奇波雷墨西哥燒烤 (CMG) 2013 Q4 法說會逐字稿

Good afternoon and welcome to the Chipotle Mexican Grill fourth-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 call is being recorded.

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

You may begin, sir.

Thanks, John.

Hello, everyone, and welcome to our call today.

By now, you should have access to our earnings announcement released this afternoon for the fourth-quarter and full-year 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, comp restaurant sales increases and growth in catering sales, throughput, food cost trends, effective tax rates, investment costs, and capital expenditures, as well as statements regarding potential menu price increases and other statements of our expectations and plans.

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

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

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

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

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

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

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

On the call with us today are Steve Ells, our Chairman 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.

I'm very pleased with our performance for the fourth quarter, as well as for the full year.

We delivered revenues of $844.1 million for the quarter, an increase of 20.7%, and $3.21 billion for the full year, an increase of 17.7%.

The revenue growth came from 185 new restaurant openings and from comparable-restaurant sales increases of 9.3% for the quarter and 5.6% for the full year.

All of this led to diluted earnings per share of $2.53 for the quarter, an increase of 29.7%, and $10.47 for the full year, an increase of 19.7%.

Of course, we are particularly pleased that Chipotle's strength continues to be rooted in our focus on the key drivers of our business, our unique food culture and our unique people culture, and a strong unit economic model that allows us to do things in ways that are unusual within the industry.

Throughout the year and during the quarter, we continued to make significant progress in each of these critical areas.

We continue to strengthen our food culture through our quest for better ingredients from more sustainable sources, and our commitment to preparing the food that we serve using classic cooking techniques.

One example of this is our work to remove all GMO ingredients from our food.

Another is the addition of Sofritas, the all-new vegan menu item we are offering in 40% of our restaurants.

We continue to make progress in our efforts to shift our ingredients sourcing to non-GMO options and will remain focused on this throughout the coming months.

As of now, all of our cooking oils used in North America are made from ingredients that are not genetically modified, and there are only a few key steps left before all of our food is made without genetically modified ingredients.

We're still working to eliminate them in our corn and flour tortillas, a process we expect to be complete by the end of the year.

We're also continuing to expand the availability of Sofritas, the vegan item we introduced in our San Francisco restaurant last year.

When we created Sofritas, we wanted to develop a recipe that would satisfy vegetarian and vegan customers and that would also be appealing to meat eaters as well, and we have succeeded in doing that.

Right now, Sofritas are in over 40% of our restaurants and amount to about 3% of our sales.

What's exciting is that about 40% of the Sofritas that we sell are being ordered by people who normally eat meat.

We are pleased with how customers are responding to Sofritas and expect to continue to roll them out as we secure more supply of this very special organic tofu in the coming months.

Many of the issues that concern us, such as GMOs or the overuse of antibiotics in livestock farming, are complex and sometimes difficult to understand.

That's why we create marketing designed to make people more curious about these issues.

We believe the more curious they become and the more they learn, the more likely they will come to Chipotle.

A recent example of this kind of communication was last year's scarecrow marketing program, which included a three-minute animated short film and a game for iPads and iPhones.

Scarecrow proved very successful in terms of sparking conversation about issues in industrial food production, which was the primary goal for this program.

It's been viewed online nearly 12 million times, and its companion game has been downloaded nearly 600,000 times, but more than that, it has sparked significant discussion about issues in food, generating 500 million media impressions through news coverage of the program, a volume of coverage that would cost some $5 million to purchase as advertising.

Continuing in the tradition of Scarecrow, we have just announced plans to launch Farmed and Dangerous, an original scripted comedy series that satirically explores the world of industrial agriculture in America.

Farmed and Dangerous consists of four 30-minute episodes that will run on Hulu starting February 17.

The series focuses on the introduction of a new petroleum-based animal feed created by the fictional agribusiness company Animoil.

By using satire and doing so in an entertaining way, we hope to make people more curious about their food and how it's produced.

Programs like Scarecrow and Farmed and Dangerous are one facet of our overall marketing designed to show customers how Chipotle is cultivating a better world.

And we're also making progress with other components of our marketing, including our traditional advertising and our local marketing programs.

We continue to run traditional advertising in many Chipotle markets around the country and just wrapped up a campaign in support of our catering program.

We also have a full slate of local marketing programs planned for markets around the country, such as our Cultivate Festivals, which will be held this year in San Francisco, Dallas, and Minneapolis.

Last year, these Cultivate Festivals drew nearly 100,000 attendees in total, and with advertising and PR support, they reach significantly larger audiences.

What's more, these programs are providing to be -- proving to be very popular, with post-event research showing us that more than 90% of attendees in each market would attend the event again.

All of these things that we are focused on -- our food culture, our people culture, the unique way in which we market Chipotle -- demonstrate how we are changing the way people think about and eat fast food.

But we also know that to really change food culture and to reach even more people is going to require that we serve more than burritos and tacos.

That's why we developed ShopHouse, which follows the same model as Chipotle by using delicious, quality ingredients; classic cooking techniques; and emphasizes a culture of top performers being groomed to be the future leaders we will need to support our growth.

And it is why we have made an investment in Pizzeria Locale, which we just announced in December.

Pizzeria Locale began as a casual dining restaurant in Boulder, Colorado.

It was started by master sommelier Bobby Stuckey and executive chef Lachlan MacKinnon-Patterson, who met while working at the French Laundry, Thomas Keller's legendary French restaurant in Yountville, California, in the Napa Valley.

Bobby and Lachlan are extraordinary restaurateurs.

Their first restaurant, Frasca Food and Wine, is nationally acclaimed.

Since meeting them over 10 years ago at Frasca, we have had recurring conversations about how we could one day work together.

When that conversation led us to the possibility of developing a fast casual version of Pizzeria Locale, we knew that was the right opportunity.

In the Chipotle format, Pizzeria Locale uses the same great ingredients as the original Pizzeria Locale in Boulder and makes pizzas inspired by the Neapolitan style, with exceptional attention to detail.

To make this concept work, where volumes are high and customers expect food to be served quickly, we designed a special pizza oven that delivers the results of the Italian wood-burning oven they used in the original restaurant in Boulder, while cooking pizzas perfectly every time in less than two minutes.

Like Chipotle, Pizzeria Locale has a focused menu and interactive service format that allows customers to customize their order.

In addition to a selection of classic and custom pizzas, customers can enjoy an array of salads, meatballs, sliced-to-order prosciutto, red or Italian wine, and a caramel and chocolate pudding called budino.

Under our agreement with Bobby and Lachlan, Chipotle has an equity interest in this new venture and could become the majority owner over time, as the concept expands.

In addition to providing capital to open additional restaurants, Pizzeria Locale can also draw on Chipotle's resources and expertise in other areas, such as real estate, finance, purchasing, and marketing.

Bobby and Lachlan and their team are driving this concept and are responsible for all facets of restaurant operations.

Not only do Bobby and Lachlan share our vision to change food culture, they are exceptionally capable restaurateurs who can help us achieve that.

The first Pizzeria Locale is open in Denver, and we are currently looking at a couple of other additional sites in Denver also.

ShopHouse, which was the first concept we developed to test the notion that the Chipotle model could be applied to other kinds of cuisines, now has six restaurants open in Washington, DC, and Los Angeles.

ShopHouse continues remind me of Chipotle in its earliest days.

Customers really love the food and the experience.

And we are eager to introduce more people to the flavors of ShopHouse.

This year, we plan to open more ShopHouse restaurants in Washington, DC, and Los Angeles.

Finally, our international presence now consists of 16 restaurants in Canada, London, Paris, and Frankfurt, with a few additional restaurants planned for 2014.

We remain encouraged by the potential for all of our growth seeds, including the new concepts and international locations, and know that success from any one of them may give us new avenues for future growth.

But for the foreseeable future, however, our growth will be driven primarily by opening Chipotle restaurants in the United States.

I will now turn the call over to Monty.

Thanks, Steve.

I am super proud of our results this quarter, but I'm even more proud of how we achieved them.

We have an amazing people culture here at Chipotle, and the foundation of that culture is a group of terrific people who are always striving to make the people around them better.

Our people are passionate about our mission of changing the way people think about and eat fast food, and they know that the way to accomplish that is to have teams of all top performers empowered to achieve high standards.

That is exactly the kind of culture we have been building in our restaurants and throughout Chipotle.

I am so proud to have seen the strength of our people culture become a defining characteristic of Chipotle and to have witnessed its contribution to our success.

Our special culture is responsible for a better unit economic model at nearly every level, and this continues to contribute to the strength of our business quarter after quarter and year after year.

The top performers that we are developing in our culture are becoming the leaders that we will need to support our growth well into the future.

Throughout the quarter, we continued to promote new restaurateurs, the elite managers who embody what our people culture is all about.

We finished 2013 with over 400 restaurateurs, after seeing nearly 40% -- overseeing nearly 40% of our restaurants, including their own restaurants and others that they mentor.

When you include the field leaders who have come up through the restaurateur program, those who have been promoted from restaurateur to apprentice team lead, team lead, or team director, we have nearly 500 restaurateurs leading more than two-thirds of the entire Company of all of our restaurants.

While the restaurateur position remains a very prestigious one at Chipotle, the program is ultimately about much more than just prestige.

Restaurateurs and the restaurateur cultures that they're building allow us to deliver consistently better results.

They make better tasting food with less waste, which leads to lower food costs.

They run better and more productive shifts, which leads to efficiencies in labor.

They maintain and repair equipment more efficiently, leading to lower maintenance and repair costs.

They have fewer costly and time-consuming HR issues because their teams understand their vision for the restaurant and are empowered and happy in their jobs.

They deliver better throughput because their teams are all top performers, and of course, better throughput is better customer service.

Overall, they are the ones who are showing us how every aspect of our business can get better and better.

So the link between our strong people culture and the performance of our Company is obvious and is the key driver to our success.

To help us continue to build and strengthen our people culture, last year we brought our entire field leadership team together to establish very clear expectations for them and to provide them with new tools to help them understand what the most important task of their job is, which is developing restaurateurs and restaurateur cultures.

At the center of this effort is a new restaurateur diagnostic and plan -- restaurant diagnostic and plan tool that I developed to help field leaders more effectively recognize what is keeping the restaurant from achieving restaurateur status and developing a clear plan of action to help their managers achieve this position more quickly.

The diagnosis and plan tool works by prompting field leaders to use symptoms which exist in the restaurants to identify broader themes that are holding the teams back from being excellent.

Once they select the appropriate themes in the tool, the tool generates a specific plan of action that the manager can employ in order to more effectively establish a restaurateur culture in the restaurant.

To use the tool properly requires that all of our field leaders are in their restaurants, constantly interviewing every member of our crew to determine the degree to which we have teams of top performers empowered to achieve high standards.

During this process, our field leaders gain an intimate understanding of the performance of their restaurants and the root causes that are preventing them from being at their very best.

Once the plan is written, our field leaders follow up every quarter with another plan, and they're watching to see how their teams are evolving and developing towards becoming a restaurateur team.

In using the tool, our field leaders become aware of a great deal of information, including the strength of the team; the depth of the people pipeline, to be sure the restaurant has the right people in place for continued development; the training systems that are in place; the scheduling; the financial metrics; and how well the restaurant is implementing the four pillars of great throughput.

Once the plan is written, the field leader and GM meet to discuss its implementation, and the field leader specifies how they plan to assist the GM on an ongoing basis.

This process is repeated every quarter with the idea that symptoms decline and each store will be getting closer and closer to having a restaurateur culture.

We are hearing over and over how excited managers are to have this tool in place.

For nearly all of our restaurants, this tool is providing a new level of understanding as to our expectations and giving clear direction to our GMs about how to become restaurateurs by taking some of the mystery out of what it takes to build this special culture.

As of now, all of our non-restaurateur restaurants have plans in place to help them on the road to restaurateur, and our field teams will create new plans for each restaurant every quarter.

Of course, having more top performers in place than ever before allows us not only to run better restaurants, but also to push into new areas to improve the Chipotle experience for our customers.

Most recently, this has enabled the rollout of our catering program, which we first introduced in our Colorado restaurants in January of 2013.

Today, we have catering available in all of our restaurants, except those in New York City, which we will add to the program later this year.

Through our catering program, customers can set up a portable version of our service line for groups of 20 or more.

For customers who are looking to accommodate a smaller group, we still do offer our burritos by the box option.

Catering sales are approaching 1%, with most of this being incremental.

In some of our markets, like Denver, Seattle, St.

Louis, and San Francisco, for example, catering sales are averaging about 1.5% of sales.

To support catering going into the busy holiday season, we had advertising running in all of our markets throughout December that included digital advertising, print, and outdoor.

The campaign performed very well during this time, more than doubling page views on the Chipotle catering site.

Given the strength we are seeing with our catering program so far, we're optimistic that we can continue growing this -- our catering sales in the future.

Having more top-performing teams also helps us drive improvements in throughput.

During the fourth quarter, we continued to see excellent progress in delivering faster throughput, with an average increase of six transactions during our peak lunch hour and an increase of five transactions during our peak dinner hour.

What really impresses me is how we achieved our fastest throughput ever even though the fourth quarter is traditionally a slower sales quarter of the year.

This tells me that we're better suited than ever to set new throughput records and have the best customer service that we have ever had as we move towards our busiest sales month, which take place during the second quarter of the year.

I hope and expect to share good news about our continued improvement on this important aspect of our business at that time.

So these increases in throughput are very encouraging and are primarily the result of having more teams of top performers empowered to achieve high standards, as well as our renewed emphasis on what we call the four pillars of great throughput.

Not only are we emphasizing the importance of consistently applying the four pillars in all of our restaurants, but we now have tools in place that will help us monitor and track our throughput performance.

With these new auditing tools in place, we can tell how frequently each of our restaurants is executing the four pillars and work with our field leaders and individual managers to make improvements where restaurants are not doing as well in this regard.

With this added visibility, we are confident that we can address any issue or issues that exist in this area and continue to drive better throughput and better service on an individual restaurant basis, so that we continue to improve service in all of our restaurants and drive additional transactions during our busiest times.

Finally, I'm pleased to report that our real estate pipeline continues to look very solid and that we maintain our belief that we are going to open between 180 and 195 new restaurants in 2014.

That means we're building more restaurants than ever before, but, importantly, we're also managing our investment costs very efficiently, and our new restaurants continue to perform very well with opening volumes at or above our communicated range of between $1.6 million to $1.7 million.

With volumes like these, we obviously are providing tremendous returns on invested capital.

For the year ahead, we expect new construction sites will account for about 50% of our restaurant openings, up from 43% last year.

And we are pleased to see that new developments are creating greater opportunity and availability for new Chipotle restaurants.

Helping to support this trend, we are seeing more activity for smaller two- or three-tenant buildings in many parts of the country.

Overall, we are going to open about 75% of our restaurants in proven and established markets in 2014, with the remainder of them in the new or developing markets.

As we continue to strengthen our food and people cultures with new tools in place to help us more efficiently develop restaurateurs and with a strengthening real estate pipeline, we are confident in our plans for 2014 and remain confident that we're going to advance our vision to change the way people think about and eat fast food.

And with that, I will turn it over to Jack Hartung.

Thanks, Monty.

We are proud of the results that we achieved during the fourth quarter and for the entire year of 2013, as our empowered restaurant teams continued to provide a great dining experience to all of our guests.

As a result, our comps accelerated during the year and reached a high of 9.3% in the fourth quarter.

These comps helped drive an overall sales increase of 20.7% in the quarter and 17.7% for the full year, and our sales totaled $3.21 billion for the year, surpassing the $3 billion in sales mark for the first time ever.

The comp was driven primarily by increased customer visits, while our average check increased by about 1%.

Average check increased as a result of our catering program, which serves a minimum of 20 people per catering order, along with an increase in add-ons, such as chips and guacamole and extra meat.

Catering has now been rolled out in all of our markets, except New York City, where we expect to add catering later this year.

Looking ahead, we will gain one extra day in Q1, due to Easter falling in the second quarter this year, so that will shift about 100 basis points of comp from the second quarter to the first quarter.

As a result of the strong comp momentum in the fourth quarter, we are increasing our sales guidance for the full year of 2014 from low single digits to a range of low to mid-single digit comps.

Our comp comparisons will be easiest early in the year and progressively become more difficult as we compare against the strong comps in the third and fourth quarter of 2013.

This comp guidance is before consideration of any price increase we may take during the year.

Our average sales volume for restaurants that have been open for at least 12 months reached an all-time high of $2.170 million, and in terms of new restaurants, they continue to perform very well, opening with sales at or above the high end of our communicated range of $1.6 million to $1.7 million.

We opened 56 new restaurants in the quarter, bringing our year-to-date openings to 185, which exceeded the high end of our guidance range for 2013, and we ended the year with 1,595 restaurants.

And as we mentioned during our last earnings call, we plan to open between 180 and 195 new restaurants in 2014, and we expect that these openings will occur relatively evenly throughout the year.

Diluted earnings per share for the quarter was $2.53, an increase of 29.7%.

Restaurant-level margins increased in the quarter by 100 basis points to 25.6% as we leveraged a higher sales comp, which more than offset food costs, which were 40 basis points higher than the fourth quarter of 2012.

EPS was $10.47 for the full year of 2013, an increase of 19.7% compared to 2012.

For the year, efficiencies from higher comps allowed us to leverage labor and occupancy lines at the restaurant level, while margins declined 50 basis points to 26.6% due to higher food costs, which were 80 basis points higher for the year.

Food costs were 33.9% in the quarter, up 40 basis points from 2012 and sequentially higher by 30 basis points compared to the third quarter.

The inflation year over year was driven mainly from higher avocado costs and, to a lesser extent, from higher tomato and corn salsa costs.

Avocado prices continue to remain high and are expected to remain elevated throughout 2014 as there will be increased demand, putting pressure on relatively flat supply levels from Mexico and from lower supplies from the California growers.

We are also expecting similar supply constraints in beef as the result of two consecutive years of drought conditions.

So as a result, we expect food cost to increase over the next few quarters, and for the full year, it will be around 34.5% of sales or higher, before the impact of any menu price increases.

We have made no decision on a menu price increase for this year, and we will continue to monitor trends such as food inflation, our comp trends, and general economic and consumer confidence trends, but based on these elevated and rising food costs, we believe a menu price increase is likely sometime during the third quarter.

Labor costs were 23% of sales in the quarter, a decrease of 90 basis points from 2012.

Most of this decline is due to leverage from the higher comp, and we also benefited from lower workers' comp in the quarter, which provided about a 20 basis-point benefit.

For the full year, labor costs were down 50 basis points from 2012, mainly due to leverage from the higher full-year comp of 5.6%.

Other operating costs were 11.3% for the quarter, which is down 20 basis points from 2012.

Lower marketing costs were offset by higher printing costs related to our rollout of catering and Sofritas, along with higher costs from local store marketing, including local fundraising efforts.

For the full year, other operating costs were 10.8%, or up 30 basis points from 2012, due to higher marketing and promotional costs, including the local store marketing.

Marketing was 1.2% in the quarter compared to 1.8% in the fourth quarter of 2012.

Sequentially from the third quarter, marketing was down 30 basis points as lower marketing levels coincided with the end of our Skillfully Made advertising campaign that ended for most markets in October.

While marketing was 1.4% of sales overall in 2013, we expect it will be closer to our targeted rate of around 1.7% in 2014.

G&A was 6.6% in the quarter, or 40 basis points higher than 2012, due to higher bonus expenses and employee taxes.

The fourth quarter included higher bonus expense due to our strong Company performance, compared to full-year bonus targets, which represents about a $4 million catch-up in the quarter.

For the full year, G&A was 6.3%, or 40 basis points lower than 2012, and a decrease as a percent of revenue was driven by costs in 2012 for our biennial All Manager conference and from lower stock-based compensation expense and from greater sales leverage in 2013, primarily -- or partially offset by higher bonus and legal costs.

The non-cash, noneconomic stock comp was $65 million for the full year in 2013 and was about $13 million in the fourth quarter.

In 2014, we expect G&A as a percentage of sales to increase about 40 basis points due to higher non-cash stock comp expense and from the cost of our All Manager meeting.

In September, we will invest about $8 million in our biennial All Manager Conference, where we will meet with our 2,300 managers and support staff, and based on today's stock price, total non-cash stock comp expense for 2014 is estimated to be about $90 million, an increase of $25 million.

While total G&A, including the All Manager meeting and the higher non-cash stock comp, will rise as a percentage of sales in 2014, our underlying cash G&A without these two items will be lower as a percentage of sales as a result of a continuing effort to grow our underlying G&A at a slower rate than our sales growth.

Our 2013 effective tax rate was 38.7%.

This is 60 basis points lower than 2012, mostly as a result of the renewal of tax credits, including the work opportunity tax credit and the R&D tax credit, that were extended in 2013 for both 2012 and 2013.

We expect our 2014 tax rate to be about 39.2%, and the higher effective tax rate in 2014 is primarily due to the expired work opportunity and R&D tax credits, partially offset by lower estimated state tax rates in 2014.

During the quarter, we purchased about $13 million worth of our stock, or over 25,000 shares, at an average share price of $505.

For the full year, we purchased about $110 million worth of our stock and over 336,000 shares, at an average share price of $327.

And at the end of 2013, we still had about $90 million remaining on our current $100 million authorized share buyback.

Over the past five years, we have invested over $610 million to repurchase our stock, at an average share price of $150.

In 2013, our average development costs for Chipotle restaurants in the US were about $800,000.

Capital expenditures, net of landlord reimbursements, totaled about $190 million in 2013, primarily related to new restaurants, along with continued reinvestment in existing restaurants and other Company initiatives.

In 2014, we anticipate CapEx will be around $225 million, the majority of which relates to new restaurant construction.

We expect our average restaurant development costs will increase around 5%, based on opening more freestanding restaurants during 2014, which are more expensive than end caps and in-line sites, and we will open proportionally more sites in our Northeast region where construction costs, as well as sales, are typically higher.

Our normal reinvestment for existing restaurants, which typically averages about $15,000 per restaurant, will be higher in 2014 and will average about $20,000 per restaurant, as we will perform a full remodel on many of our oldest restaurants.

We also plan to invest about $10 million to perform a significant network redesign in all of our restaurants, which will enhance the way we communicate and train our restaurant employees and provide better security, improved reliability, and greater capabilities, including functions such as mobile payments in our restaurants.

We were able to increase our total cash and investments by $228 million during the year and ended the year with $892 million in cash and other related investments, even after funding the opening of 185 new restaurants and repurchasing stock through our share buyback agreements totaling $110 million during the year.

We continue to believe that investing in our high returning assets -- or high returning new restaurants remains the best use of our cash, and we are confident that the growth options we are seeding today, including ShopHouse, Chipotle in international markets, and, most recently, Pizzeria Locale, will provide value-enhancing opportunities in the future.

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

Thanks for your time today.

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

Operator, please open the lines.

(Operator Instructions).

Brian Bittner, Oppenheimer & Co.

This is [Mike Themis] on for Brian.

Can you talk about the timing of becoming GMO free and how you expect to drive that awareness, once you achieve that?

And you think that the heightened awareness can drive an increasing demand for Chipotle?

We expect to be GMO free by the end of this year.

The exact timing is unclear right now, but we're making great progress.

In terms of it driving the business, I guess I would answer that as the way I would answer the impact of our Food With Integrity mission overall.

Certainly, historically, customers come in because they love the taste of Chipotle.

They love the value, the convenience, the customization -- the ability to customize their ingredients, all these kinds of things.

And that has always been the top-of-mind reasons why people say they come in.

Food With Integrity, our commitment to more sustainably-raised ingredients, which we have been at now for a dozen years or so, and talking about it, has become more and more important to customers over the years.

Whether it drives people in or not is not always clear, but what I think is really important is that more and more of our customers are telling us that it is very important to them.

They are interested in where their food comes from and how it was raised, and the -- they want to be assured that they are feeding their families healthful, nutritious, raw ingredients.

They are concerned about the environment and a lot of the problems of the commodity kinds of ingredients out there.

And so, going non-GMO, I think, fits into that Food With Integrity mission, and I wouldn't point to non-GMO as a single thing that is going to drive sales, but something that is going to continue to strengthen our bond with customers and increase the trust level and get people excited about our larger mission to change the way people think about and eat fast food.

And I think when you combine a mission like that with food that's absolutely delicious, that people crave, that they want to eat often, then I think you have a winning formula, and the two go hand in hand.

Great, thanks.

Can I sneak in one more?

Just wondering if you can talk about how you have been able to drive such strong traffic in the fourth quarter.

Most consumer companies saw the opposite happening from the third quarter to the fourth quarter, and maybe if you have any comments on what you are seeing in early 2014 that gives you the confidence to go from a low single digit to a low single digit to a mid-single digit comp outlook.

Thank you.

Yes, there is no one thing that we can point to to say that that is what drove our sales, but I think if you look at all the things we have done, including continue to strengthen our people culture so that the experience our customers enjoy when they come in is the best experience that we can possibly provide.

Our throughput is the fastest it has ever been, including, as Monty said, seasonally this is not a time when our throughput should be at its peak and yet it did outperform our throughput results in the summer.

And so, throughput was a contributor to that.

Marketing has been connecting with our customers really throughout the year, not just our Skillfully Made marketing, which connected with people and people recognized and appreciated that we really do have raw ingredients and open kitchens and they appreciate that.

The Scarecrow created a lot of discussion about Chipotle, and so there's some awareness about that, as well.

But catering was a part of it.

We know we are approaching 1% of sales with catering and we know the majority of that is incremental.

And I think those are the main -- and LSM, I'm sorry.

LSM, we did a lot of LSM throughout the year, and our teams actually did more fundraising as we approached the back half of the year, which we think just created more awareness of people that haven't been to Chipotle in quite some time.

And I mentioned earlier that our people culture, just strengthening our teams, is the biggest piece.

And so if you go through, if you're going to prioritize all those items, you'd probably have to put the biggest piece on that, even though that's tough to measure, but we just think the fact that every time our customers come in, they have these wonderful teams that are anxious to serve them.

That's probably the single biggest piece.

But to parse out how much of that 9% would be allocated to each of those pieces would be difficult to do, but we feel good about next year just because despite the fact that other restaurant companies and other retail companies have seen some softness in the fourth quarter, we seem to have been able to overcome that.

And so, I think all the things we are doing to create the special experience is working, and we are cautiously optimistic that we will be able to continue to do that in 2014.

Thank you.

Joe Buckley, Bank of America.

Jack, can I ask you to clarify your comments on pricing?

First, I wasn't sure if I heard you say if you take what is likely before the third quarter or you say during the third quarter.

Maybe just start with that one.

Yes, Joe, I said during the third quarter.

Right now, we would like to get through this first quarter.

We would like to see how this current transaction momentum will continue.

We'd just like to get through and find out how this weather might affect our ingredients.

Right now, we don't know if any of the weather we've seen in the South is going to have an effect on some of our ingredients next year, and so we would like to get through at least a quarter or so and see how things are falling out, both on our ingredient inflation side, as well as our transaction momentum.

So we think that we will be in a position to then raise prices sometime in the third quarter.

Okay, and then just as you are -- I got the impression you were backing away somewhat from the probability of a price increase.

Is that a misinterpretation on my part or did anything change in the last couple of weeks?

And then, just one more on the pricing.

You historically have a history of taking mid-single digit price increases when you infrequently take them.

When do you think you would be in that historical mid single-digit range again?

Yes, Joe, I don't know that we were trying to signal either way at ICR.

We really had no intention of changing what we had said at the third quarter, which was we have not made a pricing decision.

We will continue to monitor trends, as I mentioned during my prepared comments.

As we take a look at our current food costs at 33.9%, continued inflation, it seems more likely, and so I would say that is the update.

I would say since October, which was, I would say, that's the last time we took a stand and we weren't intending to change that at ICR.

We weren't very sure and we still haven't made a decision, but I think right now, standing at 33.9%, knowing that we have got pressure from steak, we have got pressure from avocados, it looks more likely.

Now, things change.

Just like last year, a year ago, we were saying the same thing and things changed.

In fact, our food costs in the first quarter were lower last year than it was in the previous quarter.

And so if that changes, we may back off of it, but right now, standing at 33.9% with continued pressure, it seems likely.

And I think a mid single digit, 3% to 5%, Joe.

Again, we haven't made a decision.

That's not an unreasonable assumption to assume we would be somewhere in that ballpark.

Thank you.

That's very clear and it makes sense.

Thank you.

Sara Senatore, Sanford Bernstein.

I just wanted to ask about the sales drivers, and it seems like you have a lot of these things, marketing in particular, but also throughput, operational improvements.

But you mentioned digital as a way that you've chosen to spend marketing dollars, and I think I heard you talk about mobile payments.

Can you just talk about your approach to that, how you are thinking about that, when we would expect it to be rolled out?

I know in the past you've said you don't want to do a traditional loyalty program, but maybe something that targets marketing.

So if you can just talk about that, and then I have a follow-up.

Yes, Sara, we still don't have much of an appetite or any appetite for a traditional loyalty program at all.

But we are experimenting with mobile payments, and we have a rough version right now that our employees are able to use right now, and we want to expand that.

We know that there is a lot of activity going on in mobile payments and we want to be part of that.

Once we have mobile payments, we can have a different kind of connection relationship with our customers where I do think we have the ability to -- we don't have this really lined out yet, the ability to communicate with them and maybe provide some kind of unique offerings.

If, for example, a customer has not been to Chipotle in a while, or if they come to Chipotle often and they never buy chips and guacamole, there are things that we can do that are more unique to that customer.

So I think that gives us a unique opportunity that I wouldn't call a loyalty program, but it's more of a bond that we can build, a communication that we can build with customers where we can personalize our communication and maybe some of the things we might offer to that person.

But I wouldn't expect to see a traditional loyalty program.

In terms of digital, yes, we do have a number of things that we are doing.

We do some advertising on a number of digital media, social medias, and we have a whole team of people that respond to emails.

We have a Twitter account and we are active in a Twitter account, so we're active with a lot of the social media and the digital media, but that's something we have been doing for -- that's not new.

That is something we have done during 2013 and in prior years, as well.

Okay, thank you.

And then, just a follow-up, not on that question, but an earlier one about the ShopHouse and the Pizzeria Locale.

Can you just remind us again how you are thinking about growth versus the rate that you saw with Chipotle early on, just with respect to you would think that you would have more institutionalized competencies around real estate and supply chain and all of these things?

So if you could just compare whether you would expect some of these new growth seeds to be faster than where Chipotle was at the same stage?

Thanks.

Sure, Sara.

So right now with ShopHouse and Pizzeria Locale, we are very, very focused on perfecting the experience, to introducing all the new people who come through to the uniqueness and specialness of both of these concepts.

Both of these concepts are building nicely.

We are expecting to open a couple few more ShopHouses this year.

We are expecting to open a couple of more Pizzeria Locales this year.

If I compare the rate of growth so far with both of these concepts, it's faster than Chipotle started out.

But I think you hit on something.

When we are ready to expand at a faster rate, we certainly have the infrastructure in place.

You mentioned real estate.

Well, we have so much information on 1,600 specific sites now in the US with Chipotles, and so we know exactly what regions, what markets, what intersections we would want to go to with these new concepts.

We have teams who can advise on the best locations for that.

And I think but most importantly, we have an extraordinary team of top performers who are empowered to help us expand this quickly.

And if I think about the biggest hurdles over the last 20 years in growing Chipotle, it was on the people side.

And so, with our very, very strong team that continues to get stronger, grooming the future leaders, I think that's going to be a competitive advantage that we have and that will help us grow these concepts.

But again, we are making sure that we are growing these right at this point.

It is not time to unleash them.

It is time to grow smartly and watch them and make sure that we are cooking delicious food and serving in a way that excites customers, and we are doing that.

And we are very happy with the results.

Thank you.

Alvin Concepcion, Citi.

Great, thanks, and congrats on a great quarter and a great way to finish another good year.

Comps were obviously very strong this quarter, which is impressive, but could it have been even better if weather wasn't an issue or customers did less online shopping during the holidays?

And I guess the question is, did you see a noticeable impact from these items at all?

It's a great question, Alvin, because we have seen the same things you have seen and we have seen weather being brought up a lot.

We have seen some comments that there has been so much online shopping that people weren't out and about, and so they didn't visit restaurants, for example.

I don't think we saw that, overall.

Yes, of course, we saw that on individual days, and we saw where when there were severe weather in a certain region, we saw our sales soften during that time.

But we have had a history where when the weather gets bad and people don't visit Chipotle one day -- let's say the restaurants are totally closed or they just can't go for lunch, and so our sales are way, way, way off, when the weather subsides, we tend to overperform.

We tend to see a greater-than-average comp.

And so, we tend to have an offsetting effect there, and so on a net net, I would say the weather didn't really have much of a net effect or at least the best that we can tell when you look at the overall quarter.

In terms of the online comments, that would be impossible for us to tell, but certainly by the fact that we accelerated during the quarter, or we accelerated in the fourth quarter compared to the third quarter, we certainly can't point to any online activity and say that that had a bad effect.

The other thing that we saw was that our sales were better in December than November, and I think that went against the trend, as well.

And I think that's just a function of our customers enjoying the Chipotle experience based on what our wonderful teams in the restaurants are doing that despite the weather, despite whether people were not out and about because of doing online shopping, they still decided that they wanted to dine at Chipotle during December, and we were delighted to see that trend.

And you mentioned things got better in December versus November.

Did you see that momentum continue into January?

Okay, that's a little choppy now because we are talking about some really extreme weather, and so it feels like the underlying trend that we saw during the quarter, overall average, and so let's call it the 9.3%, I would say that the underlying traffic is probably in that same kind of ballpark, in that 9.3%, but it's very hard to tell.

You have one week where the comps are not pretty at all, and then you have another week where they look pretty attractive.

But we are going to have to let the rest of the quarter unfold and see what the underlying trend is.

But right now, I would say that our trend is likely similar to what we saw in the fourth quarter overall.

And just one more for me.

I know there is some caution in raising prices because it may impact traffic, but with accelerating traffic growth, coupled with being priced at or below your competitors, has that changed your view at all on the price elasticity of the consumer or even accelerating the timeline for your rollout of the price increase?

No, we still think it makes sense to watch what happens with inflation and watch what happens with the economy's strength to the consumer and our transaction trends for at least the first quarter, and then once we see that -- and most importantly during that time, we will learn about our ingredient costs.

We will learn what effects the weather that we are seeing might have on our ingredient costs, and we would rather have that information in hand before we pull the trigger on a price increase.

Great, thank you very much.

Michael Kelter, Goldman Sachs.

Maybe a follow-up on that last point, which is with your margins hovering around all-time highs and trends re-accelerating, why even take price at all?

Because even if food costs are higher as a percentage of sales, your labor and rent and other things are lower and you are still making all these profits.

Why even take the risk with the brand at all?

Michael, that possibility still exists.

And so, we have not made a decision, and you will remember last year at this time, we talked about the price increase being likely, and then we pulled back on it.

We are not in a hurry, and we wouldn't hesitate, if conditions suggest that we shouldn't take it, that maybe we will either defer it or take it off the table altogether in 2014.

Now at some point, we don't want to be underpriced, so there is a desire to not be so far under what others are charging in the industry that people are wondering, well, gee, I wonder with this food integrity thing.

How can they claim that their ingredients are better when they are charging so much less than other restaurant companies out there?

So we would not want to be in that kind of a situation, but it's still possible that we may pull the menu price off the table in 2014.

And then, on a different topic, it has been inching up little by little, but your guidance suggested your third consecutive year of new unit openings being in the, call it, 175, 200 unit range.

Is there some sort of a soft ceiling that you have reached here, whether it is because of real estate or people, for you to be able to actually do it right location by location?

It really doesn't make sense for you to open that much more than what you are opening now, and we should start to expect the law of large numbers to kick in a little bit?

No, we don't really feel like there is a ceiling or a soft ceiling, but by the same token, we make these decisions based on what feels right when we look at the kind of real estate pipeline we have and when we look at the development of our people culture around the country and the number of field leaders who are being promoted from restaurateur positions.

So we talk to our real estate teams and we find out how it's looking in terms of getting a pipeline of great new real estate and really being very selective with that real estate, to find real estate that we believe where we can open restaurants with terrific volumes, but also reasonable development costs.

So we balance that, and then we also look at how the people culture is developing.

I would say both are going very well, but we feel with this increased guidance of 180 to 195 restaurants, that we are increasing and always pushing to build more restaurants.

But we also don't want to -- we don't want to overdo it.

We want to be very careful and measured with that growth to be certain that we're opening restaurants that are of really, really high quality with terrific customer experiences.

And it all is part of our philosophy that it is much better to allow demand to exceed -- to be in front of supply so that we are fulfilling a demand that we have created in the marketplace.

And as it exists -- as demand increases, we will be working hard to make sure that the supply can also increase, so that we can continue to have great results.

And one last one.

Can you, Jack, maybe give some figures around the constitution of your workforce and help us understand how you might potentially be affected if the minimum wage does rise to $10?

Yes, we don't pay minimum wage.

Our average wages are above $9 for our hourly employees, so a move up to $9 would have minimal effect.

A move to $10 would have an effect, but not too significant, and I would say that the impact on us would be much less than others.

And so, you would see an impact on our margins, but it would be something that we could certainly absorb.

Very helpful, thank you.

Karen Holthouse, Credit Suisse.

Congratulations on a fantastic quarter.

Going back to your comment earlier about technology investments in stores that would help enable mobile payment and some other things, how should we think about that?

Is that more of a backend investment or does that involve actually changing out POS equipment?

And if it involves the latter, is there any concern that there will be a little bit of a short-term throughput investment as workers are training on it and getting used to the new system?

Thanks.

On technology, I mentioned in my comments we're going to make about a $10 million investment in infrastructure.

We have got to redo the networks in our restaurants.

We haven't done that in quite some time, and that will be an enabler for any of the things that we want to do in the future, including things like mobile pay.

Once we have done that, we at this point don't think it is going to require new POS.

There is a device that we will need to add that's not very expensive.

It's a matter of hundreds of dollars per restaurant, not thousands or tens of thousands per restaurant.

Similar to what you see at like a Starbucks?

Yes, it could be like a Starbucks.

It would just be a reader.

Those are pretty standard.

There is nothing too fancy about that, but you got to make the big investment of several thousand per restaurant with the network, to redo the network in order to accommodate that.

Re-doing the network will give us other advantages as well, more secure.

It will be more reliable, and so it's time to do that.

But that is an enabling investment that we do have to make.

There is also always a possibility -- we aren't against taking a look at a new POS solution, and there is lots more that are out there.

There is some cloud solutions that are at least possibilities to look at.

And so, we're open to that if we found something that would be a better business alternative, but better would mean better throughput, not worse.

We would not make an investment, including things like mobile pay, that had the potential of slowing down throughput, so we just wouldn't make that investment.

But we would make an investment that would speed up throughput that would enhance the intuitive ability to train our employees.

If the technology gave us better information or just was better from an efficiency standpoint, better from a throughput standpoint, those are the things that we would look at.

We would not want to compromise the customer service that we provide our customers just to be chasing the latest technology gimmick.

Great, thank you.

Jeffrey Bernstein, Barclays.

Two questions, just first on the real estate discussion before.

In terms of your cost per site and whatnot, I think you said your costs would be up 5% in 2014.

I'm just wondering, do you see that as more as building costs going up or are you talking about more from competition for real estate, whether it be some of your fast casual peers or other driving prices higher just because so many people are growing so fast?

If that's the case, are you increasing the mix of potentially your A sites?

How does that play out within that growth for 2014?

Most of the increase that we are predicting comes from the fact that we are opening more restaurants in the Northeast part of the company where the construction costs are much higher, as well as the fact that we are going to open incrementally more freestanders, which cost more money to build.

So we still feel very good about our ability to be efficient and economical with building our new restaurants and don't see it as just leaking upward.

There is a reason for it.

And the A sites, is that a bigger component this year than last year?

Yes, with regard to the A sites, we opened -- last year, in 2013, we opened about 25 A models, and like I said in the last call, we are always looking for those because they are -- opportunistically, we're always looking for sites that have very low development cost and low occupancy cost and that we can run very, very efficiently.

So I think that you will see those be the same in numbers this year; I think probably smaller as a percentage of growth, because of the fact that we have got more of our restaurants coming from new construction.

But again, when we see them, we will find them, and we will continue to layer those into our portfolio whenever we can.

Got it, then the follow-up was just more broadly on the category.

One, I'm just curious how you even categorize the category in which you compete, whether you look at it as fast casual or more narrowly as fast casual Mexican, but just wondering how you think about the category you compete in specifically, and maybe the pace of the growth of that category or how you look at your share versus others, whether you see your share -- I'm assuming you see your share growing versus declining.

But internally, how do you think about the constituents of your category and the pace of growth for that category?

It's a very interesting question.

I would say that of all the people who play in this fast casual arena, I think Chipotle is different in two very unique ways.

And that is our very unique people culture, which is one that is cultivating a strong force of future leaders.

It is a really, really powerful thing that ends up providing a really great customer experience.

But also our focus on Food With Integrity and our desire to make available to customers the kinds of foods that really were only available at very high-end restaurants or expensive markets or farmers markets and things like this.

We have always believed that these kinds of foods should be available to everybody.

No one else is really doing this sort of thing, so I think because of that, we are in a special category of our own.

And when I think about the category, it's not really about Mexican food, of course; it's about a model, a model that allows you to source great ingredients and cook those ingredients according to classic cooking techniques, served in an interactive format, and all delivered by this team of top performers.

And so, that is a model which Chipotle and ShopHouse and Pizzeria Locale fit squarely into.

Thank you.

All right, thanks, everyone, for joining us today.

We appreciate it and we look forward to speaking with you next quarter.

Goodbye.

Thanks, everyone.

Thank you.

That does conclude our conference today.

We do appreciate your participation.