奇波雷墨西哥燒烤 (CMG) 2015 Q2 法說會逐字稿

Good day, and welcome to the Chipotle Mexican Grill second-quarter 2015 earnings conference call.

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

Thank you.

I would now like to introduce Investor Relations manager for Chipotle Mexican Grill, Mr. Mark Alexi.

You may begin your conference.

Thank you.

Hello, everyone, and welcome to our call today.

By now you should have access to our earnings announcement released this afternoon for the second quarter 2015.

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 statements about our potential business results, growth, and shareholder returns, projections on a number of restaurants we intend to open, trends in development costs, estimates of future comparable restaurant sales increases, or comps, and supply chain and other trends reflecting future comps, projections regarding trends in food, labor, in G&A costs, our expected effective tax rate, statements about stock repurchases, 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 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, for a discussion of these risks.

I would like to remind everyone that we had 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 third quarter it will begin September 1 and continue through our Q3 earnings release planned for October 20, 2015.

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 Creative and Development Officer.

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

Thanks, Mark.

I'm pleased with our performance during the second quarter and first half of 2015.

On the heels of what was arguably our best year ever as a public Company in 2014, we have continued to post strong results.

During the quarter, we generated revenue of $1.2 billion, an increase of 14.1% on comparable restaurant sales growth of 4.3% and the opening of 48 new restaurants.

This produced diluted earnings of $4.45 per share, an increase of 27.1%.

These results are particularly strong considering the very difficult comparisons we face and keep us on pace with the guidance we provided for 2015.

The strength of our business is the result of our focus on our unique food and people cultures, and in an increasingly crowded and competitive industry, these unique and compelling attributes continue to differentiate Chipotle and drive our success.

During the quarter, we took a significant step to improve the food we serve when we completed our transition to using only non-GMO ingredients to make all the food we serve in our restaurants.

We began this effort two years ago when we made the decision to voluntarily disclose the GMOs in our ingredients.

Following that move, we worked to eliminate the limited number of GMO ingredients we were using to make our food, which include soybean oil and some ingredients in our tortillas.

Today, all the food we serve at Chipotle restaurants is made with non-GMO ingredients.

While that decision was made with some criticism, most of which was tied to the notion that GMO foods do not present any health risks to people who consume them, a majority of the response to our decision was overwhelmingly positive, and we believe it was the right thing to do for a number of reasons.

First, we believe that a few GMO ingredients that were on our menu were not making our food any better in any way.

Second, that there was considerable debate about long-term impact associated with GMO farming systems.

And third, that more research is necessary to fully understand the impacts of GMO food, particularly studies that are long-term and independent in nature.

Our position on GMOs very much aligns with consumer sentiment on this issue.

And, quite simply, Chipotle is the only national chain where consumers can eat anything on the menu without worry about eating GMOs.

This direction is not new for us, and the decision is very consistent with our overall culture of serving Food With Integrity.

There are a number of ingredients that have been declared safe to eat, including artificial flavorings and colorings for example, that are also not enough food.

Simply because something is deemed safe doesn't mean that it's necessary or that it makes our food better in any way.

With our food now made entirely from non-GMO ingredients, we have set our sights on making better tortillas.

These, our seasonal tortillas, are made using only five ingredients: flour, water, starter, vegetable oil, and salt.

And when you consider that the starter, which is the leavening agent, is made from flour and water, it's really just four ingredients.

While this might sound like a relatively simple undertaking, it's actually quite a challenge because one has to account for a number of variables: moisture in the flour, temperature and humidity in the bakery, strength of the starter, et cetera.

And many of the chemical additives in commercial tortillas are designed to mitigate these variabilities.

So while our tortillas necessitates a keen eye and hand of our bakers, we know that skilled bakers can make better-tasting tortillas more similar to homemade tortillas than we currently get at commercial scale.

Tortillas made commercially generally contain artificial additives including preservatives to extend their shelf life and dough conditioners to give them strength and the ability to stretch in order to eliminate the need for natural fermentation process of dough.

The new tortillas are working -- the new tortillas we are working to develop through a partnership with Washington State University's bread lab will have no artificial ingredients, but rather will have only a few real whole ingredients that have traditionally been used to make tortillas.

Returning to this fresh or simpler tortilla essentially requires that we reinvent the way tortillas are made on a large scale, and that's exactly what we're doing.

While we are in the very early stages of this project, the tortillas that we're making are delicious and perform very well.

Later this fall, we will be scaling the project up for continued testing.

This is consistent with our overall Food With Integrity mission, one that respects the environment, farmers, the bakers, our customers' health, and ultimately their taste buds.

We have also made significant progress to resolve our pork shortage, which began in January.

As you likely recall, we suspended one of our primary pork suppliers when a routine audit found that a supplier was not adhering to all facets of our animal welfare protocol.

We have found a new supplier, Karro Food Group of the UK, and have begun serving pork from KARRO in most of our Florida restaurants, a little over 100 restaurants in total.

While it has always been our preference to source meats domestically, the quantity of pork that meets our standards is simply not available right now from domestic suppliers, as the vast majority of pork raised in the United States -- more than 95% based on our estimates -- is not raised to our standards.

The pork we are getting from KARRO Foods meets or exceeds all of our animal welfare standards, including that this pork comes from pigs that are born on pasture and raised in deeply bedded barns.

However, KARRO adheres to a different antibiotic protocol.

Under KARRO's program, pigs can be given antibiotics under veterinary supervision and can remain in the supply.

What is important to note is that antibiotics cannot be used sub- therapeutically to promote growth at KARRO.

This program is common in the UK and has been endorsed by number of animal welfare, scientific, and veterinary organizations in the United States.

During the coming months, we will be sourcing more pork from KARRO and returning carnitas to the restaurants around the country on a market-by-market basis until we are fully supplied again, which we expect to happen before the end of the year.

We knew when we made the decision to suspend pork -- to suspend a pork supplier, that it would leave us without enough pork for all of our restaurants and that our decision could impact customers' perceptions of Chipotle and have an impact on our sales.

We are extremely pleased by the reaction from our customers, many of whom applauded us for taking this principled stand.

As we continue to ramp up our pork supply, we expect to regain any lost sales tied to this outage.

We are making these changes to improve our ingredients as we continue on our Food With Integrity journey.

For more than 15 years, we've been working hard to change the way people think about and eat fast food.

In recent months, a number of food companies have made pledges to remove some artificial ingredients from their food, primarily things like artificial colors or preservatives.

This reality, however, is that these ingredients make up only a portion of the thousands of additives used in processed foods.

Aside from our tortillas, none of our foods include any of these additives.

With competitors making vague pledges, we are strengthening our marketing message to continue to show the contrast between what Chipotle has always done and the changes others are pledging.

So we've always and will continue to make our food with the very best ingredients we can find.

And once our tortilla project is complete, we will not rely on any of the artificial ingredients that are so prevalent in processed foods.

To highlight this differentiation, today we launched a new program called Friends Or Faux, spelled f-a-u-x, which is an integrated campaign that includes an interactive digital game that invites customers to learn about the difference between Chipotle's ingredients and those commonly used to make fast food and processed packaged foods.

To play the game, consumers choose a Chipotle menu item and a representative traditional fast food item, and they compare and match the ingredients, identifying which items contain which ingredients.

The online game will include a limited-time BOGO promotion for participants while encouraging customers to learn more about Food With Integrity mission.

In addition to the game, the campaign is also supported by extensive online advertising which begins today.

Constantly working to improve the quality and taste of the food we serve is embedded in our culture, and our track record to improve our food is unmatched in the industry.

With the strength of our food culture and a unique and compelling people culture that further separates Chipotle from other restaurant companies, we believe we have the pieces in place to continue to change the way people think about and eat fast food, and to deliver outstanding results for our shareholders.

I will now turn the call over to Monty.

Thank you, Steve.

Our excellent results are possible because of the strength of our very special people culture.

By hiring teams of top performers, empowering them to achieve high standards, and developing them to be leaders for our Company, we are providing a consistently extraordinary restaurant experience while also running our restaurants in a way that helps us maintain a strong unit economic model.

Having the best teams requires that we provide extraordinary opportunities for our people.

The most unique benefit that we provide is the opportunity for our people to develop into the most effective leaders they can be with the most rewarding career possible, and this is at the core of our culture.

But we also invest in benefits and compensation packages that match the talent at our teams.

During the quarter, a number of up-and-coming leaders took advantage of the opportunities as we promoted 39 managers into restaurateur positions and also promoted 16 new field leaders, including nine apprentice team leaders, three team leaders, and two team directors.

These promotions are what we've come to expect at Chipotle.

Currently, more than 90% of our restaurant managers come from within the ranks of our crew, and we have promoted 5,900 people who started as crew into management positions just this year on top of the 10,500 people who started as crew and were promoted into management positions last year.

With our strong ability to develop our leaders from within and the importance of establishing restaurateur cultures in all of our restaurants, our people culture continues to be a primary asset leading to our growth and also gives us great optimism that we will continue to experience strong growth going forward.

The leaders we are developing are able to attract other talented people to our Company and are deeply committed to having these new people reach their full potential.

By hiring only top-performing employees developing them to be at their very best, we are able to do things that other restaurant companies simply can't do.

Not only do our teams run extraordinary restaurants, preparing delicious food using classic cooking techniques and providing exceptional customer service, they also elevate the people around them.

This approach to running our restaurants is what enables us to create such an outstanding dining experience and to deliver such strong unit economics.

To help perpetuate our culture and the development of our top performers, we held a meeting during the quarter with field leaders -- some of them new to the Company and others with long careers here -- to discuss and clarify the role of all the field leaders at Chipotle.

We were pleased how committed our leaders are to the concept of achieving success by making others better.

Our field leaders see more clearly now than ever that their success depends on the success of the people they lead.

There's no ambiguity as to the priorities we have for our leaders at Chipotle.

They know that their job is to develop restaurateurs, and they have a very clear understanding as to how to do that.

We've told our field leaders that we define their success by looking at three things.

First, that each general manager that they lead must know exactly why they are not a restaurateur.

Second, each of their general managers must be able to clearly state exactly what their plan is to become a restaurateur and what their priorities are in order to do so.

Third, the general managers must be actually developing into restaurateurs.

The most important tool field leaders have to help them succeed in this task is the restaurateur diagnosis and plan tool.

Using this tool allows our field leaders to uncover the positive and negative themes that may exist in each restaurant and to make a specific plan for how to best eliminate those negative themes.

With the tool now well-established, field leaders are using it as the basis for each visit to a restaurant, and, with the proper progress updates, it has allowed our field leaders to chart the development path for restaurateur cultures, with each visit and each revision to the plan serving as a new chapter in the development story for the general manager.

Of course, all of these stories should have the same ending: another team establishing a restaurateur culture and adding to our group of elite leaders who are changing the way people think about and eat fast food.

During the quarter, we took some important steps to strengthen our compensation and benefits programs, particularly at the crew level.

We completed a first installment of our twice-annual merit increases for crew and made a one-time compensation adjustment for our kitchen managers and service managers to ensure compensation for those positions is consistent with the very high expectations that these roles carry.

We also made improvements to the benefits we offer hourly crew by increasing paid vacation and adding paid sick days and by expanding our tuition reimbursement program to include our employees in addition to the salaried managers to whom this benefit was already available.

One of the greatest benefits of having such strong cultures in our restaurants is that it enables us to deliver excellent customer service, which generates great throughput.

Our teams understand the qualities that make for great throughput are the same qualities that provide the very best customer service, having everything ready in the restaurant before customers arrive so that we are prepared for service particularly at our busiest times, as well as clear, authentic communication with customers to keep our lines moving quickly without making people feel rushed.

During the quarter we have a national throughput competition to emphasize the importance of the four pillars in our restaurants.

We achieved a number of new one-hour throughput records by reiterating the fundamentals of throughput, and we continue to increase the number of restaurants that are implementing the four pillars during our peak dinner periods.

As a result, we were able to largely maintain the substantial gains we made during 2014 to our throughput during our peak lunch and dinner hours.

This is significant because last year was a tremendous year in which we delivered double-digit transaction comps that created a very tough comparison for this year.

Our restaurateurs continue to find opportunities to improve our standards that increase throughput, and we know that we are in a stronger position today as we are better prepared to utilize the four pillars to provide a more favorable customer experience.

Finally on the development front, we are well on track throughout the first half of the year towards our guidance of opening 190 to 205 new restaurants.

Actually, the pace of openings during the first half of the year gives us confidence that we will finish 2015 at or above the high end of our guidance range for the full year.

During the second quarter, we opened 48 new restaurants; that's a total of 97 so far for the year, bringing our total number of restaurants to 1,878.

After the end of the quarter, we also opened one new restaurant in London, where Chipotle continues to build a strong customer base.

With the first week of our -- of opening of our seventh restaurant in the UK, our team has already beat the existing UK throughput record with 229 transactions during its peak lunch hour, which is very encouraging.

And finally, Canada's performance has been so successful, we no longer consider it to be a growth seed but rather a growth strategy.

This means we now view Canada as a proven market and will look to accelerate our pace of development in Canadian markets over the next year.

We also just completed the second of our three Cultivate Festivals for the year, as the most recent festival concluded in Kansas City last weekend.

This year's event in Kansas City was a terrific success, and consumers were able to try Pizzeria Locale at the festival ahead of our new restaurant opening tomorrow in Kansas City.

We continue to further develop our growth seeds with a Pizzeria Locale opening in Cincinnati and a new ShopHouse to open in Chicago.

So heading into the third quarter, we are in a great position from a development perspective, and we continue to have a very strong real estate pipeline.

We are excited about our results for the quarter and for the first half of 2015.

With a strong food culture, a unique and empowering people culture, and the best unit economics in the industry, we are changing the way people think about and eat fast food, and we are delivering outstanding results for our shareholders.

I will now turn the call over to Jack.

Thanks, Monty.

We are proud of our performance for the first half of 2015 in which we continue to have positive comp sales on annual restaurant volumes that now average more than $2.5 million each.

While our comparisons this year are the toughest we have faced as a public Company, I am confident that our top-performing teams will continue to attract more customers as they prepare and serve delicious food made from high-quality, sustainably raised ingredients.

I've been very active since our last earnings call visiting five of our eight regions and spending time with our field leadership and restaurant teams and promoting 17 new restaurateurs during that time, which gives me great confidence that we have a strong bench of up-and-coming future leaders to support our growth.

Our sales increased 14.1% in the quarter to $1.2 billion, driven by new restaurant openings and a sales comp of 4.3%, which is right in line with the Q2 guidance of low to mid single digits we provided in April.

The comp was driven mainly by our price increase from last year which contributed 4% to the comp.

We have now fully lapped the price increase taken in the second quarter of 2014, so the 4% pricing benefit we enjoyed in Q2 is gone.

Comp sales transaction counts in July so far remain a positive territory in the low single digits.

We are still without pork in about 40% of our restaurants today, but July sales are benefiting slightly by about 60 basis points from a targeted price increase on steak and barbacoa.

As we discussed during prior earnings calls, we decided to take this targeted menu price increase in steak and barbacoa as beef pricing remains at historically high levels, and our menu price gap between steak and barbacoa versus other entrees did not cover this higher cost.

The average increase was just about 4%, or about $0.30 per entree.

We have not yet increased beef prices in about 40% of our restaurants which have not been resupplied with carnitas.

We held off in those markets, as we wanted to avoid the unintended consequence of having customers trade from carnitas to steak or barbacoa and then be forced to pay more for their meal.

Our intention is to raise beef prices in these markets once carnitas is back in supply.

The price increase was effective earlier this month.

And while it's still early, we have not seen any resistance so far.

For the full year, we continue to expect comps to be in the low to mid-single digits, including the targeted price increase on beef I just discussed.

This assumes our comps remain in the low single digits for the rest of this year.

As Steve mentioned, we recently added a new pork supplier, and we hope to be back in full supply of carnitas in all markets by early in Q4.

In April, we estimated a pork shortage may have impacted our comp by as much as 200 basis points, and we believe the net impact for Q2 was in line with this estimate.

And while we're optimistic that bringing pork back to all markets will help our comp, we have not included any bounce-back related to carnitas in our guidance.

Gross net level margins increased 70 basis points to 28%, among our highest margins as a public Company despite being a less than stellar quarter for our labor execution.

Higher margins were driven by our lower food cost of 33.1%, which were 150 basis points better than last year and 80 basis points better than the first quarter.

The lower food costs are tied to our menu price increase from last year along with lower pricing for dairy and avocados, as lower dairy was driven by continued strong production and a strengthening US dollar.

And the avocado supplier benefited from an increased harvest of Mexican avocados.

These costs held relatively stable in the quarter but remained substantially elevated from historical levels and added nearly 100 basis points to our food costs compared to last year.

We hope our food costs can remain at about this level through the back half of the year, but we do expect some pressure from avocados as we purchase more from the California growers and perhaps also from beef, which has been difficult to predict and could remain volatile.

Labor costs were 22.6% of sales during the quarter, an increase of 80 basis points compared to last year.

While labor rates are increasing at a faster rate than they have in a very long time, which I will talk about a little later, the majority of this higher labor relates to ineffective labor scheduling and execution.

We were hampered during the quarter by an interruption in our labor-management reporting as a result of implementing a new workforce enterprise system.

Our investment in our operational systems are a long-term investment that will allow for more effective scheduling in the future but is not without some short-term hurdles that can be typical of these integration efforts.

This has caused us to temporarily lose some oversight of our labor scheduling.

We've now reestablished most of the management reporting now.

And so far in July, we have recaptured about half of the opportunity, or about 40 basis points, and we expect to capture the rest of the opportunity during the third quarter.

So the third quarter will still have somewhat elevated labor as we are recapturing the loss of labor efficiencies throughout this quarter, but we expect to be back to normal for all of Q4.

We believe this labor challenge has negatively impacted EPS during the second quarter by about $0.16.

While we're disappointed with our labor execution, our field teams are committed to bring our labor back in line quickly, and they are going well beyond that to ensure that all of our restaurant managers and our field leaders become experts at writing and executing great schedules.

So our labor deployment will be great with or without the availability of oversight reporting in the future, so I am confident we will fully recapture this opportunity.

Hourly labor rates including our hourly managers increased 4.2% in the quarter, the fastest we have seen in many years.

There has been a general increase in wage rates in many of our markets.

And because we desire and expect to attract and reward only top performers, very important for us to stay ahead of the curve and pay attractive starting wages.

We also continually monitor the pay of our top performers already in our restaurants as they progress through the manager ranks to ensure we are paying fair wages in light of their significant contributions until this is also a contributing factor to the increase in the quarter.

As Monty mentioned, we also enhanced the benefits offered to our crew by adding a tuition reimbursement program and by paying for sick time and increasing vacation pay.

By far, the greatest benefit we offer to our people is the significant opportunity to advance in their leadership positions within Chipotle.

But these enhancements represent important investments to ensure we are attracting, retaining, and elevating the very best people into these leadership positions.

We know that our special people culture with the restaurateur as a centerpiece leads to a better dining experience for our customers, better-tasting food, faster throughput, the development of extraordinary future leaders, better business results, and ultimately the creation of significant shareholder value.

So it's important to note that improving our special people culture occurs through great leadership and having a restaurateur vision and cannot simply be bought by throwing additional dollars at our team.

But a key component of our people culture is to attract and retain great people, so we make these investments knowing it will make our Company stronger.

We expect the incremental cost of these investments to be about $2.5 million incrementally on a quarterly basis beginning in the third quarter.

We typically pay above minimum wage in all of our markets, so a normal increase in local wages usually has little effect on us.

But in some local markets, the minimum wage has been or soon will be pushed well above our national average rate.

In the San Francisco Bay area, for example, the minimum wage was recently increased to over $12 an hour.

This increase, coupled with higher occupancy and other operating costs excluding food costs contribute to an overall cost of doing business of 30% or more compared to 30% or more higher than our average Chipotle.

But our menu prices in the San Francisco area were until recently only about 4% above the typical Chipotle.

And we're lower than most competitors in the area.

So as a result of looking at all of these factors, we decided we were underpriced in San Francisco.

We recently increased prices by 10% in the 10 restaurants within San Francisco and by 7% for the 74 restaurants outside San Francisco in the Bay Area.

These relatively modest increases effectively pass along only some of the higher cost of doing business in that area.

Because only 84 restaurants were affected, the impact on the overall Company will be about 30 basis points on an annual basis.

We will take a similar approach when the overall costs of doing business in a market are escalating on a case-by-case basis, whether these higher costs are driven by legislative changes or by market forces.

As an example, although the minimum wage in Maryland recently increased to over $10 an hour, our overall costs of doing business are reasonable there, and so we do not plan to increase our pricing in those restaurants.

Our objective will always be to keep our menu accessible to our customers while being able to recruit the best people we can with competitive wages in each market and also while considering the overall cost of doing business and competitor prices in the area.

(inaudible) costs for the quarter were 5.4% of sales, flat compared to last year.

Other operating costs were 10.9% during the quarter, down 10 basis points from 2014.

Marketing was 1.8% during the quarter, slightly lower than the second quarter of last year, and we continue to expect our marketing expense to be around 1.7% of sales overall for the year.

G&A was 5.9% in the quarter, down 120 basis points from the prior year due to lower non-cash stock comp expense.

Full-year non-cash stock comp is expected to be slightly below the $80 million we previously forecasted, and this expense will be more evenly weighted throughout the year.

Our effective tax rate during the quarter was 38.8%, and we estimate our effective tax rate for the full year will be about 38.7%.

And that compares to 37.6% for the full year 2014.

Last year benefited from an increase in the estimated usable state credits and from the work opportunity and R&D federal tax credits which have not been renewed for 2015.

If those federal credits are extended to 2015, we estimate our tax rate would benefit by about 30 basis points.

Diluted earnings per share in the quarter was $4.45, an increase of 27.1%.

We finished the second quarter with nearly $1.5 billion in cash and cash equivalents, including short-term and long-term interest-bearing investments and no debt on our balance sheet.

Since our last earnings call on April 21 and through yesterday, we invested more than $100 million to repurchase nearly 164,000 shares of our stock at an average share price of $621.

This is more than 4 times the dollar amount invested during the first quarter and nearly 5 times the number of shares purchased during Q1 when average purchase price was $675.

This is a good example of what we mean by being optimistic when the timing -- with the timing and the magnitude of our share buybacks.

While we continue to believe investing in our high-returning restaurants remains the best use of our cash, we will also continue to invest opportunistically in repurchasing our stock.

And today, we announce that our Board has authorized the investment of an additional $100 million to repurchase our stock, which brings our current unused authorization as of yesterday to $170 million.

Thanks for your time today, and we will be happy to open the lines for any questions.

(Operator Instructions) David Tarantino, Robert W. Baird.

Jack, I just wanted to follow up on some of the commentary about recent sales trends.

I think you said July had stayed positive on comps.

Could you confirm that that also implies that traffic is trending positively or at least flat so far this quarter (multiple speakers)?

David, both sales and transactions are positive in July.

There in low single digits, but they're both positive.

Great.

Thank you.

And then my other question is around the carnitas issue.

And I was just wondering if you could share what you've learned so far about the customer reaction to that in terms of the traffic trends.

And then I think you brought that back in at least one market recently in Manhattan.

So could you talk about how long it takes for customers to respond to that coming back in your confidence level, that you will be able to win that business back when you get the full chain rolled out on pork?

Yes, David, it's really early to know what the exact response is going to be based on this new supply that Steve talked about from KARRO in the UK.

But when we saw the markets, you remember since January when we first ran out, we had this rolling blackout.

So every several weeks, we would have one market run out of carnitas and then we would replenish the supply in another market.

And when you saw that, it took several weeks to get the full product mix back.

And so -- and I would say that's anywhere between three weeks at the low side up to five or six weeks on the high side.

so we are optimistic that we will start to see some of that recovery as we continue to roll markets.

But we're going to roll markets with this new supply of carnitas from now throughout the summer and then into early in the fourth quarter.

And so hopefully what we will see market by market is that the product mix will recover over several weeks and that we'll start to see sales comps recover as well.

Great.

Thank you very much.

Sara Senatore, Bernstein.

I had a couple of questions, actually more about on the mobile side.

I know you've been making some investments there.

I was wondering if you could talk about that as a -- the progress potential -- a potential comp driver.

And related to that, maybe anything you've done on loyalty.

It occurs to me that that is probably a rich source of data on your customers.

And particularly now when you have -- when the carnitas has been in shortage, you could communicate with customers directly and you would know who is or who isn't buying carnitas at your stores.

It just feels like an untapped data pool that maybe you could use.

So just an update on mobile, Apple Pay, loyalty -- that whole ecosystem, please.

Sure, Sara.

This is Mark Crumpacker talking.

Yes, in fact, we been investing in mobile on an ongoing basis for quite a while.

We're still in the process of evaluating the level of effort that's going to be required to implement Apple Pay in particular.

And we certainly see that as being a significant benefit to us once we can get that enabled, especially if it in any way speeds throughput at our restaurants.

But we'll also continue on a continuing basis updating our mobile ordering app to be more efficient.

In fact, we did an update just a couple of months ago and we have another one coming up which makes the ordering more accurate, which we're looking at having a significant impact.

And one thing I will direct you to that is not necessarily related to mobile, but it's also our efforts around catering, which currently cannot be ordered online nor can it be paid for online.

That's another initiative that we are working on which we expect will have an impact.

With regard to loyalty, that's a tricky subject.

We have studied this in depth, and we don't believe the general supposition of loyalty will make less frequent customers more frequent.

We studied that and just simply don't believe that to be true.

However, what you said is true in that you learn a tremendous amount of information about your customers.

And so we are planning on doing that, but not through a traditional loyalty program but rather through mobile payment.

So we will provide our customers at some time various options through which they can pay for their food, and we will capture data from them, whether that's through a third-party or through our -- the ability to use our own gift cards, and that will give us a tremendous amount of data about those customers.

So I can't tell you right now when those things are going to be complete, but we are investigating and pursuing all of them.

Thank you.

David Palmer, RBC.

Just building on that, I just did that Friend Or Faux quiz online, which I guess was kicked off today or recently.

And at the end, it included a BOGO coupon, which could be texted to me, and then it also signed me up for it to get text updates four times a month.

What will be the nature of those texts that we will be getting?

Are those going to be also value-oriented deals?

Well, we've actually had a text database of a number of our customers for quite a long time, and we send them a variety of different communications.

They sometimes are promotion-based, and it really depends on what -- obviously on what we're trying to accomplish.

Other times, we will send them information about upcoming events like our Cultivate events if it's in their city.

For most of our text database subscribers, we know where they are, so we can localize those messages.

But we are constantly trying to expand our mobile database.

It's a very effective way for us to efficiently reach our customers.

In fact, the Friend Or Faux game that you mentioned, just since it launched today, more than 0.5 million people have already played the game.

So it's really got extraordinary power.

So yes, there will be offers in those, but certainly not every one of the communications will be an offer.

Okay.

Thank you.

Nicole Miller, Piper Jaffray.

I just wanted to better understand what comps you need to offset inflation.

I hate to call or ask in a normal -- quote, unquote normal environment, but can you help us gauge the second-half store-level margins in what is presumably a low single-digit comp environment given that in Q2 you still did have such great leverage in store-level margin?

Yes, Nicole.

Food costs will not change based on our comps.

So food costs will either change or remain stable just based on commodity price and the pricing of the ingredients that we buy.

And as I mentioned in my comments, we are hoping that those will remain stable and stay at about the level we decide in the second quarter.

So the rest of the P&L has some variable and some fixed costs in there.

From a labor standpoint, we typically need a -- kind of the mid-single-digit comps in order to just hold our labor as a percentage of sales.

So somewhere in that 4% to 6% range.

So low single-digit comps would imply that we are going to delever on the labor line.

The rest of the P&L, a low single-digit comp, it depends on whether it's a 1% or a 3%.

If it's in the 3% range -- 2% or 3% range, unless there's something unusual with energy costs or it's something unusual that would affect utilities, we should be okay.

We should be able to about hold the rest of the costs on our P&L as a percentage of sales.

So it really comes down to labor.

Now, keep in mind we did announce all these benefits.

And so regardless of the comp, we are going to see an incremental $2.5 million added to both the third quarter and fourth quarter, and that will continue as an additional cost of providing the benefits.

And so that will cause some slight delevering as well.

Thank you.

Jason West, Credit Suisse.

Just wanted to come back to the pricing outlook.

Jack, you talked about a couple different pieces with San Francisco and then some of the beef cost pressures, but then some of that is going to get delayed as you wait for carnitas to roll out.

So could you help us out with maybe what the aggregate price increase is going to look like over the next few quarters with these different timing issues?

Yes, as we roll carnitas, there's about 40% of our restaurants don't have carnitas today.

And so that's going to be a price increase that will be in the ballpark of this 4%.

And our beef -- our stake and barbacoa is somewhere in the 30% range in terms of product mix.

So we are right now running about 60 basis points of incremental comp because of raising prices on beef.

When we roll the rest of the 40%, that will get us somewhere in the 100, 110 basis points or something like that.

And then any other things that we do related to local cost of doing business, I would expect to be relatively modest.

The example I gave you was San Francisco and the Bay Area.

That adds an additional 30 basis points.

There's not much else going on really between now and the end of the year.

So I would say we're going to be between the -- if you take the [60] on the higher cost of steak and barbacoa, add [30] from San Francisco, that's [90].

There might be another 30, 40 basis points or so that will roll in over the next several months, and that would be about it for this year.

There's an additional structural cost -- higher cost of doing business that we will look at next year like we did in San Francisco.

But just because minimum wage is increasing in the market doesn't mean we're going to raise prices.

The example that I gave in Maryland is a great example.

Another one is in Chicago.

Chicago just recently implemented a higher minimum wage, and we don't expect to raise prices there in the near future, probably not at all this year.

So we look at it market by market, and there might be some cases where when you look at all of our higher cost of doing business, that we might deem that it's necessary to take a price increase in those markets.

But I wouldn't expect that to be a significant add-on to our comp or significant add-on to the menu price increase.

Okay.

Thanks.

And then just -- that's really helpful, by the way.

On the labor side, the incremental $2.5 million per quarter, is that inclusive of some of the wage inflation that you're talking about that's stepped up lately?

And I think you raised wages for certain positions.

Or is that separate from the wage inflation that we are seeing?

It's inclusive of the stuff that Monty talked about where we looked at our kitchen managers, service managers, where we took a look at all of our folks that are already on board.

Some of that hit in the second quarter, and then incrementally adding $2.5 million on to the third and fourth quarter will cover all of that.

What it doesn't necessarily include is if there's just general market forces in a market where wages are increasing faster than expected.

That isn't necessarily included in that, and that would be dealt with case by case.

But the $2.5 million will consider all of the adjustments that we've done from a benefit standpoint and from a wage standpoint to all of our internal folks.

Great.

Thank you.

Sharon Zackfia, William Blair.

Hi, Jack.

Just kind of follow-up on the San Francisco example, what has the consumer reaction told you in San Francisco so far about the ability to take that kind of targeted price increase if it makes sense given the pressures in the market?

And then secondarily, on the pork from England, is that a similar margin profile to what you get in the US?

Okay, so on San Francisco, Sharon, I was just out in San Francisco a few weeks ago, visited a bunch of our restaurants, talked to our teams there, talked to some customers as well.

No reaction whatsoever from what I can tell.

We don't see it in any of the sales trends.

We don't see it with any of the anecdotal feedback we're getting.

Frankly, I think we've got lots more room to increase prices if we need to.

The costs of doing business are so extraordinary in that whole market that I think we're underpriced, and we could increase prices more.

As you know, we have never wanted to be too aggressive at any one time, but there's more room to do that.

So if the costs of business continue to remain elevated or if they increase further, we've got more room.

I wouldn't expect us to do anything inside of 12 months.

I don't think we would do to within a year, but I think we've got lots more room.

And then the margin on pork, very similar to our margin for the domestic pork.

Okay, great.

Thank you.

Karen Short, Deutsche Bank.

Just a question to follow up on the loyalty philosophy.

I guess -- I don't know that I necessarily understand your philosophy on being reluctant or unwilling to introduce some form of loyalty or affinity program because I guess the way I see it is you incur costs associated with the BOGOs or the Friend Or Faux free burritos and things like that.

So you could recoup costs if you are introducing some kind of affinity program that does involve some free giveaways, but then you get the benefit of having that much more robust data analytics, I guess.

So maybe just some color there.

I will take a shot at part of this, and then I think Mark will want to add something in.

Karen, we have done a very thorough analysis of the traditional loyalty programs.

And the problem is Chipotle already has so many loyal customers that the fixed costs of implementing a -- an ongoing loyalty program are so extraordinary that you had to get a pretty big incremental comp just to cover those costs, and then you had to get a comp on top of that and then maintain it for it to be profitable at all.

What we found is we have been able to build loyalty through more organic methods by encouraging people to learn more about Chipotle, by piquing their interest about how food is raised, by having them come into Chipotle and be treated to an extraordinary dining experience.

So we've seen our loyalty go up over the years.

And we think that's a better way to do it than putting in a structural framework that we didn't think was going to be profitable at all and -- or maybe would be a break-even, or you have to make an extraordinary comp to make it pay out.

Now having said that, the customer data is valuable.

I don't know Mark, if you wanted to make a comment about that.

We definitely treasure that information.

Yes, with regard to our traditional loyalty program, in the past the thinking there is that if you can take an infrequent or lapsed customer and make them come to your restaurant just one more time, you would pay for the program.

Our research has indicated that there are virtually no loyalty programs that actually achieve that.

What they do is they reward your most loyal customers.

And so we figured out other ways to do that.

We have ongoing ways to give our most valuable customer and ways to interact with Chipotle where they learn a little bit more, and we give them some free food in exchange.

But on the data side, you're absolutely right.

That's what we want, and we believe that we can achieve perhaps not the same level of granularity in the information, but enough information through a payment system that will give us what we want essentially without the downsides of the ongoing weight of the loyalty program.

So there's not quite as much data if you get in a loyalty program, but it's enough the way we envision it that it will do the trick.

Okay, that's very helpful.

Thanks.

John Glass, Morgan Stanley.

Just first, a detailed question.

Jack, can you just be explicit about the traffic and the mix in the second quarter?

Yes.

They are very small numbers, John.

The comp was 4.3%, menu pricing was 4%.

Of the 0.3%, it was a very slight negative traffic.

0.3% negative traffic, and that was offset by 60 or 70 basis points of mix.

And the mix improvement was generated a little bit by catering, a little bit by sides, and a little bit by kids' meals.

We reformatted the kids' meals, and we are now serving a few more of them, and the pricing structure happens to be a little bit higher, especially the ones that our customers are choosing.

They are choosing to build your own more frequently, and that's a little bit more expensive.

So those are pieces, but they are all very, very small numbers.

That's helpful.

The bigger question is on the newer concepts.

If I recall correctly the history of Chipotle, you got a real first-mover advantage in many markets by entering before your key competitors.

And when you did so, you did better; and when you were second, you did less well.

Maybe eventually did better, but maybe initially not as well.

When you look at the newer concepts, and particularly pizza, you are now badly lagging behind several chains that are in that category.

Why isn't that incentive to be more urgency to develop faster?

Is there other concerns you have about the concept and you're not ready to do that?

Do you think it's going to be different for pizza than it was perhaps for your core concept?

Or is this first-mover advantage maybe an overblown advantage?

Well, it's interesting.

We used to pay a lot of attention to the first-mover advantage theory.

When we were partnered with McDonald's they were telling us how important it was in their development.

Although if you look at our history and our sales trends when we come into markets and we're not the first mover, we definitely pass them.

California is the best example where we had two big competitors, and we severely lagged behind them.

Over time, though, through great execution and through a great people culture and sharing with our customers what makes Chipotle food special, we quickly took the lead.

I think the best -- the most important thing we can do is to have concepts that really resonate with customers.

And we spend -- have spent a lot of time refining the Pizzeria Locale concept.

We've gone through a couple of iterations of dough, and we think we have perfected it now.

It's really excellent, and that's been in the restaurants now for a couple of months.

And we feel confident that as we start with this dough in two new markets in Kansas City and in Cincinnati -- Kansas City just in a couple days on Wednesday, actually tomorrow, and then Cincinnati in the fall -- that we're going to prove to customers that our pizza, our dough, our method of this new way to serve pizza is superior to the competition out there.

How long it takes to lap their sales volumes, I don't know.

But if history is any indication, sticking to the things that really matter like putting teams of top performers who are really empowered to achieve extraordinary things and giving them leadership opportunities sets the foundation so they can deliver an excellent dining experience, and that's exactly what we're doing.

Thank you.

Brian Bittner, Oppenheimer.

I have two questions.

First was on just the cash.

It was like you have almost $600 million on the balance sheet today, and you are on track to do over $500 million in free cash flow.

I definitely appreciate the share repurchases that you've done and announced.

But with that much cash, why not be more aggressive with repurchases rather than be opportunistic?

And why not do that rather than have it sit on the balance sheet?

Well, Brian, I think the answer is that we do want to buy our stock back, but we don't want to just buy it back at any price at any time.

We are much happier, and we think it's a better boost to shareholder value to be patient.

Our stock has always been volatile.

It's always had run-ups; it's always had corrections.

And we think the best thing to do is [buying] the corrections, and I think the example that we just shared where over the last three months when the stock had corrected for a period of time, we bought $100 million worth.

So it's many multiple times what we bought in the first quarter.

Now, had we just decided to buy $100 million in the first quarter, it would have just not gone as far.

And so we think it's a better way to do it.

We will get more aggressive as the price does drop.

We do have more cash than we need.

We know that the best way to add to shareholder value is to ready these proceeds to be promoted to growth strategies just like Canada was.

We know that as we open up more Chipotles, we're opening the Chipotles at extraordinary returns and a cash-on-cash return in the 70% to 80% range.

We know that's the best way to capture shareholder value.

With the cash that we have, we will buy back, but I think we will continue to buy opportunistically, and we think that's a better way to build shareholder value over time.

Okay.

And my second question is on the comps.

Again, you've clearly seen an acceleration in traffic.

Obviously on the one-year but even on the two-year basis, it appears as though you have seen an acceleration in traffic.

When you look at things internally, which you can do and we can't, what do you think has really driven that improvement in the trend?

Well, if you're looking at -- the trends that I would encourage you to look at are a three-year trend.

And I talked about this on the last call, so I won't go into it again.

But this current trend that we are in is the third year of a three-year trend that started in 2013.

If you look at the three-year trends, the three-year stack for the second quarter is more than 200 basis points better than the three-year stack for the first quarter.

I think that that's more weather-driven.

So I would say right now we're not necessarily seeing an acceleration other than in respect to the worst weather in the first quarter.

We still think we are being hampered by not having carnitas, and we think that could be as much as a couple hundred basis points.

And so we look at it as more the year is unfolding the way we thought it was.

We thought that we would do 4% in the quarter; our guidance was exactly that.

We were predicting internally about 4% during the second quarter, and that's what it's doing.

We had also predicted that in the third quarter, while it's early, that we would be in the low single digits, that it wouldn't be negative, that it would be close.

And so things are, I would say, more playing out as we expect.

Okay.

Thanks.

Jeffrey Bernstein, Barclays.

Actually, just following up on that question with regard to the three-year trends.

I know you gave us a lot of color last quarter, the idea being the goal to re-accelerate those trends presumably going into 2016 perhaps and maybe start a new cycle.

I'm just wondering if you are any closer to considering or how you prioritize the opportunity whether it's -- I know there's talk about a new protein like chorizo or new day part like breakfast or greater push on catering.

I'm just wondering how you prioritize those different opportunities to maybe just to set the next path for a reacceleration in the comp.

So Jeff, most of our focus -- and the vast majority of our attention is to have the best teams we can, developing the best leaders in the restaurants, hiring and developing top performers in every restaurant because we know that there's a dramatic difference between the experience, the quality of the food, taste of the food, just the throughput, the business controls, everything when we have great leaders, restaurateur leaders that have all top performers, whether it's a culture of empowerment.

And these teams can deliver high standards in every single way.

And so that's still and always will be the vast majority of where our attention goes.

We are testing chorizo in a market right now in Kansas City.

It will -- it's early; we've only had it in market for several weeks right now.

We just this week -- Mark, I think, started advertising.

If that's something that looks like it's either attracting new customers or it's encouraging the existing customers to visit more often, that might move up in the priority list.

If all chorizo does is take our existing customers and split them among additional menu items, that will be less appealing to us because that just means we have more menu items serving the same customers, and that makes it more complicated and more difficult to serve all this delicious food.

So I come back to it in terms of priority.

The difference between a great running restaurateur restaurant with an amazing team compared to one that has a lot of teams that -- Monty talked about the BBT, a restaurant that has a lot of themes and they have some low performers on the team and empowerment is not great.

The difference in the quality and taste of the food, the difference in how clean that restaurant is, just the difference in -- when you walk in, you feel like you're welcomed by a team of people that know you and are glad you are there -- the difference when you compare that experience to a restaurant that doesn't have all top performers, it doesn't have the culture of empowerment, is dramatic.

And we believe that that is the single biggest thing we can do to build our sales over time.

The other thing with marketing is we still believe that -- we still know that there's lots of people that have never been to Chipotle.

Something like 35% to 40% of people have never been to Chipotle.

We know that when we study our our existing customers, that there is like 55% of our customers only come a couple times a year.

And so they are -- the more we can educate and entertain and things like this BOGO where if we can entice customers that don't come very often, once or twice a year, to learn more about our ingredients versus competitors, traditional fast food, and get a BOGO to entice them to come in, and that causes them to say, oh my God, I haven't been here in six months, this food is delicious, and I didn't know all this information about the ingredients.

If we can convert that person into coming three times a year, four times year, we think that's a big opportunity as well.

So the vast majority of our attention goes on doing what we do but do it better than ever.

Understood.

Thank you.

Andrew Charles, Cowen and Company.

Just curious what you're attributing the traffic bounce-back to.

Obviously during the quarter was slightly negative, but just pick up so far in July what you think is driving that.

Other than comparisons, it's really hard to tell because it feels like we're still at a disadvantage by not having pork.

So it still feels like we are being held back a bit.

And so -- but I can't point to any specific reasons why we were slightly negative in the second quarter compared to so far in July.

We are happy with the results, but there's nothing specific I can point to.

Okay.

And just Monty, just I know traffic obviously was a little bit of an issue.

But do you see any improvement or any work or anything to call out on the throughput initiatives with the quarter in terms of how many incremental customers you have got?

In terms of incremental what?

In terms of incremental customers you got through the line.

The improvements we saw in this quarter were spotty throughout the country as certain teams responded really, really well to our throughput contests.

But Companywide and overall, like I said in my opening comments, basically I think we were glad to hang on to the significant gains we made during 2014 where we had the very significant increases in throughput.

But we didn't see an increase in overall throughput Companywide during the quarter, which it's always disappointing not to see that.

But I think we are -- like Jack said, we are doing slightly negative comps.

What happens I think with our teams is it's more difficult for them to break throughput records, and it becomes a little less top of mind for them as they start to focus on other aspects of the business waiting for that traffic to increase.

So it certainly is a lot more fun to go out and set throughput records when they are shattering them on a daily basis.

And when there is a slight falloff in traffic, even if it's the flattening of traffic even for a short time, I think that sometimes our eye is not on the ball to the degree it could be.

So we do see improvements in a lot of our four pillars of execution, which is great.

We see some really good 15-minute transaction numbers and records in areas.

But overall, I think that I would be eager to see our teams push harder on the throughput such as to deliver even incremental increases in the third quarter.

So we will keep working on that.

Okay.

Thank you.

And that does conclude today's question-and-answer session.

Mr. Alexi, at this time I will turn the conference back to you for any additional or closing remarks.

Great.

Thank you for participating in the call today.

We appreciate your time, and we look forward to speaking with you next quarter.

This does conclude today's conference.

Thank you for your participation.

You may now disconnect.