奇波雷墨西哥燒烤 (CMG) 2014 Q1 法說會逐字稿

Good day, and welcome to the Chipotle Mexican Grill first-quarter 2014 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 like to turn the conference over to Chipotle's Director of Investor Relations, Alex Spong.

You may begin your conference.

Thanks, Renee.

Hello, everyone, and welcome to our call today.

By now you should have access to our earnings announcement released this morning for the first quarter 2014.

It may also be found on our website at Chipotle.com in the Investor Relations section.

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

These forward-looking statements will include projections of restaurant openings, throughput, catering growth, restaurant margins, comp restaurant sales increases, growth in average restaurant volumes, trends in food costs and other expense items, and effective tax rates as well as other statements of our expectations and plans.

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

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

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

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

On the call with us today are Steve Ells, our Chairman and co-Chief Executive Officer; Monty Moran, co-Chief Executive Officer; and Jack Hartung, Chief Financial Officer.

With that I will turn the call over to Steve.

Thanks, Alex.

Well, I am extremely pleased with our sales performance during the first quarter.

We ended 2013 with nice sales momentum and that momentum strengthened in the first quarter as our restaurant teams continued to do a great job of delighting our customers who visited Chipotle during the quarter.

Our revenues were $904.2 million for the quarter, an increase of 24.4%, driven by an increase in same-store sales of 13.4% and from the opening of 44 new restaurants.

This produced diluted earnings per share of $2.64 for the quarter, an increase of 7.8%.

What I am most pleased about is that our constant pursuit of creating an extraordinary dining culture, along with the best people culture in the restaurant industry, is resonating with our customers and they are rewarding us with their loyalty.

Our food culture continues to focus on finding the very best ingredients with an eye towards sustainability and great taste and preparing them using classic cooking techniques.

This allows us to constantly improve our already delicious food.

Our unique people culture is centered around hiring top performers who are empowered to achieve high standards and developing them to be the future leaders of Chipotle.

Although our focus and emphasis on these two key areas is not new, we are more confident than ever that building a strong food culture and a strong people culture is helping us change the way people think about and eat fast food while leading to significantly better business results.

During the quarter we announced plans to continue to roll out Sofritas.

This is our delicious vegan tofu offering and we expect to have Sofritas in all of our restaurants by the end of the year.

Sofritas is an organic tofu and it is braised with chilies, Chipotle adobo, garlic, cumin and oregano.

It has been very popular with our vegan and vegetarian customers, but we are delighted that about half of our sales come from customers who are meat eaters.

Sofritas is in nearly 1,000 restaurants and accounts for 4% of our entree product mix in those restaurants.

We continue to make progress on our quest to use only non-GMO ingredients in our food.

Just over a year ago we became the first national restaurant company to voluntary disclose GMOs in our ingredients and vowed to find non-GMO replacements.

To date we have eliminated virtually all of the GMO ingredients in our food.

Our corn and flour tortillas are the only foods we currently serve that are made using ingredients that contain or could contain trace amounts of GMOs.

And now we are testing new non-GMO recipes for these tortillas and we hope to be able to roll them out by the end of the year.

Removing GMOs is just one of the many improvements we are making as we continue to pursue the sourcing of high quality sustainably raised ingredients.

We are proud of these efforts and we are also proud of the marketing which is designed to encourage people to be more curious about their food and where it comes from and how it is raised.

We also want to educate our customers so they will appreciate that these better ingredients, prepared using classic cooking techniques, is the reason our food tastes so good.

Ultimately it is our belief that the more people know about their food and how it was raised and where it comes from the more likely they will be to eat at Chipotle.

Farmed and Dangerous is a good example of our commitment to entertain while creating curiosity about how food is raised in this country.

Farmed and Dangerous is a four episode satire we produced which ran online on Hulu and Hulu Plus.

The day the first episode posted to Hulu alongside some of the most popular television shows it was among the top five viewed shows.

After the first episode was released the show exceeded Hulu's audience projections for the entire run of the show and coverage of the show and related issues in the news media generated millions of impressions.

So we are really pleased about the attention that Farmed and Dangerous is getting.

But more importantly that it is creating curiosity and sparks a dialogue about how food is raised.

Another great opportunity to engage people in a celebration and dialogue about food is our Cultivate events.

Recall that our Cultivate festivals are daylong festivals of food, music and ideas and bring together great bands, some of the country's best known chefs and other attractions.

These festivals speak to issues like the difference between whole and processed foods, the use of GMOs, and the difference between pasture-based versus more industrial-based animal agriculture.

We recently announced that our Cultivate events will be held in San Francisco, Dallas and Minneapolis this year.

Last year about 100,000 people attended Cultivate events in Chicago, Denver and San Francisco.

But millions of additional consumers were reached through related advertising, social media and PR.

We continue to be encouraged by the reach and response of these events with more than 90% of attendees saying that they would attend again the next year and would recommend the event to others.

We will also continue to do more traditional advertising which is designed to keep Chipotle top of mind with our customers.

Our new campaign entitled Better Ingredients is currently running in many Chipotle markets around the country.

The creative content focuses on our use of great ingredients and classic cooking techniques and includes print, online ads and outdoor.

Finally, we are encouraged by the growth seeds that we have planted including our international expansion, ShopHouse and Pizzeria Locale.

Since our last call we recently opened our third restaurant in Paris and we now have 10 restaurants open in Europe including six in London and one in Frankfurt.

I should remind you, however, that we review our portfolio of growth seeds as opportunities for long-term growth potential and that our growth will be driven by the development of Chipotle restaurants in the United States for the foreseeable future.

I will now turn the call over to Monty.

Thanks, Steve.

I'm really proud of the results our restaurant team has delivered during the first quarter.

While many restaurants and retailers have talked about a tough consumer environment, either because of the bad weather or the tepid economy, our teams have created such a warm and welcoming environment that our customers visited at an accelerated rate during the quarter.

This terrific environment our customers discover when they visit Chipotle is a result of a special people culture our managers are creating in our restaurants.

It is a culture that emerges when you hire only terrific people who believe in and are committed to where Chipotle is headed, who have a desire to learn how to cook delicious food made from high-quality ingredients and thrive in a culture where they are empowered to contribute to their absolute fullest potential, including become the future leaders of Chipotle.

Of course this is the culture that customers discover when they visit a restaurateur restaurants and every one of our managers throughout the country is intently focused on creating this very same restaurateur culture in their own restaurants.

Today we have more than 500 restaurateurs including over 90 in field leadership positions, but we have more than 1,200 managers who are working hard to become restaurateurs soon.

In fact, every single one of our managers has started becoming a restaurateur within the next 12 months, most of them sometime during this year.

We know this because the plan tool that you've heard me talk about during the past two earnings calls identifies a specific plan of action by which each GM will create a restaurateur culture in their restaurant.

These are realistic plans created based upon themes our field leaders have identified when visiting each restaurant and meeting with each and every crew member on the team.

Executing the plan helps our managers ensure they have the right people on their team, that they have a compelling vision that everyone on the team is committed to, that a culture of empowerment exists in the restaurant and that the entire team understands our high standards.

When all of that exists in the restaurant, top performers who are empowered to achieve high standards with a compelling vision, that restaurant can count on a visit from Steve or me or one of our other officers for a restaurateur interview.

I'm really excited about the positive impact this plan tool is having in creating a clear roadmap for achieving this elite level of restaurateur.

I'm more confident than ever that our field leaders are spending their time wisely and productively by helping to create special people cultures rather than swatting away symptoms.

And I am more confident than ever that each of our restaurants has the opportunity to become restaurateur very soon.

Each restaurant has already received two quarterly plans and they will receive an updated plan from their field leader each quarter so that they can see the progress they are making in reducing the amount of negative themes in their restaurants and advancing towards restaurateur.

As you know, the restaurateur program is the cornerstone of our people culture where our very best managers run extraordinary restaurants and have demonstrated the ability to elevate and develop the people around them.

Many of our restaurateurs have expanded their leadership beyond their home restaurant showing they can elevate the people and culture in nearby restaurants and many have advanced into field leadership positions such as ATL where they oversee the cultures in as many as eight restaurants or the team leader where they oversee an average of 12 to 15 restaurants.

A few of our restaurateurs have even gone beyond team leader into team director roles with leadership responsibility for around 50 restaurants and overseeing over 1,000 people.

And I am pleased and proud to announce that we have achieved the first during this quarter.

For the very first time we've had a leader who started out as crew, advanced to GM, then restaurateur, through the field leader ranks to the position of Executive Team Director.

Pedro Huichapa is the first person at Chipotle to make the journey from crew member to executive team director and we are certain there will soon be more.

Pedro began working as a crew member in Denver; he proved himself to be a top performer with a knack of making the people around him perform at their very best and became a restaurateur at our Alameda and Logan restaurant in Denver in 2007.

In 2009 Pedro was promoted to apprentice team leader after all three of the restaurants he mentored as a restaurateur became restaurateurs themselves on the very same day.

From there Pedro progressed to a team leader position in very short order.

In 2012 he was promoted to team director in Arizona where he helped develop a deep bench of strong future leaders.

Now he has been named executive team director where he will lead our restaurants in Arizona, the San Francisco Bay area, Seattle, Portland and Vancouver.

We are extremely proud of Pedro and his accomplishments and are certain that he will have an even bigger impact on the Company in his new capacity where he'll continue to do what he does best, which is elevate and develop the people around him.

Pedro's story is special in that he is the first person at Chipotle to make the journey from crew to exec team director, but others are ascending all the time from crew to restaurant management and field leadership.

In fact, we recently promoted, along with Pedro, four other longtime leaders to exec team director positions.

[Ron Sedillo] became an exec team director as did [Pete Olds], [Frank Evans] and [Barry Coke] bringing us to nine executive team directors nationwide and giving us a stronger field leadership team and better development opportunities in markets around the country.

Empowered teams of top performers do everything better.

They prepare better tasting food, they create a wonderful environment where the restaurant is clean and inviting, they lead a team that is warm and hospitable and they deliver terrific customer service.

One important element of delivering great customer service, as you have heard us say over and over, is faster throughput.

And once again faster throughput contributed during the quarter as we saw an average increase of seven transactions at our peak lunch hour, from 12 to 1 PM, and we also saw seven additional transactions during the peak dinner hour between 6 and 7 PM with a dinner comp that -- during that hour growing faster than the all day comp.

And on one of our busiest days of our week, Friday, we saw an increase of 11 transactions during our peak lunch hour between 12 and 1 PM.

Our restaurant teams have focused on great execution of what we call the four pillars of throughput which has once again led to record throughput during a season, the first quarter, when throughput is historically at a low point during the year.

We attribute this better execution to our ability to observe and report on how well each restaurant and each field leader is delivering on each of these four pillars.

As a reminder, the four pillars of throughput are -- using a linebacker at peak hours, proper mise en place, having aces in their places and using a dedicated expo, or expediter, at peak times.

By knowing exactly what is happening in each of our restaurants and where to focus our efforts to drive better execution, and understand what might be holding us back, we have been able to make consistent progress in this very important area of our customer service.

Over the past year we have seen our execution for three of the four pillars of throughput, that is to say expo, linebacker and mise en place, improve from an average score of around 65% to 70% during the first review to over 90% during our most recent review.

So we think our field teams have done a great job focusing on and driving this important initiative over the past year.

We are excited that our teams are ready to break new throughput records as the second quarter of the year, which is typically our busiest time of year, comes.

And we can build on the throughput momentum that we have developed during the past few quarters.

Customers in all of our markets except New York City can now enjoy Chipotle catering and we plan to roll catering to New York City later this year.

Catering sales continue to approach 1% of our total sales and we are optimistic that catering will ramp up in the second quarter with the graduation season approaching, so more people can have a chance to try it.

As we gain momentum with our catering we still think we can get better at improving the program from an operations perspective.

While most of our customers really enjoy the customer expense we are providing with catering we want to focus on making sure that all of our orders are ready on time, that they are filled completely and accurately and that there is a seamless handoff to our restaurants from the customer order process.

As we continue to execute this program through our high standards, and as more customers discover and experience catering for themselves, we are encouraged that we are going to see continued growth from catering.

Overall, we are very pleased with the first quarter and believe that we have the pieces in place, both in terms of our food culture and people culture, to continue to deliver a terrific dining expense for our customers and strong results for our shareholders.

I will now turn the call over to Jack.

Thanks, Monty.

We are delighted that more and more people are choosing to visit our restaurants every day.

Our top-performing crews and managers continue to provide an exceptional dining expense to our guests by providing great service and serving delicious meals made from premium ingredients.

And this has led to our strong sales momentum which accelerated into the first quarter.

Our sales increased 24.4% in the quarter to $904.2 million.

The sales increase was driven by a very strong sales comp of 13.4% and from new restaurant openings.

We are very happy to report that the 13.4% sales comp represents the highest quarterly comp we have experienced in nearly eight years since the second quarter of 2006.

Back then our average restaurant volumes were under $1.5 million, while this strong comp has pushed our average restaurant volumes above $2.2 million for the first time.

The comp was driven primarily by increased customer visits and while weather in the quarter certainly created volatility, we believe there was not a net overall negative impact from weather in the quarter.

While sales were understandably down during days of extreme winter weather, when the weather improved or sales recovered to a higher level than before the extreme weather for a few days before settling back into a normal sales trend.

The comp also benefited from an increase in the average check of about 2% and we benefited by about 1% from an extra trading day as Easter was in the first quarter of last year.

Average check in the quarter was up from last year due to an increase in side orders, mostly chips and guac and extra meat, and from an increase in catering.

Catering continues to represent just about 1% of sales and the average catering order is nearly $300 so it has an obvious positive impact on the average check.

Based on this strong comp momentum we have increased our comp guidance and now expect our comp to be in the high-single-digits for the full year before the impact of any price increase which I will talk about a little later.

While the Q1 comp benefited by 100 basis points from the additional trading day this year, we will lose that day with Easter moving to the second quarter, so there is effectively a 200 basis point expected drop when moving from Q1 to Q2 just based on this trading day shift.

And as comp comparisons become more challenging each quarter as the Q1 comp from last was 1% and the comp momentum increased each quarter to 5.5% in Q2, 6.2% in Q3 and 9.3% in Q4 of last year.

Restaurant level margins decreased 40 basis points to 25.9%, the lower margins were driven by higher food costs, partially offset by favorable sales leverage in labor and occupancy cost.

Operating margins decreased by 150 basis points to 15% primarily from higher G&A costs and lower restaurant level margins.

G&A costs were higher by 130 basis points than a year ago, which I will talk about in more detail shortly.

Food costs rose a little faster than expected to 34.5% in the quarter up 150 basis points from the first quarter of 2013 and sequentially they were up 60 basis points from the fourth quarter of 2013.

The sequential increase was due to higher beef and dairy costs and in terms of the year-over-year increase food costs were higher primarily due to inflation in beef, avocados and cheese.

Beef prices are expected to continue to move higher as supply remains tight while livestock producers try to rebuild their herds and recover from two years of record droughts.

And generally US beef prices have set recent all-time highs.

And our steak prices have also hit all-time highs recently, rising 11% in the quarter compared to Q4 and they have spiked another 14% in April so far, so our steak is up 25% already since the fourth quarter.

Cheese prices are also expected to be up over 10% this year and avocado costs will also continue to rise as we are just now entering the season of buying avocados from California again.

California production of avocados is expected to be down about 30% compared to last year even though demand is expected to increase.

And while we haven't felt the effects of the recent hog virus on the supply of pork, supply challenges and pricing pressure may happen later this year.

With all of this rising inflationary pressure our food costs will be nearly 36% during April and are likely to push past that 36% over the next two quarters before the impact of any price increase.

With all of this food inflation we have seen so far and expect to continue to see, we decided to increase our menu prices.

It has been nearly three years since our last companywide price increase, and while we want to remain accessible to our customers, we are at a point where we need to pass along these rapidly rising food costs.

We are currently reviewing our menu prices on a market-by-market basis compared to competitors and based on our analysis so far we plan to increase prices on average somewhere in the mid-single-digits.

We expect we will start installing new menu boards with higher prices later this quarter and finish installation by early in the third quarter.

Labor costs were 23% of sales in the quarter, a decrease of 60 basis points from last year.

Labor leverage was driven by higher sales volumes partially offset by stronger management staffing ratios and normal wage inflation.

Our restaurant teams have done a better job of having the right number of staff and managers in the restaurants which leads to developing a stronger pipeline of future leaders as well as better restaurant execution including better throughput.

Occupancy costs for the quarter were 6.1% of sales, a decrease of 50 basis points from last year due to favorable sales leverage.

Other operating costs were 10.5% in the quarter or flat as a percentage of sales.

Marketing was 1.3% in the quarter and our combined marketing and promotional costs as a percent of sales were the same as last year.

Overall for 2014 we expect our marketing expense to be around 1.6% to 1.7% of sales with relatively higher marketing costs expected during the second and third quarters as we kick off our better ingredients advertising campaign in over 30 markets and over 1,000 restaurants.

The campaign will help customers better understand and connect how cooking with natural and high quality ingredients leads to better tasting food.

G&A was 7.4% in the quarter, up 130 basis points from last year.

G&A was higher as a percentage of revenue primarily from higher non-cash non-economic stock comp and from about $2.5 million in higher legal costs in part due to a recent settlement.

Stock comp expense was $28 million in the quarter which is up $12 million from last year.

For the full year 2014 we expect non-cash stock comp to total about $98 million or an increase of about $33 million over last year.

Now this is higher than our guidance from last earnings call, up $90 million, as the non-cash accounting charge related to stock options increased when our stock price surged after our fourth-quarter earnings release, but just before the options were granted.

The number of options granted has grown only modestly each year, but the non-economic non-cash stock comp has increased significantly over the years as a result of the accounting charge being calculated based on a rising stock price.

As a result of the higher non-cash stock comp expense and our all manager conference in the third quarter, we expect our G&A costs in 2014 to increase about 50 to 60 basis points overall over 2013.

Now this is slightly above the 40 basis point increase we talked about in February and that is due solely to the higher non-cash stock comp I just described.

So just one last point about the stock comp.

As I mentioned, the full year non-cash charge will total about $98 million, but a disproportionate amount, or about $62 million will be expensed in the first half of the year.

This is because the accounting rules require that we fully expense the charge for any employee who is eligible for retirement over six months rather than amortize the charge over the three-year vesting period.

Most of our senior management team qualifies for retirement or they will qualify before the end of the three-year period.

During the quarter average restaurant volumes increased to a new record of $2,226,000 and we are optimistic that our average store volumes can continue to improve as more people discover Chipotle and become loyal customers.

Our new restaurants continue to perform very well with new restaurant volumes opening at or above our $1.6 million to $1.7 million communicated range.

During the quarter we opened 44 new restaurants compared to 48 restaurants at this time last year.

And our full year guidance remains at opening between 180 and 195 new restaurants in 2014.

Our effective tax rate was 39.1% in the quarter and we expect our annual effective tax rate will also be 39.1% and that compares to 38.7% in 2013.

This rate increase is the result of the expiration of the work opportunity tax credit and the R&D tax credit that benefited us in 2013 and is partially offset by a lower estimated state tax rate.

The effective tax rate of 39.1% in the quarter is 270 basis points higher than Q1 of last year as remember last year's first quarter reflected the tax benefit from the work opportunity tax credit and R&D credit on a retroactive basis for all of 2012.

Diluted earnings per share for the quarter was $2.64, an increase of 7.8%.

Our balance sheet continues to remain very strong and we finished the quarter with over $1 billion in cash and cash equivalents for the first time ever including short-term and long-term interest-bearing investments and with no debt.

We continue to believe the best use of our cash is to invest in our high returning new restaurants but we'll also opportunistically participate in share buybacks and we'll continue to nurture our growth seeds, ShopHouse, Chipotle and international markets and Pizzeria Locale, each of which we expect will provide future opportunity to invest in growth.

During the quarter we purchased about $13 million in our stock or over 23,000 shares at an average share price of $548.

At the end of the first quarter we still have about $77 million left on our share buyback program previously approved by our Board of Directors.

And our Board recently approved another $100 million share buyback.

Over the past five years we have invested over $622 million to repurchase stock at an average price of $153.

Thanks for your time today.

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

Operator, please open the lines.

(Operator Instructions).

David Palmer, RBC.

This is actually Eric Gonzalez in for David Palmer.

Congrats on the strong traffic growth in the quarter.

We were wondering if you could focus on marketing for a second.

You recently mentioned how you were changing your local store marketing efforts and maybe if you could talk about the changes you made and maybe assess what has worked well for you?

And then on the digital side, do you expect to increase usage of digital marketing in the near term?

Is that something that could be a 2015 event?

And then maybe what you've learned on the digital side so far?

So, in terms of the local store marketing, we revamped the way we deploy the team.

We now have 36 marketing specialists across the country, they each create detailed plans based on the market experiences and the needs of the restaurants.

Most importantly though I think the most impact has been derived from the marketing specialists spending time with restaurant managers and the restaurant teams, developing ways that they can customize programs and reach out directly to individual customers, local businesses, schools, sports teams, hospitals, community events like races, foot races, bicycle races, things like this.

So there are a number of customized programs that they develop.

And then we usually develop custom currency that we can distribute during these events.

So it is not a one size fits all, in fact it is -- for a company the size of Chipotle it is very unique in that we are super, super nimble and able to reach out to folks on a very individualized basis, which I think has really gone to creating a very, very strong bond and a trust with our customers.

It reminds me of the way I used to reach out to the local community when I ran just one restaurant.

And I think to be able to have 1,600 restaurants plus in the United States that act like individual mom-and-pop where the restaurant manager or restaurateur and his or her team can be part of the community and that fabric just helps to strengthen the specialness of Chipotle.

So, on digital, there a really a lot of elements around digital and so I will try and touch on all of them.

First of all we've always done some marketing on a number of digital outlets, we are active on Twitter, we are active on Facebook.

We provide digital offers as well.

So we will continue to do that.

I wouldn't say necessarily that will ramp up.

But one of the things I think that we are really proud of is that our marketing has sparked conversation.

And so when we do things like Farmed and Dangerous and we do things like the Scarecrow, it creates a conversation that people are curious about, people are interested in.

And so we see lots of activity that our customers are engaging in through twitter, through Facebook kind of on their own.

And so is that really marketing?

I guess not technically.

But it is really exactly what we had intended when our marketing team, when Mark Crumpacker and his team come up with things like Farmed and Dangerous, it really says very little about Chipotle it is not really marketing in the traditional sense at all but boy oh boy does it spark conversation.

And that conversation with social media such as Facebook and Twitter, really cascades very, very quickly.

And so there is this discussion about where food comes from and how it is raised.

And we have this belief that the more that curiosity is sparked, the more that conversation carries on the better it is for Chipotle.

And then the final piece is you have heard us talk about we have been testing a mobile payments opportunity, that is going well.

We expect that we will introduce that to our customers at least in one market sometime this summer.

And we think that once we start engaging in a mobile payments opportunity like that with our customers we now have an opportunity to have personalized conversations with them as well and we communicate with them through text messages and through other opportunities once we have kind of this relationship between us and their mobile payments app, so --.

Thank you, very helpful.

David Tarantino, Robert W Baird.

Congratulations on the sales momentum you are seeing (multiple speakers).

I wanted to ask about maybe the cost outlook.

And, Jack, I think you mentioned that you are continuing to see upward pressure on commodity prices so you decided to take a price increase.

Could you frame up where you think the cost ratio might be heading without that price increase in the second half?

I thought you said over 36%.

But maybe if you can provide some more granularity on how you think this plays out so that we can model it more precisely.

Yes, we think, David, that April alone, even though we are not done with the month but just based on the commodity costs we have seen so far with avocados are up because of buying from California, steak is up for the reasons I mentioned and that is not a Chipotle only thing.

Beef prices in the US in general are at all-time highs right now.

And so, those have really spiked recently.

And then based on expected price increases in cheese we think April will be right at about 36%, we think we could push in the second and third quarter push past but hopefully not too far past that.

We are hopeful by the fourth quarter that will settle a little bit.

The avocado pricing pressure we are seeing is more of a cyclical based on buying from California and based on this year in general, supply is going to be a little bit low.

You have heard us talk in the past that avocado supply tends to be an every other year thing, that when you have one good year the next year seems to be a little bit light.

And we are in kind of that light year this year.

So we are hopeful that the fourth quarter will settle a bit and be something under 36%.

I don't think I would do a very good job of predicting it precisely, but I would guess it would be in maybe the 35% to 36% range before considering a price increase.

Got it, okay, thanks.

And then as I think about pricing, so you haven't raised prices in three years and I just want to kind of come back to your long-term philosophy on raising prices and once you implement such a price increase you could continue to see pressure and things like on some of these items.

So I am just kind of curious to know how quickly you are willing to come back to the market on pricing if you needed it in 2015 or 2016 or is this going to be more kind of an every couple of years type of strategy?

Well, I would say neither, Dave, and what I mean by that is we don't focus very much on the timing and so we don't kind of think today let's raise prices and then raise them again or let's raise prices now and not raise them again for two or three years.

What we think more about is making sure that we earn pricing power and if we focus on that, if we focus on creating a wonderful restaurant experience and cooking and serving delicious food that we'll have the permission to raise prices and if we know if we do a good job with that then picking the timing of it is less relevant it is just not that important.

And generally we've been patient in terms of raising prices.

We have had this luxury of being patient.

Now what we have seen so far and looking at market by market pricing, we believe we have got a lot of pricing power.

We feel very comfortable that if we raise prices somewhere in that mid-single-digit range we have still got room so we are not going to spend all of the pricing power we build up over time, we still have some in the bank.

And so if we need to come back at some point in the future, let's say next year, we would have the ability to do that.

And then we will go through the normal process that we go through considering inflation, considering transaction trends, considering remaining accessible.

Because, as you know, we want to remain accessible to our customers so that everyone can enjoy to dine at Chipotle.

We will go through that same consideration.

But the thing that we are most pleased about is that we have built up quite a bit of permission to raise prices and yet we won't cash in on all of that pricing ability right now so we will still have some in the bank.

Great, that is helpful.

Thank you very much.

John Glass, Morgan Stanley.

Thanks very much and I always feel badly trying to find fault in great quarters.

But in this case there were I think a number of cost issues and they didn't just relate to the foods.

I just want to explore those.

First, Jack, when you look at the labor ratio, your label dollars per store grew at the highest rate it has grown in several years, even in other quarters where you've had very strong transaction driven comps.

So was there something unique and did we run out of initiatives this quarter so you just were seeing labor inflation, did you have -- were there some inefficiencies in store?

What happened in labor this quarter?

A couple of things, John.

You know one last year we were benefiting during most of the quarters from a reduced overtime compared to the year before and so that ran out, that ran its course.

And so, we are not getting any kind of benefit from doing a better job of managing overtime.

We had parts of the country, mostly in the Northeast, that had excessive overtime costs in 2012.

And so as we compared in 2013 in doing a better job of managing overtime our labor leverage was better each of those quarters, that kind of ran its course.

In terms of inefficiencies, we probably have about 20 or 30 basis points or so in an ideal theoretical calculation of what is possible of additional labor leverage.

And the reason that didn't happen is our teams have been focused on doing a better job of staffing their restaurants.

And so, if their sales volume suggests they should have 28 people on their team instead of 24, we are now doing a better job of getting close to that 28 and they are giving them the hours, they are staffing for the four pillars.

And so, we are doing a better job of having the right number of people on the roster, and that is both at the crew level and at the manager level.

And so we have a deeper bench of top performers that we now are confident can be promoted up to kitchen manager, service manager, etc.

And so, our teams are better staffed, our schedule -- we are scheduling a full-time especially during our peak hours and so we are getting better results.

And so I will trade that 20 or 30 basis points, that is theoretical, for better throughput for a deeper bench and a fuller staff of crew and managers in a heartbeat.

It is possible over time, but we are not going to rush into it.

It is possible over time we might be able to capture that 20 or 30 basis points ,but I would consider that to be a relatively small inefficiency or investment to get the operating results that we have seen.

That is helpful.

And then on the G&A line I think even excluding the stock-based comp and the litigation, G&A dollars grew and a rough calculation is like still up 30%, and I'm not sure if that is right or not.

But is there anything unusual in G&A other than those two items that would have grown faster than it will grow the rest of this year?

No, I mean, we did have -- our bonus is up a little bit, John, partly because the quarter was good.

It was a little bit just as a true up from last year's bonuses, a couple small things here and there.

I think if you take out the non-cash stock comp and take out -- for the full year I am talking about now, if you take out the non-cash stock comp, take out the manager conference which will cost $8 million later this year and you look at it year over year I think we will have some slight leverage in our G&A.

So I think our spending is in pretty good shape.

We have added a number of people to our ranks in the past year to support our growth.

But I would say there is nothing out of the ordinary underneath our G&A.

It is still leveraging slightly.

And over time hopefully we will have the opportunity to leverage it even more as we kind of grow into the recent headcount additions.

Okay, and then just I guess the capstone of that is does the pricing take care of all this?

In other words, will operating margins expand in the back half given food inflation and given all the other things you just talked about, is it enough to do that?

Well, it depends on what happens in the back half of the year.

But based on our expectations, yes, I would expect our margins will expand.

Great, thank you.

Jason West, Deutsche Bank.

Just, Jack, I didn't quite hear if you said any sort of update on where things are running in the second quarter.

Sorry to be so short term, but just with the compares getting tougher I know we have got a 200 basis point swing on the trading day, just any help you can offer on kind of how to model the second quarter so far?

Yes, in April so far I would say that the underlying trends are comparable to what we saw in the first quarter.

And so I think if you take into account that we are losing a couple hundred basis points compared to the first quarter in terms of trading day and it is a tougher comparison.

But if you adjust for those the underlying kind of transactions that I am seeing and the underlying sales that we are seeing are comparable to the first quarter.

Okay, great.

And then just when you ran through the pricing timing, can you -- it was a little bit fast, can you run through that just one more time in terms of when the pricing will be fully rolled out to the system, kind of mid second quarter, is it end of the quarter, things like that?

No, I would expect it will be fully rolled out to all of our markets by early in the third quarter.

I mean I suppose it is possible we might be able to accelerate and get it done by the end of the second.

But I would say by early and the third quarter we'll have new menu boards with the new prices in all of our markets.

Okay, great.

And then just one other quick one.

Monty, you talked about the throughput improvements at peak periods.

Can you remind us what your average peak lunch transactions are and peak dinner transactions just so we have kind of a foundation there?

Yes, well, we usually don't talk about specifically what those numbers are, but they are sort of in that between 110 and 120 range during Friday's at peak lunch and a little lower that when you look at Monday through Friday.

And that is for the first quarter.

We expect that in the second quarter and probably third-quarter as well, we will see those increase hopefully even substantially because the first quarter is our slowest time of year in terms of what we would expect in terms of throughput.

And get we have derived these wonderful throughput improvements where even our peak lunch and dinner hours nearly kept up with our all-day comp numbers in terms of being able to put more people through at those peak hours, which is really difficult.

In fact, in terms of the absolute number we put through, the number of people per hour of the day, we have bigger gains during lunch and dinner than any other time of the day, we have seven more people that we put through the line on average per restaurant during those times of day when our lines are longest.

So we are very, very proud of our field teams for accomplishing that.

But we also know that our field teams know that now is really when that game begins because now is when our peak season is descending upon us, when we will be busier and will have an opportunity to really, really hit the ball out of the park on these throughput numbers as we execute the four pillars hopefully as flawlessly as we ever have and thereby give a much, much better customer experience to everybody.

So we are proud of the absolute numbers but I think particularly in light of the fact that the first quarter is not one of the places where we usually set records, and we did.

Great, thanks a lot.

Nicole Miller, Piper Jaffray.

Awesome quarter.

When you think about catering what kind of customer feedback are you getting?

And I'm specifically wondering if you would consider delivery or test it.

Yes I mean -- thanks, Nicole and with catering most of our customer comments -- a lot of customer comments are coming in that are just very delighted that we have it in the first place.

Something less than 1% of comments are still frustrated with it being late or things not being put together correctly.

And I think we are still working out some bugs in that regard but we are proud of generally how our restaurant teams are accomplishing catering.

In terms of delivery, it is not something we are particularly excited to get involved with at this point throughout the country with the possible exception of Manhattan.

But really with catering right now, our customers are pleased to be able to come in and carry in these very -- we package things in a very easy way where our customers can carry even a fairly large catering order out and take it home with them.

And I think that while some people would like us to deliver, our fear would be that putting in place a delivery model would change the unit economics of the catering program and make it more difficult for us to price it competitively.

And I think if you put delivery in, let's say one out of 10 people would like delivery right now, I think that if you offer delivery, six out of 10 might take it.

And so I think something like that, I'm just making these numbers up.

But basically we don't want to put delivery in place and end up costing us the ability to be really competitive and to deliver this food to folks at this terrific price and in this really fun way.

We don't want to drive the prices up by wrecking the unit economics of it.

So I don't think you will see us do a wholesale delivery program in catering for the foreseeable future.

Very helpful.

And I also forgot to ask, are most of those catering orders coming in online?

Well, it is a combination of online and also through a call service that we have in place.

Right.

Does it -- is it weighted towards one or the other?

It's comes through a call center that is a third-party vendor and then they pass it on to the restaurants and make sure that it is taken care of.

Oh, okay.

I just didn't know if there was online (multiple speakers)

Well, online, catering per se doesn't come in online.

We have online orders for multiple orders and, Jack is telling me right now, it is coming.

So in terms of being able to do online orders for catering, that is still something we are working on.

Fantastic.

Thanks for the time.

Andy Barish, Jefferies.

A couple of things just wondering your impressions on sort of has the value gap for Chipotle kind of widened, meaning the time you've taken between pricing increases has shown up in customers' perceived value being a lot higher?

And then secondly, just on the throughput, again sort of more theoretical, but how are you balancing speed versus kind of the hospitality side of things in the restaurants if you could?

Well, I will answer the throughput question and pass it on to Jack to talk about the pricing value proposition.

But with regard to throughput, I think that notion of fast throughput somehow is degrading the customer experience is the wrong -- we look at that as being the wrong way to look at it.

In fact the way we work on throughput is basically to understand that those things that are best in terms of hospitality, things like clear communication, great eye contact, friendliness along the line, efficiency along the line, sense of urgency -- all of those things are the things that compose a great customer experience at Chipotle.

That is why we are so insistent on having top performers and aces in their places on the line and all of that.

However, not only are those things the things that generate the best possible customer expense, those same things happen to be the things that generate the fastest throughput.

So I would literally tell you that as our throughput gets faster you can count on our hospitality not only not degrading but actually getting better, us having better and better communication, being more and more prepared so that our actions on the line look not hurried but fluid.

And we are not operating with a sense of panic but rather we have a team of top performers who look very, very comfortable and are very comfortable serving customers.

If you look at our fastest throughput in our restaurants in the whole country, those restaurants tend to be the ones that actually have the best customer service.

So if you were to go survey everyone in our lines they would all want faster throughput.

And while occasionally we do get a comment from someone who is perhaps very new to Chipotle who says I felt rushed through the line, when we look into those comments and contact those customers it is almost really never that they were rushed, it's because we did something wrong or didn't listen to them carefully or didn't give them what they wanted, not because of speed.

So faster throughput equals great customer service through and through.

Andy, on the consumer view of the price value, when we dig into why consumers think that Chipotle is a good value, sure price is a piece of it, but the bigger piece of it is experience.

It is the quality of the food, they trust where the ingredients are coming from, they can see the open kitchen and so they feel good about seeing their food made in front of them.

And so -- and they love the taste of the food.

We get lots of comments about how friendly our crew are, how hospitable our crew are.

And so, most of the value comes from the experience.

Our pricing certainly is affordable and in fact when you compare our pricing to others in the fast casual we are often cheaper and we should be able to be more expensive because we spend more on our ingredients for sure.

But our customers don't place a big part of the value that they -- value scores that they give us, which are very, very high, a smaller -- a part of that is attributed to price alone which is different than what customers of other restaurants might say.

So we feel good that we focus on the things that we focus on -- great expense, great food, great teams, they are creating a wonderful dining experience, that our customers will continue to see Chipotle as a great value and they will continue to be willing to spend a little bit more money and it really is just a little bit more money for this wonderful dining experience that we offer them.

Appreciate it, thank you.

Keith Siegner, UBS.

Congratulations to the restaurateurs that are the ones out there managing that transaction growth on a day-to-day basis, it is very impressive.

Monty, thank you very much for all the color around the four pillars, how this is helping increase the customer service and the throughput.

Aside from the four pillars, are there other opportunities to grow the transactions?

How was the use of say the online order ahead?

Is this helping contribute to the traffic growth?

Are there other alternatives aside from just the four pillars that could be opportunities to keep that transaction growth growing?

Thanks.

Yes, it is a great question and we have looked at it in different ways over the years.

I think when we first really started to put our eyes on throughput in 2006, we were a little -- I would say a little bit more gadget focused, we were concerned about having a second cash register and how that would increase throughput.

And if you look back far enough you will see a comment from me eight years or seven or eight years ago saying that a second cash register could increase our throughput 40%.

In fact that was true at the time.

But then what we started to discover was there were places where we'd add the second register and throughput would go up 40% and we would remove the second register and throughput would stay the same or go even higher.

And so we knew there was something more to it.

Then later we added change machines that would automatically dispense the change to the customer and that did increase throughput a little bit because it took a second or two or three off of the job that our cashier had to do.

And so that was an effective thing.

And then we tried the handheld ordering system, which is still in operation in a few restaurants.

But what we kept finding is no matter how much of these sort of gimmicks we added or how much we tried to use technology to increase our throughput, nothing could compete with the restaurants that had I guess I will say two things -- one is having a restaurateur team, having a team of all top performers who are empowered to achieve high standards.

To make a long story short, great teams are just a faster and better.

But another thing was the teams that did best or the teams that were aware of and efficient at implementing these four pillars of throughput.

And so, as we started to notice that the four pillars dwarfed any other effort that we put in place to increase throughput, we decided that that has to be our focus, particularly because we still had a significant number of restaurants that don't consistently execute the four pillars.

There are some other things though that we are looking at, one thing is credit cards continue to be a more and more significant part -- they grow in terms of the percentage of our transactions that are paid for by credit cards.

And that helps us because credit cards are still faster than cash.

And we have done a lot to make sure that that is true over the years in making sure that the time between a swipe and a printout of a receipt is very, very fast.

And now it is just a few seconds at Chipotle.

And as you know, we don't require signatures except over a certain dollar amount.

So that sped us up.

I think also through online ordering, that gives us a great opportunity to increase throughput as well because we prepare those orders on our second make line and then when those folks -- when they come in they are not in our main line, and so that allows our throughput to go quicker.

So certainly online ordering is an ongoing opportunity that we are consistently working to increase.

So those are a number of things -- I think also in time we will work on of course the technology to make credit cards still faster with chip and payment and the tapping of the credit cards and whatnot.

So anyway, there are a lot of things we are always focused on.

But I think you will see for the foreseeable future the execution of these four pillars will be the top priority -- well, I should say the second priority, the first priority is having a restaurateur team that can carry it off.

Thank you.

Nick Setyan, Wedbush Securities.

I wanted to ask a question on the minimum wage especially in California later this year.

And ex pricing how we should think about that impacting the labor line going forward?

I know there is another one coming next year again, plus you have the healthcare headwinds kicking in a little bit more next year.

So maybe you can just kind of remind us what the impact we should expect is?

Yes, the California minimum wage, this summer it is going to increase to $9 and then it is actually not next year it is two years from now in 2016 will increase again to I believe it is -- to $10.00.

We've already been paying -- we have always been above minimum wage.

We have been hiring in California between $8 and $9 and starting at the first of this year we have been hiring at $9.

So we have already been kind of early adopting this first wave.

And so, there is very little effect.

I would call it at a companywide level negligible effect.

There will be a bigger effect when the minimum wage increases to $10 in California in a couple years.

But even that is in the range of a few million dollars, not tens of millions of dollars.

So we can certainly absorb that.

And I am sorry, Nick, what was the second part of your question?

Just the healthcare impact, if you guys could remind us what that is expected.

Yes, okay, so the healthcare impact ,that will depend -- we are planning on offering healthcare to all of our hourly crew that meet requirements that work the 30 hours or more per week, which most of our crew, more than half of our crew do work more than 30 hours.

We are planning on offering an insurance plan, an incredible insurance plan to those folks.

What we don't know is how many will accept it.

Our estimate is that this will cost somewhere around or below 1% of sales.

But we won't know that for sure until we offer the insurance and then we can see how many people adopt it versus how many people decide not to take the insurance.

Got it.

And I'm just shifting a little bit on the unit growth side.

Are you guys seeing more opportunities with some of the construction increasing?

In the past that has been a little bit of a limit on how fast you can add new units.

But it does seem like it is becoming a little bit more of a tailwind.

So could we potentially see the unit growth or the additions at least increase a little bit going forward?

Yes, I mean right now what gives us great optimism is the fact that impact from new restaurants that we build is very, very, very low, it is below 1% and has been below 1% every year for quite some time.

And so -- in terms of the pipeline of new restaurants that we are able to find and build we have a significant new pipeline and believe we will be able to level load our restaurant openings throughout the rest of this year.

And which will put us well on pace to hit the numbers that we suggested that we will hit in terms of new store openings.

So we feel very, very good about that.

Now in terms of being able to accelerate that number, there is always the possibility to accelerate that number and what we always do is sort of balance the quality of the real estate we are able to find with our ability to have great people to run those restaurants.

And we are feeling -- as I talked about during my opening comments, we are feeling very, very good about the pipeline of leaders that are moving up through the ranks and the probability of having an even faster pace of restaurateur development do in large part to the use of the plan tool and our field leaders use of that device to help people make sure they have plans in place.

So the people pipeline we feel is really strong, the real estate pipeline is very strong.

But I think you will see us continue to be careful and measured in terms of how we add restaurant so that we can continue to have these really delightful new store openings that deliver great customer experiences.

Thank you very much.

Matthew Difrisco, Buckingham Research.

Hi, this is Katherine Heng filling in for Matt here.

And thanks for taking my question.

I just have a question on the G&A line.

I think you said it will be up 50 to 60 bps but you are keeping the $90 million non-cash stock-based comp.

So since you have higher in 1Q does it mean it will be evenly spread out meaning later in the remaining quarter?

And then also, can you talk about the litigation cost like what is in it?

And them should we consider it as a onetime measure?

Yes, so on the non-cash stock comp, and it is actually $98 million in total for the year, $28 million hit in the first quarter, $62 million will hit in the first half of the year, that means $34 million will hit in the second quarter.

And then will level off to around $20 million in the third quarter and around $15 million in the fourth quarter.

And so, by the time we get to the fourth quarter the non-cash stock comp is close to half of what it will be in the first quarter.

So that is why G&A in the first quarter is quite high, but it will level off over time and normalize over time.

And keep in mind that is all non-cash, it is a journal entry.

Those amounts are never paid.

And so -- but it is spread unevenly throughout the year.

And then your second question, I'm sorry, was --?

So it is on the litigation cost.

Oh, litigation.

Yes, we are not going to comment on specifically what that was about.

We did have more activity during the quarter, and so we don't feel like the activity that happened in the quarter will be something that will recur, litigation is hard to predict perfectly.

But we do think that the quarter was a little bit unusually high and we would hope that it would settle back down to normal charges for the rest of the year.

Okay, if I can just have one more follow-up.

Can you talk about the volume that you are seeing in ShopHouse and Pizzeria Locale and also the international?

Yes, we are not commenting specifically (technical difficulty) volumes.

There is lots of attributes that are really important about Pizzeria Locale, about ShopHouse and Chipotle International and the volumes is just one of them.

What I can tell you is that the volumes for all of our growth seeds, they are behaving similarly in general to how we saw Chipotle going into early markets back when Chipotle was kind of unknown, back in the early 2000's or so.

And so there is a discovery process.

And so the restaurants don't open up at the same levels that Chipotle in the US does.

But as the discovery process happens we are seeing more and more people coming, we are seeing the traffic increase, and we are seeing patterns that are very similar to what we saw with Chipotle in the early days and we find that to be very encouraging.

But we are not disclosing volumes, that is just one very small piece, one little sound bite of everything that we are looking at in terms of the quality of the food, the quality of the people, the quality of the customer experience.

And so we are not talking about specific volumes.

All right, thanks, everyone, for joining us.

We have exceeded our time for the call but we thank you for joining us when we look forward to speaking with you next quarter.

That does conclude today's conference.

We thank you for your participation.