奇波雷墨西哥燒烤 (CMG) 2013 Q2 法說會逐字稿

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

All participants are now in a listen-only mode.

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

(Operator Instructions).

As a reminder, this conference is being recorded.

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 second-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.

Forward-looking statements will include projections of the number of restaurants we intend to open; comp restaurant sales increases; timing and impact of menu price increases; trends and food cost; marketing spend and other expense items; effective tax rates; stock repurchases 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 the Annual Report on Form 10-K as updated in our subsequent Form 10-Qs for a discussion of these risks.

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

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

For the third quarter, it will begin September 1 and continue through our third-quarter release in October.

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.

Well, 20 years ago this month, I opened the first Chipotle in a little space near the University of Denver.

I had no idea that this little restaurant would someday become one of over 1,500 restaurants and that, together with over 42,000 team members, we would be changing food culture in this country.

When I opened that first restaurant, I wanted to show that just because food is served fast didn't mean it had to be a typical fast-food experience.

So, I stressed over every ingredient and the team and I worked very hard every day to make sure that we served delicious burritos to every customer who visited.

And today, as a team, we welcome each and every customer as if we were inviting them into our own home, proud to serve the food that we had been working on so hard to prepare.

And as I reflect on this journey we have been on for the last 20 years, it occurs to me that while we are bigger today, we have a much larger team serving many more customers in many more ways, we are doing just what we did when we opened the first restaurant 20 years ago.

We still stress over every ingredient, though we have raised our expectations to expect not only fresh ingredients, but ingredients that are responsibly raised.

And our empowered teams of top performers in our restaurants today care just as much as we did back then about making sure every customers feel welcomed and are treated to a delicious meal every time they visit.

I am proud of what we have accomplished together over the last 20 years, but I am even more optimistic about our potential over the next 20.

We are pleased with our performance for the second quarter of 2013, which included revenues of $816.8 million, an increase of 18.2%.

Comp sales increased 5.5% in the quarter and diluted earnings per share increased 10.2% to $2.82.

We are particularly pleased that the strength of our performance continues to be driven by our focus on the things that really drive our business.

Our food culture and our unique people culture.

Throughout the quarter we continued to make progress in each of these areas.

We expanded the rollout of Sofritas, a vegan tofu entree, to all of our restaurants in California.

We are pleased with Sofritas, both in terms of the taste and how they are being received by customers.

As of now, Sofritas accounts for between 4% and 5% of our product mix in California.

That percentage was higher at the time of launch when there was significant marketing support.

And we think it will creep back up in time as we gain wider acceptance since many people are still unfamiliar with the idea of a tofu entree at Chipotle.

We are expanding the Sofritas test to include our restaurants in the Pacific Northwest this month, and we are considering additional markets this fall when we expect additional supply to become available of our tofu.

Many of you have seen that Chipotle recently became the first restaurant company to voluntarily label GMOs in our food.

We made this decision because part of our Food With Integrity mission is to educate people about the realities of the food they choose to eat.

Most consumers don't understand how pervasive GMO ingredients are in this country in restaurants and supermarkets.

But the fact is that 94% of the soybeans and 88% of the corn in this country are genetically modified.

While there is not yet a clear scientific consensus on issues related to GMO foods, use of GMO crops has been banned or restricted in a number of other countries and there is increasing debate about the issue in the United States.

At Chipotle, while most of our ingredients are already GMO-free, we are committed to accomplishing the difficult mission of removing all GMO ingredients from our food.

We have already made a significant progress toward our goal with -- completed the transition away from soybean oil to cook our chips and crispy taco shells nationwide by replacing it with non-GMO sunflower oil.

And we also replaced soybean oil in our Chipotle chili adobo used to marinate our chicken and steak, choosing instead to use a non-GMO rice bran oil.

These are important steps for us in moving away from genetically modified ingredients altogether.

And there will be significant further progress in the coming months.

Our marketing continues to highlight our food culture and how it differentiates us from other restaurants as we believe customers are increasingly receptive to messages about where their food comes from and why that is important.

During the quarter, we hosted the first of three cultivate festivals planned for this year, this one in San Francisco.

This event drew over 40,000 people to Golden Gate Park where they entertained or were entertained by great bands and some of the country's best-known chefs.

They also had a chance to learn about some of the important differences between industrial food and food that is sustainably raised, differences between fresh and processed foods, and trivia about Chipotle's 20th year -- 20-year history.

With broader marketing support including advertising, PR and in-store communication, the reach of these events is significant in the host markets, giving them impact beyond those who attend.

The next cultivate festivals will be in Denver on August 17 and in Chicago on September 7. These events are part of our big picture efforts to show how Chipotle is cultivating a better world.

In addition to our cultivate festivals, we are now well into our skillfully made advertising campaign.

And our ongoing tracking of that campaign is encouraging with 93% of consumers say they find the ads relevant compared with an average of 55% for advertising campaigns in general; 91% saying they are a little or a lot more interested in trying Chipotle compared with the norm of 61% for other ad campaigns; and 89% saying that they felt a lot of information in this ad was new to them.

This campaign, like most of our advertising, is designed to help customers understand what is different about Chipotle, that our food is skillfully made and that our commitment to great ingredients is unique in the category.

This is a different approach to fast food marketing, but one that very much matches the way we have built the Company.

Collectively, the components of our marketing programs are creating positive impacts on how people perceive Chipotle.

And we believe they will continue to help attract and educate customers and to build more loyalty among existing customers.

In honor of our 20th anniversary, we have launched a promotion called Adventurrito, which is challenging customers to complete a series of online puzzles to be eligible to win free food from Chipotle for up to 20 years.

The program began on July 13 and continues for 20 days and provides customers a chance to win free burritos for a year with 20 people winning this prize on each of the first 19 days, and an opportunity to win 20 years of free burritos on the final day of promotion.

We will award up to 20 grand prizes at the end.

During each day of the promotion, we reveal a new puzzle with video clues that feature friends or people who have been involved in Chipotle in some way over the last 20 years, including chefs, athletes, actors, musicians, and political figures.

Customers who correctly answer all of the daily puzzles over the first 19 days will have a chance to unlock the grand prize puzzle on the 20th day where they could win free burritos for 20 years.

This promotion was designed with our loyal customers in mind as our most loyal customers have contributed so much to our success over the years and we wanted to create a program that gives back to them.

Customers seem to love the promotion and we have already awarded many daily prizes so far.

During the quarter, we opened our first ShopHouse restaurant in Los Angeles, actually in Hollywood, and are very encouraged by the first weeks of operations and the excitement this has generated.

From the beginning, ShopHouse has reminded me very much of how people responded to the first Chipotle.

People love it and appreciate that we are giving them something very different than what you would get from traditional fast food or other chain restaurants.

ShopHouse is reinforcing the beliefs of having a restaurateur culture -- ShopHouse is reinventing the benefits of having a restaurateur culture.

We opened the LA ShopHouse with one of our restaurateurs and from the very first day we have had a tremendous crew that is cooking delicious food and providing a truly unique experience for our customers.

ShopHouse is continuing to show us that there is significant potential for our business beyond burritos and tacos.

And we are really encouraged by its potential.

We have two more ShopHouse restaurants slated to open in the coming weeks, one in Los Angeles and one in DC -- Washington, DC, and leases signed up for four additional locations, all of these locations in either Los Angeles or Washington, DC that should open by mid-2014.

As much as we see long-term potential for ShopHouse, I should remind that all of our growth in the foreseeable future will be driven by Chipotle in the United States.

I will now turn the call over to Monty.

Thank you, Steve.

One of the most significant changes we have made to our business since Steve opened the first restaurant 20 years ago was to build a people culture that is as unique and compelling as the food culture.

By bringing our people culture in line with our food culture, we have been able to improve the overall experience we provide; develop exceptional leaders; strengthen our economic model; and create more opportunity for our people than ever before.

The cornerstone of our people culture is our Restaurateur program.

These elite managers are continuing to set new standards for the quality of the experience we provide and for our financial performance and they are also filling our pipeline with the future leaders we will need to keep pace with our growth.

During the quarter we promoted 46 new restaurateurs out of the 56 candidates we interviewed, a selection rate of 82%.

While this is off a little bit from our highs, but it is still a clear indication that the overall caliber of restaurants for candidates is very strong and that our field leaders have a growing understanding of what it takes to become a restaurateur.

Through the first half of the year, we've promoted 91 new restaurateurs and 36 of our existing restaurateurs were promoted to R2 and R4 positions.

This group of extraordinary leaders continues to expand their leadership influence as they move into field leadership positions.

During the quarter we promoted 10 new apprentice team leaders, four new team leaders and one new team director, nearly all of these coming from restaurateurs.

With the continued advancement of managers to restaurateurs and restaurateurs to field leaders, 70% of our restaurants are now overseen directly or indirectly by leaders who have come through the program.

The strength of our restaurant teams is not only allowing us to provide better service and a better experience, but also allows us to take on exciting new challenges.

In January, we launched our catering program in our Colorado restaurants and since then have expanded that to a dozen markets around the country.

We now have over 200 restaurants offering catering and expect to more than double the restaurants offering catering by the end of August.

By the end of this year, we will roll out catering to all of our restaurants.

While catering is still relatively new to us, it's off to an excellent start and showing great potential.

Many of our customers were delighted to offer Chipotle for their recent graduation celebrations and the feedback from parents and graduates alike has been overwhelmingly positive.

Overall the restaurants that are currently offering catering -- or in the restaurants that are currently offering catering, sales are approaching 1% of the total sales and we believe that the vast majority of that is incremental.

We believe catering will continue to grow as we roll this out further and as more customers get an opportunity to try it.

Recall that our catering program allows customers to essentially set up a mini Chipotle service line to make their own burrito bowls and tacos any place they choose.

We are offering catering options that feature two or three meats as well as a chips and salsa-only offering.

Last quarter I told you I would give you an update on our efforts to improve throughput in our restaurants.

Typically the second quarter represents one of our busiest times of year, which provides a significant throughput opportunity for us.

Last year, we made great progress in this area, achieving our fastest throughput ever as our crews systemwide focused on the four fundamentals that lead to excellent throughput.

This helped us drive comp sales during our peak lunch hours faster than the overall comp.

This year during the second quarter, our Friday throughput increased by an average of two transactions per hour during our peak lunch hour which is from 12 to 1 PM, compared to the second quarter of 2012.

So we have managed to speed up our already fast service and make additional gains in this important area.

But the truth is that we are actually disappointed that we were not able to better translate our skills into better results this quarter.

We know we can deliver even faster throughput during our lunch peak.

And as we do, we know that more customers are going to choose to visit Chipotle, confident that they will breeze through the line and receive terrific customer service.

We are committed to doing all we can to maximize this important strategic advantage that Chipotle has over all of our competitors.

The good news is that we know how to drive faster throughput.

And the answer is to make sure that we execute on what we have been calling the four pillars of great throughput.

Having excellent mis en place so that everything is prepared and the line that is properly set up to serve customers; making sure we have a linebacker in place to keep the service line clean and stocked which allows our team on the service line to give their full attention to customers, having our aces in their places which means our best people at each station during our busiest times, and making sure we have expediters who can assist customers in moving through that cash out process quickly during the peak times.

Our internal analysis has shown we have faster throughput when all four of these throughput fundamentals are followed.

But while we have been communicating the importance of this to our teams, I think we have not been clear enough with the message.

Nor have we emphasized its importance well enough at the restaurant level.

So, recently, for the first time ever, we have made these four pillars a key part of each manager's semi-annual bonus measure which will encourage our field leaders to diligently train their teams on these metrics.

We have also provided specific goals tailored for each restaurant to track their improvements and speed of service.

We are also making execution of the four pillars of throughput a prerequisite to becoming a restaurateur.

Finally we are training all of our field operators to understand that creating a great culture around the four pillars is not just about speed of service.

It also causes the entire shift to run better; make sure that our people are set up for success before the rush; improves the empowerment of the team; and dramatically improves the customer experience.

As always, I will continue to update you on the progress -- on our progress in this critical area of our business.

Our development team had another very strong quarter as they opened 44 terrific new restaurants and crossed the 1,500 mark with a total of 1,502 at the close of the quarter.

Not only do we remain on track to deliver the high end of our restaurant opening guidance for this year of 165 to 180 restaurants, but our development pipeline remains strong for the future giving us confidence that we will be able to continue with strong growth in 2014 and beyond.

The strength of our operations coupled with our unique and compelling food and people cultures have us well-positioned for the second half of the year and continue to give us confidence in our ability to provide long-term value to our shareholders in the years to come.

I will now turn the call over to Jack.

Thanks, Monty.

We are pleased to report another quarter of strong operating and financial results.

Our focus on building a special food culture, a unique people culture and a strong unit economic model continued to deliver these strong results and we believe they also provide a compelling advantage in a very competitive industry.

We know that empowered teams of top performers serving great tasting food made from high-quality, sustainably raised ingredients will result in an exceptional dining expense for our guests and lead to even more loyal customers visiting Chipotle.

Our same-store sales in the quarter were up 5.5% and our average sales for restaurants that have been open for at least 12 months is over $2.1 million.

Overall sales for the quarter increased 18.2% to $816.8 million, driven by new restaurant openings and the 5.5% comp.

Year-to-date sales were $1.54 billion, an increase of 15.9%.

The quarter comp was primarily driven by an increase in customer traffic along with the benefit of one additional trading day compared to the second quarter of last year.

Year-to-date comps were 3.4% driven by increased traffic.

So far in July we are seeing underlying comp trends similar to the trends in Q2 after adjusting for the extra day in the quarter.

Without the extra day in the quarter, the underlying comp trend was about 4.5%, which is an acceleration from the underlying 3% comp we saw in Q1.

This higher sales comp trend became apparent in the second half of April when more normal spring weather arrived in most of the country and continued into May and June.

In light of this higher comp trend, we are raising our full gear sales comp guidance to low to mid-single digits.

We opened 44 new restaurants in the quarter and 92 for the year so far which brings our total Companywide restaurants to 1,502 at the end of Q2.

We continue to expect to open between 165 and 180 restaurants for the full year and we are pleased that at the end of Q2 we are more than halfway there, as our development teams have worked diligently to build more inventory to support level loaded openings throughout the year.

Our new restaurants continue to perform very well and are opening at or above the high end of our $1.5 million to $1.6 million sales range.

Restaurant level margins for the quarter were 27.6%, a decrease of 160 basis points from last year and year-to-date margins were 27%, a decrease of 130 basis points.

Higher food costs and higher marketing costs more than offset favorable sales leverage both in the quarter and for the year.

Our food costs in the second quarter were about the same as in Q1, but 100 basis points higher compared to Q2 of last year due to higher cost for our salsas, higher costs for cheese and from higher chicken slightly offset by the lower cost for our avocados.

A freeze in Mexico severely impacted our tomatillo supply, increasing our cost for both red and green tomatillos, while our corn salsa costs are higher as we fully converted to serving our delicious sweet white corn which is more expensive than yellow corn.

Year-to-date food costs were 33% which is up 80 basis points from last year.

We expect food costs will remain at about this level or slightly higher for the rest of this year as we expect cost pressure from higher avocado and steak costs.

We expect avocado costs to move higher in the coming months from increased demand for California supplied avocados and from recent hotter weather which affects the fruit size and the availability, as well as from slightly lower expected supply from Mexico in the fall.

As a result of the relatively stable food cost and a longer-term general forecast of a stable or perhaps even deflationary food cost, we do not have any current plans to raise prices for the remainder of 2013.

Labor costs were 22.7% of sales in the quarter, a decrease of 40 basis points from last year.

And year-to-date labor costs were down 30 basis points.

Normally we would not see labor leverage with an underlying comp of around 4.5% as the benefit from sales leverage is offset by wage inflation.

But our wage rates in the quarter were about the same as last year as our restaurant teams have done a better job of fully staffing their restaurants with top performers, thus resulting in lower overtime this year compared to last.

We anticipate labor costs as a percentage of the sales will move modestly higher in the coming quarters, due to seasonally lower sales in Q3 and Q4.

Occupancy costs for the quarter declined 10 basis points from last year due to the favorable sales leverage.

Other operating costs increased 100 basis points from last year, as marketing costs increased to 1.5% of sales in the quarter compared to about 0.7% last year and from slightly higher promotional costs.

We expect marketing to be about 1.6% overall for 2013 as we continue our skillfully made advertising campaign across the country.

And from marketing events around our cultivate platform in the third quarter including cultivate festivals in Denver and Chicago.

As a result, we expect marketing expense to be around 1.7% in the second half of the year.

In the quarter, G&A was slightly higher than last year by 10 basis points primarily due to higher legal and higher payroll, mostly due to a bonus accrual.

G&A costs for the first six months of 2013 were 6.2% of revenue or a decrease of 70 basis points compared to last year.

And this decrease was due to lower stock-based compensation expense and lower employee payroll tax as Q1 in last year included a one-time catch up adjustment for performance shares and higher payroll -- employee payroll taxes on a greater number of stock option exercises from last year.

We expect total non-cash stock compensation will be about $66 million for the full-year 2013 or about the same as last year.

And we expect our G&A as a percentage of sales will be about the same as in Q2 or perhaps slightly higher as we move into seasonally lower sales periods.

Our effective tax rate for the second quarter was 40.1% and for the full year we expect the rate to be around 38.9%.

The second quarter includes a non-recurring adjustment of around $1 million for changes in state income taxes that reduced earning by about $0.03 per share.

This includes about $250,000 in interest expense in the interest and other income line of the P&L with the rest of the adjustment reflected in the tax line.

For the third and fourth quarters of this year we expect to have tax rate of about 39.4%.

Diluted earnings per share for the quarter was $2.82, an increase of 10.2% from last year.

During the quarter we repurchased about $30 million of our stock or nearly 84,000 shares at an average share price of $353.

At the end of the second quarter, we had nearly $120 million left on our share buyback program previously approved by our Board.

And over the last five years we have invested over $580 million to purchase about 4 million shares at an overall average price of $145 per share.

We finished the second quarter with about $775 million in cash and cash equivalents, and short- and long-term interest-bearing investment and no debt on our balance sheet.

We continue to believe that the best use of our cash is to invest in our high returning restaurant and we will continue to develop additional growth options by planting seeds including ShopHouse and Chipotle outside the US that will provide attractive value-enhancing growth investments in the future.

In the meantime, we will continue to opportunistically repurchase our stock to enhance shareholder value.

Thanks for your time today, and at this time, we would be happy to answer any questions you may have.

Operator, please open the line.

(Operator Instructions).

David Tarantino, Robert W Baird.

Good afternoon and congratulations on a good first half of the year.

Jack, just a question on your pricing philosophy and strategy.

I know you mentioned you don't have plans to raise prices for the rest of the year, yet the food cost ratio you mentioned also was going to creep up or stay similar to where it was in the first half which is above the historical norm.

So I am just wondering how you are thinking about that.

Is this another delay in your price increase?

Or are you thinking that you don't need it at this point?

Maybe if you could lay out your thoughts there.

Yes I would.

I would call it a delay.

But I think it is a delay right now that, based on what we see for the rest of this year, we don't feel compelled to increase prices in the next two quarters.

Certainly that may change, but based on our current margin, based on what appears to be a tamer food inflation environment generally, based on the fact that even the pressure I talked about mostly coming from avocados, on our food cost line in the next couple of quarters, those are more cyclical than inflationary.

I would argue that is based on just what we are seeing in California and Mexico in avocados this year.

So they don't feel like permanent inflationary items.

And then another consideration is -- Steve had mentioned we want to remove GMOs and that is a significant challenge.

There is going to be some costs associated with that as well.

And so we'd like to be patient with that as well.

And so when we do raise prices, we may be able to time that when we are doing Food With Integrity items like removing the rest of the GMOs in some of our ingredients.

We also have had some of our supply of naturally raised meat such as steak this year be a real challenge.

We are working to get that back up to 100.

So there's other -- 100%.

So there are things like that that we think will add to the quality of our food.

But will -- may add to the cost as well.

And so we think that it is wise to wait until we understand what those costs are going to be.

And maybe time it around some of those items.

And so, right now we don't think we need to do anything in the next two quarters.

Great.

And, Jack, just to clarify some of the items you just mentioned, are those items you expect to happen early in 2014 and is that why you are waiting it's just that it may be a couple of quarters out from where you (multiple speakers)?

We hope so, David, but it is hard to pin it down.

Because when we are changing ingredients like this, there are so many things to consider.

Of course, cost is really just one of them.

The most important is what is the impact on the recipes.

What is the impact on the taste of our food, the quality of our food.

We want to be very careful before we are switching out ingredients that we don't have unintended consequences or we don't have customers that feel like gee, I don't really like the taste of the food.

We don't think that will happen, but we have to be very careful as we do this.

So it is not unreasonable to think that we can get a lot of this done, maybe all of it done in the next two quarters.

But it is hard to say that with certainty.

Makes sense.

Thanks very much.

Michael Kelter, Goldman Sachs.

I wanted to ask, after your restaurant margins have gone up year after year after year for so many years, they have stabilized now in this 26%, 27% range for the past three or four years.

Is there any reason to believe it is some sort of natural ceiling about what the concept will be able to achieve or is it --?

Do you think maybe this is just a pause and you have a vision that it can move higher?

Well, it can move higher.

I don't think it is a natural ceiling.

I think it depends on what our ultimate volumes are and that depends on what our comps are.

We have always talked about that, food costs aside and food costs, by the way, the margin pressure we have seen in the quarter and for the year can be easily remedied by increasing prices.

We think we have got their pricing power.

We think our food cost is higher than it normally would be.

And so that part we think we can solve.

So then beyond that, we think we still have leverage.

If we can deliver a comp that is at or above a mid-single-digit comp, that is driven by transaction, we think we still can maintain or even add to our margins.

And in fact we think that if we were able to drive a higher than mid-single-digit comp, we can increase our margins at a similar level to any other concept that is at a much lower level.

So we don't think our ability to raise margins has been diminished at all.

But it all will depend on what the comps and what our ultimate average volumes end up being.

And then, do you have maybe any research that suggests the majority of your customers want to pay more for GMO-free foods?

Or is that a decision that you make more based on feel?

We - customers don't fully understand GMOs.

There's a small number of people and we have seen this when we recently put information about GMOs on our website that are really into it, really understand it and are really excited about us removing GMOs.

I would say the vast majority of our customers are largely unaware of which of their foods that they eat everyday contain GMOs, what the impact of GMOs might be.

There is a lot of debate and uncertainty around the real impact of GMOs.

So we don't necessarily think that customers are going to want to pay more or going to visit more often.

But all along the way on our Food With Integrity journey, we have always done things that we thought were the right things to increase the quality of the food that was going to be more wholesome, more helpful and more respectful to the environment.

And we think GMOs follows along that same thinking.

And we think over time, as our customers and as -- customers in general, as they discover more about where their food comes from and as they discover more about what Chipotle is doing to source these higher quality ingredients, we think that does build customer loyalty.

So we think it is going to be good for our business.

But it is hard to say that there is a direct correlation between removing GMOs and people paying more or people visiting more.

And if I could sneak in one last one.

Since the employer mandate and the Affordable Care Act is delayed by a year to January of 2015, do you plan to hold off on offering insurance to your employees until then?

We are still studying that.

That is a very possible outcome.

The one challenge we are dealing with, Michael, is we have got a -- we have been offering for a number of years now a streamlined version that our crew have had the option to elect and then pay for this coverage themselves.

It's called the Starbridge program.

We are trying to figure out whether we will be allowed to continue to talk for that.

Right now it is possible that we won't be able to.

That we will have to remove that.

And so we don't know how exactly to deal with our few thousand employees that are already electing that.

We would like to not have to take something like that away from them.

So we are still studying that.

Right now it is likely that we will delay it, but this is the one issue that we want to get our arms around before we make a final decision.

Thank you very much.

Keith Siegner, Credit Suisse.

Just to dig into the traffic trends and the throughput issues, very, very encouraging, obviously at 5.5 in terms of the traffic mix benefit.

If you think through that Friday scenario you gave Monty and how much of this might have come from expanding throughput initiatives, maybe breaking that down a little bit more, if you think how much of the increase in sales on the same-store basis is coming maybe outside lunch?

Are you seeing changing patterns and willingness to eat outside those peak hours?

Is it broadening out in appeal on that front?

Maybe anything you could give us on comps at peak hour, how much is throughput and then comps outside peak hour as well?

Thanks.

Yes, it is a great question.

We really focus on throughput during peak hours just because that is where there's sort of the most sand in the hourglass, so to speak, and where we had the most opportunity to put people through faster and thereby avoid people walking away from the end of the line.

And so one of the things we were very encouraged by in the last couple of years is our ability to drive a better comp during the peak lunch and peak dinner times than we did during even the rest of the day.

This last quarter, that wasn't the case.

The comp that we drove during peak lunch was slower than the all-day comp.

Although the comp that we drove at the peak dinner hour was slightly better than the all-day comp.

So we are still achieving some really nice gains there.

But the amount of additional transactions we put through during the rest of the day were higher.

So the sort of what we call shoulder hours between lunch and dinner, we did very, very well.

We had unusually high comps during those hours.

Now that can be caused by the fact that people choose to avoid the long lines and simply reschedule their lunch for a later time or it can just be caused by the fact that we have a lot more transactions coming through the restaurants generally.

This quarter, second quarter of 2013 versus the second quarter of 2012, we actually had 25 transactions more per day coming through in each of our restaurants on average.

And like I said, only two of those occurred, only two incremental, occurred during the peak lunch hours.

So we are still proud to eke out those two because it is difficult during lunch to put through -- that is the name of the game is to put through more people during that busiest time.

But like I mentioned we are still a little disappointed just because we think we can do much, much better.

We know we can do better because our very fastest restaurants are way, way faster than our average restaurant.

And as the lines build we really want to continue to teach and encourage our teams to focus on these four pillars of throughput which not only enable us to put people through the line more quickly, but also do it, just increase the quality of the customer experience a great deal as well.

So we are very pleased in our ability to drive additional transactions through our restaurants.

We are very pleased to be able to do it without adding a substantial amount of labor or any additional equipment.

But we know we can do a heck of a lot better as well with the knowledge we have already accumulated about how to drive throughput.

So we are excited to continue to work on achieving those gains as we get our teams more and more focused on this very important advantage of ours.

Thank you very much.

Joe Buckley, Bank of America.

Just a couple of follow-up questions.

Questions on the previous sales mix you mentioned.

Do you have any sense of how much of that is incremental?

Are those California stores comping up better than the system?

Yes.

We think very little if any of it is incremental.

We have only done a little bit of advertising, a lot of that is done through tasting as customers come in.

And so we don't see any evidence that it is incremental.

So we think that is all trade-off.

I think what is encouraging is that only half of the trade-off is coming from vegetarian.

The other half is coming from some of our meat entrees.

A lot of that is coming from chicken.

And so we are pleased by that.

That has got a broad appeal.

So we are hopeful that overtime that as people want to visit Chipotle more often and they are looking for a little change in what they are ordering, that they will order the Sofritas and it will add to our comp over time.

But I would say right now we are not really seeing anything that is obvious, that it is incremental right now.

And then, just a question on the marketing.

Some of those specifics, Steve, that you shared were very impressive.

Can you tell us a little bit more?

I mean have you done different forms of marketing in different regions?

Are there any other earnings you can share with us and do you have a sense that it is driving some of that nice traffic increase?

Well, so, you know -- we don't know exactly how much of the comp the marketing is affecting.

But the numbers I shared with you, I think, are significant to us because we want to make sure that what has traditionally been a more difficult message for us around Food With Integrity and things and marketing -- and marketing messages that are not difficult fast-food marketing messages, these different kinds of messages were tough for us.

And we feel that we have been getting better at them over the last couple of -- last two to three years or so.

I think we are feeling really good about skillfully made.

And what we think is really important is over the long term continuing to form a close bond with our customers, getting them not only interested in things that they hadn't thought about before.

It was a question about are people asking for non-GMO foods?

Are they willing to pay for it?

Well, it is a great question.

But when I think about food with integrity in general, customers weren't asking for that.

This is something that was very important to us and really was around conducting our business in a way that we think is open and honest and ultimately best for customers and the environment and animal welfares and farmers and things like this.

Customers aren't directly asking for that.

But when you help them understand the importance of these things, I think it develops a stronger relationship.

So that is why these numbers are significant to us.

Because they are finding this marketing as increasingly relevant to them.

And I think that's especially important as we go into new territory and start talking about things like GMOs.

So I am very bullish.

Again, how much of that -- how much of the marketing contributes to the comp?

We are not exactly sure.

But we have always taken a longer term view in our market approach.

And rather than put out campaigns that will spike up sales, or contribute to a quick comp, we would rather ensure that we are building the business consistently and long term.

We think that is ultimately better for our shareholders and for the business.

And just one more real quick on the -- seems the sales increase, was it all transaction?

Was there any deviation in the check?

No, it was all transactions, Joe, except for the one extra day.

So that the 5.5%, 1% of that came from one extra day but the 4.5% underneath that was all transactions.

Thank you.

Jeffrey Bernstein, Barclays.

Two follow-ups.

First is on the marketing line of question.

Seems like you are very happy with the skillfully made efforts here and it looks like this quarter was a big spike in terms of what you spent.

I think, Jack, you said 1.6% for all of 2013.

I am just wondering first if you can lay out the biggest buckets within that.

I guess and some of it is cultivate versus the coupons versus more traditional radio and billboard.

Just wondering how you break out that bucket and then how should we think about 2014 in terms of as a percentage of sales, if you are pleased with it at this point?

Like is there is a ceiling as to how high you would go or how much you would be comfortable to increase it for next year?

Yes, Jeff on 2014, it is too early to tell.

We really haven't done our budgeting.

But I would expect that we would be in the same ballpark.

This 1.6%, 1.7%-ish kind of range.

There's nothing that we have seen or talked about so far where we talked about, yes, let's really ramp it up.

And in terms of the split it varies by quarter.

It varies by year.

But I would say generally it is a reasonable split between what I would call traditional advertising, the billboards, the radio, and things like that.

We are probably putting more money into that this year than we have in the past and we have had one flight already.

We are going to do more of it beginning in August.

So we are probably going to spend a little more than we have in the past.

Cultivate, we have added a cultivate.

And so those are nice, local, really having some close contact with people in not a marketing way, but in an experiential way.

So we have added one.

And so, we are spending a lesser amount on that because it is only in three markets.

And then we have got some other things coming up in the fall that Steve has talked about that are more similar to our Back To The Future video that we had last year.

Back To The Start.

I'm sorry, Back To The Start.

Not Back To The Future, the movie.

But more in that kind of entertainment where we will have a video, a video series where it is entertaining and there's also a message, a message about food.

And that is coming up as well.

And so it is split up between a number of things like that.

They are very, very different.

Some are experiential.

Some are traditional.

And some are very nontraditional.

And as the year comes to an end and we look at how things went, we will revisit and then decide what we do in 2014.

But I would expect the overall marketing expense to be in the similar ballpark.

Got it.

Just a follow-up.

I think you mentioned from a commodity.

I don't know if you gave us the basket per se, I think you had said it was going to be similar to slightly higher.

I think you meant -- is that versus the 33% so we should be assuming 33% plus in the back half of the year.

Can you share how much -- what the basket inflation is at this point?

How much is locked kind of thing?

Very little is locked.

We have beans locked.

We have our corn for salsas locked just through the end of this quarter, the third quarter.

And then we have to re-up there.

We have a few other.

I think we have rice locked and that is about it.

The majority of what we buy, we have no locks in the meats.

We have no locks on the avocados.

That is just not possible with what we are buying there.

So really for the most part most of our ingredients are floating, according to the market.

Got it.

And lastly you said the 4.5% underlying comps, it sounds like after the start of April was very steady through the quarter at that kind of 4.5%.

It sounds like you are saying that is what is running in July.

If that's true the compares is there anything unusual about the compares?

I know some of your peers talked about June and July of last year things really slow down peered so I am just wondering if you said as very stable on a two-year basis or how you read that month-to-month?

I would say that trends that we are seeing are pretty stable.

I mean nothing is stable when you go day by day or week by week.

But when I look at the entire quarter and I looked at once weather, kind of returned to normal weather.

Because in the first half of April with the Easter moving from one year to the next and then with the weather it took a while for spring to arrive.

It was hard to get a read until the second half of April.

Once the second half of April appeared, when I look at the entire period all the way to July, it looks like a pretty stable 4.5% underlying run rate.

I would say the compares are largely meaningless.

And the reason I say that is because the trends from last year was I would call it the third year of a trend that started three years ago with the recession.

And if you add up all the quarters for the last three years ending in 2012, we added about 27% to 28% in each quarter to our sales and that was done since the recession.

And now this is a brand-new trend.

The brand-new trend was an underlying 3% in the first quarter and now it is a 4.5%.

It continues to feel like a 4.5% as we are into this third quarter and so I think looking at comparisons to last year, I think, will not help you diagnose the trends at all.

Very helpful.

Thank you.

Mitch Speiser, Buckingham Research.

Just to follow up on Jeff's question.

It does -- the trend of 4.5% traffic you are seeing that right now.

But do the traffic comparisons -- I mean, do they get more difficult in August and September and you just feel that it is meaningless, but does it get more difficult for the balance of the quarter?

Well, if you went back to last year you would see that in our comps actually were lower in the back half of the year.

And I think if you were going to draw the conclusion that, oh, lower comps in the back half of the year, that means the compares are easier.

I think that is where you would be misled.

This trend that we are seeing right now is a couple months old.

Still very young.

It feels like a 4.5% trend right now.

And that's I think the best way to think about it.

I think any kind of compares to last year, if you try to draw anything out of it at all you might conclude that they are easier comparisons.

But that is not the way to look at it.

Those compares are really it is the completion of a three-year trend that started three years ago.

And so we started with a clean sheet of paper with this trend.

We are starting a brand-new trend is the way I would think about it.

Okay.

Thank you.

And a question on the non-GMO products.

As a base, the food costs were 33.1% in this quarter.

If you were to implement this program of non-GMO prices and assuming no pricing, what type of food cost percent should we think about modeling?

We don't know, to be honest.

That is why we want to hold off.

We have to discover things like make sure that we get the right oil, that the oil performs the way that we wanted to, that the taste is delicious.

Ideally it would improve the taste of the food.

We need to study things like yield and waste and holding times and things like that.

There's a whole host of factors.

And so we really don't know what the cost is going to be.

So we are going to take a very diligent, very thoughtful approach and make sure that we do it right in every single way.

And the idea of holding onto any price increase until we understand all of that and then try to time those, we think, makes quite a bit of sense.

If I can slip one more question in.

It looks like Sofritas is on its way to going national, perhaps.

When we think about the kitchen and your ability to add new products, you have always focused on improving the existing products.

Sofritas is new.

Are there any physical capacity constraints in the back of the house if you wanted to add, say, one new product per year?

Is there a point where you may have to do a more meaningful reconfiguration in the kitchen?

Yes.

Well, in terms of the production capability back of the house, not only is there a lot more room for more volume production, but there would also be room for different items.

It has never been our thought that we want to hold back on new items because they are, in some way, difficult to produce.

If you look at our kitchen it is interesting.

Lots of fast-food restaurants employ very specific equipment to do specific tasks.

We have things like pots and pans, knives and cutting boards.

And you can -- and grills and things.

And so you can prepare a wide variety of foods, all different kinds of foods with these basic kitchen tools.

So we are very, very well prepared, well-suited to take on new tasks.

The reason we choose not to, I think, is twofold.

One is that our very simple ordering system allows for great throughput.

It's, as you know, one of our competitive advantages.

But I don't know that we necessarily need to continue to add or we need to add things in order to keep customers coming.

I remember 20 years ago people said, Steve, a menu with burritos and tacos?

I mean, you are going to have to add new stuff pretty soon and -- but it is the combinations of things that people can make not only for taste but for diet.

And people can -- and vary over the years during their visits that really keeps Chipotle fresh.

So I think it is really, really important that we keep a simple, streamlined, very efficient frontline.

That being said, the addition of Sofritas is really not something that we have noticed has any negative impact on throughput or the frontline operations.

And it is my hope -- we haven't seen this yet, but it is my hope that we will get more people who might not have thought about eating at fast-food restaurants who might be vegan or vegetarian or just health-conscious in general to maybe come and try us and learn that this is a new kind of fast food.

So Sofritas is a very special menu addition in that it really not only respects our Food With Integrity mission in the use of this non-GMO organic artisanally made tofu, but it also has an appeal to those who are health-conscious.

Thank you.

Paul Westra, Stifel Nicolas.

Good afternoon.

Couple of questions.

One was a follow-up on catering.

Wouldn't (inaudible) rollout costs impacting the second half as you ramp up the national rollout?

And then a related question is the breakeven volume low enough where also it begins to build and sort of a little bit maybe (multiple speakers) --/

Paul, I am starting to lose what you are saying.

Can you speak louder?

My apologies.

The question was on catering.

Should we expect some rollout costs associated with the national rollout ramp later in the year.

And a related question was the breakeven level you expect with catering you are about 1% now you said and existing stores suggest a breakeven level now or not?

Yes.

Well, the cost of rolling it out is very insubstantial.

It is -- there's a pallet of equipment that is delivered to the restaurant when we roll it out to a new restaurant.

And once that equipment is stored and everything, we are ready to go.

And the margins on catering are favorable so that we can comfortably begin serving it right away.

In terms of the breakeven cost, no issue at all.

There's zero cost on that.

We are, I think from the get-go from our very first catering order served we are achieving the margin that we would expect from it, just like we would with any -- serving a burrito bowl or anything else that we serve.

The packaging for catering had a cost to it.

But most of the cost of that -- nearly all of the cost of that is rolled into the prices we charge for the catering spread.

And we do ask for them to come back with -- we do ask folks to bring back some parts of the packaging in exchange for which we will give them a free burrito.

But that is more just because we want to be responsible and reuse those aluminum parts that don't wear out.

So even if they didn't bring that back we would be just fine from a marginal standpoint.

So really it is something that is profitable from the very first order and there is no, really, there is no rollout cost to speak of at all.

Or very, very slight.

And when you think about that, maybe being national mix at the end of this year, Sofritas may be becoming national even later, I want to tie that into maybe your commentary or thoughts on the marketing spend and I can tell your brain is perfectly aligned with current trends and marketing toward digital and local and customizable.

But those are two initiatives that seem perfect for maybe some national ad spend.

I mean, because I wanted to align that with what you are thinking about the same market spend next year and maybe do you have a thought about dialing up marketing or around catering?

(multiple speakers).

Well, in terms of the catering marketing, we are -- that doesn't really I don't think require anything different or an additional kind of spend than we already had.

That can easily be added to what we are already doing and our -- and I would say the same, I would say the same for Sofritas.

In our current advertising campaigns like Skillfully Made, we can easily replace that with pieces that would promote Sofritas.

But there is a lot of local store marketing that we can employ to promote both catering and Sofritas.

And I think we are getting better and better at our local start marketing tactics.

And I think those are the ones that are really powerful especially when there is a deeper message behind something like Sofritas.

Great.

One last question.

We have seen some very good commodity cost declines at least in the base commodity, corn, wheat, soybeans.

Is there anything (technical difficulty) usually takes some time 12 months maybe to show up later in the meat products?

But there's nothing we should expect I mean, obviously, with [inaudible] coming down looking out to 2014 I know you don't want to show your parts too much, but there's nothing we should be -- that shouldn't be translated into your relatively benign costs for 2014.

No.

We think the same thing that generally there is a stable environment.

I would say the one thing that could potentially be different is we have had real challenges from a supply standpoint with our meats, steak in particular.

We have fallen below 100%.

Chicken, we fell below 100% and actually raised for a while.

We are back up to 100% now.

And so there's a different supply and demand formula that is going on right now.

That supply just seems to be tight right now.

So it is possible that we might not see the same kind of deflationary, that commodity a meats might provide, but we don't see the inflation pressure that we saw like at the end of last year.

It does seem like there's stable pricing at least or stable cost at least.

But we might not get all of the advantage that the commodity everyday ingredients might bring.

Great.

Thank you and congrats for a good quarter.

Thanks Paul.

Andy Barish, Jefferies.

Two quick things on the mix, that had been running negative.

It sounds like it's turned to flattish.

Was that a little bit of catering and maybe some of the upgrades on the margarita side and then, secondly -- or just different consumer behavior maybe?

And then secondly on stock-based comp, that had come down in the first quarter and for the year.

Was there some more favorability here in the 2Q or not really?

On the stock comp, our dollar cost this year was higher than last year.

What you saw in the first quarter was kind of a one-time thing.

We had a $6 million -- I think it was a $6 million catch-up adjustment in the first quarter of last year.

And that was for some performance shares where it became apparent more likely than not that we would meet the performance criteria.

And so we had a catch-up adjustment for I think it was roughly a year and a half or so worth of expense, if you will, once it became apparent in the first quarter of last year that we would reach their performance criteria.

So that is why stock comp was lower Q1 this year versus last year.

In the second quarter we were up a little bit and I don't know, I don't have the numbers offhand, but it was about 10%, 15%, something like that.

So the growth was a little bit less than sales.

And then overall for the year, most importantly, we are going to be at about $66 million in total which is about the same as last year.

And then your other question is on mix.

Yes, we had seen -- we continue to see that there is a slight degradation in drinks and that is what we were seeing before.

It is very modest so it did less than a little bit.

And then we saw some offsets in a few other things particularly like guacamole, for example.

And so those two things just offset.

And you will remember in the past the mix that we were saying was very, very modest.

But we pointed it out because there was a slight difference between our transactions and the comps we were seeing.

But in this quarter the transactions just about exactly mirrored the sales.

So no net mix of that whatsoever.

Great.

Thanks everyone.

Looks like we have exceeded our time.

So thanks for joining us and we look forward to speaking with you next quarter.

Thanks everyone.

Thanks everyone.

Thank you.

Once again this does conclude today's conference.

We thank you all for your participation.