奇波雷墨西哥燒烤 (CMG) 2013 Q1 法說會逐字稿

Good afternoon and welcome to the Chipotle Mexican Grill first-quarter 2013 earnings conference call.

All participants are now in 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.

Thank you.

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

You may begin your conference.

Thank you.

Hello everyone and welcome to our call today.

By now, you should have access to our earnings announcement released this afternoon for the first quarter 2013.

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 restaurant openings, throughput, comp restaurant sales increases, trends in food costs, and other expense items, effective tax rates and our unit economic and shareholder returns as well as other statements of our expectations and plans.

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

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

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

I'd 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 the next earnings conference call.

For the second quarter, it will begin June 1 and continue through our second-quarter release in July.

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 performance for the first quarter of 2013, which included revenues of $726.8 million, an increase of 13.4%.

Comp sales increased 1% in the quarter and diluted earnings per share was $2.45, an increase of 24.4% over the first quarter of last year.

We continue to improve our restaurants by aspiring towards the very high standards that have made us successful, from the ingredients that we used to our culture of top performers.

Our long-term focus on these attributes of our business has made Chipotle a unique and special kind of restaurant company.

During the first quarter, we launched our catering service and began testing a new vegetarian menu item called Sofritas in seven of our Bay -- San Francisco Bay area restaurants.

We began offering catering to customers in Colorado on January 21, which essentially involves allowing customers to set up a portable version of the Chipotle service line for groups of 20 or greater.

For customers who are interested in something smaller, we also offer a catering option of chips and salsa with guacamole and for customers who need smaller group meal options, we are continuing to offer our Burrito by the Box for groups of six or more.

Overall, we're pleased with how our catering program is progressing in the Denver market.

On April 15, we expanded it to 144 more restaurants, including the rest of our Rocky Mountain region, as well as restaurants in Philadelphia, Nashville, Wisconsin and Las Vegas.

We are now on track to launch catering to all of our restaurants nationwide by the end of August.

Over time, we believe the catering can help us expand our business, while also providing our customers with a fun and convenient way to enjoy Chipotle.

Sofritas, which we began testing in seven San Francisco Bay Area restaurants in late January, has also been performing well.

On April 8, we expanded the test of Sofritas to include nearly 100 additional Northern California restaurants.

Our marketing team is working on several different fronts to improve our customer awareness and appreciation of Chipotle.

In March, our marketing team launched our Skillfully Made advertising campaign, which coincides with the start of our busier times in our restaurants.

The campaign focuses on the preparation of fresh ingredients and cooking by hand.

This outdoor print and radio advertising is planned for 26 markets throughout the year and supports about 900 of our restaurants around the country.

Advertising buys such as this are intended to keep Chipotle top of mind with customers, which is one of the key elements of our overall marketing strategy.

In addition to this top of mind advertising, our marketing team is also using local marketing to connect with customers on a local level to help make our restaurants part of the fabric of the communities they serve.

This local effort is made up of market-wide programs implemented by our team of more than 30 marketing strategists in 26 key markets around the country.

Our marketing team is also using brand marketing to build deeper connections with our customers and create a dialogue around issues that are important to Chipotle and to demonstrate how we are working to cultivate a better world.

Activities in this category include films such as last year's Back to the Start animated short film, as well as events such as our Cultivate festivals and social media and PR efforts.

We have just announced the dates for talent lineups for three Cultivate events this year in San Francisco in June, Denver in August, and Chicago in September.

And we are also developing other programs for later this year.

These programs help customers understand why it's important to know where their food comes from and how it's prepared.

The more they know, the more likely they will be to appreciate everything we do at Chipotle.

Finally, turning to our longer-term growth opportunities, we plan to open three ShopHouse restaurants in the coming months with one in Washington DC's Georgetown neighborhood and two in Los Angeles, one in Santa Monica and the other in Hollywood.

Similarly, the second Chipotle in Paris is under construction, and we expect to open our first restaurant in Frankfurt, Germany later this year.

This comes in addition to the six restaurants we currently have in London, five in Canada, and one in Paris.

While we continue to be optimistic about these future growth options, including ShopHouse and Chipotle in Europe, the focus of our growth for the foreseeable future will be Chipotle in the United States.

I will now turn the call over to Monty.

Thanks Steve.

Throughout the quarter, we continued to make significant strides developing our people and establishing cultures of top performers in our restaurants.

I'm very happy to have our two new restaurant support officers, Gretchen Selfridge and Mike Duffy, helping to lead and develop our field and restaurant teams, as well as helping to identify and promote the 45 new restaurateurs that we added during the quarter.

I'm also glad to be seeing a higher percentage of candidates being accepted into the program than ever before as our field teams get better and better at communicating Chipotle's vision to our restaurant teams.

One leader who has demonstrated a special ability to lead his teams to create restaurateur cultures is Doug Netzhammer, who was recently promoted to the position of Executive Team Director over our newly created Southwest region.

Over the past five years, Doug and his team have developed 31 restaurateurs with an amazing selection rate of 94%.

As with any of our most successful leaders, Doug knows his success comes from making the people around him better and by developing our field leaders who impact the restaurants every day by coaching and inspiring others to be great.

During the quarter, we also promoted 43 restaurateurs to mentor additional restaurants as well as five new apprentice team leaders, eight new team leaders, and two new team directors.

To help ensure our restaurateurs are successful when they begin to mentor other nearby restaurants, our training team is developing an [R-Plus] training course for them.

We believe this new R-Plus training, which is taking place in all of our regions, will set new restaurateurs up for success by helping them become more effective leaders over multiple restaurants.

The accelerated success that we are seeing in developing our people and advancing our culture demonstrates that we have a deeper and stronger bench and our teams are getting better at understanding what it takes to develop a restaurateur culture.

Elevating and empowering these extraordinary field leaders allows them to have an even greater impact on developing and leading special people cultures.

These restaurateur cultures result in better more efficient operations and a special dining experience for our customers.

Of course, one of the ways that Chipotle provides a great customer experience is through excellent throughput.

Recall that, in 2012, we were able to provide faster throughput during the peak hours of the day as compared to the all-day comp.

As we lap the throughput gains made from last year, these comparisons become more difficult.

In the first quarter this year, our peak lunch comp from 12 to 1 grew more slowly than our all-day comp, but our peak comp -- but our peak dinner hour comp from 6 to 7 p.m.

did grow slightly faster than the all-day comp.

As the second quarter is the busiest time of the year for us, we've asked our field and restaurant teams to bring particular emphasis to the things that lead to excellent throughput.

Specifically, we are tasking our restaurant teams and field leaders to make sure that we are fully staffed so that we have solid teams that are capable of serving the additional customers that visit our restaurants at this time of year.

Next, we are making sure that our field teams and restaurant teams implement the four pillars of great throughput.

Ensuring that restaurant teams have excellent mis en place plus so that they're ready for the peak hours and having everything prepared and the line set up to serve customers quickly, making sure we have expediters working in all of our restaurants during the peak times who are totally focused on helping our customers move through the cash-out process quickly and efficiently; seeing to it that we always have a linebacker position in place to allow our teams on the line to focus their full attention on quickly and efficiently creating a customized meal for each of our customers; and finally, making certain that we have aces in their places, meaning that we have our best people at each station and we are not training new hires during rush times.

We know from our own experience that, when our restaurants follow these four simple steps, our customers will enjoy not only faster throughput, but a much better overall customer experience.

At our next earnings call in July, we will know much more about the success of our efforts since some of our busiest times are upon us now.

And we expect to report to you that we are better at delivering fast throughput as our top-performing teams work to capitalize on this key advantage Chipotle has in terms of delivering delicious food quickly.

I want to also update you on our development progress.

In addition to the strength of our people culture and our operations, our development pipeline remains strong and based upon our great performance, we are confident -- based upon our great performance in the first quarter, we are confident that we're going to deliver on the high end of our guidance range of 165 to 180 new restaurants this year.

Of those openings, we expect about 30 restaurants will be A model locations, those being restaurants which typically have a slightly smaller footprint and lower development occupancy and operating costs.

And you'll gradually see more Chipotle restaurants developed in nontraditional locations such as mall food courts.

Though we have just a few food courts right now, we've been very pleased with the unit economics of those, as well as our ability to provide a great Chipotle experience in these venues.

We continue to see a slight increase in the pace of new real estate construction which we hope will give us even more attractive locations for our development teams to consider.

In 2013, we estimate that new construction, as opposed to remodeled sites, will represent about 40% of our new store openings, which is up from a low of 30% in 2010.

Finally, before I turn the call over to Jack, I want to give you an update on the government's investigations into our hiring practices and related disclosures.

This week, we received an additional request for documents from the Civil division of the United States Attorney's Office for the District of Columbia requesting work authorization documents for all of our employees since 2007, plus employee lists and other documents related to work authorization matters.

While this is just one of numerous requests we've received from the government over the course of this three-year investigation, we wanted to make you aware of it due to the expanded geographical scope of the latest request.

We'll continue to cooperate with the government and its investigations, which we believe will be ongoing for quite a while, as it will take some time to comply with these most recent requests and it will also take the government some time to digest all the information we are providing.

I will now turn the call over to Jack.

Thanks Monty.

We are very proud of the results we achieved in the first quarter despite an uncertain economic environment and with the difficult comparisons.

Our top-performing crews and managers continue to delight our customers by providing great service while serving delicious food skillfully made with premium ingredients.

Our sales increased 13.4% in the quarter to $726.8 million, driven by new restaurant openings and a sales comp of 1%.

The comp was driven mainly by increased traffic and was impacted by two fewer trading days compared to last year as our restaurants were closed on Easter and due to leap day in 2012.

So without the negative impact of Easter and leap day, our underlying sales comp for the quarter was around 3%.

Average check in the quarter was up just 30 basis points as the remaining menu price increase of 70 basis points was offset by selling slightly fewer drinks as a few more customers purchased their meals to go then last year.

We've now fully lapped the menu price increase taken in Pacific in March 2012, so we will lose the 70 basis points in the comp going forward.

In the second quarter, the loss of the menu price impact will be offset by picking up one extra day with Easter shifting to the first quarter this year.

Taking all these factors into account and considering the still-uncertain economy, we reaffirm our full-year comp guidance of flat to low single digits before the impact of any future menu price increase.

Restaurant level margins decreased 110 basis points to 26.3%.

The lower margins were primarily driven by higher food costs, along with higher occupancy costs.

Operating margins increased by 50 basis points to 16.5% despite the lower restaurant level margin as G&A costs were 160 basis points lower than a year ago, which I'll talk about in more detail shortly.

Diluted earnings per share for the quarter was $2.45, an increase of 24.4%.

Food costs were 33% in the quarter, up 80 basis points from the first quarter of last year, but sequentially food costs were down 50 basis points from Q4, primarily due to lower avocado and dairy costs.

In terms of the year-over-year increase, food costs were higher due to inflation in our salsas and other produce, chicken and dairy, which are partially offset by lower avocado costs.

Over the next few quarters, we expect food costs will be relatively stable and will remain at or perhaps only slightly above the 33% we saw in Q1.

If we do see increases, it's likely to come from our steak and from seasonally higher avocado costs as we return to buying avocados from California this summer.

In terms of the future menu price increase, we will continue to monitor food inflation, comp transaction trends, general economic and consumer confidence trends, and the menu prices of competitors.

Based on our food costs declining from Q4 and the still uncertain economic environment, any price increase we decide to take won't occur before late summer or early in the fall.

Labor costs were 23.6% of sales in the quarter, a decrease of 10 basis points from last year.

Labor leverage is driven by higher sales volumes, which includes the benefit of higher menu prices, and for more efficient labor management.

We would normally expect labor to delever at just a 1% comp, but the effective comp was really more like 3% after taking into account the loss of two days in the quarter, which is in the ballpark of the mid single-digit comp we typically need to hold our labor as a percent of sales.

Occupancy costs for the quarter were 6.6% of sales, an increase of 30 basis points from last year, primarily due to the deleveraging effect from two less training days in the quarter.

Other operating costs were 10.5% in the quarter, up 20 basis points compared to last year, driven by higher promo and slight delevering and other restaurant related costs.

Marketing was 1.2% in the quarter, or about the same as Q1 of last year.

And overall for 2013, we still expect our marketing expense to be around 1.7% of sales with relatively higher marketing costs during the second and third quarters.

G&A was 6.1% in the quarter, down 160 basis points from last year.

Recall that Q1 of last year included a one-time catch-up adjustment of $5.6 million for long-term incentive performance shares that were issued in 2010.

And last year's G&A also included about $3 million related to employee payroll taxes on stock option exercises.

For the full year 2013, we expect non-cash stock comp to total about $66 million, or about the same as last year.

This is lower than our previous guidance of $72 million to $77 million as the calculation of the non-cash accounting charge related to stock options includes a lower volatility rate than originally estimated.

In the quarter, average restaurant volumes remained very strong at $2.1 million, and we are confident that our strong unit economics can get even better as more customers discover and choose to visit Chipotle.

Our new restaurants continue to open at or above our $1.5 million to $1.6 million communicated range.

During the quarter, we opened 48 new restaurants compared to 32 restaurants at this time last year.

Our effective tax rate was 36.3% for the quarter, which reflected the tax benefit from the work opportunity tax credit and the R&D tax credit related to 2012.

In January of this year, these credits were renewed by Washington for both 2012 and 2013.

Our first-quarter tax rate will be lower than the overall tax rate in 2013 because we recognized all of the 2012 tax benefit from these credits in the first quarter, which benefited earnings by about $0.10 and resulted in a Q1 tax rate of 36.3%.

Each of the remaining quarters for this year will have a higher tax rate of approximately 39.1% with the overall blended rate for the year estimated to be about 38.5%.

We finished the first quarter with over $700 million in cash and cash equivalents, including short-term and long-term interest-bearing investments and no debt on our balance sheet.

During the quarter, we repurchased about $51 million in our stock, or 164,000 shares at an average share price of $310.

Also during the quarter, we received an additional 21,000 shares from our accelerated share repurchase program which ended and settled at an average share price of $287.

At the end of the first quarter, we still have about $149 million left on our share buyback program previously approved by our Board of Directors.

While we believe that investing in high-returning restaurants remains the best use of our cash, we will continue to opportunistically repurchase our stock to enhance shareholder value.

Thanks for your time today.

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

Operator, please open the lines.

(Operator Instructions).

Sara Senatore, Sanford Bernstein.

Caller, your line is open.

(Operator instructions).

We'll move on to Sharon Zackfia with William Blair.

Good morning.

I'm just curious.

I think, Monty, you were talking some about throughputs, and maybe the lunch throughput not quite as robust as the overall comps throughout the day.

Can you talk about staffing, and whether or not there is some sort of kind of logjam with the new governmental requirements you're kind of having to go through, or how we think about labor in the stores and whether there's a step-up investment necessary to kind of push the volumes beyond the $2.1 million per box?

Thanks Sharon.

The answer is no, that nothing that the government is doing, and none of the regulations are preventing us from getting plenty of applicants and plenty of new hires for our restaurants.

The reality though is all of our teams in the field have a vision of creating these restaurateur cultures.

And the attributes of a restaurateur culture are to have a team of all top performers who are empowered to achieve very high standards.

And the top performer piece of that means that they are getting better and better at being very, very selective in who they bring aboard on their teams.

So while we are getting literally hundreds and hundreds of applications for every available crew position nationwide, especially in light of our new hiring software and Taleo system, still our team in the field are being very, very selective in who they bring on board.

Sometimes that can lead to them running with teams that are a little bit more lean than they would like to have because they would rather wait to hire someone who has all of the characteristics of a terrific performer.

So when we look at the staffing levels of our restaurants, we are always working to have them more -- always working to elevate the staffing and always working to make sure that we have full teams.

And when we do that, yes, that tends to lead to us being much better implementing these four pillars of throughput, particularly in having the expediter position available and the linebacker position available in all of our restaurants.

So we are constantly looking at staffing.

We are wanting to increase our staffing in our restaurants, but we don't want to sacrifice having terrific people in the restaurants in order to do so.

So, it's just a matter of all of our restaurants having a vision of staying ahead, staying ahead of the game on staffing, particularly as we get in these sort of busier times of year, like the second quarter that we are in now.

And so when we do that, we are very optimistic that we're going to continue to be able to move the throughput needle that we moved so well over the last seven quarters or so, even though this quarter was I think a little disappointing in terms of our ability to move the lunch throughput.

Can I ask a follow-up?

What kind of ballpark figure percentage would you say is kind of ideally staffed in Chipotle's system at this point?

When you talk about percentage, I don't really know how to put it in percentage terms, in the sense that we have -- our restaurants have all sorts of different volumes.

And so we are talking about numbers of people per restaurant, as so I don't really understand how I'd put it in percentage terms.

This is Jack.

There is not -- we don't need to move our labor as a percentage of sales up to get the throughput gains that Monty is talking about.

Oftentimes, if we've got enough people but somebody will call out on a day and so they don't show up at the lunch shift, or we've got new people and they are not ready to be an ace in their place on the front line.

But in terms of labor as a percentage of sales, we don't -- there's no need for that percentage to go up in order for us to get the throughput gains that we know are possible.

Thank you.

Nicole Miller, Piper Jaffray.

Looking at the results, I'm trying to understand the share repurchase and how that would look for modeling purposes for the rest of the year.

Can you talk to us about if in fact you are a serial share repurchaser, can we model it in?

What would be the magnitude?

Because, to your point, Jack, even though you have accelerated development, really you are still sitting with $700 million on the balance sheet.

We've always been opportunistic since we are still a growth company and we still think that we've got significant opportunity over the long term to invest in some high-returning assets.

We've planted growth seeds which aren't growth strategies today but we think will turn into growth strategies in the future.

And so we know that the best way we can add shareholder value over time is to invest in these very high-returning assets.

The share repurchase has been more of an opportunistic thing for us.

While we've got the cash on the balance sheet, we've taken advantage of inflection points in our stock.

When the stock has pulled back, like it did last year, we got very, very aggressive.

The stock has run up recently, and so we are less aggressive when the stock has run up.

We don't consider ourselves to be perfect at figuring out exactly what our stock should be worth at a particular point in time, but because it moves up and down throughout the year, we get very aggressive on the way down and we get less aggressive on the way up.

I would not extrapolate our purchases over the last quarter or two where we have been very, very aggressive.

Maybe it's been the last three quarters now.

I wouldn't extrapolate that and say we'll continue that unless there is an inflection point in the stock, based on the fact that now we have recovered I think it's about $100 since the low point back in October.

That should lead you to expect that we would be less aggressive in the buyback.

But every dip that we see throughout the year, we are going to be in there buying aggressively.

Okay, thank you.

Jeff Farmer, Wells Fargo.

Can you hear me?

I apologize for that, not quite sure what happened.

Jack, I was just looking to see if you are willing to provide any additional color on the intra-quarter same-store sales trends, how it played out as you moved through the quarter and then as you rolled into April.

Anything would be helpful.

Yes.

In terms of during the quarter, it was -- there is not really a pattern I can share with you that would add a lot of value.

I've seen a lot of other companies say that it got tougher, then it got better.

Frankly, January was a better month in the quarter than we expected, and it looks like better than other companies as well.

But when I look at kind of the underlying take-out, weather this year, weather last year, take into account that you've got a holiday and we lost a day here and there, I think an underlying 3%, adjust the 1% back of up to 3% is a pretty good guide of what the underlying comp was throughout the quarter.

April has been a tough read as well, because the first week we were post-Easter, we always do really well post-Easter.

When we close our restaurant for a day, the very next day is a very busy day for us, and then a few days are busy as well, so the first week of comp in April was a nice week for us.

The second week, though, we are comparing against the week after Easter from last year, and so we are comparing against a tough week last year.

But when I sort through that, I don't see anything, Jeff, that tells us that there has been a change in trend, either up or down, from kind of the underlying 3% that we saw in the first quarter.

Okay, helpful.

Thank you.

John Glass, Morgan Stanley.

Thanks.

First, could you just clarify your comments on the food cost outlook?

So 33% is better than it was last quarter.

Was this a good run rate to think about and is it before contemplated price increases, or did you get some one-time benefits because avocados were less expensive and maybe it goes up from here?

When we talked at the last quarter, food costs in the fourth quarter rose faster and to a higher level than we expected.

And so at that point we were thinking, okay, here we go, and we expected additional inflation on top of that, although we did say in the quarter that food costs peaked during the middle of the fourth quarter, and then were starting to retreat a little bit.

They continue to retreat, so we're pleased to see that it came up -- instead of holding flat, which is about what we thought it might do at the 33.5%, it came all the way down to 33%.

And now our outlook right now looks reasonably stable, looks more stable at this 33% than it did early in the year.

We do think that there's some pressure.

It doesn't seem that severe, but there is some pressure with our steak.

We will see seasonally higher costs for avocados, but that's where we see the pressure.

So, it seems like it's fairly benign, and the increases don't seem like they're going to be too terribly significant over the next quarter or two.

And if that's the case, we would like to kind of stand pat on any kind of a menu price increase with that kind of inflation.

It doesn't mean the menu price increase is off the table, but I think, at one point, we are thinking it could be kind of a midyear price increase and we don't think we'll do anything that quickly.

So it changes your timing view.

Does it also change your magnitude view of pricing then as well?

No, because when we do increase prices, we will take into account inflation.

And if inflation -- the actual inflation and the expected inflation is high enough to suggest or lead to a menu price increase, I think we are still on kind of the order of magnitude that we talked about, kind of in that 3% to 5% kind of range.

And if inflation is more benign, we will just hold off and wait.

And the other key factor is to compare what our prices are like compared to our competitors, and so we will want to make sure that, one, we have pricing power, which we feel like we do, and two, we don't want to be overly greedy.

So I think the range of the price increase would probably be similar.

So it's more, at this point, more of a timing thing.

Okay.

If you could finally explain the G&A one more time?

It sounds like -- is the core G&A actually still growing at the rate it was prior?

It sounds like this is a valuation change of options, not an underlying change in the number of options.

Was it one-time?

Was it voluntary?

Or does this carry through to future option grants as well if you change your volatility assumptions?

Okay, so I'm going to assume you're not talking about the one-time stuff from last year; you're talking about the fact that our stock -- yes, our stock option is going to be $66 million instead of $72 million to $75 million.

This is -- every year, we recalculate the accounting charge for the grant for that year.

We did that this year.

Volatility did move down and it looks like it was because we do a 3.5 year -- it's a fairly complicated calculation, but the biggest part of it is based on a 3 to 3.5 year volatility.

And by cutting off kind of the oldest part of that 3.5 year and replacing it with the last year, volatility moved down.

If our volatility stays at that kind of a rate, we would expect similar kind of calculations in the future.

We didn't change materially the number of options that we granted.

That number was about the same.

And so it's really just a function of the volatility.

So we will do this every single year and, if volatility stays in check, I would expect similar kind of results in the next year or two as well.

Thank you.

Jason West, Deutsche Bank.

Yes, thanks.

Just a quick follow-up on that last question.

So, there wasn't sort of a catch-up in the calculation that helped you materially in the first quarter; it's sort of a lower level throughout the year than you originally thought it would be?

Yes, no, again, we are just talking about stock comp for this year, the $66 million.

Right, sorry, yes.

No, there's no catch-up.

That is we took the number of options that we granted, just like we did last year.

We valued them just like we did last year.

It just so happens that the valuation for each option that we granted was lower than we expected, and it was all just because of the formula.

The formula, using a lower volatility rate, just resulted in a lower value.

And keep in mind, this is all non-economic.

It's a journal entry.

It has no impact on our cash flow whatsoever.

And can you remind us how you guys target the core G&A growth, excluding the options?

Is that still expected to be some percentage of sales growth, or how do you guys think about that now?

Our target is always to have our underlying G&A growth, not counting stock options, grow at a slower rate than sales.

And we have been successful in doing that pretty much every single year as long as you take out the stock options, and that would be our goal going forward.

We don't want to grow our G&A or our headcount at -- either at the sales growth rate or at a faster rate than sales growth.

We always want to grow our G&A at something less than our sales growth.

Okay.

And then just the last thing, on the marketing spend, I think you're lapping a pretty low level of spend in the second quarter, so I'm assuming that line is going to be under some pressure this quarter as you lap that.

And then just overall, you guys talked on the last call a lot about more traffic-driven initiatives and more outdoor and things.

Can you say how that's going?

Is it moving the needle?

Is it something that's tough to measure?

If you could just talk a bit about the success rate on that incremental marketing and the changes you made there.

Yes, Jason, I'll start on the marketing spend.

You're actually absolutely right.

In the Q2 of last year, we spent 0.7% sales and marketing.

This year, we will spend quite a bit more.

The fact that we think that we will overall for the year spend about 1.7%, and we think we will spend more than that in the second and third quarter.

So I would think in terms of something in the 2%, perhaps even more than that in the second and third quarter.

So you're right.

There's at least 130 basis points or more incremental marketing that we'll spend in the second quarter of this year.

And then I'll let Steve talk about your other question about marketing.

Sure.

In regards to more traffic-driving marketing, let me just back up a little bit and say that we sort of lump our marketing into three different categories, the top of mind kind of advertising which would be more traditional transaction-driving stuff, outdoor radio, print, direct mail, that kind of thing, our local marketing, and our brands marketing.

In terms of our top of mind advertising on outdoor radio and print and so forth, we have a new campaign that we are calling Skillfully Made.

And it's really building on our last campaign that talked about the quality of the raw ingredients; it talked about where our ingredients come from, and the importance of sustainability and things like that.

The Skillfully Made campaign that had just started recently and will carry us through the summer and into fall, into early fall in some markets, really speaks to how we prepare our food in the restaurant which we think is really unique and a differentiator.

You know, we have really great pictures and great taglines to accompany these pictures that show how we prepare food in our restaurants.

And they are not the typical kinds of food pictures that you would see.

They're sort of close-up shots of prep, where you see cutting boards and knives and pots and pans and people making salsas, people adding herbs to salsas, people grilling chicken and sauteing fajitas, vegetables.

It really is sort of mouth-watering and very appealing.

And it has a very sort of reality kind of look to it in that it's not staged.

We just took a camera into one of our restaurants and shot pictures.

So, that's all very much traffic-driving kind of advertising.

But what we are doing with our brand marketing is we are adding a traffic-driving component to that.

The brand marketing includes things like our -- last year, you saw us introduce our Back to the Start video.

We have two more videos that we are doing or two more films that we are doing this year that are in production.

One is a series called Farmed and Dangerous, and it's a series that's going to come out in September.

And there are traffic drivers that are embedded into that that include ways to redeem currency and BOGOs and things like that.

The other video is a short in duration, similar to Back to the Start, that builds on that theme also.

And it also has the traffic drivers built into that.

And so this is something different than we were doing last year.

And then of course, in our local marketing, there's traffic driving in that, in that we are connecting with customers on a one-on-one sort of way.

We have 30 local marketing strategists around the country.

And as we build relationships with our communities through different organizations or sports teams or schools, things like this, we use, again, our marketing currency to drive traffic.

So, really this year definitely an emphasis on doing things that drive traffic.

But again, we are just sort of starting our top of the mind advertising, and that's going to be running all the way through summer and into fall.

So, results to come later.

Great, thank you.

Michael Kelter, Goldman Sachs.

I wanted to ask, you said the underlying run rate of same-store sales was running in the 3% range and you take out all the kind of moving parts.

And that's below the rate of growth you've previously said you need to hold profitability levels.

And so I guess my question is, in the absence of a price increase, if things are running at 3%, should we expect deleverage on margins for the balance of the year?

3% -- food costs are going to do what food costs are going to do.

3% is a little lower than normal.

I've always talked about we need kind of more of a mid single-digit, and so we did add a little bit of leverage at that 3% in labor.

But that could've gone the other way.

We picked up 10 basis points that could have gone the other way.

Normally, occupancy costs at 3% or so, we should be able to hold onto that line.

I know you're talking about the other line item, so 3% is right around where we'll either slightly delever or maybe just hold onto our margin.

It would be handy, especially if it's all transaction, if we are getting 3% and none of it is price.

That is right around where it's touch and go on whether we can hold onto our margin or whether we might delever slightly.

And then on a different topic, could you just talk more about your experience with catering so far?

Obviously, it's doing well for you to roll it out across the system.

Maybe you can give us the metrics around it at the store level?

I don't think we are ready to give specific numbers.

but what I can say is customers are really enjoying it; we're getting tons of positive feedback.

I'll also say, which I think is very important, that our crews are having a really -- they're successfully rolling -- helping to roll this thing out.

It is I don't want to say easy, but it's relatively easy to serve our customers through catering rather than have them come in through the line, through the regular service line.

It's much, much more efficient.

But in terms of breaking down sort of detailed numbers at this point, I think, again, I think it's too early to do that.

But I can say that we are happy with the success so far, and we'll continue to roll that out.

And as we are in more and more markets, I think we'll be a better position to talk about how that's affecting the economics.

And then one last one, as I understand it, you're experimenting more with breakfast hours.

And I guess I'm curious, two questions on that.

One, is it just extended hours or are you considering some breakfast specific items at this point?

And then secondly, where you have expanded to breakfast hours, what has that done?

Are those hours productive hours for you before 11 o'clock?

So, let me talk about breakfast specifically.

We only have two restaurants that we open up at sort of a traditional breakfast time.

They're both in airports, one at Dulles Airport, and there we are serving our regular menu, and then at the Baltimore airport where we serve a breakfast menu which includes a new item that we have which is actually really, really delicious.

It's called frittatas.

We have two varieties of frittatas, a chorizo frittata and a vegetarian -- a vegetable-based frittata.

And that's very, very popular and gaining more popularity as we continue to serve it.

Those are the only two places really that I would consider us having breakfast.

Now, we do open our restaurants earlier in areas where there is demand.

And so I don't know if that's what you're referring to when you say more breakfast hours.

But our restaurant managers watch carefully the traffic and the activity in their particular neighborhoods.

And we can open up as early as 10 o'clock.

I'm not sure if we open up much earlier than that, but if there is demand in those areas, they certainly do take advantage of that and open up, and that's in a number of restaurants in all of our markets.

Thank you very much.

John Ivankoe, JP Morgan.

Good afternoon.

Thanks guys.

This is Amod filling in.

The first question was on new unit volumes and kind of the trend over the next few years.

2012, you obviously had some difficult laps I think from the 2011 portfolio.

But can you talk a little bit about some of the puts and takes?

I think Monty, in the prepared comments, you remarked about considering more mall units, also considering more A models and new construction versus remodeled construction.

What are some of the kind of puts and takes behind the new unit volume trend?

As we said, we opened 48 restaurants during the first quarter.

And we are confident in the real estate pipeline that's coming for the rest of the year.

In terms of your question about the mall locations, we've only open a few of the mall location so far, but what we are really pleased about is the investment cost of those locations tends to be substantially below what a traditional Chipotle costs to open.

And the volume of those restaurants tends to be at or above what a traditional location brings in, so the unit economics of those mall locations is really, really good.

And so that has given us the confidence to look more aggressively towards mall locations where we can open them in a way that is really good for our trade dress, really good for our brand, and where we can have the confidence that, with a relatively low investment, we can get really nice returns.

So you'll be seeing us do a substantial number more of those during 2013, which will increase our portfolio of mall locations quite a lot during this year over the handful that we have done historically.

Other than that, our real estate portfolio is sort of very similar in terms of the types of locations we're going into with mostly endcap locations with a decent mix of freestanders as well, and then storefront locations and a few in-line locations.

So that balance has stayed relatively similar.

We have also seen the amount of restaurants that we are putting into new centers increase as more money becomes available for developers to build those sites.

And that was -- so it's kind of the pendulum is swinging back towards the way it was several years ago when the vast majority of our restaurants, something like 70% of our restaurants, were being built in new developments, new structures.

For a time, especially during the recession, the pendulum swung such that we were building most of our restaurants in remodeled locations.

But despite the fact that more of these new centers might be coming online, and I think I said during my comments it might be as much as 40% for our 2013 portfolio, despite that fact, we were very optimistic and aggressive about what we can do with the continued focus on our A model strategy.

So, we are going to be continuing to bring emphasis to really looking for these locations that may have been less attractive to us in the past because of being off the beaten path, or having a demographic -- less demographic certainty and looking to open those as A models because our experience in doing so has shown us that we can derive very, very favorable returns on investment by going into those locations.

So, that is saying it will be a continued focus for us.

So, really it's I think it's all very positive.

Our new store unit productivity has been really terrific, and it's been terrific despite the fact that we've opened up -- I think we've opened up our willingness to experiment with different types of locations quite a bit more with those few airport locations, with a few mall locations, with a lot of A model locations, and continuing to pursue the traditional Chipotle's, either in new construction or in remodeled locations.

So, yes, that's why we are bullish and why I suggested that we'd probably succeed in being towards the top end of our guidance of 165 to 180 restaurants this year, and with hopefully very favorable returns.

Okay.

That's very helpful.

Just on a different tack, could you talk a little bit about the learnings from Farm Team and whether or not some sort of revamp or increased emphasis on loyalty should be expected at some point in this year?

So I think we are going to maintain our position that doing sort of a traditional loyalty program as one would expect, it looks like sort of a buy nine get one free or however it is they work -- is probably not the way we think about building loyalty.

If I think about the best way to build loyalty, it's not through perhaps a specific program, but by doing what we do really, really well.

We have really -- we score very, very high when we do research and interview our customers relative to our competition because of the kind of experience that we provide.

It is really based on the sourcing of great food, preparing it in front of customers and served by an empowered team of top performers.

So, when I think about loyalty, that's probably the most important thing that we can do.

So Farm Team was a way to engage our customers, and bring them in, and teach them more about how we source our food.

It sort of got this loyalty program somehow got attached to that.

And I'll take responsibility for it.

It was not meant to be a traditional loyalty program, though.

But again, again, what we do really, really well in our restaurants builds great loyalty.

And I think we're going to continue, over the years, to build on that by providing people with the very best sustainably raised foods and served by a team of top performers that they won't be able to find anywhere else in any other kind of fast-food environment.

Thanks guys.

Nick Setyan, Wedbush Securities.

Thanks for taking my question.

Just to kind of look outside the US, your international business, and just kind of look at ShopHouse, it does seem like you guys are accelerating the pace of development there.

How can we think about the contribution there in terms of the unit growth going forward?

When should we think about it becoming a more meaningful contributor?

Maybe you can talk about sort of the kind of economics you're seeing in the different geographies, internationally as well?

We don't really have a projection or a forecast to tell you that, okay, next year or the year after or so is going to contribute meaningfully to our unit growth or to our growth overall.

Right now, our focus is on building the team, building customer awareness, allowing people to discover what's special about Chipotle, making sure the brand, the Chipotle brand, really comes through in a special way the way it does in the US.

And so far, that's going well.

But we are going to be very patient before we turn the dial.

And when you say it looks like we are accelerating, we don't think about that we are accelerating at all.

We think about it in terms of we are still planting seeds.

So ShopHouse is one restaurant where we are planting a few more seeds.

Now, sure, we are going from one restaurant to four, and that might seem like that's going really, really fast, but to us, it is still planting seeds.

It's another seed in a different trade area in DC, and it's planting a couple seeds and introducing the ShopHouse brand to new customers in the LA area.

And so that's, again, building customer awareness, allowing people to discover ShopHouse.

Customers that have been to ShopHouse in DC so far love it.

The people that have come to our Cultivate events where we've had some sampling of ShopHouse food, they like it as well.

So we are really pleased with the response so far, but we are still in this very early stage, not a growth strategy.

When it's time where we think it's time to ramp it up, meaning we feel like the teams are ready, the customer acceptance is ready, the awareness is ready, we will then provide that kind of a forecast with you, but that's not on the near-term horizon right now.

I would say the same for the international development as well.

It's a lot of seed planting and it's a lot of introducing the brand and building the teams but not growth mode for the foreseeable future.

Thank you.

Matthew DiFrisco, Lazard Capital Markets.

Thank you very much.

One of the things I noticed with the catering was, in a couple of the markets we tried it at, you've done some things, sort of a bounce-back helping them incentivizing people to bring back the [Sternos] and bring back some of the materials by giving a free burrito.

Is there a sort of let's wow them first and worry about costs later approach, or are the margins pretty strong already on the catering business as far as looking at it as an executable -- not just leveraging the cost of the store, but looking at it as the amount of labor you put into it and the equipment costs?

I know some other peers, maybe the casual dining guys, had problems before with take-out with the packaging being a little bit unwieldy and expensive.

So I'm just curious on what your learnings have been early on so far on the cost side of it.

Sure.

There's no question that there's a cost associated with the set up for catering.

How that's offset by the more efficient -- the catering labor-wise is much more efficient.

We would rather serve 30 people through catering rather than bringing them in through the line.

It's very, very easy; it's very, very fast.

And it does not take the same amount of labor by a long shot.

The desire to have people bring back some of the catering equipment, set-up stuff, by offering them a burrito really wasn't driven by economics so much as we don't want to waste.

We don't want to throw these things into the landfill.

It's just a part of being a more green company, I suppose.

Additionally, anything that we can do to bring customers back into our restaurants I think helps.

And we think that perhaps there is an opportunity again to just bring people back who might not be a regular Chipotle customer, but who might have tried catering, to bring them in for an in-store experience.

Great.

I also thought the reusable bags obviously were pretty strong.

I thought that was appealing that you're not using a lot of waste.

I appreciate it as well.

Looking at it as far as structurally, is there anything that would inhibit you from or preclude you from looking longer-term maybe to do delivery, or are you thinking right now you like the guy coming -- you like the person coming into the store and having that connection with them rather than delivery?

I don't know if it's so much a connection, but I think about it perhaps this way.

When we offer catering -- and I'll make this up -- let's say that sort of eight out of ten people will sign up for your catering and maybe there's only two people who would not use it because we don't deliver.

However, if we started out by delivering, maybe eight people would take the delivery option and then you've added all that expense.

So, I think, as we are introducing this, it's a much better economic model to have people come in.

And then at a later time, it could be years down the road when we want to build a catering business even more, then there is a delivery option.

But the expense of delivering I think is not something that makes sense at this point.

There are plenty of people who will stop in to pick up their catering order.

Understood.

Thank you.

Can I ask another question to Jack about pricing if I can?

Sure.

You said in the past about pricing roughly, I don't think you don't like sort of taking baby steps.

You sort of like to get it done with, and then move on.

So I guess the number sort of thrown out there in the past was a little north of 3% would be something if you were to take price.

Given the current environment where COGS have come down a little bit now, a little bit more favorable maybe than the last time you guys have spoken, is your strategy still to take that meaningful sort of price increase but maybe take it later in the year now, or have that option to take it rather than take something but take less of a price increase?

Yes, I think you said it well when you said it's an option.

Right now -- taking a price increase is always an option.

And leading as an option, meaning don't pull the trigger, that's why in my prepared comments I said if we do anything, it will not be before late summer, early fall.

The fact that inflation has stabilized a bit, the fact that our food costs actually improved in the quarter and the fact that the economy is sending mixed signals again, it seems like the economy is off to a great start and then every time about this time every year for the last few years in the spring, we get mixed signals on consumer confidence and job creation and things like that.

So I think the idea of being patient and let some time pass and let's see what happens with inflation over the next few months, let's see what happens with our transaction trends, let's see what happens with consumer confidence and the economy.

And then when we do an increase, I still think we would like to kind of one increase and not multiple per year.

We don't want to keep nickeling and dime-ing people.

And I think in terms of the order of magnitude, this isn't a decision we have made.

I think somewhere in that 3% to 5% I mentioned earlier is probably the order of magnitude considering inflation and considering what would be a fair increase, considering what our competitors are charging.

So nothing imminent, nothing this summer, but we'll keep an eye on it.

And the earliest we would do something would be late summer, early fall.

Excellent, thank you.

David Tarantino, Robert W. Baird.

Hi, good afternoon.

Just a couple of quick ones.

I guess, first, on the quarter and the comps in the quarter, Jack, I think you talked about an underlying trend of 3%, but you didn't really talk much about the weather impact in the quarter.

So I was wondering if you took a stab at maybe quantifying what the year-over-year impact of the weather might've been during Q1.

I can't tell, to be honest.

It looks like we probably got a weather benefit in January, not that January was a great month, but it wasn't a super bad winter and I think the winter before may have been a little bit more extreme and I think that went against us in February because February last year was really, really mild.

And so I don't see that weather stands out as a significant negative, even though it was a tough comparison.

And I guess if -- when we look at what our trends are in the second quarter, I might have a better idea depending on what the second quarter ends up being.

But right now, it feels like that weather bounced around a lot during the quarter but I don't know that it had a net impact that we could point to and say for sure here's what the impact was.

Okay, thanks.

And then maybe one more quick one on the pricing and the cost relationship there.

I think -- I guess I'm just wondering what your overall philosophy is on managing the cost line.

And if I look at the 33% that you're running on the food cost line, that is the high -- that would be the highest level you've seen in 10 years.

And I'm just wondering if that's a level that you find acceptable, or is that something you would like to see managed lower over time?

I guess I'm just trying to figure out how you're thinking about that longer-term.

33% is a little on the high side.

We've had -- I think we've had quarters at higher numbers than that.

Maybe you're talking about for the whole year.

We've had it at or in the ballpark of a 34% or so.

We think our model works better when it's more like in the 32% range.

Of course it's even better still at 31% or lower.

So this is more on the high side.

So it's not that we are thinking, oh, 33% is perfect, and so we are just going to never increase prices as long as we are at 33%, but it's more of a -- it's stabilized and let's see what the next chapter of inflation is.

Our margins are still extraordinarily high; our returns are still extraordinarily high.

We do think we've got pricing power.

We think that we are priced at or below our competitors, and we think we have the ability or we should be able to charge higher prices because of our food integrity, the higher costs of our ingredients.

And so I'd like it to be lower than 33%.

We're just not going to be in a hurry to push it lower right now.

Great, that's helpful.

Thank you.

Due to time restraints, this concludes our question-and-answer session.

I would like to turn the conference over to Mr. Alex Spong for any additional or closing comments.

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

Thanks everyone.

And this does conclude today's conference.

Thank you for your participation.