奇波雷墨西哥燒烤 (CMG) 2015 Q3 法說會逐字稿

Good day, everyone.

Welcome to the Chipotle Mexican Grill third-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 Alexee.

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 third-quarter 2015.

It may also be found on our website at Chipotle.com in the investor relations section.

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

These forward-looking statements will include statements about potential business improvements and shareholder return; projections of the number of restaurants we intend to open, and trends in development costs and new restaurant returns; estimates of future comparable restaurant sales increases, or comps; and supply chain and other trends affecting future comps; projections regarding food, labor, marketing, occupancy, and G&A costs and our expected effective tax rate; statements about stock repurchases; as well as other statements about our expectations and plans.

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

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

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

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

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

For the fourth quarter, it will begin December 1, and continue through our fourth-quarter and year-end earnings release, planned for late January 2016.

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

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

Thanks, Mark.

I'm pleased with our performance during the third quarter and throughout the full year.

With very difficult comparisons against the record year we had in 2014, we have continued to grow our business in a competitive environment while maintaining some of the best margins in the industry.

During the quarter, we generated revenue of $1.2 billion, an increase of 12%, on comparable restaurant sales growth of 2.6% and the opening of 53 new restaurants.

This produced diluted earnings of $4.59 per share, an increase of 11%.

With year-to-date revenue of $3.5 billion, comp sales growth of 5.5%, and earnings per share growth of 26%, we are well on track to deliver another strong year.

More than that, I'm proud of the fact that we continue to deliver such strong results by maintaining true to our vision to change the way people think about and eat fast food.

We're realizing this vision through constant attention to our unique food and people cultures, and by innovating to improve upon these key drivers of our business, even in the face of challenges.

During the quarter, we made significant strides to overcome a major obstacle tied to our ability to obtain pork that meets all of our animal welfare standards.

Earlier this month, we announced that we have returned carnitas to 90% of our restaurants nationwide.

As discussed on the last earnings call, we have begun to source pork from Karro Foods in the UK.

It is raised in a way that meets or exceeds all of our animal welfare standards.

Just like our current protocols, Karro does not use antibiotics non-therapeutically to promote growth in healthy animals.

Karro follows European standards that allows antibiotics to be administered under veterinary supervision when necessary.

We have been very happy with the quality of the pork they have been providing, and the care and respect with which Karro is treating their animals.

Since beginning our relationship with Karro, we have also secured an additional pork supplier, and we expect to have enough pork it to return carnitas to all of our restaurants by the end of November.

We know that many of our customers love our carnitas, and were disappointed we had stopped serving it in a number of our restaurants around the country.

To all of our customers who have been inconvenienced by our carnitas shortage, I'd like to personally thank you for your patience and your support.

We knew this issue would be difficult for our customers and our restaurants.

But we also knew that suspending sales of carnitas in some of our restaurants, rather than serving commodity pork, was the right thing to do.

And we're thrilled to see that so many of our loyal customers agreed with our decision.

After highlighting this issue, we have begun discussions with a number of additional suppliers across the country that are interested in working with us to improve animal welfare conditions and meet the standards we require for our pork.

I'm so excited about this encouraging change, particularly when compared to the reaction we received when starting our Food With Integrity program a little more than 15 years ago.

At that time, there was very little pork available that met our requirements.

But today, some of the largest agricultural producers are taking a much closer look at the way they raise their animals.

And they are starting to see what we have always believed: that food grown and raised with respect for animals, the environment, farmers, and customers, simply taste better.

We are excited to be close to returning carnitas to 100% of our restaurants.

And to let our customers know that carnitas is back, we have been promoting its return in our restaurants through social media and with PR so customers who have been awaiting its return know where it is available.

Of course, changing the way people think about and eat fast food requires more than overcoming supply chain challenges.

We focus a lot of our marketing effort on educating customers through entertaining and creative approaches, which Mark will talk about a little bit later.

And we're delighted that we continue to see evidence of Chipotle's impact on food issues.

Most recently the state of California passed SB27, making it the first state in the country to pass legislation to limit antibiotic use in healthy livestock, and to ban the routine use of antibiotics to promote growth.

We began serving meat from animals raised without the use of antibiotics in 1999, when we started serving pork from Niman Ranch.

Today we serve more meat from animals raised without antibiotics than any other restaurant company.

While we have been encouraged by even small steps made by other restaurant companies to reduce antibiotic use in farming, and move from some of the largest meat producers to embrace antibiotic-free practices or to reduce antibiotic protocols.

The California bill is important, as it is the first to mandate more responsible antibiotic use in livestock.

This is an important step forward in the evolution of animal agriculture, and we hope that others will take similar steps in the foreseeable future.

During the quarter, we opened our seventh restaurant in London, a small, five-day-per-week location in the financial district, which is intensely lunch-driven, like our first stores inside the Loop in Chicago.

It is off to a solid start and has been breaking peak-hour throughput records in the UK.

Additionally, just last week we opened our fourth restaurant in Paris, entering a new neighborhood for us.

Our growth seeds in Europe continue to build brand recognition and are at the front end of developing a loyal customer base.

Our growth seeds here in the US continue to show promise, and we have continued to expand ShopHouse and Pizzeria Locale.

ShopHouse recently opened its fourth location in Los Angeles, bringing the total number of ShopHouse restaurants to 11, and we plan to open two ShopHouse restaurants in Chicago before year-end.

Pizzeria Locale expanded to its second market during the most recent quarter, opening its first restaurant in Kansas City, and we plan to open two pizzerias in Cincinnati in the coming months.

Very exciting to apply our strong food culture and our unique and empowering people culture to these growth seeds.

We are changing the way people think about and eat fast food, and our commitment to that vision is the best way to deliver outstanding results for our shareholders.

Last, we recently hired our first-ever Chief Information Officer.

Curt Garner will be joining Chipotle on November 23, and comes from Starbucks, where he held the same position.

In his 18 years at Starbucks, Curt helped build the technology infrastructure that began with fewer than 2,000 stores to one that now supports a global business.

We believe that Curt's background and expertise will be a great asset to Chipotle as we continue to seek ways to accelerate our use of technology to help strengthen our business.

We are very excited for Curt to join us, and look forward to the value he will bring to Chipotle.

I will now turn the call over to Monday.

Thank you, Steve.

Our excellent results are possible because of the strength of our 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 setting ourselves up to be able to provide a consistently extraordinary restaurant experience while also maintaining a strong unit economic model.

Like our food culture, building the right people culture is an ongoing journey.

It is one that requires us to constantly push ourselves to find ways to get better, and to raise the bar on the quality of the experience we provide.

During the quarter, we hosted our biannual field leadership conference to bring together all of our field leaders in support departments to talk about how we can strengthen our culture.

It was a wonderful and inspirational two days, focused on how our field leaders can make a bigger impact in their restaurants and help our teams on the road to Restaurateur.

We discussed the importance of instilling an inspiring vision, creating encouraging circumstances, and how to best utilize our diagnosis and plan tool to identify negative themes that are standing in the way of a restaurant achieving Restaurateur status.

Our unique people culture also continues to gain traction within our growth seeds.

As Steve mentioned, during the third quarter we opened our seventh restaurant in London.

And I recently visited the fantastic team there, and was pleased to be able to sign them off as Restaurateur.

Our European operations team -- which is led by Jacob Sumner, a team leader and Restaurateur -- has been building outstanding teams to ensure the customer experience we are providing in these new markets meet our high standards, and he continues to develop Restaurateur cultures in these restaurants quickly.

To help us better plan for future growth, we recently hired Jerome Tafani as our head of European business development.

Jerome has decades of restaurant industry experience in Europe and is spearheading our planning process, including navigating the nuances of operating a new restaurant brand across several countries, and identifying lower-cost real estate options in markets that are very expensive.

As European customers continue to discover and turn into repeat customers at Chipotle, we are excited for the leadership and insight that Jacob and Jerome bring, and we look forward to great things to come from this team.

As of the end of the quarter, we are proud to have a strong roster of nearly 500 Restaurateurs, with an additional 30 restaurants ready to be signed off by an officer.

Our past investment in field leadership is beginning to bear fruit.

And we are confident those improved restaurant cultures will lead to better service and a more compelling experience for our customers.

Beyond our efforts to strengthen our restaurant leadership, we recently took a very visible step towards bolstering the bench strength in our restaurants as we held our first-ever National Career Day in September.

We set ambitious goals to interview more than 30,000 candidates for this, and through the event and surrounding publicity we ended up hiring 4,977 incremental crew members.

Not only are we excited about our new hires, but this event also created a significant opportunity for us to showcase our people culture and the unique career opportunities we provide.

Although the overall labor market continues to show signs of tightening, we have found that top performers are consistently attracted to the challenging work environment and growth potential offered at Chipotle.

One of the leadership roles within our restaurants is the reliance on what we refer to as a take-out specialist, whose job it is to take care of our out-of-store orders, which are a growing part of our business.

As you may know, virtually every one of our restaurants is equipped with a second make line, which is an abbreviated version of the front line where we serve our regular customers.

Fortunately, those second make lines are gradually getting more use, and we are now averaging nearly $500 a day in sales per restaurant on the second make line, company-wide.

In some of our high-volume restaurants, the sales in the second make line are much, much higher, such that it is virtually a second restaurant within the restaurant, which is a phenomenal way for us to leverage our existing kitchens.

When we receive online, fax, or catering orders, the take-out specialist is managing the timing of orders, food production, and all other aspects of the guest experience, and preparing the orders to be picked up.

Not only is this sales channel exciting, but it offers the additional benefit of improving throughput, as the more people who use the second make line, the better the customer experience is for the rest of our customers, who can more quickly receive and enjoy their meal.

During the third quarter, our teams increased throughput during our peak dinner hour by one transaction, while non-peak throughput counts increased by nine transactions.

Unfortunately, we declined by one transaction during our peak lunch hour, and our teams will be working on instilling a sense of urgency to continue to improve this important aspect of customer service during the peak lunch hour.

We know that as our volumes continue to grow, our teams need to continue to achieve incremental throughput gains to improve the overall customer experience.

Better throughput is one key driver that helps us improve our unit economic model that over the years has contributed to some of our best cash-on-cash returns.

Another component for a terrific return on investment is the great job that our development team has done in identifying locations for new restaurants while maintaining reasonable capital investment costs.

We've built a fantastic development program, as our real estate, design, and construction teams are finding favorable new restaurant sites and negotiating some of our best lease terms.

During the quarter, we opened up 53 new restaurants for a total of 150 restaurants through the first nine months of this year.

This is the fastest that we've ever added new stores, and we're not done yet.

Our teams have been working diligently, and we are increasing our guidance for the full-year 2015 to a range of 215 to 225 new Chipotles.

What's even more encouraging is that we are able to complete these restaurants in what is arguably one of the most competitive real estate markets we've seen in recent years.

Our teams have given us feedback that the competition for new site locations remains high, and the demand for talented contractors, subcontractors, and crews is intense, as many developers are taking advantage of the current low interest rate environment.

Despite these pressures, we continue to focus on identifying an optimal mix of end-cap and in-line restaurants that have actually allowed us to lower our average investment cost.

Also, Chipotle remains a preferred tenant for many landlords, and that places us in a strong position to negotiate favorable lease and tenant improvement terms.

It also helps us get into properties even where demand is very high.

As we think about 2016 new unit development, we expect to open new restaurants at an even faster pace, and are currently projecting a range of 220 to 235 new restaurants for next year.

I will now turn the call over to Mark.

Thank you, Monty.

During the quarter, we continued our efforts to educate consumers about issues in food, and our unique food culture, through innovative marketing programs.

In a promotion we call Friend or Faux, we challenged consumers to identify real, friendly ingredients that align with our Food With Integrity vision; and faux ingredients -- artificial flavors, preservatives, and additives -- by comparing our food to a representative set of food meals such as burgers, sub sandwiches, and pizzas that are often manufactured with highly processed ingredients.

People who played the game could win a buy-one-get-one offer at Chipotle simply by comparing what's in our food against what's in traditional fast food.

The idea for this promotion was to show the simplicity of Chipotle's food, all of which is classically prepared from just 68 ingredients across our entire menu; compared to typical fast food, where a single menu item can have upwards of 100 ingredients, many of which are chemical additives.

The program launched in July, and consumer participation exceeded our expectations, with more than 750,000 people playing the game within the first 24 hours.

In total, the program generated an average of 180,000 page views a day, totaling 7.5 million views over the duration of the program.

The campaign message was clear, with a large majority of respondents in a follow-up survey saying that they understood the intent of Friend or Faux, and that already positive views of Chipotle were strengthened by the program, with three-quarters of respondents saying that it made them more interested in eating at Chipotle.

And although sales did increase with these promotions in July, our long-term goal remains to engage our customers and educate them about the quality and simplicity of our food.

We also introduced a retro style video game called Taste Invaders, as another entertaining way to point out to customers some of the artificial ingredients found in typical fast food.

The game -- which is referred to as a galactic battle against artificial ingredients -- has been played more than 2 million times, and provides another creative path to learn more about the food Chipotle serves compared to the vast majority of other chain restaurants.

We also continued to advertise nationwide throughout the summer months, using traditional online, radio, and outdoor media.

Our goal to educate customers about where our food comes from and the simplicity of our ingredients is also being carried over to our annual Boorito promotion and fundraiser this month.

Because we've always believed that artificial ingredients simply aren't necessary for delicious, flavorful food, we are asking our customers to add something unnecessary to their costumes October 31 in order to qualify for a $3 burrito.

Boorito has become a favorite promotion for our customers, and we expect it will contribute $1 million to benefit the Chipotle Cultivate Foundation.

Increasingly, our customers are ordering using their iPhone and Android devices or visiting our website to order online, and we continue to make improvements to enhance and simplify those user experiences.

Our mobile and online sales continued to grow for the seventh consecutive quarter, and currently represent more than 5% of top-line sales, up more than 40% over last year.

As we move forward, further investments in those platforms will be made with an eye toward developing tools and technologies to help our restaurant teams better manage and execute our out-of-store orders.

Over the next year, we will also continue to improve and simplify our customers' ability to order their meals online.

These investments are still at an early stage, but we believe that they will help us increase the quality of the experience for our guests ordering out-of-store, and will help us grow this promising piece of our business.

We have also added a new delivery partnership for customers who prefer that convenience.

Ahead of the fall semester at colleges and universities across the country, we entered into a delivery partnership with Tapingo, a delivery service that targets college campuses, and that is already well-liked and widely used.

We are now delivering to 40 major campuses across the country through this partnership.

Because it's so tailored to students, Tapingo's service includes additional conveniences, such as the ability to partner with university payment programs and deliver to dorm rooms and school buildings.

Tapingo marks our third delivery partnership; and, collectively, these valued delivery partners enable us to offer a delivery service throughout much of the country.

Customers also continue to discover our catering.

As of tomorrow, it will be two years since we rolled out catering options on a national level, which is available everywhere with the exception of New York City.

And while we continue to gain traction in catering, we know there is still work to be done.

Part of that work is to test and ultimately roll out an online platform that will allow customers to order and pay for their catering in advance, and ultimately to have those orders delivered.

Setting up delivery for catering is not a simple task, however, particularly when you consider that many of our catering orders are intended to serve up to 200 people.

That's a lot of food to be delivered hot, fresh, and delicious in a way that meets our high standards and reflects positively on our brand.

So we're going to need a partner that has the scale, reach, and capability to deliver those large orders [end].

So we will be carefully pursuing potential partners, and hope to have trials complete in late 2016.

I will now turn the call over to Jack.

Thanks, Mark.

Overall, we are pleased with the continued strength of our business during the third quarter, despite lapping historically high same-store sales comparison from 2014.

We continued to grow our comps this quarter by 2.6%, which is on top of last year's comp of 19.8%, our highest as a public company.

And we are able to continue to grow even as our restaurants are now achieving volumes of more than $2.5 million on average, all of which can only be accomplished by having top-performing crews and management teams in place that are driven to create an exceptional dining experience for our customers.

Overall sales for the quarter were up 12% to $1.2 billion, driven by new restaurant openings and a 2.6% comp.

Year-to-date sales were $3.5 billion, an increase of 15% over 2014.

Our comp increase during the quarter was driven by a 1.9% increase in customer visits, which accelerated from the second quarter.

Increasingly, more customers are connecting with our vision.

And they appreciate the real food made from wholesome, delicious ingredients, using classic cooking techniques.

And they appreciate that all of that just tastes better.

Our sales comps were highest in July when our Friend or Faux campaign was in full force, but were lower in August and September.

We were happy with the customer response and engagement with Friend or Faux during July, as our customers who played the game learned about our simple, wholesome ingredients and were treated to a BOGO for playing.

During the third quarter, we also began implementing a targeted menu price increase on steak and barbacoa due to the sustained beef inflation, and we'll continue to roll this out -- roll this increase out across the remaining markets during the fourth quarter.

This price increase is expected to contribute about 130 basis points when fully rolled out.

And for the third quarter, this targeted menu price increase contributed about 70 basis points to the comp.

Traffic during the first few weeks of all October so far have been pretty choppy, but overall they are averaging about the same as what we saw during August and September, so slightly lower than the overall 2.6% comp in Q3.

With the recent return of carnitas to 90% in our restaurants, and expectation of getting back to 100% soon, we would expect Q4 comps will be similar to what we saw in Q3.

For the full year, we continue to expect our overall comp will be in the low to mid-single-digits.

And as we look to 2016, we expect the comps will remain in the low-single-digits.

Diluted earnings per share for the quarter was $4.59, an increase of 11%.

And year-to-date earnings per share was $12.92, a 26% increase over 2014.

With 2,000 restaurants on the horizon, and our restaurants currently achieving record volumes, we are very confident about what lies ahead as we continue toward our vision to change the way people think about and eat fast food.

Restaurant level margins during the quarter were 28.3%, a decrease of 50 basis points, as higher labor and marketing costs were partially offset by lower (technical difficulty) costs.

Food costs were 33% in the quarter, down 10 basis points sequentially from Q2, and down 130 basis points compared to 2014.

The decrease from the prior year was largely driven by lower costs for avocados and dairy, offset by sustained inflation for beef.

We saw minimal inflation for the rest of our food during the quarter, and we expect our food costs to stay in line with recent results through the end of the year.

Our pricing for our avocados has benefited this year, as robust supply from Mexico has helped to keep prices down, while dairy prices remain low due to strong production and increased domestic supply, as the strong US dollar has reduced dairy exports.

For 2016, we expect food cost inflation will be relatively flat.

And our food costs could decrease slightly, depending on what happens to our beef costs.

US herd count for beef cattle continues to build, and we may see some relief in the cost of naturally raised beef late in 2016.

Labor costs were 22.2% of sales in the quarter, an increase of 100 basis points from last year.

And year-to-date labor costs were up 40 basis points.

After our last call in July, we made significant progress in reducing our labor cost inefficiencies, and a return to what we would consider to be normal labor management and scheduling practices.

This resulted in Q3 labor being lower than Q2 by 40 basis points.

Labor delevered versus last year by 100 basis points, as a result of wage inflation, with our hourly wages up nearly 5% over last year; along with the cost of adding enhanced benefits such as tuition reimbursement, paid sick leave, and increased paid vacation for our hourly restaurant employees, as we discussed during our Q2 earnings call.

Going forward, we expect labor to be slightly higher than Q3 in the fourth quarter during a seasonally lower sales period.

Occupancy costs were flat in the quarter compared to last year.

And as Monty mentioned, we are lowering our overall development costs which will further strengthen our unit economic model.

Other operating costs were 11.1% in the quarter, an increase of 90 basis points versus last year, largely due to the timing of our marketing and promotions this year, including our Friend or Faux game and the increased spending surrounding summer advertising to keep Chipotle top-of-mind.

Marketing was 1.5% of sales in the quarter, up 20 basis points from last year, and is expected to decline slightly in the fourth quarter.

Promotion costs were 90 basis points during the quarter, up from 50 basis points last year.

For 2016, we anticipate marketing expenses remain right around 1.5% to 1.6% of sales.

G&A expenses were 5.8% during the quarter, down 80 basis points from the prior year.

And remember that 2014 included our biennial All Manager Conference, which also will occur in 2016.

The conference cost around $10 million in 2014 and is expected to cost around $12 million in 2016.

Lower stock-based compensation expense and lower bonus costs are also benefiting G&A for the quarter and for the year to date.

Our non-cash, non-economic stock comp expense was $20.7 million in the quarter, down slightly from last year.

And for the first nine months, stock comp expense was $58.6 million, down from $83 million last year.

And we expect the full-year charge this year will be about $78 million.

During 2016 we expect our G&A, including stock-based comp, to grow at a slower rate than sales, before considering the impact of the All Managers' Conference.

Stock comp for 2016 will depend on the stock price at the time of the grants and the number and the types of equity awards issued.

Our effective tax rate for the quarter was 38.7%.

And we expect our effective full-year rate to also be 38.7%.

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

The tax rate in 2014 benefited from an increase in the estimate of useful state tax credits, and from the work opportunity and the R&D federal tax credit, which have not been renewed by Congress for 2015.

If those federal credits are extended to 2015, we estimate our tax rate would benefit by about 40 basis points.

And our estimated effective tax rate for 2016 is expected to remain at around 38.7%.

During the quarter, we repurchased about $30 million of our stock, or approximately 46,000 shares, at an average share price of $670.

At the end of the third quarter, we had $155 million remaining on our share buyback program.

We finished the quarter with $1.58 billion in cash and cash equivalents, with no debt on the balance sheet.

And we continue to believe that the best use of cash is investing in opening our high-returning Chipotle restaurants in the US.

And we will continue to nurture our growth seeds, including ShopHouse, Pizzeria Locale, and our international Chipotle restaurants, so they will become a compelling use of capital in the future.

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

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

(Operator Instructions).

Sharon Zackfia, William Blair.

So, just two questions, Jack, I guess on the carnitas.

Have you been seeing a bump, then, when carnitas returns to the restaurants?

I know originally you thought it was about a 200 basis point penalty.

And then separately on labor, on the wage inflation at 5%, can you dimensionalize what you think your underlying wage inflation is?

I think you did some sort of step-up or adjustment in your wage schedule.

So I'm not sure how much of that was proactive versus reactive, and what might be the ongoing run rate for 2016 for your wage inflation.

Yes.

Sharon, on carnitas, it's hard to tell because we did return to 90%, and we finished September just under 60%.

We did hit 90% in the second half of September.

It did look like, in the markets that did get carnitas back, that we did see some improvement during the second week of October.

But October has been so choppy so far that it's hard to tell.

We did expect that, based on when we suspended the sale of carnitas -- we did see what we thought could be as much as a 200 basis points negative impact on the comp.

So we're hoping we'll see that return.

But it will take a little bit more time for us to fully see that happen.

In terms of the wage inflation, a lot of that was proactive.

We did have some isolated areas -- we had San Francisco, we had parts of DC -- where there were minimum wage increases.

And in most markets, we are above minimum wage, so that doesn't have an immediate impact.

But just because of general competition for employees, just the expectation that we want to hire top performers and we want to be the employer of choice, we've been very proactive in making sure that not only our starting wages are competitive, but we also took a look at a number of our hourly managers during the summer to make sure that we're paying fair rates to them as well.

So that was proactive.

In terms of what to expect going forward, Sharon, I think it just depends on what the labor market looks like.

I wouldn't expect it would stay at fully 5% year-after-year.

So I don't know it would compound all the way to 5%.

But I don't know that it's going to drop all the way down to 2%, which is what it had been running for the last, I'd say, two or three or four years.

Okay, thank you.

David Tarantino, Baird.

Jack, just a question on how you are viewing the recent trends in your business.

And I know you mentioned that August and September were a little slower than July.

Do you think you've seen a change in the underlying momentum of the business?

Or was that just moreso related to the benefit you saw from the buy-one, get-one-free promotion?

Well, definitely, David, the reason I wanted to go through the monthly comps is -- July, we benefited; there was a lot of awareness, a lot of people playing the games, a lot of people earning and then redeeming the buy-one-get-one, and that always results in a short-term bump in sales.

So I would say that the July moving to September -- or moving to August, was more the hangover effect from Friend or Faux.

But we're kind of holding at that lower level, that low-single-digit level.

Some of that also is due to very, very tough comparisons to last year.

So I would say we're just holding our own right now.

I wouldn't say, after the July bump that we got Friend or Faux, I would say we're just kind of holding our own.

I don't think we're accelerating, but we're not -- or we're not decelerating, but I don't see us accelerating either.

Great.

That's helpful.

And then maybe a second question.

You hired a new Chief Technology Officer recently.

And I'm just wondering, big-picture, what we should expect to see from that hire.

And does that include perhaps a strengthening of the mobile ordering platform, or any of the other elements related to that?

Yes, David, he hasn't even started yet, so it would be premature to say exactly what we're going to do.

But one way we think about the business is, about two-thirds of our business is eaten outside of a restaurant, but only 7% of our business is ordered outside of a restaurant.

And so there's a big gap between our customers who choose to -- or end up eating somewhere else other than a restaurant.

So it kind of makes sense for us to provide the convenience to order outside of a restaurant.

And we do have iPhone, we do have Android, but we could make that whole process more efficient.

And we could make it more reliable.

And our customers, they love to go through the line because they have complete control.

But I think there are ways for us to -- between both a focus on operations, on that second make line that Monty talked about, as well as looking at what technology opportunities that are there.

I think we can enhance that overall experience, so that 7% can continue to grow over time.

Great.

Thank you very much.

Jeff Farmer, Wells Fargo.

You guys did touch on it, but what was the duration of the Friend or Faux promotion, and the approximate number of BOGO transactions you guys saw in the quarter?

The promotion ran -- was it about five weeks, Monty?

About six weeks.

Six weeks.

The total number of BOGOs, I think, was right around 2 million.

Okay.

Was it that much?

Just under, perhaps.

Yes.

And then just following up on that, so the ultimate impact on both Q3 transaction and mix -- what was that for the quarter, as well?

Well, the overall quarter, we did a 2.6% comp.

1.9% was transaction, and 0.7% -- 70 basis points -- was from menu price increase.

And that was the targeted -- vast majority was targeted menu price increases related to our steak and barbacoa.

Okay, thank you very much.

David Palmer, RBC.

Your throughput -- you mentioned that the lunch hour declined a little bit.

I realize it's peak daypart and during peak season.

But how important do you think that was?

And are you contemplating any significant adjustments to drive throughput?

Yes, I always think it is very important that we continue to focus on throughput.

And I think that -- I obviously -- coming off -- we were sort of coming off our highest seasonality in terms of the crowds coming through our restaurants; and then simultaneously with a lower transaction comp than we've been experiencing.

I think what happens is sometimes our teams get focused on a number of other things: it's staffing, being a model, training new managers, onboarding new crews.

And then I think sometimes when things aren't moving, when the growth isn't quite as rapid, people get a little less excited about pushing throughput and really watching their four pillars execution.

So I think that it is kind of a long way of saying it's -- I think we took our eye off the ball a little bit.

I think it happens sometimes, especially after a year of the blistering comps, the 19.8% a year ago during this time.

During those times it's very easy to keep throughput top-of-mind and have our crews be focus intensely on it.

We had contests running; we had people excited about breaking throughput records; and just a lot of focus on it.

And I think that the focus has waned a little bit.

And that is not saying we want to see it continue.

Because throughput, even during slower growth times, and we have lines; and we have lines that cause some people to want to walk away.

And so we are going to work to replenish and reinvigorate our teams to focus on throughput and on execution of the four pillars of throughput, because it is still an enormously huge competitive advantage for us and a huge part of customer service.

So even though it's only a fall-off of one transaction, we do look to gain transactions.

And as we've seen from the previous several years, we've gained -- even at our core lunch hour, we have gained transactions almost every quarter.

And so we don't like to see a fall off one.

But we are glad to have retained the really significant gains we made during 2013 and 4014, but we'd like to improve on that still more.

Just a quick follow-up on David's question about mobile order: the fact that you have mobile order already, a lot of people are focusing on that for Starbucks, and it's making a great strides for them.

You improved your mobile order earlier this year.

It feels like a lot of people don't know about it.

To some degree, is it just about marketing what you have?

Or do you think this is going to be more about improving the mobile order technology in some way?

Well, we've deliberately under-marketed our mobile ordering.

And the reason for that is fairly simple.

We just have not quite optimized the experience in the restaurants to the point where we feel comfortable driving a large number of people in there.

And we're working on all of those improvements.

So we don't want somebody to go in, make a mobile order, and go in and have a degraded experience.

And so, all of the growth of that we've seen on mobile has essentially been with outstanding marketing at all, so there is a tremendous amount of potential.

But as we talked about in our prepared comments, we really want to optimize the experience before we really drive people in there (technical difficulty) the mobile experience.

Additionally, we think that we have the ability to drive a lot of traffic to -- through mobile ordering, and that will go to our second make line in the back of the house.

We think that potentially we could overwhelm that second make line, so we have started to retool that second make line to have at least the same capacity as our main line.

By the way, it doesn't take extra space in the kitchen, which is good news, but it does take some retooling.

So it needs to be a combination of both the marketing of that technology with increasing the capacity of the second make line.

Thank you.

Andrew Charles, Cowen and Company.

On the same-store sales guidance, it seems low-single-digit for 2016 reflects significant deceleration on a two- and three-year basis.

Yes, of course, there's some price that's likely to fall off, but what are the other factors driving deceleration?

Or would you say that low-single-digits is a function more of conservatism?

Well, the way I would think about it, Andrew, is that we just finished a three-year trend -- and I've talked about this on some earlier calls.

If you go back and look to 2013, we started a new trend where we started in low-single-digit comps and we built our comp for the next several quarters.

We had a price increase in 2014.

But if you combine the last three years -- and this is the end of that trend -- our three-year comps are up in the high 27%, 28% range.

We now need to start a new trend, because we started that momentum -- and if you look quarter by quarter to quarter, you can see that the momentum builds for several quarters; it levels off.

It peaked last year at 19.8%.

And then as you are comparing to multiple years of double-digit comps -- and none of this is based on gimmicks, on promotions, on discounting, or anything like that.

It's really just inviting more customers in; they have a great experience; they want to come back.

There's then education that Mark and the team have done, with things like Scarecrow, and things that raise the awareness of where food comes from, why in our food is different.

And our customers have been able, during this three-year trend, to connect the dots between why the food they love so much, why it tastes so good -- because it comes from these great ingredients.

Because the food is prepared using classic cooking techniques.

There's real cooking going on at our restaurants.

And so right now, we're in this challenge where we've got three years of growing our sales by 27%, 28%, and comparing to that is difficult.

And so what we're hoping will happen is we'll be able to ignite another trend, another three-year trend.

When that will happen, what the order of magnitude of that happening, is very difficult to predict.

But over the last 10, 15 years, Chipotle has seen these kind of waves of comps.

And most of it is around creating awareness and appreciation for what we do at Chipotle.

Okay.

And Steve, just a separate question.

You just didn't answer the last question; you talked about, you need to retool the second make line.

It's not going to involve extra room.

But can you give us a sense for what really needs to be done there?

Is it a sense of execution of the four pillars?

Is it more around labor training?

Any kind of direction would be helpful.

Sure.

Well, it wouldn't be four pillars in that there is a dedicated crew person -- or two, depending on volume -- to that make line.

So it's not the same deployment.

But there are a lot of things having to do with capacity of the bin size in the -- as you hold hot and cold food.

The bin size right now is very small, so retooling that to have a larger capacity.

Also, the way we scoop can be improved using different kinds of utensils that are more efficient that might not be appropriate for the mainline, but are very efficient in the back of the house.

And then also the way orders come in: right now, they comment on a paper chit, if you will, which has to be read.

So there are different technologies that we are looking at right now.

And we've been going through this process to determine which one is going to be best for us.

But they involve different ways that the orders can be indicated to the crew people so that they can make these orders much faster, much more efficiently.

So it's an exciting project.

And it's moving fast, and keeping pace with the ability to roll out this technology.

Thanks.

Karen Short, Deutsche Bank.

First question just on the fourth-quarter comp guidance, the guidance seems a little light or conservative, in light of the price increases.

And I know you gave some color on October, but any more color in terms of what the composition of the comp has been so far in October?

And then I just had a follow-up.

October would be similar, but there's maybe a little bit more menu pricing in October, but not much more.

So I would say the makeup of the comp is similar in terms of we're running about a 70 basis point price increase.

Maybe that's 80 or 90, something like that.

We will gradually get that up to 130.

We hope it does prove to be conservative, and maybe it is conservative.

But October is so choppy right now, it really isn't giving us any indication of what the current underlying pattern is.

And so, I hope that when we report in January, we'll come back and you all say, you guys were too conservative.

But right now with what we saw finishing the quarter, and then what we saw in October being very, very choppy, it's very difficult to read.

Got it, okay.

And then just actually in response to the last question, I know you commented that you have seen waves of comps.

And I think what you said is that the waves have generally revolved around awareness.

But I guess maybe a little color.

Is history on what has driven your comps really relevant in terms of what might drive the next wave?

The way I see it, the competitive environment has and is changing rapidly, as is technology, so maybe just your thoughts there.

Well, of course, our comps going forward are likely to be different than historical.

But we still find that there's lots of people that either aren't aware of Chipotle, or they are aware of Chipotle but they don't know about where our food comes from.

They don't know that we're doing real cooking.

This happens to me all the time.

We just got an email from a former colleague of ours who's in Florida, moved down to Florida, and he says out of 10 people, as many as seven or eight or nine of them have never been to Chipotle before.

And so, there's still this opportunity to educate people -- one, that we exist, which that is changing over time, because as we are in more markets, more people know about Chipotle.

But they don't necessarily know that we're using classic cooking techniques.

They don't necessarily know that we do things like source naturally raised meats, and we have a local program during the right seasons and things like that.

And so that's something that we all bump into people all the time that don't fully understand that.

So there's still awareness around why Chipotle is different.

There are lots of competitors out there -- and this makes, I think, the messaging more difficult -- that are messaging that they are doing something that is more natural, or that would imply that there's higher quality there.

So that does make the message more clear, but we believe that the source of where our comp will come from will still come from educating people about Chipotle, increasing the awareness about why we are different from others.

And we've had a great experience, where people come in and try Chipotle and they have a great dining experience.

They tend to want to come back.

And so, while, yes, it's more challenging; yes, we have higher volumes; yes, there are more competitors out there; generally our job is -- or our challenge is to get more people to understand, and come visit Chipotle more often.

Great.

Thanks very much.

Jason West, Credit Suisse.

A couple questions.

Jack, on the pricing, the [1.3] that's tied to the beef items, you had also mentioned on the last call some pricing in certain minimum wage markets.

Is that on top of the [1.3], or is that included in that run rate?

It is included, Jason.

But the only reason why we didn't point it out, it's just very, very small.

Right now it's literally a handful of restaurants, a few dozen restaurants.

And so, it's a very small part of the 130.

Okay, got it.

And as you are thinking about next year, and we do have some wage pressures; sounds like food costs, not really a big pressure.

How are you thinking about the next wave of pricing, when you'd want to start looking at that?

Is wage pressure something that you want to get ahead of, as we get into next year?

Yes, we don't have any plans right now for any kind of a national price increase to deal with wage pressure.

But we do have a number of isolated markets, a number of which are coming up in January.

We will take the same approach that we took with -- we talked about it on the -- I think it was on the last quarter.

And it was in the San Francisco area, and then also in the -- I think it was the Mid-Atlantic area.

We had a couple markets that had pretty significant increases in minimum wage.

Generally we are not affected by minimum wage.

But in some cases, the minimum wages are being increased to $10, $11, $12 per hour, and those will have some impact.

We don't automatically increase prices in those markets.

What we do is we look at all of the cost of doing business in that area.

And in the two cases that we mentioned last quarter, we increased prices there because not only are wages up, but those areas already have a higher cost of doing business: things like higher occupancy costs and local taxes and things like that.

And when we looked at competition, the competition was pretty aggressive in raising prices.

So we'll do this same thing with minimum wage increases on a market-by-market basis.

And we'll make the decisions on a market-by-market basis, based on the wages, other cost of doing business, what the competitors are doing, and what our current margins are.

We will consider all of those factors.

Okay.

Thank you.

Keith Siegner, UBS.

Jack, you highlighted $1.58 billion in cash.

You highlighted how the best use of that is to put it towards new unit opens.

You are already accelerating Chipotle opens.

This year is above target.

Next year is even more.

How close are we to accelerating the unit opens for ShopHouse and Pizzeria Locale?

I hate to put a timeline on it.

We are accelerating to a certain degree, but I assume what you mean is to really ramp it up aggressively.

They're still in the nurturing phase.

They're still in the brand-building phase.

When we open up a new restaurant, it behaves a lot like Chipotle 12, 15 years ago, when we went into a new market where it's an unfamiliar brand, it takes a while for customers to figure out what ShopHouse is.

Pizzeria Locale, while it's pizza, it's pizza that may be unfamiliar to customers that are used to traditional pizza.

And so, there is still a brand-building and an understanding of what we're doing, very similar to what we saw with Chipotle in the early days.

We're seeing encouraging signs, like we're seeing some very strong comps in the markets that we've opened.

It's why we've done things like -- with ShopHouse, we're going to open a new market in Chicago.

And so it gives us now three different markets where the brand-building and the awareness is being created.

With Pizzeria Locale, the same thing: we will very soon -- we are in two markets right now, we'll be in a third market.

So I think we're planting the right seeds.

We're doing it in a number of markets where more and more customers will be able to visit these restaurants, to figure out what's different about ShopHouse, Pizzeria Locale.

And as we see the awareness build, as we see the comps continue to build, just like we did with Chipotle in the early days, we will continue to invest in those markets.

And I would say a very similar reaction to what we're seeing in Europe: we're seeing very attractive sales comps.

We are seeing some inconsistency in the way the stores open.

Some open hot, and open up pretty high right away; and, some, it takes a little time to build.

So they are still what we consider to be in the early brand-building stage, but we're seeing some encouraging signs.

Okay, thanks.

And maybe one quick one for Mark.

If we really are going through this three-year cycle, this is the point where the Company is very well flush with cash, the traffic is a little lower in this part of the three-year cycle.

And we talked about some of these other awareness issues.

Why not use this as a perfect opportunity to really put some money into the marketing program for long-term brand awareness, long-term brand-building actions to cement that relationship and awareness for the Food With Integrity?

Why not step up some of those efforts a little more at this part of the cycle?

Thanks.

Well, I'd say that we actually probably are stepping it up in some regards.

One thing that I think is important to understand about our strategy here is that we deliberately spend less on our marketing so that we can afford these higher-quality ingredients.

And that's essentially the main marketing benefit to our customers.

And so, we find different ways to tell that story, entertaining ways to do it.

But we have recently shifted our focus more to telling the basic story about where our ingredients come from, and how they are made.

And we have significantly increased our focus on digital marketing, which we found to be very effective.

We are going to be using some more of our in-store assets to communicate some of these messages, like our packaging.

And so, I think we're doing it.

I think what you won't see from us, though, is some people might think ramping up would mean, well, head to television or something like that.

The problem with television, beyond the expense, is that it's really, really tailored toward 30-second spots, which really only deliver if you have some sort of a promotional or call-to-action message in them, which is a very slippery slope.

So we're going to stay the course on telling this brand story.

But we are working on several large initiatives, similar to the ones you've seen in the past, as well as what I just mentioned, which is an increased focus on digital and in-store communications.

I'd say we are ramping it up in some way, yes.

Thank you.

Nicole Miller, Piper Jaffray.

When you looked at costs in October, November, and December of last year, just like you gave us an idea of what was your best and worst this past quarter, does it get easier or more difficult as you exit this current quarter, please?

It is similar, Nicole, because even though we had a lower comp last year at 16%, if we do a comp that's similar in the fourth quarter to what we saw in the third quarter, you'll see a three-year comp -- and I keep going back to this three-year trend -- that will be very similar.

So it feels about the same.

I wouldn't say it's any tougher.

I wouldn't say it's any easier.

It feels like it's a very similar comparison.

In each month?

Okay.

Yes, each month -- it bounces around with the holidays, but I wouldn't say there's anything out of the ordinary within the quarter -- that is out of the ordinary, worth pointing out.

And I'm sorry, I missed it.

Was it $155 million remaining on share repurchase, or $135 million?

$155 million, so right in the middle of what you had.

$155 million, okay.

155, yes, one-five-five.

And then just a big-picture question.

With the acceleration in development, are you finding more sites that are perfect for Chipotle?

Or is this also a benefit of the nearly 5,000 hires you made recently, that Monty was talking about earlier?

No, this is really that we are -- our real estate people throughout the field are gaining confidence in that we have gone to a lot of smaller or newer markets, or off-the-beaten-path markets lately with a lot of success.

And our new store openings continue to be at a very solid volume.

And so, I guess just the confidence of our teams in the field who are out looking for real estate is very, very high, that they can confidently sign deals.

And also, we are better known than ever as a tenant.

We are better trusted than ever by landlords, and so we are a very sought-after tenant.

And given the little bit better availability of money, people are willing to build an end cap with us in mind, or build a three-unit complex and put us in it.

And so we are able to just find a whole lot of deals, even while walking away from deals and striking a relatively harder bargain.

And also, our team has been organized in a new way that's more efficient, that has allowed us to work -- for them to work really, really well together.

And with their increased confidence, the team is just feeling great.

And they're producing a lot of great sites with really big terms, with great tenant improvement allowances, and building these things for less than we did last year, which is superb.

Thank you.

But it really isn't any result of our hiring.

Our hiring is something we did because we're really trying to become staffed as well as we can in our existing restaurants, to have an adequate complement of people to build up our future leadership and have a great base in being able to build, when we do build new restaurants.

Thanks, Monty.

And at this time, for closing remarks, I would like to turn the call back over to Investor Relations Manager, Mark Alexee.

Thanks, everyone, for joining the call today.

We really appreciate the time.

We look forward to speaking with you on our fourth-quarter and year-end call in January.

Thanks again.

This does conclude today's conference.

We thank you for your participation.