better in every single way.

And we have been anxious to get the new grill in as many restaurants as possible.

And we think 2013, we are going to be able to make a big dent in that.

So you can cover most of the base in a matter of a couple of years rolling out the new [grill]?

Yes.

We (technical difficulty) a couple years, yes.

We think we can.

Okay, thank you.

Jeffrey Bernstein, Barclays.

Two questions, I guess, first, just following on the earlier topic of pricing.

I know you talked about at the earliest maybe midyear, but I'm just wondering theoretically how you think about it.

I know in the past, you did -- well, it seems like pricing going forward will be more nationwide, rather than in one specific market with the rollout of, let's say, premium ingredients.

I was wondering how you think about it, whether -- I thought in the past you have talked about you would prefer to do one larger increase rather than smaller increases.

So I'm just wondering with the current inflation level, what pricing would you consider?

And are there any concerns when there's only a few well-recognized items on the menu, in terms of how you take that price?

Yes.

Let me take a crack at it.

There's a lot to that, but let me try to, in a condensed answer, try to cover all those.

In terms of the percentage increase, if we're talking about inflation in the mid-single-digit range, 3%, 4%, 5%.

A price increase would -- in that same 3%, 4%, 5% range, if you exactly match the food inflation, that would allow our food cost to bounce right back to where it was before this inflation.

It would allow all of our other line items to get better.

Okay?

And so it wouldn't take much of an increase to get our food cost right back where it should be and get our margin back to where it was before inflation, or maybe even better.

And as a perspective, a 4% or 5% increase on a burrito is about $0.25 or $0.30, so it's not that much.

If you compare that, I know some have asked us, well, instead of doing one price increase in a year or one every other year, why don't you do a few small ones?

Well, if you are only going to do a 4% or a 5%-ish -- let's say 4%, for example -- instead of doing 4%, you could do (technical difficulty) increases and you could do it 2% at a time.

But now, what you are talking about doing is an increase of, on a burrito, maybe $0.10 or $0.15 early in the year end then do another $0.10 or $0.15 later in the year.

And we would rather not nickel and dime our customers.

We would rather do it one time.

We would rather have the conversation with them one time, because a lot of customers don't necessarily notice the amount of the increase, but they do notice when you are increasing it multiple times.

And so our real desire is to not increase prices.

We would rather find efficiencies ourselves, and that is why we have always been patient.

We had always tried to make sure that we can find as many efficiencies within our existing business model before having to raise prices.

But in cases like this where we think we are finding most of the efficiencies or have most of the efficiencies in our model where inflation has put our food costs up into this range, 33.5%, 34% or so, we find that we have no choice but to raise prices.

So did that help, Jeff?

Does that answer your questions?

Yes.

So the 4% to 5% wouldn't be unreasonable.

You kind of look at it as, I would rather receive $0.25, one time, rather than multiple (multiple speakers) that's unreasonable.

(inaudible) in our thinking.

Yes, we would rather not do what we did three or four years ago where we waited three years or more in a lot of our markets and then we raised prices 7%, 8%, 9%.

Okay?

That we want to avoid at all costs.

But when you are talking about $0.25 or so, we think that's not an unfair increase to take.

Got it.

And then just separately, on the new unit productivity, I know there was some noise in the middle of 2012 with your new unit openings.

I was just wondering if, as you look out to 2013, as it relates to this productivity, I think you said it was in the 40% in new developments and 20% A sites.

But putting that all together, would that as a mix?

What would be your expectation for productivity?

What would have maybe the most or least impact?

Just so we are prepared for thoughts on a unit productivity based on what you know today in terms of your unit openings.

Well, our new unit productivity has increased steadily over the years.

As our comp sales have increased, our new units have followed suit and been a substantial percentage of the amount of our average unit volumes.

So when you talk about a stir in the middle of 2012 with regard to new unit productivity, from our standpoint, there wasn't any "stir" . What you are probably referring to is that there was some talk about new unit productivity falling off in 2012.

From our perspective, that's really not what happened.

What did happen was that we had a pretty exemplary 2011 with very high new store opening volumes driven in large measure by the fact that we were opening a great deal of our restaurants in proven markets, and these proven markets have, as Steve mentioned in his opening words, a very high likelihood of delivering great returns.

And so we opened a lot of -- in 2010 and 2011, we opened a lot of restaurants in these proven markets.

Our A models in 2010 and 2011 were almost all in proven markets at that point, and that was very intentionally done by us to basically stack the deck in our favor of our A model strategy being successful.

And it worked much, much better even than we thought it might with new unit volumes for our A models that were literally just about at pace for our traditional openings.

But with lower cost structure associated with those A models, that meant that our returns on the A models were extraordinary in fact, during those years, much better than our traditional openings.

So when we went into 2012, before that year began, we explained to you guys that we would be continuing on with our A model strategy, but doing it in -- taking some more risk with it and going into developing markets and experimenting with the A model strategy in those developing markets.

We did so.

It has been very successful.

The A models now are opening nearly at that new store opening rate.

It's lower than the traditional models now in terms of openings, but with returns that are really at pace, very, very similar to the returns of our traditional units.

So we feel very, very strongly about new unit productivity.

We've felt that it has been an uninterrupted increase of new store productivity over the years with the possible exception that 2011 was an outlier to the good and an extraordinary year due to having so many improving markets and having so many A models in proven markets and taking a little bit more risk thereafter.

Got it.

So 2013 is more normalized based on the lap of 2012 versus the anomaly of, perhaps, 2010 and 2011?

Yes, I think that is a fair estimate.

We will see how it goes, but we feel very, very good about the way they are opening and don't see any reason why we wouldn't continue to have the success with our new stores that we have come to rely upon.

Very helpful, thank you.

David Tarantino.

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

Perhaps maybe if you could talk about what you have seen so far and if you have seen any change in the momentum of the business and if you feel comfortable giving some directionality on the comps, that would be great.

Yes, David, I do usually give some kind of indication based on how sales are doing.

I'm really unable to do it this time, and the reason is because there is not really a pattern that I could see in January that I could tell you would give you an idea of what's going on in the rest of the quarter.

The reason for that is we had some days and some weeks that were really nice mild winter weather and our comps looked better than expected.

And then, we've had some snow and cold and some normal winter weather.

And then the comps fell off quite a bit, as you would expect.

So I have not been able to really pick up a pattern that I could tell you what I expect during the quarter.

So the only thing I can tell you at this point is the quarter is a tough comparison, for the reasons I mentioned, because we are comparing to the three-year, nearly 30%, and we are missing a couple days and we are comparing to -- and we are just now comparing, by the way, to some of the really mild weather.

Most of the mild winter weather we saw last year was in February.

So the first quarter trends, they have still to be rewritten.

And so I'm sorry, but there's nothing I can tell you to give you insight in terms of how the quarter might finish.

Okay, fair enough.

And then, Steve, a big picture question on Chipotle brand.

It seems like you are talking a lot more about traffic drivers in terms of advertising and catering and a new menu item.

And I'm just wondering if you think the brand is reaching a point at which you need those traffic drivers to continue to sustain the unit volumes that you are seeing currently.

I don't know if need is the right word.

Over the years, we have had a lot of requests, and we have ignored a lot of those requests for fear that it might upset the focus that we have, which contributes to a great economic model, as you know.

But a couple of things appear to be really important requests, we think, and that has been the ability to enjoy Chipotle in people's school or office or some other large venue kind of area.

And that's why we think catering is a really good option for that.

People did these catering events, but we would make boxes and boxes of burritos.

And we feel that this is a completely different experience that (technical difficulty) and that we thought that people would enjoy it.

And they are enjoying it.

And it's really a new way to experience the same stuff.

And it's very, very efficient for us to do.

The other item, the Sofritas, we think, is really, really important because it speaks to not only a new taste and new experience at Chipotle, but it speaks to this idea of Food With Integrity.

That even if one is not a vegetarian or a vegan, you can participate in this idea that eating less meat is somehow environmentally responsible or maybe better for your health.

A lot of people think that eating less meat is more helpful.

So we have created this exciting new thing called Sofritas which really has -- it's very, very savory.

It has this umami flavor, this -- the fifth flavor, which is something that a lot of vegetarian offerings don't have.

Vegetarian offerings at a lot of restaurants seem to be the dish but without meat.

This is something that is very deliberate and creating something that is vegan and quite delicious.

So these are things that we have been thinking about for a long time, mainly by listening to our customers and deciding if it actually fits into the economic model or doesn't degrade the economic model.

And in fact, I think catering has the potential to dramatically improve it because we can serve these 2 to 200 people much more efficiently, much more quickly than if they were to come through the service line.

And the Sofritas is quite easy to prepare.

It is braised and has lots of ingredients, but the actual preparation, the finishing preparation in the restaurant, is quite efficient.

And it only takes up one of our service containers on the line.

So I think both of these are going to help people enjoy Chipotle more often, and perhaps in different ways without a degradation to the model.

So hard to really answer your question whether we need this, but it seems like the time is right and it's fun to try new things in a very measured way.

That's helpful, thank you.

That concludes today's question-and-answer session.

At this time, I would like to turn it back over to the speakers for any additional or closing remarks.

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

Ladies and gentlemen, this concludes today's conference.

We thank you for your participation.