奇波雷墨西哥燒烤 (CMG) 2016 Q2 法說會逐字稿

Good day and welcome to the Chipotle Mexican Grill second-quarter 2016 earnings conference call.

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

Thank you.

I would now like to introduce the Investor Relations Manager for Chipotle Mexican Grill, Mr. Mark Alexee.

You may begin your conference, sir.

Thank you and good afternoon, everyone.

Welcome to our call today.

By now you should have access to our earnings announcement released this afternoon for the second quarter of 2016.

It may also be found on our website, at chipotle.com, at 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.

And these forward-looking statements will include statements about our business recovery, sales trends and potential to recover lost sales, funding of new restaurant growth, projections of the number of restaurants we intend to open, as well as statements about planned marketing programs, future restaurant margin, projected trends in food, labor, marketing, promo and G&A costs and statements about stock repurchases as well as other statements of our expectations and plans.

These statements are based on information available to us today.

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

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

For the third quarter of 2016, it will begin September 1 and continue through our third-quarter earnings release, planned for October 25.

We will start today's call with some prepared remarks.

We will (technical difficulty) approximately 20 minutes of questions.

On the call with us today are Steve Ells, our Chairman and co-Chief Executive Officer; Monty Moran, co-Chief Executive Officer; Mark Shambura, Director of Brand Marketing; Jack Hartung, Chief Financial Officer; and Curt Garner, Chief Information Officer.

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

Thank you, Mark.

And good afternoon, everybody.

Our sales recovery that began midway through the first quarter continued at a modest pace in the second quarter, and we saw a return to profitability along with the opening of 58 new restaurants.

During the second quarter, we generated total revenue of $998 million.

Our sales comps improved by 6% from the first quarter to a negative 23.6% for the quarter.

As a result of promotional activities we are seeing slightly better improvements in comparable traffic with customer traffic down 20% in the quarter.

While we would like to see sales recovery occurring more quickly, we are optimistic that our Chiptopia summer rewards program, which launched on July 1, will encourage more guests to visit our restaurants and that this will help lead to a sustained higher sales recovery.

Though the program is just a few weeks old, we're already seeing approximately 30% of all transactions participating in Chiptopia.

We have seen further improvement of comparable restaurant sales and transactions with comp sales down about 21% in July and traffic improving.

So that is now down to a negative midteens for July, so far.

Diluted earnings per share was $0.87 for the quarter, down from $4.45 earned in the second quarter last year.

While our unit economic model has been significantly affected by the sales hit, it continues to fully fund our current level of new restaurant growth.

Last week Chipotle celebrated its 23rd anniversary.

Throughout our history we have been working hard to change the way people think about eating fast food.

And as we have grown into a national brand, we have cultivated and been supported by a very loyal customer base.

As customers have fallen in love with Chipotle, they have also placed an extraordinary level of trust in us and have come to know that we will do the right thing when it comes to our food, our employees and our approach to running our business.

Through the food safety events we faced last year, we lost some of that trust.

Our customers have come to expect a lot from us -- to prepare, cook and serve fresh, delicious food while pushing the envelope to encourage farming and ranching practices that respect animals and the environment and the people who raise the ingredients we use.

We are committed to exceeding our customers' locations and restoring their confidence that we will deliver on our promises.

While there are no quick solutions to restoring our trust and bringing our sales act to previous levels, we're focused on a number of activities which will continue to emphasize driving traffic in the near-term and increasing customer frequency.

We will also focus on longer-term brand messaging and on advancing our Food With Integrity efforts, which have been key to building trust and loyalty with customers over the years.

But the best thing that we can do in the near term is to encourage customers to come back into our restaurants and to ensure that our restaurant teams are delivering an extraordinary dining experience on each and every customer visit.

In the first half of the year we have invested more heavily than ever in marketing and promotional activity, and those investments are beginning to pay off.

Since the CDC's investigation into Chipotle concluded in February, we have done a number of things.

First, we launched our largest-ever mobile offer into our largest-ever direct mail program.

Second, we introduced a new menu item, chorizo, and we expect to have it in all of our restaurants by the end of the year.

Third, we created our first-ever customer rewards program, Chiptopia.

And fourth, we launched a new animated short film in an effort to help customers appreciate what is unique about Chipotle.

Collectively, these efforts along with excellent operation are bringing customers back into our restaurants and our teams are working hard to provide an extraordinary experience in all of our restaurants, every day.

The introduction of a new menu item such as chorizo is unusual for us.

As you know, we have always maintained a very focused menu and rarely changed it.

Instead, we focused on doing just a few things in our restaurants so that we can do them better than anybody else.

But we have never ruled out additions or changes to the menu, and chorizo is one of the few changes that we have made to the menu in 23 years.

Our chorizo is made with a blend of responsibly raised pork and chicken, seasoned with paprika, toasted cumin and chipotle peppers.

We sear the chorizo in our restaurants to give it a perfect char, and we believe it's a great addition to our menu.

It gives customers another option and one that has been well received, accounting for approximately 6% to 7% of entree sales in the restaurants where it's available.

During the quarter we also resumed serving locally grown produce in all of our restaurants.

Typically, our local program for produce runs the summer and early fall months, during the time that makes up the local growing season for much of the country.

As we look to establish Chipotle as a leader in food safety, it is also important to us that we remain true to our commitment to serving Food With Integrity including locally grown produce.

Through a partnership with Primus Labs funded by Chipotle, we are working with local growers to make certain that they can achieve our high standards for food safety, and we are auditing any farms that we work with to be sure they are compliant with all of our rigorous safety standards.

Initially, as we layer in new local produce suppliers that have made our new food safety standards, our local produce program will have fewer farm partners than it did in the past years.

But, as we scale the program in the coming years, we will have more local farmers participating in the program than ever before.

We are also working hard to achieve our goal of eliminating the very last artificial additives from our tortillas.

Tortillas are the only food item on Chipotle's menu that contain any additives, which include a minimal number of preservatives and dough conditioners.

While we have made significant strides in reducing the number of additives in our tortillas today, the goal is to achieve a simple recipe with only a few ingredients, much like tortillas made in a more traditional way that includes wheat flour, vegetable oil, water, salt and starter for the flour tortillas.

Finally, I'd like to address recent headlines surrounding Mark Crumpacker, our Chief Creative and Development Officer.

We were surprised to learn of these personal issues and placed Mark on a leave of absence.

We believe this will allow us to remain focused on our work and our efforts to serve great-tasting food, provide an extraordinary restaurant experience and to continue winning back our customers.

One of the cornerstones of our people culture is to build top-performing teams.

Mark certainly had accomplished that in our developing and marketing team, and we have the utmost confidence in those teams and the people who lead them.

We know that they will do an excellent job running those departments.

In Mark's absence, we have asked Mark Shambura, our Director of Brand Marketing, to lead our marketing team; and Carolyn Anderson, Executive Director of Facilities, Construction and Design, to lead our development efforts.

And we have asked Curt Garner, who joined us as CIO late last year, to lead our e-commerce team.

Mark Shambura joined our marketing team in 2013 but his experience with Chipotle goes back further than that.

Mark led our team at CAA Marketing from 2009 to 2011, working on some of the first innovative branded content programs including the animated short, Back to the Start, and also worked on the development of our Cultivate Food, Music and Ideas Festival.

In his role as Brand Director of Marketing, Mark already has been overseeing several critical marketing functions including all brand planning, content programs, digital -- which includes Web, mobile and social -- and promotions and events.

Carolyn Anderson began working with Chipotle 20 years ago as an outside vendor in charge of facilities management.

She joined us as National Facilities Manager in 2005 and was promoted to Facilities Director in 2008, where she was able to streamline or reinvest efforts to create programs to empower our restaurant managers to be better stewards of their restaurants, leading to substantially lower maintenance and repair costs.

Carolyn's leadership and the exceptional work she and her team were doing led to her promotion to Director of Facilities and Construction in 2012 and, again, in 2014 to a promotion to Executive Director of Facilities, Construction and Design.

She is proven in building top-performing teams that have paved the way to redefine development's roles and responsibilities.

And she has been critical to developing and executing our strategy surrounding sustainability, food safety and increasing our cash-on-cash returns for new restaurants.

Curt Garner has been involved with our e-commerce team since he came on board last November and has been extremely valuable as a member of the management team over just the past nine months.

Curt oversees all of our information technology infrastructure and his impact on future sales channels, so shifting our entire pipeline out of store sales projects to Curt's guidance has been a very natural fit.

We're confident in the current strategic direction of these teams and have full faith and confidence in Mark, Carolyn and Curt's abilities to deliver great results.

I will now turn the call over to Monty.

Thank you, Steve.

As we work to bring customers back to our restaurants and to reinforce Chipotle as an industry leader in food safety, it has never been more important to have top-performing teams in our restaurants and among our feel leadership.

It's the strength of our people culture and our teams that has allowed us to quickly implement many new programs in food safety as well as marketing.

To be sure that our restaurant teams are aligned around our current priorities and that their efforts are directed to the right things, we have realigned some of the success measures for restaurant managers and teams, and we are tying incentives increasingly to our most urgent priority of having an exceptional guest experience as well as effective local store marketing.

We have also changed the prerequisite to becoming a restauranteur, placing greater emphasis on measuring the guest experience, business fundamentals and food safety compliance.

Historically, these measures have always been important, but we are emphasizing them even more and providing additional tools and training to be sure our restaurants are exceptional in achieving these high standards.

We have also changed how we calculate our manager bonuses to reward excellence in these metrics with the greatest emphasis on food safety.

This renewed focus on an excellent guest experience, local store marketing, food safety and business fundamentals will be the means by which restaurant managers are eligible to be interviewed for restauranteur.

Once they make these greens fees, as we call them, they are interviewed, as before, to determine if they have a team of all top performers and power to achieve high standards.

Historically, these fundamentals were always important to becoming a restauranteur, but our audits for them have become more specific and rigorous and our expectations for their achievement more stringent.

The added focus we applied to that part of the process is already paying off in terms of generating sound business fundamentals in our restaurants and the improved food safety audits that we are seeing.

During the quarter we made significant progress completing the implementation of an industry-leading traceability system which will be fully implemented in all of our restaurants by the end of this month.

Already the traceability program has been rolled out in more than 1,900 restaurants.

This has been a significant undertaking to put in place, and we are very pleased to be so close to completion of this industry-leading food safety enhancement.

Prior to this year we had traceability in place between our suppliers and our distribution centers, and from the distribution centers we could trace ingredients to our restaurants using ordering and distribution data.

But the significance of this state-of-the-art traceability system is that we will have the ability to know exactly which supplier we got any particular food item from as well as the lot number of all produce, meat, sofritos, beans, salsas, dairy and tortillas that are received in our restaurants.

The system uses barcodes on every package to allow it to be traced from the supplier to the restaurant in the same way that overnight delivery services trace packet shipments was all over the world.

This system is another significant way Chipotle is becoming an industry leader in food safety because it gives us the ability to quickly investigate food quality issues in our supply chain or immediately remove food from our supply chain that we may find not up to our high standards.

This September we will post our biennial all managers conference.

This year's conference will include restaurant managers, field leaders, operations leadership and select individuals from support departments.

The content for this year's conference will be focused on helping our restaurant teams to create an excellent guest experience and teach them to more effectively market their individual restaurants.

This conference is an excellent form to reinvigorate our restaurant teams and ensure that they are totally focused on the things that will most powerfully allow Chipotle to achieve its goals.

On the development front our openings continue to be on pace with our guidance for 2016.

We have opened 116 restaurants so far this year, which is about half of our total planned openings of 220 to 235.

We are pleased that we have a strong pipeline of real estate locations under consideration.

But, as I explained last quarter, we will continue to be judicious in evaluating those locations in light of this current operating environment and with an eye towards delivering strong returns.

We have refocused our real estate team on assessing future openings with a more conservative lens that takes into account our current economic model, particularly given recent changes to our average unit volumes.

We have also temporarily shifted some of our markets into our developing markets category in order to direct our new store investments towards markets with the strongest track record of opening sales.

This may slightly temper the number of openings in these markets in the near term as we look to rebuild our sales momentum and will help us ensure strong new store productivity.

The impact from this is primarily on where we open new stores, with a minimal impact on the total openings.

Because the real estate pipeline is inherently long term in nature, some of our efforts to reprioritize our market mix will not be realized until late in 2017.

Of course, we will update you in the coming months as to how many restaurants we do expect to open in 2017.

We're also working to strengthen returns in our new restaurants by optimizing our average investment costs.

This year we will realize some cost savings through a collaborative effort between our design and procurement functions.

In addition, our real estate team has been able to find an increasing number of great sites with strong landlord work (technical difficulty), providing for landlords to invest more in our buildout costs.

Divestment of these efforts translates to an average investment cost that is shaping up to be around $800,000 for 2016, in spite of increased market pressures on materials and labor.

The strength of our teams continues to be our key advantage.

Top-performing teams allow us to take on new tasks more rapidly than others might be able to and to create the great restaurant experiences that drive more traffic to our restaurants and delight our customers.

We are confident that our teams will lead our recoveries in this difficult time in our history, such that we will emerge a stronger brand as a result of these challenging times, and allow us to divide excellent value to our shareholders as well as the many additional stakeholders who benefit from our successful achievement of our vision.

I will now turn the call over to Mark.

Thanks, Marty.

Throughout the quarter, we continued to heighten our marketing initiatives to drive sales and increase positive perception of our brand.

Through quantitative and qualitative research we have undertaken regarding purchasing habits, we have a better understanding of our customers, their motivation and visitation patterns than we ever have before.

We continue to increase promotional efforts more than we generally would, because we think it's critical to reestablish contact and frequency among our guests so that they can recall how much they enjoy Chipotle.

In the last few months we executed an integrated approach which included a number of different marketing activities.

We launched our largest-ever mobile and direct mail promotions.

We introduced chorizo as a new menu item and will have it in all of our restaurants before the end of the year.

We developed and launched our first-ever customer rewards program, Chiptopia, and will be studying the initial three-month program to help us develop a more lasting rewards program.

We maintained a larger ongoing advertising presence than usual and we launched the new animated short film, A Love Story, to support Chiptopia with the aim of reminding and inspiring our fans and attracting new customers.

It has already been viewed in totality more than 17 million times with support from PR, paid digital and social media buy along with placement on more than 10,000 movie screens.

These marketing activities are an important part of our strategy to help drive our sales recovery, and we are seeing encouraging results in consumer research.

In a June 2 survey by [U-Gov], for example, consumer perceptions of Chipotle turned positive for the first time since November.

While sentiment is not to where it was prior to these issues, it shows movement in the right direction.

This improving sentiment is also supported by our own ongoing brand health tracking study, which shows consistent upward trends since mid-January's all-time lows.

During the second quarter we saw modest improvements in consideration and admiration across key customer segments.

And with Millennials 18 to 34, a key customer group for us, we continue to see that they have the most favorable opinion of Chipotle.

During the first quarter new customer acquisition was down from the previous quarter, but we saw improvements in this area in the second quarter and a trend in new customer acquisitions which we can directly attribute to our aggressive promotional offers.

While we still have work to do to increase key brand metrics and traffic volumes, we have a very full slate of marketing programs planned for the remainder of the year that we believe will continue to support our coverage.

The first phase of our recovery plan, which began in February and which we are just coming out of, focused on winning back our customers.

Based on the data we have come we believe that the majority of our most loyal customers have returned, but many of them are not coming as frequently as they used to.

The second phase of our recovery plan, which we are in the early stages of now, continues our win back strategy but as a focus on increasing frequency and attracting new customers.

Programs such as Chiptopia summer rewards and Love Story are aimed at helping us achieve these objectives.

Just three weeks after launching the Chiptopia program we have more than 3.6 million participants and are seeing approximately 30% of all transactions participating in Chiptopia.

This is a significant start to the program and we anticipate our participant levels to continue to increase over the coming weeks.

Most importantly, we are seeing growth in the number of guests that are visiting Chipotle at a run rate of more than 24 visits per year for our most frequent customer tier.

These increased visits have helped the topline and have grown our traffic counts by 5 points from June.

It still very early to draw conclusions on the long-term sustainability of this trend, but every incremental visit from a customer provides an opportunity for us to further restore trust.

All of these programs are helping to change the conversation about Chipotle.

Q2 social sentiment is at 93% of the level it was pre-crisis, and the response to our Love Story film has been extremely well-received.

80% of consumer conversation is positive.

Overall, our marketing awareness is at its highest since Q1 of 2015.

Lastly, according to a survey by [Ace Metrics], A Love Story is the highest scoring QSR ad they have ever tested, delivering strong results on breakthrough, which means higher attention and likability relevant to other measures, as well as change, meaning viewers feel strongly that the brand is moving in a new direction.

The survey indicates that the film delivered strongly not only with our brand loyalists but also with lapsed customers and brand considerers.

For the remainder of the year, our marketing programs will continue at a robust pace.

Among the programs you can expect to see in the coming months are ongoing emphasis on advertising and digital content to highlight our commitment to using high-only ingredients and preparing food using classic cooking techniques, just as we have always done, without cutting corners; and new content demonstrating how Chipotle has become a leader in food safety.

Targeted promotions aimed at inviting groups like students and family, the national roll-out of chorizo by the end of the year, our annual Burrito Halloween promotion, which will have a charitable component with our Cultivate Foundation, a holiday promotion and a gift card incentive program, continued improvements to our mobile and e-commerce program and continued emphasis on restaurant-level marketing which allows our restaurant managers to delight customers on a very local and individual basis.

We are encouraged by the progress we are making to improve sentiment about our brand and drive traffic to our restaurants.

While we recognize that there is a lot more work to be done to restore confidence, we believe that we have the right programs and the right teams in place to improve in these areas.

I will now turn the call over to Jack.

Thanks, Mark.

The sales comp in the second quarter showed modest improvement from the trends we reported in April, when we reported that comps were running in the negative 26% range.

We'd like to see the sales recover happen more quickly, but we are as committed as ever to do all we can to reengage with our customers, to restore their trust in Chipotle and reestablish customer frequency.

The first half of 2016 has been focused on establishing and execute industry-leading food safety practices along with aggressive offers to invite our customers to return to Chipotle.

As we begin the second half of 2016, we are optimistic about engaging our customers at a deeper level, going beyond basic broad-based free food offers with Chiptopia, with branding efforts that are uniquely Chipotle such as the Love Story video, rolling out chorizo and continuing to show leadership in food quality by removing a few remaining artificial ingredients from our food.

Though it's very early, we are optimistic about the customer engagement with Chiptopia so far.

Over 3.6 million actual or digital cards have been issued.

And, as Steve mentioned, nearly 30% of all transactions are engaged in Chiptopia.

Sales comps for the past two weeks have improved to down 20% to 21%, and that range.

But importantly, transactions have improved from down 20% in June to down 15% during the first half of July, improvement of 500 basis points.

Our main objective with Chiptopia is to reward and incentivize our loyal customers, who have decreased their frequencies since late last year, and to restore their visit frequency back to their previous level.

Our research has shown that most of our loyal customers have returned to Chipotle but not at the same frequency.

So Chiptopia is targeted at those customers.

And the early frequency results are very encouraging.

In fact, since Chiptopia began July 1, we have seen 90% increase in the number of customers who visit 2 1/2 times or more each week compared to June.

We have seen a 200% increase in the number of customers coming in from 2 times to 2 1/2 times per week compared to June.

And we've seen a 140% increase in the number of customers who visit between 1 and 2 times each week compared to June.

So we're off to a great start with Chiptopia so far.

We will continue to engage and encourage our customers to visit often during the entire three-month program.

And when our restaurant teams delight them with delicious food and great service, we have a great shot at maintaining or even improving these reestablished higher frequency levels.

The average check has declined slightly during July, by nearly 3% versus June, as many customers have already redeemed their free chips and guac for registering in Chiptopia, or they have redeemed their free burritos for earning frequency status.

Some customers are spending a little less on extras.

There is only a $6 minimum purchase price in Chiptopia.

We're also seeing a slightly smaller group size.

One important note in the accounting for Chiptopia -- although the program is intended to last for three months, ending September 30, there will be rewards available to be redeemed in the fourth quarter or beyond.

Therefore, at the end of the third quarter, GAAP accounting requires that we defer a portion of the revenue from the third quarter into the fourth quarter or later, when the rewards are ultimately redeemed or the awards expire.

It's not possible to project what that deferral might look like right now, but we will fully explain the impact during the third-quarter earnings call.

Our entire Company is eager to see the sales recovery happen even faster, in all restaurants in all markets throughout the country.

Many of you on the call today probably feel the same way.

And while we would certainly like to be further along, there are signs that the recovery is well on its way and continues to march along.

The Companywide July sales comp was down approximately 20%, along with the July TC comp of down about 15% has come a long way from the low point in January, when sales were down 36% and TCs were down 34%.

July, so far, represents a recovery versus the low point in January of 42% on lost sales, meaning that we have recovered 42% of the lost sales from January.

And we have recovered 53% of the transactions that were lost in January.

So most of our markets across country are further along (inaudible) in the recovery.

For example, in middle America and mid-Atlantic, Southeast and Southwest, which combined account for nearly 2/3 of our comp restaurants, the comp sales were down about 18%.

The comp TCs are down 13% in July.

This represents a recovery rate versus January of 46% on sale and nearly 60% on TCs.

Our best market in the country is in Ohio, where comp sales are down just 12% and TCs are down just 6% in July.

We still have a ways to go, but we are making progress.

Unfortunately, the recovery is not as far along in the Northeast and on the West Coast, where comp sales are still down around 26% and comp TCs are down around 21% in July.

Of course, these are the areas closest to the events of last year, and so the recovery is not as far along as it is in the rest of the country.

In fact, sales recovery for the Northeast and the West Coast combined is only 35% and TC recovery is about 45% when comparing July to the January lows.

We returned to profitability during the quarter with EPS of $0.87 per share.

Of course, fully restoring our earnings power is highly dependent on the pace and the magnitude of our sales recovery, which remains a top priority for us.

Running through the P&L for the quarter, we reported $998 million in sales, a decrease of 17% versus the second quarter of 2015.

We generated a restaurant level operating margin of 15.5% in the quarter, which is down from the second quarter of 2015 but up sequentially from the first quarter of 2016.

During the second quarter, sales deleverage contributed about 800 basis points of pressure compared with Q2 of 2015.

Food costs were 34.2% in the quarter, up 110 basis points from the prior year.

Underlying inflation was minimal during the quarter as increased supplier costs for our new preparation of tomatoes, lettuce and steak along with food waste more than offset last year's small increased menu prices and lower spot pricing for paper and beef.

Food waste added about 70 basis points as we are still inefficient with some of the new procedures and we are still navigating through ordering and prepping the right amount of food at the right time, especially surrounding promotions.

Looking at the rest of this year, we anticipate food costs will remain at right about the same level as many efficiencies we achieve are likely to be offset by higher avocado pricing and (inaudible).

Labor expenses during the quarter were 27.7% of sales compared to 22.6% during the second quarter of 2015.

Nearly all of this drop of about 450 basis points is due to sales deleverage.

The remaining increase is due to labor inflation offset by better labor scheduling this year versus Q2 of last year.

In Q2 of last year we had a system reporting issue which led to elevated labor scheduling.

Our underlying labor inflation is running at about 6% while hourly wage inflation is closer to 9%.

[Occupancy] costs were 7.2% of sales, higher as a percentage of sales by 180 basis points, all of it related to sales deleverage.

Other operating costs were 15.2%, up from 10.9% during the second quarter of 2015, driven by deleverage and higher marketing and promo activity.

Marketing costs during the quarter were 2.7% of sales, and promo activity added 1.6% of sales for a total of 4.3% combined, compared to 2.3% last year.

Our investment in marketing and promo will remain at elevated levels as we continue to aggressively engage with our customers to regain their trust and loyalty.

G&A expenses were $70.8 million in the quarter, which is virtually identical to last year's expenses of $70.2 million.

A few months ago we made the decision to temporarily hold off on hiring any new G&A headcount in an effort to manage our support costs during these challenging times.

Instead, we have now the focus of all of our support teams to only those efforts which will lead to safer food, a better restaurant experience for our guests or increased sales.

Our teams have stepped up to the challenge and are reporting a greater number of restaurants without adding resources and are focusing the vast majority of their efforts on those three things -- food safety, the guest experience and sales building.

Of course, we continue to hire at the restaurant level to support our new restaurants and to ensure every restaurant is fully staffed and ready to delight our customers when they visit.

As a percentage of sales, G&A expenses increased 120 basis points to 7.1% of sales, due entirely to sales deleveraging.

Underlying G&A for the next two quarters will remain at about this level, but the third quarter will include the incremental costs of the all manager conference, which is expected to be around $10 million.

Our pretax income was $41.7 million and our tax rate for the quarter was 38.6%.

For the full-year 2016 we also estimate our effective tax rate will be about 38.6% compared to 38.2% in 2015.

So the higher tax rate is a result of higher state taxes.

During the second quarter and through yesterday, we repurchased $117 million of CMG shares at an average price of $438.

We generated cash from operations of $118 million during the quarter and we continue to maintain more than $600 million in cash and investments.

As we work to restore customer trust and restore our earnings capability, we still have the ability to fund our growth and buy back our stock opportunistically.

As of today we have $123 million remaining in our current share repurchase authorization.

These are challenging times, the most challenging we have ever faced.

Our Company is committed to restoring customer trust and recovering customer visits and restoring our economic model to its full potential, which we believe will position us to add significant shareholder value for a very long time.

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

(Operator Instructions) Brian Bittner, Oppenheimer & Co.

I just want to better understand the strategy of your new loyalty program, Chiptopia, because with the comps still down over 20%, I guess the impact to the overall trend of the business does seem pretty muted despite all the data that you talked about, including 30% of transactions using it.

Can you just comment on the reason behind why the strong data isn't necessarily having a bigger impact on the recovery?

And secondarily, what is the plan when summer is over regarding loyalty?

Are you going to maybe switch to something that's aimed less at those that have already come back and maybe more at regaining those that you have lost?

Thanks.

Yes.

You know, the program has only been around for less than three weeks, and the first week had a holiday weekend in which we saw some pretty choppy enrollment during that time with [4 July] being closed and the buildup to 4 July, which is -- it's not a regular transaction or sales builder for us.

Since then we have seen a very regular engagement.

We've seen a very regular ramp-up of people that are participating in the program.

We have significant -- every single day.

We have over 100,000 people that are added to the program.

The majority of them are registered in the program.

And we've seen significant repeat visits.

We've seen like 28% of the people that are enrolled, that are engaged in Chiptopia have come back a second time.

So we are seeing exactly the results we hoped that our already loyalty customers who have reduced their visits after the events of last year are coming in more often.

We are hopeful that will happen as we get into the end of this month.

And by the way, there is an incentive for people to come back more often as the months close because each month counts toward earning the big end-of-program awards.

And so achieving a level in July is the starting point.

And it starts over.

Basically now you need to achieve that same level in August and in September.

So it's very, very early.

And so we are optimistic that we got a 500-basis-point impact in, effectively, less than three weeks.

In terms of what's going forward, after this we are going to watch this very closely.

We are going to learn from it.

We are going to find out what works, what doesn't work both for our customers and for our teams and restaurants.

And we anticipate we will have another program.

We just don't know yet whether it will be another temporary program, will it be another kind of permanent program.

But it's very, very likely that we will have something to follow on when Chiptopia ends at the end of September.

Thanks, Jack.

Joe Buckley, Bank of America.

I guess a couple of questions on Chiptopia as well.

Improving in July, you guys showed sequential improvements [from] June.

Is some of that show the benefit from the year-over-year comparison?

And if so, how much?

And then GAAP widening between transactions and same-store sales -- should we read into that that the costs of Chiptopia is going to be rather high?

And then last one on Chiptopia, and the last one -- as you roll it out, are there learnings about the technology framework within the Company and you have a sense that you have to invest more heavily in technology either on the expense side or CapEx side over the next couple of years?

Okay, John, I'll take a shot at these.

The first question was about the comparison.

The comparison is not easier in July.

In fact, if anything, the comparison is tougher in July.

So we feel good about the 500 basis points of improvement so far.

In terms of the average check, it's only down less than 3% in July.

We had a gap even before July started, Joe, and a lot of that is due to lower fruit size.

It's also due to the fact that we've had a lot of promos throughout the last few months as we tried to earn customers back.

With the less than 3% that we are seeing in July so far, right about half of that is due to the retention of awards.

That was part of the program.

We were prepared to offer compelling incentives to get people signed up.

And so, all you have to do is come in, get a card.

You don't even have to register and you will get free chips and guac.

A lot of those have been redeemed already.

The fact that there's a lot of redemption of burritos already means that our customers are marching through the levels.

They are already earning mild status.

A bunch of them have earned medium status.

And believe it or not, within the first 12 or 13 days, we had thousands of people that had earned the hot status, which means they came 11 times already.

And you can't come more than twice in a day, so you have to come basically 11 days.

And people had already been part of the program within the first 12 or 13 days that we were open.

So, the redemption of awards -- we totally expected that.

T

The other thing we did on purpose, we had a pretty low threshold where if you came in and spent $6, which basically means come in and get a burrito, you will be part of the program.

Again, Joe, our objective was to get as many visits as possible, the idea there being once we get them in the restaurant so we can delight them with a terrific experience, we have a shot at keeping them.

So we didn't want to set a high threshold.

And so that has contributed to folks participating without all the add-ons, without the drinks and things like that.

So the average stuff -- we are ready for that.

And we think gaining the customer visit is most important and we will work on the average check later.

And then in terms of technology, I don't know if Curt is on the phone.

I think the question, Joe, was have we learned something about technology and do we have to make significant investments in technology going forward with our customers.

Yes, that's the question.

Chipotle has got some great technology assets already in place with the mobile app that's very popular in the marketplace and in-store technology that's very capable.

And certainly we're committed to continuing to innovate and build upon the experiences and reduce friction in the customer experience with them.

I think the great opportunity that we have going forward as we look at investment is capitalizing upon these programs to understand the incredible amount of data that we now have available to us as our customers engage in programs like Chiptopia.

We are already starting to see some significant insights and learnings from that data.

And I think there's an opportunity for us to continue to do more in that space around personalization and other ordering capabilities that will again remove friction for our customers.

Thank you.

Jeffrey Bernstein, Barclays.

Just two related questions on the comp, one just in terms of recovery.

You mentioned a couple of times that maybe the pace is slower than you had initially expected.

I'm just wondering what you believe the greatest impediment of frustration is with this survey work you've done or learnings or whatnot, whether or not you are still confident in that full recovery or whether that just seems harder to see at this time.

And second one was just, how would you define success with the comp?

I'm just wondering, going from here, it seems like you are down 21% in July.

What's the pace of expected improvement in 3Q?

How do you think about that for to comparison?

I'm just trying to define what success might be.

Thanks.

Jeff, success for us is getting all the sales back.

Now, the timeframe -- we can't predict what that is.

We're frustrated that we are not further along.

But there has never been a case like this.

Any of the case studies that we looked at in the past just didn't have the amount of publicity and did things like what happened in March where nothing happened and yet there was a news story about somebody that -- or some of our crew that didn't work because they were ill, didn't show up to work, no customers got sick, and yet that turned into a news story.

So it has been frustrating that there have been things beyond our control where things have worked perfectly well and we followed all protocols, that still caused our recovery to see a setback.

So it has been challenging and frustrating.

But our objective is to fully win all of our customers back.

How long it will take we just don't know.

In terms of some of the things we've learned on why it has been slower, we know that we have to build our customer trust back.

A lot of the research has told us customers are looking for more information, they are looking for a longer time period where nothing happened.

And so, so far, so good in that.

Mark had mentioned this -- I don't know if you picked up on it -- that he and the team are starting to put together a strategy where we will communicate what we've done in a compelling way.

It's not something that we are excited to talk about in terms of food safety, but we are doing some amazing things.

We are talking to some of the best experts or the best experts in the country.

And so we are doing things that are industry-leading and we're going to find a way to share that with customers so that we can rebuild their trust back that it's okay to come back to Chipotle.

We're also going to continue introducing that makes Chipotle special.

I don't know, Mark, if you want to talk more about that, where we're going to talk about food and integrity, we're going to talk about what we are doing with ingredients and talk about the things that people have come to love about Chipotle.

I think, in addition to the content and communications specific to food safety you are starting to see us get back into a pattern of the marketing that we used to do with A Love Story.

We are adding new news with [Teresa], we are adding new news with Chiptopia and trying to reclaim our voice with the Love Story film.

And we need to get back into a rhythm of new programs and new news that remind our fans of the Chipotle they know and love and introduce Chipotle brands to new people with efforts like A Love Story.

Sara Senatore, Bernstein.

Two questions, if I may, one about the product and one about margins.

So first on the product, obviously with all the changes you've made in your supply chain, there is always some debate about whether people like it as much, if the food just tastes as good as it did before you made some of these adjustments.

The social media coverage varies on what people are saying.

So I wanted to see if you had a view on that, whether that has played any role, a change in taste or perceptions on customers, traffic.

So that's one.

And in the second question I had was for Jack about margins.

I'm trying to reconcile what we are seeing in your margin structure now versus historically, which is to say I think you have suggested that the current run rate, roughly $2 million AUV, restaurant margins are where they are in the midteens, if I go back to 2011 when your volumes were about $2 million, your restaurant margins were 26%.

So I understand that there has been inflation and you clearly have some food costs associated with it.

But I'm just trying to understand if there's any way to bridge that roughly 1000-basis-point gap between what your margins have looked like at these volumes in the past and what you are guiding to now.

Sure.

Well, so I'll start with the food and the taste of the food.

So during the time of the incidents last fall, we didn't know the cause.

And so we look at every single ingredient we were bringing into our restaurants and, working with a number of food safety experts, try to understand what the risks of those items were, of the individual items coming in.

And I'll just gives you an example that I think illustrates how things happen.

So take bell peppers, for instance.

One of our experts said that it would be helpful if we could test the bell peppers before you -- before we bring them into the restaurant.

Well, the way to test them, though, is to slice them up in the central kitchen and then wash them and then test them and then package them.

That turned out to degrade the flavor.

It does not taste as good as when our crews would expertly chop, using a cutting board and a knife, right there in front of the customer and then sauteing.

But in order to make sure that we had the highest food safety, we went right to the central kitchen.

And we did this with a couple of other items also.

And I fear that we probably did negatively impact the flavor.

And I think maybe some customers noticed that also.

We have reversed that, though, with bell peppers and other items because we have developed with our in-house food safety expert, [Jim Marston], a number of interventions that we put in place from the farm all the way through the distribution system and into the restaurants.

So with peppers, for instance, we now have our crews blanch the peppers in boiling water, which would completely eliminate any pathogen that might be on the surface.

This blanch doesn't actually cook the pepper because it's for such a short period of time, but it's plenty of time to kill any pathogen that may be on the surface.

Our crew then goes with the old process of, with a knife and a cutting board, chopping right in front of the customer and then sauteing, as usual.

We did the same thing with lettuce.

We've put a number of interventions in place, so we brought chopping lettuce back into the restaurants.

And so we've returned, I think, our food to taste levels that were where we were before the crisis.

But we are going beyond that.

We are going beyond that in the elimination of preservatives and dough conditioners in our tortilla.

If you look at the ingredients of Chipotle overall, it's a really, really clean ingredient list.

And what do I mean by that?

It doesn't have the kinds of things that are very hard to pronounce, preservatives and fillers and artificial flavors and artificial colors, all these kinds of things.

And so once our -- in the fall, our tortillas are rid of the preservatives, we will be in an extraordinary position to tell people, our customers, about our very, very clean ingredient labels and be proud to display them.

And I think that's not something typical fast food could do.

So again, we are not only bringing the great tastes that we had precrisis but we are continuing to push Food With Integrity in ways that are going to set industry standards.

And your customers are -- when you serve it, they recognize this and kind of agree with your take on that?

Yes, they do.

And in fact, Sara, our complaints amongst customers have actually gone down in terms of food complaints.

So we feel very, very strongly about the quality of our food, the taste of our food and the customers' perception and satisfaction with the quality and taste.

Thank you.

On the margin, so if you look at our [15-5] today and what's different than it would have been a few years ago -- and, listen, I don't have the details of 2011 but I do know the pieces.

There's about, 350 basis points or so, 325-350 basis points of what I would call nonrecurring expenses.

200 of that is in our marketing and promo.

We are intentionally overspending on that line item, and it's way above historical norms.

There's another probably 125 to 150 basis points or so of inefficiencies.

We are wasting a lot of food.

We are not very efficient with labor.

And part of it is because we are taking on a lot of new procedures, and that has been inefficient.

We are being efficient in terms of dealing with motions, and we are changing to overstaff rather than understaff.

So that's in that 325 to 350 basis points.

Food cost, I believe, back then was probably in the 31% range or maybe even below that.

There was a time when our food cost was in the 30% range.

And so, without the details in front of me, I'm guessing that was probably 300 basis points or so difference in food cost.

And what's happened there is we just haven't raised prices very much over the years.

Our model year ago could handle a 34% food cost.

With the deleveraging effects and all of these inefficiencies, a 34% food cost is a lot more painful today.

We also have labor inflation that has crept in since then.

And I'm just guessing that's probably at least another 200 to 300 basis points of labor inflation, especially in the last year, has been significant.

We had intended to pass on the way traits that we were seeing because of local pressures, because of raises in minimum wages, some of them very significant in $10, $12, $13.

And we haven't really raised price -- we haven't passed on the cost of those higher wages.

There's probably a couple hundred basis points there.

We do have recurring food safety costs that you've heard me talk about.

We talked about that being in the maybe 200 basis point range.

I think it's going to be better than that.

I would say that's probably going to end up in the 100 to 150 basis points.

Right now we got about 150 in there.

And so that's the only thing that's really what I've said is an absolute permanent.

So if you add all these things together you are probably in that 1,000-1,100 basis points or so.

So those are the items.

We are very aware of the items.

We believe the most important thing we can do -- we've lost 800 basis points because of deleverage.

That's why most of our focus this year -- of course, food safety first; now secondly is to recover our customers.

We are doing that through offers, through Chiptopia, through branding.

And then our focus, as Monty mentioned, is making sure that our customers have a wonderful experience when they come back because if we get our sales back, we get 800 basis points of margin.

These other items, though -- we think we can chip away at these other items as well.

But we don't want to go after them aggressively until we have recovered as many or all of our customers.

And once we've done that, then we know that we can make a lot of progress on these other margin items as well.

Thank you.

Nicole Miller, Piper Jaffray.

What data are you collecting through the loyalty program?

And what do you intend to do with it?

And a follow-up -- how is the turnover at the store level?

And as you realign the incentives, is it changing or do you expect it to change?

Thanks.

Nicole, on the -- I'll take a shot at this, and then I don't know if Mark wants to add on to it.

The single biggest thing we are doing is we can now match up specific customer behavior using credit card data and people's enrollment in Chiptopia.

And we have been able to go back.

And so far we've gone back to June, but we are going to go back to even a year ago, before all these things happened, to see the loyalty of our customers.

We've got lots of outside data showing us what has happened to the loyalty of our customers.

So we're going to be able to do a better job of seeing those customers that were once loyal a year ago that were coming twice a week or three times or four times a week and have dropped their business down to once or twice a week.

We are going to be able to see whether Chiptopia is bringing them back up to the two or the three or four times a week that they visited.

We've done that so far just going from June into July.

And we are very encouraged, and I share that with you.

We also now have greater engagement with a lot of customers where we can actually reach out and market to them.

And so we have a communication link that we have with our customers as well.

And then, Mark, I don't know; is there any other customer data that you --

I would focus mostly on we used the data in the regress analysis to really hypertarget those who had descended in their frequency for those who had left, to make sure we could invite all of those people into the program.

And now we can match up those who are now in the program to determine what their return frequency level is and utilize all of that data we are mining there for us to help influence the evergreen loyalty program that we are currently evaluating in the months to come.

And then the other question was on turnover, Monty.

I don't know if you wanted to comment on turnover?

Yes.

Our turnover is going various directions for different positions.

The crew turnover right now is fairly high.

It's in the 130%-plus range.

And our kitchen manager term has picked up a little bit, whereas the general manager turnover has gone down quite a lot.

And we've really targeted general manager turnover, in particular, in an effort to try to reduce general manager turnover.

We are making certain to communicate and understand exactly the reason for every single person turning over.

And in fact, you need all sorts of approval for a general manager to turn over at Chipotle because we want to have that intimate of an understanding as to why they turned over.

So that system has really worked.

But we also implemented a similar program where any manager turnover is something that has to be approved by our team directors in the Company.

And so we anticipate that continuing to work on that we will get a better understanding as to why some of the turnover is happening and continue to work on reducing turnover.

Thank you.

That does conclude our question-and-answer session and brings to the end this conference.

We appreciate your participation.

You may now disconnect.