奇波雷墨西哥燒烤 (CMG) 2014 Q3 法說會逐字稿

Good day, and welcome to the Chipotle Mexican Grill third-quarter 2014 earnings conference call.

(Operator Instructions) As a reminder, this conference is being recorded.

Thank you.

I would now like to introduce Chipotle's Director of Communications, Chris Arnold.

You may begin your conference.

Hello, everyone, and welcome to our call today.

By now, you should have access to our earnings announcement released this afternoon for the third quarter 2014.

It may also be a 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 statements about our business model and consumer trends and how those may influence our results in the future as well as projections of comp restaurant sales, the number of restaurants we intend to open, the impact of menu price increases, trends in food, labor, and G&A costs, effective tax rates, stock repurchases, and shareholder returns, as well as other statements of our expectations and plans.

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

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

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

I would like to remind everyone that we've 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 fourth quarter, it will begin December 1 and continue through our year-end release.

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

With that, I will now turn the call over to Steve.

Thanks, Chris.

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

We have continued the momentum we built through the first half of the year, growing revenue to $1.08 billion for the quarter, an increase of 31.1% on same-store sales growth of 19.8% and the opening of 43 new restaurants.

This produced diluted earnings per share of $4.15 for the quarter, an increase of 56%.

These results would be remarkable for any restaurant company.

But for Chipotle, where we're now more than 21 years old, with more than 1,700 restaurants and average unit volumes of more than $2.4 million, we think they are extraordinary.

While our performance has been particularly strong this year, our results have been solid throughout our history as a public Company, even through the depths of the recession, and I am often asked how we continue to perform so well.

The fact is, there is no great mystery to it.

Our ability to generate such strong sales growth is the result of our commitment to serving the best-tasting food we can.

Food that is made with ingredients from more sustainable sources and prepared using classic cooking techniques.

And our commitment to having teams of top performers in our restaurants who are empowered to provide an extraordinary customer experience.

It is our focus on these key -- two key areas that will allow us to achieve our vision to change the way people think about and eat fast food.

This formula is unique in the world of traditional fast food in some very important ways.

The traditional fast food sector has traded food quality and taste for low cost and ease of preparation.

It has aggressively marketed low prices to entice customers to visit more often, which has resulted in the need to reduce costs by cheapening ingredients and by compromising the overall dining experience.

We have not made these compromises because our fundamental belief is that in order to provide an extraordinary customer experience, you cannot take shortcuts.

We have shown that we can spend more on ingredients, not less, and charge a fair price.

And at the same time, generate outstanding business results that we can prepare food using classic cooking techniques in each and every one of our more than 1,700 restaurants and have consistency.

That we can provide great service and still be fast.

That we can have teams of top-performing managers and crews cooking in the restaurants and still maintain an efficient labor model.

Rather than compromise any of the important variables involved in running restaurants, our decision is to deliver all of them, and it allows us to create an extraordinary experience that is unique to Chipotle.

This formula has worked extremely well for us since the very beginning, and others are starting to notice.

A July survey of fast food customers asked more than 32,000 participants who reportedly ate at more than 96,000 fast food meals at 65 chains to rank restaurants based on the quality of the food and the experience.

Chipotle topped the list while traditional fast food restaurants were ranked near the bottom, with customers citing uninspiring food as the primary reason.

Despite offering dollar menus and frequent discounts, many of these chains also scored poorly in terms of value.

The bottom line: customers want delicious food served quickly in an interactive format, and they are increasingly unwilling to compromise.

Perhaps not surprisingly, this survey found that younger consumers, the millennials, were more inclined to skip traditional fast food in favor of restaurants like Chipotle.

Food industry research indicates that millennials are turning away from traditional fast food in favor of better food and a more enjoyable experience overall.

They are more concerned with how food is raised and prepared than previous generations and are willing to seek out and pay a little more for something they recognize as better.

Better tasting, better for the environment, and better for their well-being.

Investment analyst research also shows similar results.

Over the last decade, there's been a noticeable shift among consumers away from traditional fast food and casual dining chains to fast casual restaurants, as customers are looking for better-quality food served in a convenient format.

The companies that have lost the most customers over the last decade are traditional fast food chains, while the biggest gains go to fast casual restaurants.

Chipotle tops the list of restaurant companies gaining customers during this time period.

These trends are validated looking at the performance of Chipotle and other restaurant companies.

Our business is thriving, posting a same-store sales increase of 19.8% for the quarter and 17% year to date.

At the same time, traditional fast food companies are struggling to produce positive same-store sales growth at all.

The gimmicks that have driven the fast food sector for years, dollar menus, limited-time offers, and merchandising partnerships are not producing results like they used to, as consumers simply want better-tasting, nutritious food and a more compelling experience, not gimmicks.

In some cases, these other companies are looking to revamp their branding efforts to change their customers' perception but not the food.

Fundamentally, these are shortsighted reactions that seem out of touch with what customers want: better food and more compelling dining experience.

This is exactly what we offer at Chipotle, and we think it's replicable with other kinds of cuisines.

We are in the early stages of developing two new fantastic restaurants, what we call our growth seed concepts: ShopHouse Southeast Asian Kitchen and Pizzeria Locale, using the exact same model that has driven Chipotle's success.

Each of these concepts shares our commitment to using only the very best ingredients, to classical cooking techniques, and to building cultures of top performers who are empowered to achieve high standards.

During the quarter, we opened another ShopHouse, the eighth one in the Washington, DC, area.

ShopHouse very much reminds me of Chipotle when I opened the first one of the restaurants.

It is food that is new to many of our customers, but they love it and are thrilled to enjoy a meal that is flavorful, skillfully prepared, and served in a way that is accessible and affordable.

At the beginning of this month, we also opened a second Pizzeria Locale in Denver.

Pizzeria Locale was developed by two extraordinary restaurateurs, executive chef Lachlan Patterson and master sommelier Bobby Stuckey, and we have partnered with them to bring the Pizzeria Locale experience to more customers using the same format that has worked so well for Chipotle.

More than ever, I believe this is the new fast food model.

Increasingly, consumers want what Chipotle is doing, and they seem to be turning away from traditional fast food in favor of better food and a more compelling experience.

That is what drives our business and continues to provide outstanding results for our shareholders.

And it will continue to be our primary focus.

I will now turn the call over to Monty.

Thanks, Steve.

Neither our vision of changing the way people think about and eat fast food, nor the results we are producing, would be possible without our team's top performers who are empowered to achieve high standards.

We have totally changed the traditional fast food formula which depends on constantly lowering costs and simplifying the tasks in the restaurant to the point where they are essentially foolproof.

Instead, we're creating rewarding environments with skilled teams who do work that they are proud of.

We ask more of our people, not less, and reward them with greater opportunities when they step up to meet the challenge.

This is one of the many areas where Chipotle is unique within the industry, and we are performing well because we have so many top performers who are committed to achieving our vision and to providing an extraordinary restaurant experience.

At the end of the quarter, we had our All Managers' Conference in Las Vegas.

This conference, which we hold every two years, is a powerful way for us to teach and inspire our restaurant managers and the teams that they are building to raise the bar and to share more about our vision and changing the way people think about and eat fast food.

The conference also allows us to introduce new tools that help set our managers up for success.

This year's conference focused on our vision and the importance of our food culture, people culture, and unit economic model.

Presentations to our managers highlighted many of our accomplishments.

We discussed the importance of ingredients that are raised with respect to the environment, animals, and the farmers who produce them.

We emphasized the importance of developing extraordinary leaders and how that is critical for our business.

And we explained our strong unit economic model and why it is so important for our managers to remain focused and disciplined in protecting it and how they run their restaurants.

We also used the conference to introduce new tools to help better set our managers up for success.

One promising development in this area is a new tablet-based training system that we are just starting to roll out in our restaurants.

This new tool will allow us to compile all of our training materials, including text and video, in a single place that can be quickly and easily updated and accessed immediately in any of our restaurants or offices.

We introduced this new system at our managers' conference and are just beginning to roll it out to restaurants now, but are optimistic that this new system will improve upon our already successful training programs.

Ultimately, better training programs help us improve how we develop people and teach specific skills.

In turn, this will help us deliver a more consistent restaurant experience.

Finally, we also used the conference as an opportunity to introduce our new concepts, ShopHouse and Pizzeria Locale, to our employees.

Each of the new concepts had exhibits at the conference that were designed to resemble the actual restaurants.

The people running each concept first provided a thorough overview of each restaurant to all of our managers and guests and then served food, allowing everyone to see and taste for themselves just how delicious these restaurants are.

This was the first time most of our employees have tried either of these restaurants, and they were very excited.

While most of our growth will continue to be driven by opening and improving our Chipotle restaurants, we felt it was a great time to introduce the opportunity that these concepts provide to our teams, as our operations teams will ultimately play the most important role in helping them expand.

While we believe the conference is enormously valuable to our managers, it's also incredibly inspiring and powerful to us.

The conference provides a clear and strong picture of the movement we are creating.

There were nearly 3,000 inspired top-performing employees as well as valued suppliers at the conference, each committed to helping us achieve our vision.

Being part of that is a powerful experience for all of us.

During the quarter, our efforts to build and strengthen our cultures continued, with the addition of 41 new restaurateurs.

We also promoted 27 of our existing restaurateurs into R Plus positions and 15 restaurateurs into more senior field leadership positions, including four new team directors.

Because of the success that these extraordinary leaders have had developing the people around them, we paid out nearly $700,000 in the quarter in people development bonuses and nearly $2 million year to date.

These bonuses are paid specifically when restaurateurs develop crew into management positions.

As the rank of restaurateurs continue to grow, so does their reach.

These extraordinary leaders now oversee more than 70% of all of our restaurants.

This is important, in thatthe restaurateurs and their crews deliver a compelling dining experience that keeps our customers coming back.

Our unique people culture is an area where Chipotle excels, and that is contributing significantly to our overall performance.

One area in particular where we have seen tangible benefits from the special cultures is in the area of our throughput.

Our teams are continuing to increase the speed of service we provide, and by doing so are providing a better customer experience.

During the quarter, throughput remains strong and actually got stronger with an increase of six transactions during the peak lunch hour and six transactions during the peak dinner hour compared to the same time last year.

We would not be able to achieve such extraordinary same-store sales increases without these continued improvements in throughput during our busiest hours.

The improvements we are seeing in our throughput as a result of having more top-performing managers and teams that can make sure that we have the four pillars of throughput in place.

Using a linebacker during our peak hours, having proper mis en place, ensuring there are only aces in their places, and using a dedicated expediter during peak hours.

We have proven that when we focus on these four pillars, we can serve more customers and provide a better experience.

It's for this reason that we measure our effectiveness in this key area as well as provide bonuses to our field teams in part based upon their ability to execute these four pillars.

Finally, I would like to provide an update on development.

While we expect to end this year with total new restaurant openings at the high end of our guidance of 180 to 195 new restaurants, for the year, about 70% of these locations will be in proven markets with 15% in new markets and 15% in established or developing markets.

Going forward, we believe that we're well positioned to continue to find excellent real estate.

While the market overall has become more competitive for the kinds of sites are looking for, Chipotle remains a very desirable tenant with strong financials.

Given the strength of our position, we expect to open between 190 and 205 new restaurants in 2015, which will include a small number of growth seed restaurants.

We expect to see some pressure on rents in major markets, but think that we can offset some of that with a strong supply of new, smaller retail strip centers.

In many cases, we're able to find developers who are willing to build a two- or three-tenant strip for our use and believe that there continue to be great opportunities ahead in some, of the smaller more remote markets that have been underserved.

Places such as Corpus Christi, Texas, or Greenville, North Carolina, where we have recently opened restaurants.

We have the right pieces in place.

The right food culture, people culture, and unit economic model to continue on our path to change food culture, and we believe that our success in doing that will allow us to generate outstanding returns for our shareholders.

I will now turn the call over to Jack Hartung.

Thanks Monty.

Our team's top performers continue to provide an incredible dining experience to our customers, and our ongoing commitment to using the very best ingredients for our food has continued to bring more customers through our doors.

We're very happy to announce another great quarter with strong financial results.

Last quarter, we recorded our second strongest sales comp as a public Company.

In this quarter, after 21 years in business, we're delighted to report an even higher third-quarter sales comp of 19.8%, making it the strongest sales comp since becoming a public Company in 2006.

It is really quite an achievement, and we are proud of these results -- proud of our results which are driven by our unique food, our unique people, and our strong business cultures.

Our third-quarter same-store sales comp of 19.8% has helped to drive average sales volume for the restaurants that have been open for at least 12 months to an all-time high of $2.4 million.

Overall sales for the quarter increased 31.1% to $1.08 billion, driven by the comp of 19.8%, which includes the full impact of the menu price increase along with new restaurant openings.

Year-to-date sales were just over $3 billion, an increase of 28.2%.

The quarter and year-to-date comp sales increase is driven by increased customer visits, along with a higher average check.

Our average check in the quarter is up about 8.5%, driven primarily by an effective price increase of about 6.3% as well as from catering and slightly larger group size.

Although our menu prices increase, we continue to see very strong transaction growth, and we are experiencing very little price resistance, just under 1% so far with very little menu trade down.

We're delighted to see that the price increase we had to take after three years of absorbing food inflation had little or no effect on the strong customer loyalty we have worked so hard to build.

It confirmed our belief that our customers understand and appreciate our focus on sourcing high-quality ingredients and that they see tremendous value in the dining experience they enjoy at Chipotle.

We will continue our focus on developing teams of top performers who are empowered to achieve high standards, as we know these strong comps are not possible without them.

Our teams, freshly inspired by the themes presented at our All Managers' Conference, will help continue our success and achieve our mission of changing the way people think about and eat fast food.

Though we will finish this year comparing to a higher comp of 9.3% in the fourth quarter of last year, we continue to expect comps for the full year 2014 will be in the mid-teens.

Of course, 2015 will bring even tougher comparisons, especially in the second half of the year.

We expect full-year comps in 2015 will be in the low to mid single-digit range and will decline beginning in the second quarter as the menu price increase begins to cycle off.

Our new restaurants continue to perform very well, and we still expect strong opening sales volumes in the $1.7 million to $1.8 million range or higher.

What we are most pleased with regarding our new restaurants is that we continue to staff them with terrific leaders and teams of empowered top performers delivering the same incredible dining experience that our customers have come to expect.

This allows us to continue to grow while delivering industry-leading unit economics and returns for both our existing and new restaurants.

Diluted earnings per share for the quarter was $4.15, an increase of 56% from last year.

We were able to grow EPS at nearly double our sales growth rate despite higher food costs, as we delivered sales leverage on the labor and occupancy line.

Our operating margins were up 250 basis points to 19.1% while restaurant-level margins were up 200 basis points compared to last year to 28.8% due to our strong transaction trends and the benefit of the recent menu price increase.

Year-to-date diluted earnings per share was $10.29, an increase of 29.8% over last year.

Restaurant-level margins year to date were 27.4%, an increase of 50 basis points due to higher comps offset by higher food costs.

Food costs were 34.3% in the quarter, down only 30 basis points sequentially from Q2, and food costs were up 70 basis points over last year despite having the full benefit of the price increase in the quarter.

Without the menu price impact, our food costs would've been around 200 basis point higher.

And this means underlying food inflation was around 8% over last year, so our 6.3% price increase did not fully cover all of this inflation.

While we expected food costs to stabilize in the second half of the year, we saw costs for beef and avocados continue to rise in the quarter.

Had ingredient costs, primarily for beef and avocados, stabilized as expected at the level we saw in Q2, our food costs would've been around 80 to 90 basis points lower, and our restaurant-level margins would have been approaching 30%.

We expect these elevated food costs as a percentage of revenue to continue and even increase slightly in Q4 as continued inflation in beef and dairy is expected and will be offset by lower expected avocado costs.

As we look to 2015, we hope our costs will stabilize, but we expect food cost inflation will be in the low single digits from where food costs were in Q3.

These prices are expected to remain elevated through 2015 due to strong demand amid tight supply as livestock producers continue to re-build their herds after two years of drought conditions.

Avocado costs increased significantly this year due to a light California crop, though anticipated avocado costs will decline in Q4 as we source from Chile and Mexico.

We don't expect much if any benefit from avocado prices next year due to rising demand and supply shortages caused by drought conditions in California and Chile.

We saw prices for cheese and sour cream increase to record highs in the quarter, and we expect that dairy costs will remain high through the end of this year.

But we do anticipate dairy price will come down in 2015 from these 2014 highs.

Labor costs were 21.2% of sales in the quarter, a decrease of 160 basis points from last year, and year-to-date labor costs were down 100 basis points.

Labor leverage is driven by higher sales volumes, partially offset by higher management and crew staffing ratios, which contributed to slightly higher labor costs per store, and by normal wage inflations.

We expect labor costs as a percentage of sales to move higher in the fourth quarter due to seasonallly lower sales.

While we have always offered a basic, low-cost health insurance plan to all of our hourly employees in the past, effective January 1, 2015, we will be offering coverage that qualifies under the Affordable Care Act to eligible hourly employees.

Currently, we estimate over 10,000 of our hourly employees will have the opportunity to sign up for health insurance.

And while we can't predict how many will choose to enroll in this new plan, we estimate thattotal cost will not exceed 1% of sales.

We also will see minimum wage increases in a number of states and cities, which we expect to have only a modest inflationary impact on labor because we pay above minimum wage.

Occupancy costs declined 70 basis points from last year for the quarter due to favorable sales leverage.

Other operating costs were 10.2% in the quarter, a decrease of 60 basis points versus last year, and year to date, they were 10.6% unchanged from last year.

In the quarter, our other operating costs moved lower due to lower marketing and utility costs.

Marketing was 1.3% in the quarter, down 20 basis points from last year, and is expected to increase to around 1.5% in the fourth quarter.

G&A was 6.6% in the quarter, 20 basis points higher than last year, and the increase was primarily driven by our biennial All Managers' Conference held September.

The conference cost just over $10 million, with nearly 3,000 Chipotle employees and suppliers in attendance including all of our GMs and restaurateurs.

In 2015, we will hold our biennial field leadership conference in the third quarter, which we expect will cost around $1 million.

Non-cash stock comp was about $20 million in the quarter, and year-to-date non-cash stock comp was about $83 million, with a small portion of that in the labor line.

We continue to expect non-cash stock comp for the full year will be around $98 million, which is about $33 million higher than 2013 due to this year's options being issued at a much higher share price and as a result of much of the senior management team qualifying for retirement, which accelerates the non-cash charges.

As a perspective, G&A without the non-cash stock expense and without the cost from the all manager conference, G&A would've been down about 60 basis points compared to last year.

G&A in the fourth quarter will be lower as a result of the reduced stock comp charge and not having the cost of the all manager conference, which will be offset somewhat by a $1 million donation related to our annual burrito promotion and fundraising event benefiting the Chipotle Cultivate Foundation, along with normal G&A additions to support our growth.

In 2015, we expect underlying G&A as a percentage of sales before non-cash stock comp charges will grow at a lesser rate than our sales growth.

Our effective tax rate for the third quarter was 37.2%, which includes adjustments relating to filing the 2013 tax return.

We now expect our effective tax rate for 2014 to be around 38.5%.

In 2015, we expect the effective tax rate will be around 39.1%.

The work opportunity tax credit and the R&D tax credit have not been renewed by Congress for 2014 or for 2015.

If these credits are renewed, the state tax rate would benefit by about 50 basis points for each year.

During the quarter, we repurchased about $13 million of our stock, or over 20,000 shares, and average annual -- average share price of about $654.

At the end of the third quarter, we had about $127 million left on our share buyback program previously approved by our Board.

Overall, we've invested $673 million to purchase nearly 4.2 million shares, at an average price of $161 per share.

We finished the third quarter with over $1.2 billion in cash and cash equivalents and short and long-term interest-bearing investments and no debt on our balance sheet.

Although we continue to believe the best use of our cash is to invest in our high-returning domestic restaurants, we plan to carefully nurture our growth [seeds], ShopHouse, Pizzeria Locale, and Chipotle outside the US, as we expect they will provide attractive value-enhancing growth investments in the future.

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

Thanks for your time today.

At this time, we'd be happy to answer any questions you have.

Operator, please open the line.

(Operator Instructions) John Glass, Morgan Stanley.

Thanks very much.

First, Monty, I just wanted to ask you about your thoughts on unit growth.

Are you beginning to hit a maximum number of stores you can open in a year given either real estate availability or own ability, human capital?

Is this 200 plus or minus about where things level off, or how do you see it over the next two to three 3 years as you think about that?

Yes, John.

Thanks.

Well, we don't really think in terms of maximums -- in terms of maximizing our growth.

What we do is we continue to try to strike a balance and open restaurants when we -- at the speed with which we can find great real estate that we think will be -- perform well, plus the speed with which we can create or develop managers to run those restaurants really effectively.

So this amount that we've said we'll open 190 to 205 for next year, we talked to our real estate teams, that is where we have struck the balance that we believe we've got really strong people development throughout the country, and certain markets being stronger than others.

And we've -- and our teams in the field feel very optimistic about this type of real estate they're finding and the prospects for those sites to do well.

So it's just a balancing act, and we do think that this 190 to 205 is a really sensible growth rate.

We're not talking yet about what we're going to do in 2016, 2017, but we suspect it will continue to strike that balance based on people and on how well our real estate performs.

But if you look at our opening volume so far, like Jack said, our new stores are opening about $1.7 million to $1.8 million on average.

And there was a time not too far back where those were volumes that we hoped we would reach as a system, and now those are our brand-new stores that are opening at those volumes despite the fact that we're opening fewer tier 1 locations.

So we're opening a lot more locations that in the past we might have walked by.

Also, our operations are the strongest they've ever been.

Out throughput is the fastest it's ever been, and there's a lot of reasons to believe that we can feel good about asking our field teams to pick up and run new restaurants and that they will be able to do it tremendously effectively.

That's helpful.

And Jack, just a clarification.

The ACA cost you're talking about for 2015, you said not to exceed 1% of sales.

What does that mean?

Is that an incremental 100 basis points of pressure versus '14, or what do you mean by that 1%?

Yes, it would be an incremental cost, John.

But we think it will not even reach 1%.

We just don't know how to estimate it, and so we just put kind of an upper range on it that we don't expect no matter how many -- even if way more people than we think or that we estimate will elect for the new insurance that we're offering, that it will still not be more than 1%.

We think it is likely to be less than that.

We just won't know until our people begin to enroll, and that will happen here between now and the end of the year.

Okay.

Thank you.

David Tarantino, Robert W. Baird.

Hi.

Good afternoon, and congratulations on great results.

Jack, I wanted to ask a question about the comps momentum that you are having.

And could you talk specifically about potentially the trends exiting the quarter and entering Q4?

And then maybe how would you frame up the outlook for Q4 given that the comparison does look maybe 300 basis points more difficult?

Yes, David, I would say that the trends through September and into October so far have been very consistent.

We are now comparing to a tougher quarter.

So last year, we -- in the fourth quarter, our comp was about 9.3%, and it was like 6.1% or six-point-something percent in the third quarter.

So it's a 300 basis point tougher comparison.

So I would expect that you will see our comps decline by that tougher comparison.

So from a dollar and transaction standpoint, the trends are holding well as we move from September to October.

Yes, but the tougher comparison is going to have an impact for sure.

Great.

Very helpful.

And then maybe one on the cost side.

The commodity environment seems to be getting worse and worse.

So I was just wondering what your thoughts were on if we can see continued pressure there, what your thoughts were on another round of price increases.

Maybe not right away but as you move through 2015.

Yes, David, probably too early for us to consider a price increase.

The way we think about the commodities right now, we are seeing pressure from three main areas: from beef, from dairy, and from avocados.

Avocados, we think, is more cyclical.

It is caused by weather.

It was caused by -- this year, there was a shortage relative to the demand.

While we think that's going to continue somewhat next year and so we won't get the break -- at one time, we thought we would get a break.

Next year, we don't think we will get the break.

We do expect that avocado costs will be relatively stable next year, and we are hoping that this is going to be more of an upper limit for avocados, but time will tell.

Beef is going to take a couple of years to grow out for -- to replenish the herds is going to take a couple of years.

So we think that beef is probably going to remain at this elevated level, probably have additional pressure, hopefully not too severe pressure going forward.

Dairy, we think, will come back.

We think that dairy has hit peaks.

In fact, just in the last couple of weeks, we've seen butter costs come down pretty dramatically just in the last two weeks.

That affects our -- the cost of our sour cream.

And so if that holds, we think that dairy is already starting to come back to where maybe a normal sustained price would be.

So when you net it all together, it doesn't feel like extreme pressure, David, so it is too early for us to be even thinking about another price increase.

So hopefully things will stay stable and we won't have to think about it until sometime after 2015.

Makes sense.

Thank you.

Thanks David.

Nicole Miller, Piper Jaffray.

Thank you, Good afternoon.

Great comps.

I'm wondering if you have some of your latest survey work talking about usage patterns.

So is this more frequent -- more frequency from your most loyal guests, or are there some new users in the mix or a change at the core?

Is there anything you can share on that front?

Well, Nicole, this is Mark Crumpacker, the Chief Marketing Officer.

We don't right now have data that shows us which -- whether it is increased frequency from customers or new customers.

It's our belief that it's a combination of both.

We do have some feedback, some research back on the advertising campaign we've done, and we've seen increased awareness in increased purchase intent with all of our existing customers.

So that is leading us to believe that that is certainly a major factor.

But given the level of the comps, we suspect that there's got to be a large number of new customers in there as well.

Okay.

And if you do -- if you do have your core guests, how many times they come, and your most loyal, do you have anything on that as of late?

How often they use you on a weekly basis or monthly or anything of that nature?

Quarterly?

Well, that's actually not something that we track on a quarterly basis.

We do have research regularly.

We're doing it now, so we will have some feedback on that in the future.

But right now, we don't -- I can't tell you the increased frequency of the existing customers.

Okay, great.

And then just back on the comps, I think, Jack, last quarter you said there's 2.5 price because it was only partial price.

2.5 mix, and the rest was traffic.

When you said 100 basis points of resistance, I'm not clear, is that trade down in mix like the beef to chicken conversation, or is that meant to be a traffic-resistant comment?

You know, Nicole, it looks like it's mostly traffic.

We started to see some trade-downs from steak to chicken like when we reported earnings in July.

And we thought that maybe that would increase, but it really didn't.

And so the trade-down effect -- there is some from steak down to chicken -- was very modest.

It didn't really continue to get worse.

In fact, it leveled off quite a bit.

So from what we can tell, it looks like maybe our comp, if there is no resistance, should have been just a little over 20%, maybe 20.5%, something like that.

So we're looking at something less than 1%, and it looks like it's driven on the transactions.

Fantastic.

Thank you very much.

Thanks, Nicole

John Ivankoe, J.P. Morgan.

Hi, thanks.

It's [Imod] Galvin filling in.

The first question is -- based on our estimates, it appears you've had a pretty extraordinary increase in year-over-year and new-unit volumes.

And I know there were some concerns back in 2012 when you might have been laughing over some very strong unit results in 2011.

So can you just help us maybe with where you're opening units next year in terms of proving risks emerging in new markets and how that compares to this year?

If it's materially different in any way?

Yes, it's not going to be materially different.

Next year, we will -- I mean, this year we opened about 70% of our restaurants in proven markets.

So, 15% in developing markets and 15% in new markets.

And next year will not be substantially different.

It's a very similar strategy and just a carryover of what we've done this year.

Okay.

And then with the recent announcement of some restaurant partnerships with ApplePay, can you just tell us maybe where you stand on mobile payment and whether your infrastructure is in place to roll that out now?

Or do you have to maybe make some additional technology investments behind POS or something else at the restaurant level?

Well, we -- right now, we don't have imminent plans to roll out ApplePay support.

It's something that we are considering for 2015.

There are considerable technological constraints to implementing it just based on the way payments are processed with our system.

We are in the process of readying the launch of our new ordering app in November.

And when we do a rev of that -- in the middle of next year is our anticipated time -- we might include ApplePay.

It's just a little bit too early for us to tell just given that we haven't sorted out all of the back-end issues.

Okay.

Thank you.

Jeffrey Bernstein, Barclays.

Great, thank you very much.

Just two questions.

One on the comps side.

As you now lap or as you look to 2015, and it looks like you are lapping what will be mid-teens comp growth in 2014, wondering how you even think about what the right number should be.

It looks like you guide low single-digit to mid single-digit.

Just lapping such strong results, how do you even arrive at something like that?

What kind of history do you use or how do you even come up with that on such a heroic lap that you have?

And then I had a follow-up.

Well, Jeff, it's a great question.

And so we don't spend a lot of time trying to predict how we're going to over -- to leap over that number.

What we do is we take our current sales trends and we literally just push them out over the next 14 months for the rest of this year and then for all of 2015.

And if we don't increase our sales trends or if we don't decrease our sales trends, we think we will be in this low to mid single-digit comp range.

This is the way we have always predicted comps.

As you know, we had 10 years of double-digit comps before the recession.

That was interrupted during the recession, then we had almost two full years of double-digit comps again after that.

And so we really don't have a magic approach or a crystal ball to predict how you are going to exceed like a 19% comp, for example.

We are constantly working on improving our customer experience.

We're constantly working on improving our people culture.

We're constantly looking to upgrade the quality of our ingredients.

Throughput, we're constantly working on throughputs.

So we're constantly working on the things that will enhance the dining experience.

And over the years, it's paid off that when we do a good job, when we have great teams, when they do a good job of providing a great dining experience, customers want to come back to Chipotle more often.

And hope thatwill happen again and hopefully will -- the comp guidance we have today will come back and say, boy, it looked conservative at the time.

But there's no other way for us to predict it other than to take our current sales trends and then assume they don't change and then we back into a number which falls into that low to mid single-digit range.

Understood.

And then just a follow-up on the food inflation side.

Jack, I think in your remarks you said in '15, that we should expect a low single-digit basket increase, but I know oftentimes -- I think you said you were talking about relative to 3Q.

So I'm just wondering if you are taking the 34.3% in the third quarter and we should assume low single digit off of that prior to pricing.

Or maybe if you could just tell us what the outlook is for 2015 either for the line item or what the overall basket is versus the full-year 2014.

Or is there any other way to look at it just so we make sure we understand it correctly?

The comparison you're using again?

Yes, yes.

What I would -- the way I would think about it, Jeff, is we just finished a quarter with food costs in the 34.3% range.

Based on what we see today, we see hopefully relative stability with avocados.

We don't get a break, but hopefully it will be relatively stable.

Dairy just hit a peak, just hit a high.

Hopefully that will stabilize and maybe even come back.

But beef is -- there's going to be more pressure there.

And so when you net those three together, and we assume everything else and what we buy is going to be relatively stable, we think there will be slight pressure to next year from the 34.3%.

We don't know exactly what the pressure is going to be.

We think it looks like it will be relatively modest barring unusual things like weather or supply shortages or things that we can't predict today.

And so we think there's likely to be some modest pressure on the 34.3% that we're seeing in the third quarter today.

And that's even with the 6% plus pricing at least for the first part of next year.

But then assuming, none, for the rest of next year?

That's right.

In my assumption about food cost pressure, I'm assuming no price increase.

Got it.

Thank you.

Brian Bittner, Oppenheimer and Company.

Another question on the 2015 comp guidance.

It seems like it's just par for the course as far as historically how you initially project your comps going into the next year.

But the mathematics behind it that you just explained, obviously, it seems like you are giving a lot of respect to the tougher compares and justifiably so.

But it does seem like you built this comp particularly this year via throughput in a sustainable way and you really raised the base of the business.

And so when I think about 2015, can you talk through it a little bit more about what is left to do on the throughput side of the world that has helped your comps so much this year?

And why maybe this time next year we could be surprised sitting here saying, wow, that low to mid single-digit comp projection was conservative.

Yes, I guess there's two pieces to it: a throughput piece, and then I will let Jack answer the balance of it.

But when we look at throughput, you can kinda look at it two different directions.

It's very hard to raise throughput without additional people wanting to eat at Chipotle.

But we can even if additional people don't want to work -- don't want to -- we get the same amount of traffic.

There still are opportunities to increase throughput just by moving our lines quicker, especially at the peak lunch and peak dinner hours, which we were able to do once again this quarter.

But by the same token, when you have a lot more people coming to us, as has been the case recently, then throughput becomes even more important, especially because of those peak lunch and peak dinner hour bottlenecks.

And our teams in the field are very focused on this and have been working really, really hard to drill the four pillars and to be -- to have everything going that they need to have going to increase our throughput.

And we've been measuring at the field leader level on all of our field leaders are aware of it and they know where they stand versus their colleagues throughout the country in terms of their group of restaurants and their ability to deliver execution on the four pillars of throughput.

So we have an opportunity, we think, to get much, much faster because still, our very fastest restaurants in the country at peak lunch hour are doing 350 transactions an hour and sometimes even more than that on a very regular basis.

So we know it's possible to go very, very fast.

Our average restaurant does something about one third of that speed at peak lunch hour.

So our ability to achieve higher throughput is enormous, but it depends on a few things.

It obviously depends on having plenty of customers coming through our doors, and it also depends on the type of customer, and it also depends on whether it's lunch or dinner.

Because at dinner, people -- there tend to be more children and more group orders, which take longer to put through.

And larger-size transactions as well, which take longer to ring in.

So we have a huge amount of ability to increase throughput, particularly if we keep seeing these increases in traffic.

And so that -- increasing the throughput will help to drive a comp, but also an increased comp can help to drive throughput.

So it kind of goes both directions.

And now we feel really, really good about throughput because of having 6 more transactions coming through at lunch, 6 more transactions coming through at dinner than happened third quarter a year ago.

Plus, we put through an additional 5 transactions about -- approximately 5 transactions for every single hour of business during the day.

So there's not one time of the day where we haven't managed to speed up and deliver better on the four pillars of throughput, and so that gives us plenty of confidence that we can answer the call of any additional transactions that come throughthe door.

But that being said, I will let Jack answer the part about how we measure the comp.

Yes, and I think your question about what else can happen such that year from now we look back and say, boy, that comp was conservative, is that the essence of the question?

I'm just trying to think about how much respect you're giving the comparisons, and really it's like they just build a bigger base.

I guess more of the question for Monty is is there a percentage of the store base for instance that does not have all four pillars in there?

I'm just trying to think about the runway for comp growth from throughput even as you base the tougher comparison base that you saw this year.

So maybe the way to answer it -- I think maybe the cause and effect, and this is what I think -- that the point Monty was making is the cause and effect may be different than what you're thinking.

You are thinking that if we have that great throughput, that is what's driving the comp.

Well, we are getting a comp throughout every hour of the day.

And we need to be as fast as we possibly can during lunch and during dinner because we already have a heavy concentration of customers coming through at those times.

We need to get faster because as more customers want to come to Chipotle, if we don't get faster, we're going to be repelling them.

We are not -- they're going to be walking off the back of our line.

So the demand is happening.

And then throughput is necessary, absolutely necessary, to allow the demands that come into our door go through the line and be satisfied customers.

So in terms of what is driving the comps, I think you have to go back to Steve's comments that there is something going on in the industry.

People are rejecting the traditional fast food model.

They are -- the Chipotle approach is resonating.

I think the marketing that Mark and his team have been doing is causing greater curiosity, especially with millennials where things like the Scarecrow and Back to the Start and Farmed and Dangerous, these are resonating with people that care about where their food comes from, how it's raised, what's the impact on the environment, on their health, things like that.

And so there is a movement going on that is resonating.

Chipotle is the only one that is doing what we're doing with food, with a people culture where you feel like you are being treated to a -- an authentic dining experience, although it's affordable and it doesn't take that much time.

And so it is likely that these trends will continue.

It's not likely that all of a sudden, people are going to stop worrying about where their food comes from and stop appreciating the wonderful experience that they get by joining Chipotle.

So it is likely that that will continue.

It's incumbent upon us and our teams, then, to make sure throughput is there ready for the customers as they come in so that we can accept them into our line.

Okay, that makes sense.

And as far as the GMO-free menu, are we any closer to an announcement date on that?

Well, we don't have a specific announcement date, but we can tell you that we are largely serving only ingredients that are free of GMOs.

And so we have made a ton of progress on that, and we've recently rolled out all of our tortillas being GMO free, and it's just no announcement date yet.

Okay.

Thank you.

Jeff Farmer, Wells Fargo.

Jack, can you share with us where chicken, beef, dairy, avocado, and whatever else matters, where they stand as a percent of COGs?

And how should we think about the relationship between spot prices and what you are paying for a lot of those higher-quality inputs?

Yes, Jeff, we don't talk about the individual ingredients and the percentage because that changes over time.

Like steak this year would be higher than last year.

But if you take beef, chicken, avocados, cheese, and beans, those are our top five ingredients, and those account for right around half of everything that we buy.

So any one of those, when you have a significant impact on cost either up or down, it's going to have a meaningful impact on our cost of goods sales.

And then in terms of looking at spot as a proxy for any of those, is that still a directional proxy?

It's directional.

You just have to be careful of the source.

Like, for example, if the source is the same feed that we would be using, if there's going to be an impact.

Right now the pressure that is affecting beef is that there were these droughts.

And the droughts affected all beef naturally raised and commodity beef as well.

So that's something that when you look at the source of why there is a shortage, something like weather is likely to affect both naturally raised as well as commodity.

Years ago, there were world factors that were affecting chicken, that were affecting -- like the bird flu and things like that that didn't affect us at all.

So Jeff, you've got to go look to the source.

Generally, when it's drought conditions, when it's general supply and demand, generally those things are at least directionally going to impact commodity and actually raise ingredients as well.

It may not be on the exact same timing, may not be the exact same magnitude, but everything that I'm telling you about -- dairy, about beef, as well as with avocados -- you are seeing similar trends in the commodity markets as well.

Okay.

And you touched on it, but as your brand awareness and unit volumes continue to grow, what's been the resulting impact on the restaurants in the comparable store base?

So are they entering neutral talent headwind?

And where does it stand relative to where you were a few years ago?

No, the new stores still out comp the existing stores.

The five-year-old existing stores still comp in the double digits -- well in the double digits.

So when we do -- when we see these kind of comps, it's very broad-based in terms of the layer of store openings.

It's broad-based in terms of markets.

And when our new stores, even though our new restaurants are opening up at way higher volumes than they ever have before, they still out comp the stores that are two years old or three years old -- really, every other store.

So they come in stronger, and then they comp stronger than every other layer as well.

Thank you.

Thanks Jeff.

Bryan Elliott, Raymond James.

Good afternoon gentlemen.

First, a couple things.

One, maybe a little nit to pick.

Couldn't you have done something to push the comp over 20% for the quarter?

(laughter)

It would've been nice.

Work on that for next quarter.

Seriously, my question -- I guess a clarification on the question.

Jack, just clarifying again this 1% traffic pressure or response to pricing that you mentioned.

So you are -- as I heard you, you said you were kind of looking at the traffic growth rate prior to the price increase.

And then subsequent to the price increase, there was a 1% decline -- a point decline in the rate of traffic growth.

Is that what you were saying?

That's right, Bryan.

Okay.

With that in mind, when you have 1% or something less than 1%, there's a lot of noise in there, too, and so we're going to continue to watch this.

Yes.

Sure, sure.

No, I just wanted to make sure I understood what exactly the message was.

My question -- I would like to, if I could, drill down a little more into the ACA commentary and understand I guess sort of some of the details.

So you talked about you are going to offer an ACA compliance plan to all of the eligible hourlies.

There's maybe 10,000 of them.

And can you help us with what exactly ACA compliant means with respect to the income limit?

So I think to be ACA compliant, if I recall correctly, it's kind of dropped out of the news and all, but the portion of the premium that you can ask the employee to cover has to be, I believe, it's something like 9% or less of their total income.

And so, A, is that right, and, B, I guess then thinking about that that there's going to be -- it's going to be impossible to know until after the fact how many people at certain pay grades are going to be buying into the insurance and how much your portion is going to be versus their portion.

Maybe you can flesh out a little of that --

Yes, Brian, what you're talking about is to comply, you need to have a plan that's credible.

Okay?

So it meets the requirements, so it's got to be real insurance, and there are guidelines for that and our plan does meet that.

And it's got to be affordable.

And affordable -- you're roughly right that it has got to be -- what is tough about it, it's got to be based on household income.

Okay?

So we don't know whether there's other income earners in the family, so we had to use some estimates.

We feel pretty good, though, about the fact that everyone will be able to afford this plan.

We've gone through a lot of different assumptions, lot of different calculations.

We know what our folks are making.

What we don't know is how much the other wage earners in the house are making.

So we think that our plan is going to be affordable by most, if not all, of the employees that are going to be offered insurance.

If more than 10,000 people, Bryan -- we don't have an exact number, but I said a number more than 10, so it's for sure more than that that are going to be eligible.

And eligible means that you have worked here for a year and you have -- during this time, you have averaged 30 hours or more.

And what we're going to be doing throughout the year is each month as people hit their anniversary date, we're going to identify whether they qualify.

And so it's an estimate because each month we're going to be recalculating and kind of having reenrollment throughout the year to see if people -- see if our employees are eligible and if they choose to go ahead and enter the insurance rolls.

And are we talking just about hourlies?

I assume that the management staff is already on a corporate-type insurance program.

Right.

Management -- salaried management, and we have typically at least two salaried managers, a GM or restaurateur and then an apprentice in each restaurant.

They already qualify for health insurance today, so you're talking about our hourly crew and our hourly managers in the restaurants that will now qualify.

And of the total premium cost, roughly what is the split between the employee and the employer?

We are paying a majority of it, and you have to to make it affordable.

Sure.

I'm wondering is it like -- you're going to pay 75% or 80% of it, or is it more like a little north of 50%?

No.

It's -- it depends on whether it's family or not.

But it's -- for example, it will cost an average employee a couple hundred bucks or so a month in terms of the premium.

That doesn't count deductibles and things like that.

And the Company on average, we think it's going to cost us around $3,000 a year, so we are paying more than half of it for sure.

And we're doing everything we can to make it affordable -- as affordable as possible.

I have also read about some very, very high deductibles.

These high-deductible plans are the reasonable deduction -- deductible plan kind of what you consider to be normal.

I was reading the other day about deductible plans that have a $5,000 and $6,000 deductible.

So it's what you would consider to be a normal deductible -- kind of a normal monthly premium, a couple hundred bucks per employee, and then Chipotle is paying what we estimate to be over $3,000 per employee per year.

All right.

Very helpful.

Thank you.

Thanks, Bryan.

Joe Buckley, Bank of America Merrill Lynch.

You mentioned catering contributing to the check.

Could you just give us an update on what percent of sales is catering?

And how big a portion are you making this holiday season on that business?

Well, Joe, the catering -- we mentioned catering was like 1.6% in the second quarter.

But seasonally, with graduations, we saw that as being seasonally our highest quarter.

This quarter we were right around 1% catering, so we did pull back a bit.

And I don't know if we -- do we have anything special planned, Mark, for the holidays?

Yes, we will be doing holiday promotions.

It's turned out that one of the things we have learned about Chipotle catering is that it actually is slightly more appealing to folks that are doing parties at home than it is people that are doing things in the office.

So we tend to make our -- put our marketing around events that happen at home like graduations, Super Bowl, that sort of thing.

Oh, I'm sorry, I guess I can only call it the big game.

But keep in mind with catering, too, right now we're just rolling out catering.

And we don't yet have online ordering for it.

It's really just in its infancy, so it has a long way to go as we roll this out.

Okay.

Thank you.

Maybe one quick one because you mentioned online ordering.

How -- is that becoming a more significant part of your store business?

Away from catering.

Joe, if you take all of the online -- like the iPhone, fax, online ordering and catering together, it's somewhere around 5.5% to 6%.

It was like 6% last quarter, so it's -- call it between 5.5% at 6%.

So it's bigger.

Three, four years ago or five years ago, it's 3.5% to 4%, so it's definitely moved up.

But we know that there are companies out there that are doing 7%, 8%, 9%, 10% of their sales.

So we think there is still a lot of room to move.

Okay.

Thank you.

Thanks Joe.

And that does conclude the question-and-answer session.

I will now turn the conference back over to you for any additional or closing remarks.

Thank you all for joining us this afternoon, and we will look forward to speaking again next quarter.

Thank you.

That does conclude today's conference.

We do thank you for your participation today.