奇波雷墨西哥燒烤 (CMG) 2016 Q3 法說會逐字稿

Good day and welcome to Chipotle's third-quarter 2016 earnings conference call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Mark Alexee, Investor Relations Manager for Chipotle Mexican Grill. Please go ahead, sir.

Thanks. 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 of 2015. It may also be found on our website at chipotle.com in the Investor Relations section.

Before we begin our presentation, I will remind everyone that parts of our discussion today will include forward-looking statements as defined in the securities laws. These forward-looking statements will include statements about our business outlook, forecasts of EPS, comparable restaurant sales, restaurant level operating margins and G&A and other cost savings in the quarter-fourth 2016 and for the full-year 2017, and descriptions of the impacts of new technologies on our business, statements about planned marketing programs, projections of a number of restaurants we intend to open and new restaurant development costs, projections of effective tax rates for 2016 and 2017, 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, 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.

And I would also 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 of 2016, it will begin December 1 and continue through our fourth-quarter earnings release planned for late January 2017.

Our discussion today will also include non-GAAP financial measures, a reconciliation of which can be found on the presentation page of the Investor Relations section of our website. We will start today's call with some longer than normal prepared remarks, and then we will be sure to allow 20 to 30 minutes for questions.

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 Marketing and Development Officer; and Jack Hartung, Chief Financial Officer.

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

Thanks, Mark, and good afternoon, everybody. We are beginning to emerge from the most difficult year in our history and are seeing many reasons to be optimistic that we are headed in the right direction to restore our business to a place our many shareholders will be proud of. But please know that, while we are still on the road to recovery, we are not satisfied, and we will continue to work extremely hard to make the necessary adjustments necessary to restore our business and deliver results as quickly as possible.

From early this year, we have recovered more than 16 points of sales comp, and we have recovered 20 points of traffic comp, and we are making steady progress toward further recovery. During the third quarter, we generated revenue of $1.04 billion, down 15% from last year on a comparable restaurant sales decline of 21.9%.

During the third quarter, we opened 55 new restaurants, bringing our total number of restaurants to 2178, and we generated diluted earnings per share of $0.27, which includes a negative $0.29 impact related to asset impairment.

Since our recovery began, we have seen it gradually improving outlook for sales and earnings and fully expect that those trends will continue. 2016 will be marked as a significant reinvestment year as we continue to work to make Chipotle a stronger company in the wake of last year's events.

Looking forward to 2017 and based on current trends, we believe that we will produce diluted earnings of $10 per share on same-store sales growth in the high single digits for 2017. We believe that the full-year 2017 we can generate restaurant level operating margins of 20% and save more than $100 million in capital and operating expenses combined. To achieve these results, we must be steadfast in executing our recovery plan, which remains the primary focus of everybody at Chipotle. Specifically, we are focused on delivering a safe and extraordinary guest experience in every restaurant, restoring trust and building sales, restoring our economic model and enhancing the guest experience through innovation.

Monty, Mark, and Jack will provide additional details on some of these priority areas, but right now I would like to speak to the last point, which is enhancing the guest experience. Two important enhancements to the customer experience are menu innovation and digital ordering. We are actively flooring ways to enhance the guest experience by offering new additions to our menu. We believe that this is a good way to entice infrequent or lapsed customers to return, as well as a way to increase sales. Any time we consider new menu items, it is important to us that they remain consistent with our food culture, both in terms of the ingredients we use and how the new items are prepared. A great example of this is chorizo, which we launched nationwide earlier this month. Chorizo now accounts for roughly 7% of entree sales around the country. Feedback from customers has been extremely positive, and we plan to ramp up our advertising in the fourth quarter to support chorizo by encouraging our customers to come in and try it.

We are also currently testing two different desserts, and we hope to select one to offer in the near future. We believe that there is an opportunity to excite current customers and to attract new customers with thoughtful menu development and we are exploring these options. We're also moving aggressively to make digital ordering more appealing to our customers and more efficient for our restaurants. Nearly all of our restaurants have a second make line in the back of the restaurant where we fulfill digital, fax, and catering orders. By optimizing the use and design of these second make lines, we envision a time when digital ordering could account for a much larger percentage of sales than the 6% it represents today. Maximizing our digital sales requires changes both to the second make line itself and to the ways by which our customers place digital orders. Our original second make line resembles the service line our customers see in the front of the house, both scaled down and it takes up less space.

The new line is a much more ergonomic and efficient design configured such that less labor will be required to produce higher sales volumes and does sell more quickly. The new line incorporates an advanced queuing system that takes advantage of a heads-up visual display, which allows our crews to assemble orders without distraction. The benefits of these new lines will be enormous, including faster, more efficient assembly orders, reduced errors, and more consistent portion sizes for our customers, all of which we believe will help us drive increased sales volumes. After some additional testing is complete, we will begin to selectively add these new digitally enhanced lines -- digitally enabled lines to some of our highest volume markets where it can best enhance our out of store ordering experience.

It is important to note, however, that all of our original second make lines are still able to take advantage of enhanced digital ordering options, even though they don't have the advantaged indicating system of the digitally enabled lines.

Our crews in these restaurants will work from paper tickets until their restaurants are upgraded with the new system. To stimulate additional use of these second lines, we are introducing a new mobile optimized ordering site that provides an alternative to our iOS and Android ordering apps. Mark will talk more about this new ordering option later in the call, but the new site makes ordering and paying for digital orders easier than ever.

In addition to our new ordering site, we are testing a tablet-based ordering option, which allows customers to avoid the line and order in restaurant on available tablets and get their order made from the second make line in the back of the house. This tablet-based ordering system will initially be tested in a series of restaurants that are equipped with the new make line. When the full system is realized, the second make line has the potential to deliver as much as 50% of the sales from some locations, including digital orders from all sources, including catering and delivery services.

Finally, we've fully impaired the assets related to ShopHouse, which totaled approximately $14.5 million on a pretaxes basis. We opened the first shop house in 2011 and currently operate 15 ShopHouse restaurants in three separate markets. ShopHouse is managed by a small independent team, which was tasked with creating a compelling brand, which could develop into a compelling growth strategy and enhance long-term shareholder value. We are proud of the ShopHouse team, the delicious food they have created, and the excellent customer service they have delivered. But after operating in three distinct markets and opening in a variety of trade areas, ShopHouse simply has not demonstrated the ability to support an attractive unit economic model. As a result, we have decided not to invest further in developing or growing the ShopHouse brand and will pursue strategic alternatives.

Although the exotic ShopHouse cuisine was not able to attract sufficient customer loyalty and visit frequency to make it a viable growth strategy for us, we continue to believe that our approach to food, people and unit economics with the right cuisine with the right concept can lead to a compelling growth strategy. And we are optimistic that our other growth seeds serving pizza and soon burgers, both of which have broad customer appeal, can become further growth strategies for us.

While this was not an easy decision, we trust in our overall growth seed approach where we can innovate and develop new concepts with a relatively small capital investment and little or no distraction to the Chipotle business, and we will only invest additional resources both time and money into growth seeds that show the potential to become meaningful growth vehicles and a compelling way to enhance shareholder value. We continue to believe that we have an extraordinary potential and are fully confident in our ability to achieve it.

Monty, Mark, and Jack will talk in greater detail about our plans to realize our potential and build greater shareholder value.

I will now turn the call over to Monty.

Thank you, Steve. Achieving a full recovery means having all of our restaurants at their very best in terms of serving delicious, safe food and providing an excellent restaurant experience, while continuing to grow sales. As we move forward with our recovery plans, the guest experience remains our greatest area of focus. Providing an excellent guest experience starts with serving food that is always safe and delicious. While many of our enhanced food safety efforts occur outside the restaurants in the supply and distribution network and with enhanced technology, we also rely on strong restaurant teams and field leaders to carry out additional elements to our food safety program in the restaurant.

Ensuring that we execute these procedures in our restaurants has been our top priority. To accomplish this, we have significantly expanded expanded training, food safety inspections, and third-party and internal audits in our restaurant. These audits help us identify opportunities for improvement and ensure that all the programs we have put in place are being executed consistently and properly.

To further these efforts and to continuously improve food safety in our restaurants and supply chain, we have also established an independent food safety advisory counsel made up of some of the country's foremost experts in food safety and food microbiology. This advisory counsel, alongside Dr. Jim Marsden, our Executive Director of Food Safety, is charged with continuously reviewing our food safety programs and looking for opportunities to strengthen them even more.

This quarter we shared some key points about our enhanced food safety program with our customers through our PR campaign aimed at highlighting eight key areas of advancements that we have made. The campaign included full-page ads in newspapers, as well as online and social media advertising, in addition to print and video materials of Steve describing why our food safety changes are so effective. The campaign was very well received and was effective in communicating the comprehensive steps we have taken. Details surrounding each of these programs continue to be available for you to see on our website.

At the same time, we are keenly aware that safe food alone will not bring people into our restaurant. Instead, they come for delicious food and an excellent guest experience. This is why our restaurant teams are focused on delivering great tasting food and an excellent customer service in clean, friendly restaurants. This starts with our commitment to serving the best tasting food we can, food that is made with ingredients that are raised with respect to the environment, animals and the people who produce them, and we continue to look for ways to improve the quality of the food we serve, including our quest for better tortillas made with no artificial additives or preservatives -- a promise we made last year and are close to fulfilling. So, as we work to rebuild our company and strengthen our brand, it is critical that our entire organization is focused on those things that will most powerfully delight our guests and speed our recovery. For this reason, we used this year's All Managers Conference as a time to articulate to our field leaders and managers three areas of focus that are in their control: first, providing an excellent guest experience; second, marketing their individual restaurants; and, third, restoring and protecting our unit economic model.

Our officer team asked our managers to first train the fundamentals of excellent operations so that they can then proceed on the path to restaurateur. Our relentless focus on the most important things and implementing them exceptionally well is what has always made Chipotle great. And we know that to ensure our sales recovery, we have to do better than ever to win our customers back.

Also, great throughput is the key part of the guest experience at Chipotle and one of our key competitive advantages. To do it well requires constant training and focus. During the last year, where we made implementation of our new food safety program the highest priority, some of our restaurant teams have lost some of the throughput skills that they had developed before the crisis. And, with high turnover at the crew level, it is even more important that we continue to emphasize and train the skills needed to deliver fast throughput, including the four pillars of throughput.

Of course, a primary reason our throughput slowed was that our sales slowed after the crisis. But throughput still can be and will be faster as our restaurant teams commit to drive this critical aspect of an excellent guest experience.

Additionally, we are emphasizing the proper use of the second make line with our field teams to enable the teams on the front line to take great care of the guests in front of them.

This will be even more important as we layer in some of the technologies that Steve talked about which will revolutionize our use of this second way of serving our guests. Our initiatives surrounding catering and technology adoption for mobile and online ordering round out the makings of an excellent customer experience and will allow for further sales recovery and future growth.

Our restaurateur program remains central to our ability to continue to produce the leaders we need to accomplish our mission and guide our restaurants through the sales recovery. This program has allowed us the ability to relocate some of our best operational leaders in order to establish better uniformity of operations around the country. Specifically, in our fast-growing and high-volume Northeast region, which includes New York and New England, we were not satisfied with our guest experience in terms of throughput and dining room cleanliness. By relocating some of our strongest executive leaders directly into these markets, we are now confident that they will quickly return these restaurants to the operational excellence that we and our customers have grown to expect.

These leadership changes include the relocation of an executive regional director and an executive team director, as well as the addition of time five team directors. We have confidence that our newly strengthened Northeast team will provide much needed support to our general managers and quickly and dramatically improve the guest experience.

Over the last four years, we have added many field leaders to our ranks to be sure that we have the right ratios of restaurants per leader to carry out our mission. I have met with all of our field executives since then, and I am confident that they are all clear on our priorities and that they are the right people to help us achieve our mission.

Prior to last year's issues, Chipotle had the strongest economic model in the industry. Of course, this model has been weakened due to lower sales volumes that we have seen this year. While it is critical to fully restore sales volumes and keep improving them from there, we also know that we need to improve our economic model now so that we can provide healthy returns even at lower volumes. The key to restoring our business model is making sure that we are being as efficient as we can with our financial resources, but doing so without compromising the strength of our support teams and field leadership. We are using this crisis as an opportunity to take a critical and disciplined look at how we manage our financial resources, and we have established a goal of saving $100 million across operational, G&A and CapEx expenditures.

These cost savings will not detract from the customer experience. Instead, we are finding these savings in a number of areas, including disciplined staffing and support departments and field leadership, better business terms with suppliers, operational efficiencies, and new restaurant designs that remain true to our brands but have lower investment costs. This more disciplined approach to managing expenses will allow us to strengthen our economic model to the benefit of shareholders while not compromising our ability to deliver an excellent customer experience.

Finally, we continue to believe that expanding Chipotle in Europe holds a lot of promise for our future, but we know that to best ensure our success there, we need to provide the area with more strategic attention. For this reason, we recently hired a managing director in Europe, Jim Slater, a proven industry leader who ran successful operations for cost of coffee and led Costa to become the number one coffee brand in the UK. Jim will be working to develop our European markets into an investable growth strategy. We are excited to have Jim onboard leading our European team, and together they will work through some of the best strategies for our continued development in Europe.

Through all of these initiatives, we are confident that the plan we have in place to drive our recovery is the right plan, and we know that we have proven leaders throughout this Company who can inspire a culture of excellence and help lead the way to recovery. I am confident that through our progress towards providing a better guest experience all of the time, increasing sales through marketing and strengthening our unit economic model, we will dramatically improve returns to our shareholders in the months and years ahead.

I will now turn the call over to Mark.

Thanks, Monty. I am very glad to be back, and I am eager to share with all of you some of the important work that we are doing to bring customers back and restore our brand image. But, first, I want to apologize to everyone for recent events in my personal life. I am sorry that I caused a distraction for the Company, and I wanted you all to know that I have put this behind me, learned from it and returned to my role in early September excited and with a renewed focus and determination to help drive Chipotle's recovery. I want to thank you all for your support and forgiveness, which has meant a great deal to me.

Today, I am going to recap the market activities from Q3, and then I'm going to talk about several important breakthroughs with regard to customer data, technology, and restaurant design before reviewing development expectations.

During the quarter, we successfully concluded the Chiptopia Summer Rewards Program designed to restore the frequency of our most loyal customers. In all we had just under 6 million participants with more than 2.5 million of those earning rewards in the program. We issued 340,000 super rewards for customers who maintain higher frequency levels, including more than 75,000 catering for 20 rewards. We are excited by the potential positive brand impact of 75,000 catering parties over the coming six months.

Throughout the course of the promotion, we saw increased transaction and frequency levels, but most important we have nearly returned to pre-crisis levels among our most loyal customers. After the completion of the program, we anticipated traffic to fall slightly, but we have instead seen our improved sales levels generally continue to hold, which is very encouraging.

During the quarter, we ran three marketing campaigns, each with different and complementary objectives, but first was the food safety advancements campaign Monty referred to, which was designed to communicate what we have done to ensure the safety of our food. The campaign was broad reaching with more than 90 million impressions. Last customers engaged more than any others with the video component of the campaign. The results of the campaign are positive, and we will continue to communicate the benefits of our food safety program so that every customer can rest assured that our food is as safe as possible.

The second campaign surrounded our Love Story animated short film, which is distributed through digital media, social channels, and in movie theaters across the country. The film has been viewed more than 60 million times and has proven to be highly effective at building trust in the Chipotle brand. The campaign also included the Love Story game, which challenges players to match fresh ingredients while avoiding fake ones. The game launched earlier this month, and it quickly surpassed the initial results of our popular Friend or Foe online game from the summer of 2015. Millions of people have played the Love Story game and more than 3 million BOGO rewards have been earned by playing the game. More than 35% of those have already been redeemed.

The third campaign running during Q3 was the ingredients range campaign, which is designed to increase visits to Chipotle and build the brand's trust by focusing on higher quality -- high quality of our delicious ingredients. Ingredients range is running across nearly all media channels, including outdoor, radio, print, digital, social and theaters. Both Love Story and ingredients range campaigns exceeded our expectations, and for this reason both campaigns have been extended to run through much of the rest of the year.

Finally, with regard to Q3, I would like to provide an update on our latest consumer research. Admiration scores and serves healthy and nutritious food attributes have nearly returned to pre-crisis levels. Agreements that we have appropriately addressed the food safety issues increased to 90%. Sentiment on social media is increasingly positive and press mentions were 80% positive last month. Both are at or near pre-crisis levels. However, considerations still lags pre-crisis levels by more than 10%. So it is up slightly for the quarter.

Moving on to Q4 and beyond, we will be leveraging significant improvements in our customer data capabilities, along with a shift in marketing strategy to aggressively target new and lapsed customers. By combining transactional information with other customer data, we are now able to identify more than half of our customers and reach them with specific offers and (inaudible) messages. This important breakthrough not only allows us to target messages and offers to current and lapsed customers, but it also allows us to accurately measure the effectiveness of those efforts by tracking return visits. If already delivered to targeted campaigns using this data and we are continuing to refine our programs in real time.

But this new customer data has implications well beyond more targeted and measurable marketing. The data allows us to very accurately measure customer frequency and details about their orders and behavior. For example, using this data, we now know that during the last six months, we saw nearly 30 million new customers at Chipotle. These new customers are customers who we have not seen since before the food safety events of last year. In fact, transactions from these customers accounted for nearly half of all transactions over the last six months.

Additionally, we know how many of these customers return to Chipotle for additional visits and how many of them became regular customers. When combined with our marketing and advertising efforts, this detailed view into frequency and behavior allows us to evaluate the return to various marketing and promotional activities.

Beyond customer data, we have also now begun to benefit from the strengthening of our technology infrastructure. In just a matter of days, we are launching a new online ordering experience that makes ordering and paying for Chipotle from any mobile device easier and faster. This mobile optimized website works on any recent Web-enabled device, and it requires no app download. The new ordering experience offers a beautiful and intuitive way to order from Chipotle. This new ordering experience is in addition to our existing apps for iOS and Android that currently have a combined user base of more than 2.6 million people.

Additionally, our test of smarter pickup times has concluded, and we are in the process of rolling this technology out nationwide. Smarter pickup times allow us to adjust the wait time between order placement and pickup times based on the demand and capacity of a given restaurant at a given time. This means that the customer is always presented with the shortest possible time between order placement and pickup. Smarter pickup times works with our iOS and Android apps, as well as our new online ordering. When combined with the advanced second make line, Steve described earlier, has significant potential to increase our online ordering volumes and improve the customer experience. We expect smarter pickup times will be rolled out nationwide by January.

Recent advancements in our technology infrastructure are also going to have a significant impact on the customer experience of ordering catering at Chipotle. Next month, we will enable online ordering and payment for catering, which previously was only available was via phone and required in-store payment. The ability to order and pay for catering online will dramatically improve the customer experience, while simultaneously decreasing our call center costs.

The next step with catering is to offer delivery, and tests are currently underway. Both catering and mobile ordering will receive significant marketing support during Q4, a time of year where we typically see an increase in catering volume ahead of the holiday season.

We have also been supporting the national rollout of chorizo, and we are excited by the results. As Steve mentioned, chorizo currently accounts for about 7% of sales, and customer response has been very positive. 84% of customers who tried chorizo like it, and 70% of those who tried it say that chorizo increases their desire to visit Chipotle, and 77% say that the new offering makes them feel more favorably toward Chipotle. Because of these strong results, we plan to increase the reach of our chorizo advertising campaign by more than 400%.

Next, I would like to talk about television advertising and the test that is currently underway. We recognize the need for wide reaching efforts to invite new customers to Chipotle. The fact that nearly 30 million new or lapsed customers visited Chipotle over the last six months shows that customers are responding to our advertising and promotional efforts. But in order to accelerate that momentum, we are considering a national -- we are considering national television advertising. Because our ingredients range campaign tested positively in terms of customer perception and brand trust, we are running a 30-second ad from that campaign in multiple test markets. If the test reveals that television advertising delivers the results we want, we may begin to integrate national television buys into our advertising campaigns.

You may also be aware that we are currently undertaking a review of advertising agencies. While we are pleased with our current agency partners, we have developed a robust new marketing strategy for 2017, and in order to ensure that we have the absolute best creative work on that strategy, we are reviewing potential new partners. The review will be complete by the end of the year and in time for the launch of a new campaign in the spring of 2017.

Going forward, we believe that there will be opportunities to incorporate new menu items into our overall marketing. We have been encouraged by the response we have seen with chorizo and see an opportunity to build excitement among existing customers and attract new customers through the popular addition of menu items that are consistent -- that are consistent with our brands.

Any new menu item will be accompanied by extensive advertising campaigns designed not only to tout the new menu additions, but to excite customers about coming into Chipotle.

Finally, I would like to report on the successful launch of a new restaurant design that has been in development for more than a year. The new design is an evolution of the current design with improvements in lighting, acoustics, seating, customer flow and the presentation of our kitchen.

Additionally, the new design is more cost effective with an average cost of $760,000, which is about $40,000 less expensive than our current restaurant design. We also anticipate a reduction in maintenance and repair as a result of this new design. This new restaurant design is already open in certain locations and under construction in several others. We expect that more than 50 new locations in 2017 will utilize this design and even more than that will benefit from some aspects of new design.

Our new restaurants have been performing at approximately 73% of our comp restaurant volumes, slightly lower than pre-crisis levels. But in areas where we have increased the marketing of our new restaurant opening, that performance has improved, and we are closing the gap for those pre-crisis levels.

In total, we are planning to open between 195 and 210 new restaurants in 2017. As our returns on new restaurants have compressed this year along with our margins, we have lowered the numbers of restaurants we plan to open. We will continue to focus on opening up the best potential sites that combine a lower risk profile with the highest possible returns. And even with our lower sales levels in 2016, we are not seeing a marked increase of cannibalization from opening new restaurants, which remains at less than 1% nationally.

Most important, we view this reduction in new restaurant openings as temporary. Our long-term development pipeline remains robust, and with our new lower-cost restaurant design, we are setting our new restaurants up to achieve even higher levels of return on investment. We strongly believe that the ultimate potential for Chipotle restaurants in the US could total 5000.

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

Thanks, Mark. When the year began, we described 2016 as a year where we will make significant investments to ensure our food is safe and encourage our customers to return to Chipotle. We knew these significant investments would put additional pressure on our margins in the form of elevated food costs, higher advertising and promotion costs, and higher labor costs to serve our returning customers. We intentionally did not emphasize restaurant efficiencies and even encouraged extra staffing in our restaurants during promotion peaks because we did not want to risk trading a few points of margin on the P&L and return for disappointing a customer who visits an understaffed restaurant.

The sales decline, combined with these investments and inefficiencies, have resulted in significant declines to our margins. As we near the end of 2016 and we begin to look ahead to 2017, we will continue to do all we can to restore customer trust and recover customer visits. But we also are committed to taking an important step to restore our economic model. With the strategies you have heard Steve, Monty, and Mark talk about, we believe we can deliver a comp in the high single digit range for the full year in 2017. Of course, we hope these strategies will deliver an even greater sales increase, but we believe this comp projection represents a stretch, yet responsible, goal.

With a focus on delivering greater efficiencies in our restaurants, identifying cost savings in everything we buy in our restaurants and in our offices, supporting our growing restaurant base with flat G&A, and beginning to normalize our promotion into advertising, we expect to deliver a restaurant level margin of 20% and an EPS of $10 in 2017. While these projected results do not fully restore our economic model, it is an important step in the right direction. We continue to believe we can over time fully recover our restaurant margins as sales recover.

From a unit economic standpoint, these projected results would lead to an average restaurant volume of around $2 million and restaurant ROI of around 50%. And the return potential for new stores is even greater as we expect the average unit store investment to decline to around $760,000 in 2017.

I will talk more about what is expected in 2017 and in Q4, but now let me recap our results for the third quarter.

During the third quarter, we reported sales of $1.04 billion, a 15% decrease from the third quarter of 2015. Our reported sales were reduced by $11.5 million because of deferred revenue related to our summer Chiptopia promotion.

As a reminder, Chiptopia ended on September 30, and we recorded deferred revenues associated with rewards earned, but not yet redeemed. These rewards can be redeemed or will expire over the next six months, and the deferred revenue will be recognized over this period.

As a result, we reported a negative same-store sales comp of negative 21.9%, which included a negative 0.8% income impact from the revenue deferral. The Q3 comp comprised of July down 23.8%, and that includes 100 basis points from the revenue referral deferral. August was down 21.7%, which includes 70 basis points from the revenue deferral, and September was down 20.1%, which includes 70 basis points from the deferral.

And while October comps for the first two weeks are affected by Hurricane Matthew and were down about 21%, the past 10 days have recovered and normalized and were down around 19%. While we are not satisfied with still being down around 19%, we continue to see small but steady progress month after month.

As a side note, July had improved the declines in the 21% range in the weeks before our Q2 earnings report, but then was impacted by a negative month in trading day effect, plus comparing to our Friend or Foe BOGO from 2015, which ran the last week of July and into early August. And it was also impacted by the Chiptopia revenue deferral.

Our traffic trends have also steadily improved and were down 15.2% overall in the quarter compared to down 19.6% in June. Transactions improved to 13.4% in September and most recently are running down 14% in the past week or so. Chiptopia helped drive the sales and transaction improvement in the quarter as our most loyal customers returned to their historic frequency patterns, as Mark mentioned.

On a regional basis, we continue to see wide variances in the progress of the recovery with comp sales in the Midwest and middle regions of the country down in the 17% range in September, outperforming the coastal areas, especially in the Pacific Coast and the Northeast, which are down closer to the 24% to 25% range in September.

From a transaction standpoint, there are several markets, including Kansas City, Chicago, Denver and Minneapolis where traffic is now down only in the high single digits. We know that restoring customer apps takes time, and to help ensure that renewed habits established during Chiptopia for our most loyal customers continue to hold, the Love Story campaign that Mark mentioned was launched this month. Although hard to estimate customers behavior in October from only a few weeks of data, so far our high-frequency customers are continuing to visit this month with similar frequency to September. Restaurant level margin was 14.1%, down from 15.5% in the second quarter of this year. The deferred revenue related to Chiptopia negatively impacted our restaurant level margin by nearly 100 basis points, so our underlying margin was 15.1%.

The remaining decline from Q2's margin of 15.5% is due to higher marketing and promo costs related to Chiptopia and higher food costs. Food costs were 35.1% of sales, but excluding the effect of the deferred revenue, underlying food costs was 34.7%. This represents sequential increase from Q2 of 50 basis points, primarily due to much higher costs for avocados.

Avocado supply declined during the summer, and we, again, experienced higher pricing, although we had hoped that this would be a temporary spike. In recent weeks, though, supply has become even tighter, and pricing had become much more volatile than expected. In fact, we have seen that some competitors recently have posted signs on their doors saying they are out of avocados altogether.

We have remained in supply of avocados, but case pricing has risen from an average of about $30 per case during the first half of the year with case pricing approaching $80 this month. Because of these higher avocado prices, food costs will remain above 35% in Q4 before seeing relief in early 2017.

Our labor costs for the quarter were 27.6% of sales, up from 22.2% of sales last year. Without the revenue deferral, labor costs were 27.3% of sales. Sales deleverage accounted for approximately 300 basis points, and the remaining increase relates to inflation and additional labor related to Chiptopia and other promotions. Underlying wage inflation was in the 5% to 6% range in the quarter. Labor was about $9 million higher in Q3 versus Q2 this year to support higher sales levels as our transaction trends continue to improve. We also have increased labor as we return to prepping produce inside of the restaurants, and we also had increased labor to support the higher promo level activity at Chiptopia.

In prior years, total labor dollars had been relatively flat from the second quarter to the third quarter. Other operating expenses as a percent of sales were 16% during the quarter, an increase from 11.1% last year. About 290 basis points of the year-over-year increase is due to sales deleverage. Marketing and promo expenses combined were 4.8% of sales during the quarter, which has doubled the rate of marketing and promo from the prior year, and it was 50 basis points higher than Q2, due to Chiptopia. In Q4 we anticipate our marketing and promos will remain at about the same level as we test TV in a few markets.

Also, as we invest in ads supporting chorizo and as the Chiptopia earned awards are redeemed and expensed in our promo line.

G&A costs for the quarter were $78.4 million or 7.6% as a percent of sales. Underlying G&A, excluding stock comp, was $61.9 million in the quarter. During the quarter, we held our biannual All Manager Conference, which totaled about $10 million, and $8 million of that was expensed in the third quarter.

As a reminder, this conference will not be held in 2017, although we traditionally hold a smaller field leadership conference which we expect would cost between $1 million and $2 million. Including (inaudible), our G&A was flat year to date on a total dollar basis compared to 2015, despite supporting an additional 247 new restaurants opened over the past year. We froze our support headcount early in the summer and have been actively prioritizing where we invest our support to ensure that we are investing in providing an excellent guest experience and recovering sales.

As we look ahead to 2017, we are planning to continue to keep our underlying G&A expenses before stock comp flat compared to 2016 and lower on a percent of sales basis, despite growing our restaurant base by another 200 restaurants.

For the full-year 2016, we estimate our effective tax rate will be 38.2%, in line with 2015. The full-year 2016 estimated effective tax rate benefited from additional federal tax credits earned and a tax benefit from previously earned California state tax credits that we now estimate will be realized, and they were offset by higher estimated state tax rates. We currently anticipate the full-year 2017 effective tax rate will be 39.5% and is higher expect rate for 2017 does not include the benefit of previously mentioned tax credits related to prior year.

Third-quarter net income was $7.8 million, and diluted earnings per share was $0.27. This included the negative impact of $0.23 related to revenue deferral and a negative impact of $0.29 for the impairment of ShopHouse. Before these adjustments, Q3 EPS was $0.79 or $0.08 lower than Q2 of this year, due to the [AC] costs, the cost of Chiptopia, and higher avocado costs.

As of September 30, we maintained $609.8 million of cash and investments. During the quarter, we generated cash from operations of $101 million and generated free cash flow of $36 million.

We also repurchased $70.3 million of our stock during the quarter at an average price of $409 per share. Over the life of our share repurchase program, we have repurchased $1.9 billion of our stock at an average price of $289 per share. We will continue to manage our balance sheet to invest in our sales recovery, grow our business, and opportunistically return cash to our shareholders via share repurchases.

Recently, our Board of Directors approved an additional $100 million of repurchase authorization and, as of yesterday's close, including the additional approval, we now have $154.6 million remaining on our share repurchase authorization.

Looking ahead to Q4, we will begin to compare against last year's comp negative 14.6%, so, of course, our comp will improve against a soft comparison and will likely be in the negative low single digits. Margins are expected to remain in the midteens as the benefit of a continued steady sales recovery and the reversal of a deferred revenue from Q3 will be offset by Q4 having seasonally lower average daily sales.

G&A will be about $10 million lower than Q3 because of the AMC expense not recurring and slightly lower stock comp. And we believe these guests will improve to around $1 per share. Avocado pricing is the big wildcard as every $10 per case price movement up or down will impact the EPS by $0.17.

As I mentioned earlier, 2016 has been a year of significant investment in food safety and restoring confidence customer trust and recovering customer visits. It has been a difficult year in terms of margins and earnings, driven by lower sales, including related deleverage and the impact of these significant investments. We will continue to work harder to recover our sales, shifting our strategy from giveaway discounts and rewards through new menu items, technology-driven convenience, better operations including faster throughput, and more aggressive brand marketing including TV. We know that fully restoring our previously industry-leading economic model depends on fully recovering our sales.

We feel confident that we have the teams in place to execute our strategies in 2017 and achieve a high single digit comp sales increase of 20% restaurant level margin and a $10 EPS. Our comp target will not be an easy hurdle to meet, and of course, we are not in complete control of it. But we are in control of how we manage our restaurants, and we are in control of how we manage our expenses, both in the restaurant and with our support G&A. To earn a full-year 2017 target of 20% (inaudible) operating margin, we need to earn about 50 basis points of additional margin versus the current underlying run rates of about 15%. We will recover this 500 basis points in several ways. First by effective scheduling of our crews to ensure we have the right staff at the right times to deliver an excellent guest experience, but also to ensure we are not ever overstaffed, especially during low sales periods. We can manage our food costs more effectively by reducing waste by ordering, prepping, and cooking to prep quantities throughout the day. By cooking to ideal temperatures which not only makes our food taste better, it also results in avoiding unnecessary yield bonds.

We can also more effectively manage smaller, but important, restaurants costs such as repairs and maintenance and kitchen supplies. This has grown faster than sales in recent years. We have invested heavily in training our field leaders recently to effectively manage the business culture in the restaurants they oversee. These field leaders spend two full days in what we have called a business boot camp, and they have been training their GMs and reinforcing how to create an excellent guest experience while effectively managing their P&L.

We also expect promo costs, which are in other operating costs, will normalize in 2017 as we reduce reliance on giveaways and discounts. And marketing will either normalize or it will remain at elevated levels in support of efforts such as TV advertising, which we would expect will result in higher sales and great leverage on the rest of the P&L.

In addition, we have an internal goal of saving at least $100 million in recurring annual costs. This includes a review of everything we buy both in the restaurants and in our offices. It also includes capital expenditures, including the new more efficient restaurant design Mark mentioned, which will reduce our investment costs from over $800,000 to around $750,000 in 2017, a savings of nearly $10 million in 2017 alone.

As I mentioned previously, we plan to keep our underlying G&A costs before stock comp flat from 2016 to 2017. In dollar terms, that would result in G&A before stock comp of around $220 million in 2017. We chose not to fill about 100 staff positions this year, which were vacated via turnover and not refilled, but were approved in 2015, but were unfilled headcount adds, al of which will save around $10 million annually and will help our underlying G&A dollars remain at the current level.

Our teams are effectively supporting our restaurant by stretching the ratios a bit and focusing only on those activities that maintain safer food, lead to a better guest experience, they grow sales or strengthen our economic model. We increased our field support significantly over the past three years and have nearly the lowest ratio of stores per field support staff than we have had in 10 years. We currently have nearly 300 field leaders, which includes area managers, team leaders, and apprentice team leads. So, even as we build 200 new restaurants on average, the field leader ratio will increase by less than one restaurant per field leader in 2017.

Our restaurant teams and support teams are responding well to the challenge of more effectively managing costs and are energized by helping us restore our business. As we challenge our restaurant managers at the AMC, one of our restaurant tours, Philip Esposito from our Newbury Park restaurant in California, reached out to me the very day after the conference with an idea to simplify some of our back office functions. His idea affects every restaurant and will save us more than $1 million across the country -- across the entire company. And I have seen similar commitments throughout the company in our restaurant and in our offices to be more disciplined and more discerning with every dollar we spend. And everyone feels ownership to do their part to help strengthen our economic model while we work to bring our customers back. We are confident that the approach we are taking will help restore our margins and our earnings capability without taking away from the customer experience.

In fact, the techniques our field leaders are teaching will result in scheduling and deploying the restaurant themes to deliver the best experience and the most delicious, safest food possible which also leads to a better financial result. These efforts will allow us to generate respectable results in 2017. But, more importantly, we believe we will ultimately emerge from this challenge stronger than ever as our cost structure will be leaner, we will be more focused than ever, and our skill level throughout the company will be sharper, and our economic model with sales fully restored will be stronger than ever.

Thanks for your time today, and we will now answer questions.

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

Steve, I just have a general question on the overall operating approach going forward. One of the hallmarks of the Chipotle business is how simple you have kept the operations and how focused you have been on delivering high quality. And now, we are hearing that you're going to shift the focus a bit towards menu innovation and perhaps traditional marketing tactics or strategies. So just wondering why you think that shift is needed now versus, perhaps, just going back to basics on focusing on delivering the high quality experience.

Well, David, I think that we are going to do both. We're going to focus on fundamentals and try to continually deliver a better experience through that method, but we also want to try new things. Again, to get some customers who may have lapsed to reinvigorate our regular customers to encourage them to come more and perhaps to even entice new customers who haven't tried Chipotle.

It is important that when you add something to the restaurant, you take something away. And, although with the addition of new menu items, we are not going to take away other menu items. There are things that we can do to create efficiencies in the way we prep, in the way we get ready for business, in the way we find leverage. Finding leverage is interesting because there have been suggestions that we had breakfast, for instance. Well, I am not saying that we won't add breakfast, but when trying to find leverage, our second make line now has an enormous opportunity. And second make line can attract or provide for catering, for delivery, for the mobile app to enable customers that are in line to get out of line and go to a tablet and probably things that we haven't thought of yet. It is extraordinarily leverage because the labor to produce the food is much less at the second make line because of the new technology.

So my point is that you need to balance everything in the restaurant. And so we will make some things more efficient, so we will be able to add things like a dessert item or a new menu item. Again, if you look at some other examples of fast food places getting too complicated, I don't think they kept this idea of taking away whenever you add something. So, on balance, you still have the same amount of ability to focus on delivering the extraordinary experience that they have been accustomed to.

And I guess just a quick follow-up to that, if I may. You have gotten the $2.5 million without any of those new menu items. So I guess the question is, why do you think you now need new menu items to get back to those kind of levels versus just going back to the old operating approach? I guess I am a little confused by that point.

Well, David, this is Mark. The new menu items, I wouldn't worry that we are going to slip into the traditional fast food model of introducing multiple new menu items wrapped with advertising multiple times a year. Our business really doesn't support that anyway because it is really a one price for everything you get at Chipotle unless you get something extra like meat or guacamole.

So we really don't have the ability that we wanted to to add lots and lots of menu items. However, there is a considerable amount of value to being able to advertise to people or to market to people something new, and we have seen it now with chorizo. It has been very effective, which is why I mentioned in my prepared remarks that we are going to increase the amount of reach of that campaign four times. And what it does is it gives people a reason to reconsider Chipotle or just to add it to their routine where they may have dropped in occasion. And we are seeing it to be very effective.

And so I wouldn't worry that you are going to see switching to this model of repetitive menu additions with lots and lots of advertising around them. But there is a real value that we have seen now very tangibly with chorizo in terms of adding something new every now and then. So I really wouldn't worry that it is going to be a complete change in strategy at all.

Great. Thank you.

(Operator Instructions) John Glass, Morgan Stanley.

Thanks very much. You highlighted a number of technology initiatives that will eventually drive sales, but at least one of the competitors in the marketplace has done that. It has taken a toll on earnings for several years. It turns out there is a lot of training costs. There is technology costs. So how much of that, if any, of those costs you factored into 2017? Do you have a sense of not just the buying of the technology, but what the training costs might be for such initiatives?

Well, let me start, John, by talking to you about how the primary component of this thing works with regard to the technology. So the second make line that Steve referred to, we have had one in our restaurants for many, many, many years, the classic version. This new version is much more efficient. Whether or not you have the tech component added to it or not, it is just a better layout. It has got bigger bins. It is set up to be more efficient. And that new line actually is slightly cheaper than our existing second make line.

And so that line, that is without all the technology component on it is actually a little bit cheaper than our existing line, and so we are going to move quickly to have all of our restaurants outfitted with that new line starting in March of 2017. So all new restaurants will have it, and then we are going to selectively retrofit high-volume restaurants with it over the coming year.

And so I think it is going to be relatively quick. Now, what I just described was the line itself without the technology component. It is completely set up to handle it. We add that line to the restaurants. And then, as we see fit, we can add the technology component to it, and it is not a tremendously expensive addition as well. And so you are not going to see lots and lots of the need to build big kiosks in the front of the house, that sort of thing, because this system actually, whether you are using it from a tablet inside the restaurant or from your phone in your pocket, uses a very, very similar ordering system to the one I described in my call, the new online ordering site that we have developed. And so there is very, very little overall investment in this thing, and I believe that we can turn it around fairly efficiently as we roll into our restaurants.

I would also add that, often, with the introduction of technology, there is a lot of expense in training to this new technology. With the second make line, this technology actually is very intuitive. So it is actually easier to train a crew person how to operate the second make line with this new indicating system than with the old method.

So when you plan for 2017, have you factored in costs -- trading costs, labor cost to do this, or is that not in the plan for 2017? You don't think it will be an impact.

John, we don't think it is going to be an impact. We think the labor is going to be neutral. We think over time it is going to be a laborsaving. The labor per sales dollars on the second make line is more efficient than labor per sales dollars on the front make line. Even though this is early on, you know what the teams have shown so far with this new approach is they can produce food a lot faster and more accurately. And so there is really built-in efficiencies.

If we didn't have second make lines, I would say this would be a major undertaking. It would be a lot of training, and it would take quite some time. The fact that virtually all of our restaurants already have a second make line, what they are doing right now is they are struggling to make the food on second make line with a little piece of paper, with a lot of abbreviations. What they are going to get instead of that is they are going to have a very clear indicator with display screens.

And so they are going to be doing the same things they always have. And the restaurant that was retrofitted in New York, it seems to have been intuitively stopped, just gravitated towards the display frames, and just intuitively, just kind of made the food the way they always would, except they were not stopping like in between every ingredient or two to look at this little bitty piece of paper that is about the size of a register receipt.

So it is early, but so far we don't think there is going to be an increase in labor. The equipment cost is not that expensive. There will be (inaudible) under depreciation depending on how many we can roll out, but it is not going to be significant. Not something that is going to affect our ability to get to the $10 EPS.

Got it. Thank you.

Jason West, Credit Suisse.

Just a couple of sales questions. I think guys mentioned, Jack, you are running it down around [20] in October. But I also thought I heard you say that you have seen a full return to your kind of most frequent users, which I think is new. Could you try to explain what is going on there with the different customer buckets? You are still down 20, but sounds like things are improving. Just trying to reconcile those issues.

And then, the other question on the comp outlook for next year, does that include any incremental pricing? Thanks.

Okay. Yes. Chiptopia was designed to go after our most loyal customers. It is a relatively small customer group, but it is a group that comes very often. When we look at -- we sliced and diced our customer group a number of different ways. And when we look at our customer group for those customers that come at least a couple of times a month to one time per week or greater, as one group, another group would be some -- a customer that comes, say, once a month. Another group would come two to three times a month, and another group would come once per every six months.

When you take that most frequent group -- by the way, all of those groups were negatively affected by anywhere between 20% and 25%. Meaning they all drop down their visit frequency. And in case of the infrequent customer, we just lost customers, and we lost them to the tune of about 20% to 25%.

After Chiptopia, we recovered to a point of where most frequent customers were back to 95% to where they were before. Now, some infrequent customers did not increase their frequency, but we were able to see some customers that were not coming as often as, let's say, once per week, now were coming once per week.

We don't have the same exact customers we had before. One thing we have learned as we have gone through and we have gathered the data, mined the data that Mark talked about, we found that we have kind of a constant movement of customers that are coming. Some are coming more frequently; some are coming less.

What Chiptopia did was encourage those customers either were coming frequently and reduced. A lot of them did come back, and then we encouraged some that were coming a couple times per month to come at least once per week or more. But, if you look at that most loyal customer group that come in multiple times per month, that group, we have recovered 95%.

Now, the rest of the group is a much, much, much larger group of customers that come much less frequent. That is why the things that Mark talked about make so much sense. That is why TV advertising makes sense. That is why advertising things like chorizo, which is new news, makes a lot of sense. Dessert, once we decide which dessert we want to go with to try to go beyond a tough market, these are things that you can advertise and appeal to a broad group of customers. And so that is what our approach is to get that much, much larger -- tens of millions of customers to come to Chipotle and so we can recover that group as well.

And then, in terms of the comp, we don't have any menu price built into the comp at all.

Great. Thank you.

John Ivankoe, JPMorgan.

Two if I may. At first, on that $100 million of recurring cost savings, I think you called out $10 million of CapEx. Does that mean there is $90 million of OpEx savings that you expect in fiscal 2017 over fiscal 2016, just as a clarification?

Not necessarily. There may be other things that we buy, for example, small wares. Most small wares would be OpEx. There might be some equipment that we will do a more efficient job of buying and we might be replacing, but might not be a new store impact, but we were replacing, let's say, grills, for example. We are looking for a reduction in expenses in what we pay for everything, and so there may be some additional CapEx. But I would say the majority of the $100 million is going to be in operating expenses.

Okay. And, secondly, the Chiptopia program, obviously, it was successful with your most frequent customers. But given some of the complexity regarding the program, maybe some of your not as frequent customers did not know necessarily how to use it or what their benefit would be, or going that number of times in a month would be a lot to ask someone that doesn't go to the brand, for example, once a week. Is there a way to approach loyalty in a different way that would have a broader appeal, and is that potentially part of the plan in 2017 and 2018 to have something that is simpler and that will be a permanent part of your offering?

John, an interesting thing which I mentioned in my remarks I think that is worth noting is that, over the last six months, we saw 30 million customers that were either new or people that we hadn't seen before come into Chipotle. And this is thanks to this new data capability that we have, and additionally we are now able to reach a very large number of those people. And so we have dramatically improved our ability to reach out to these customers, and they are in all frequency categories, by the way. These 30 million people range from one to more than 10 times in terms of number of visits during that six-month period. So they are all across different frequency bands, but we have such an extraordinary new ability to reach them that we are evaluating exactly how best to use that in order to create incentives for them. And we don't want to rely on a continuing basis on discounting. Obviously that cheapens the brand and creates a sense of entitlement ultimately such that people just begin to expect it.

So we are very carefully evaluating how that is going to look. But, to answer your question, I would say, yes. We are going to look at how we can use this new information we have about our customers and this really amazing ability to track whether or not what we do with them drives them in.

So we can determine now with a very high degree of fidelity whether or not an offer or an ad of a particular type or any other type of promotion or communication actually resulted in a visit from these customers. And so I don't want to commit right now to exactly what we are going to do because we are -- it has really been just over the last few months that we have developed this capability. But we are absolutely going to use it in a way that allows us to create ongoing incentives to create the momentum for these less frequent customers to become more frequent.

I am very excited about just the simple idea that so many new customers came to Chipotle. I mean, it says a couple of things to me. First, it says, you know, even though it is tempting to think that while people are still reluctant to come to Chipotle, with that volume of people coming in as new customers, I think that is unlikely. That is showing a pretty major shift in people's attitudes. But also, those somewhat infrequent new customers have extraordinary potential to become frequent. They are the ones who have the potential to create great comps for us in the future. And so we are going to be doing whatever we can to make their stay at Chipotle as enjoyable as possible. So I can't give you a firm answer, but I hope that helps you understand sort of how we are going to be looking at it.

Thank you.

David Palmer, RBC Capital Markets.

First to follow up on some of that questioning about the marketing, you mentioned a few things: the new product news, national TV. All these things will be part of Chipotle's future potentially, and you have tinkered with loyalty and now looking to make a bigger push behind mobile order and maybe even delivery.

Based on the analysis you have done so far, because it is hard for us to assess, what potential changes to marketing among these and maybe some other stuff do you believe will be the most promising and most likely that we will see?

Well, they all have promise in their own right. I think, though, that as I mentioned in answering the last question, we have seen very, very large numbers of new customers experiencing Chipotle. And so I think there is extraordinary potential for us to continue bringing in large groups of new customers, and that is the reason why we are currently testing television.

And television isn't a panacea. It is going to be a component of the larger campaigns that we do, but it is very efficient when we get to the level of doing it nationally. And so I believe that that probably has some of the most significant potential for us to bring in lots and lots and lots of new customers, and then assuming that we create a great experience for them when they come in the restaurant, they will then turn into more and more frequent customers.

So I suspect that amongst those things, that has huge potential, but I will follow that with a very close second, which would be the increase in our digital promotion and the capability of online ordering. And I just want to take a second to tell you a little bit more about what I am talking about with regard, for example, to smarter pickup times, which is the ability for somebody to come into Chipotle and get an order very quickly after they ordered it. We have been conducting a test over the past several months of this technology, and through our analysis of that, we have found that when people place orders at Chipotle, there is a very significant lag between when they place the order and when our restaurants allow them to come pick it up. This new technology actually eliminates our restaurant's ability to set that time gap and instead sets it automatically based on the load of restaurants. And so we are seeing the potential to do as many as one entree per minute using this new system.

And so the marketing that goes around that, that encourages people to place their orders via digital assuming that, again, those orders are fulfilled in this efficient and excellent way, I think, has a tremendous amount of potential. So I put that as a close second for the top of mind marketing that we are going to be doing.

Thank you.

Karen Holthouse, Goldman Sachs.

Just thinking about some of the other pieces that have been part of improving the digital experience at the store, I know the POS system has been a part of upgrades were needed to be able to move forward. Are they are -- is sort of everything else in place that you think a lot of this can be pretty plug and play once it is in store, or are there sort of technological or technical hurdles you think you're still going to be working your way through?

Well, I think that most everything is in place and I say that wanting you to know that a couple of the key pieces are actually going to be rolled out throughout the month of November.

So we have, as you mentioned -- we have had some issues with regard to payments in particular, and the new responsive online ordering website that we talked about on this call and some other, including catering, will now have a more streamlined payment process. And I will go into the technical details as to why it is more efficient both for us and the customer, but having gotten over that hurdle actually enables us to do a lot of the things we talked about without further technological investment.

Now, I do want to caution, though, that, of course, when you are adding anything that consumers are interacting with and new technology per customers, there is always room for things to go wrong, and we are going to need to iterate and we find those things. But I don't see any large technological hurdles that we need to overcome in order to implement this. We have overcome a lot of those over the last 18 months actually, and we were just now in November going to be taking advantage of a lot of them.

And then, as a follow-up on the digital -- the more one-to-one marketing, is the data set that you are working off of -- because my impression or my understanding is that the average consumer isn't scanning or swiping a dedicated Chipotle card at Chipotle. Is that working off of last names and last four digits of credit cards, and then how does that evolve or change as we move towards chip and PIN implementation when you don't get that data anymore?

Well, yes, I mean, we are using a combination of last name and four digits of the card. But, also, a unique combination of both Chipotle owed and commercially available databases to create actual profiles of each customer.

And so we have the ability to now, as I mentioned, reach many, many many of our customers using this technology.

Chip and PIN is something that we have yet to implement at Chipotle for throughput reasons, and we very much hope that we are going to leapfrog chip and PIN. But, I feel reluctant to go too far into the technological reasoning behind that without Curt, our CIO, weighing in on it. But there are more efficient ways of making payments than chip and PIN, and it doesn't seem to be -- even though it is required by the credit card companies, it does not seem to be the technology that is going to be readily adopted by choice for consumers. And so we are simultaneously working on a variety of payment options ourselves, and we expect that those will augment any loss, should we ever implement chip and PIN.

Great. Thank you.

Jeff Farmer, Wells Fargo.

I am just curious what are the pros and cons of maintaining almost 10% new growth rate in 2017 on the heels of what looks to be like almost 12 months of a 20%-plus average transaction decline? Just curious why you guys are sticking with the big numbers instead of potentially taking it down 10% or 20%, just until the transaction stabilized a little bit.

Jeff, we took a look careful at our whole portfolio, and we did pare it down. And we pared it down where we eliminated either remote sites that are hard to operate or new or developing markets where the risk of low sales and the risk of a trying to staff a team and attract customers in an area that doesn't have perhaps a strong brand awareness or brand appreciation. And so we pare those down.

But to cut the openings even further, there just isn't an advantage to doing so. The impact when we open up restaurants on our existing comp is minimal. It has always been less than 1%. It is still less than 1% this year. So it is not like there would be a significant comp rebound.

We have the pipeline. So, other than paring down, as I mentioned, we have had a strong pipeline.

So there just isn't an advantage. The recovery doesn't get jumpstarted just because we would feel peel off another 25, 50 or 100 openings. So there wasn't any advantage to doing so. So we thought we did the responsible thing in doing what we could to shore up the quality of the portfolio. But, going beyond that, just didn't offer any benefit from what we could see.

Okay. That's helpful. And just one follow-up. On the potential timeline for the national TV and heightened digital capability rollout, you guys mentioned it a couple of times, but theoretically, how quickly could we see TV and under what circumstances would we see TV?

Well, right now, TV is being tested in three markets between October 21 and November 20. We will evaluate that on a number of different levels, and that television in two of those three markets is running concurrently with other supported advertising, which is normally the way we would do that television doesn't stand on its own typically.

And so as a result of those tests, we will integrate television and, as I mentioned, probably at a national level. That is where the great efficiencies come in when you are making (inaudible) like that. We would integrate that into most likely the campaign that we have launching in spring.

Now, it doesn't mean that we couldn't add some selective TV in certain -- for certain reasons before that, but I would say that certainly by March 2017, you would see -- if the test is successful -- television integrated into the campaign.

Thank you.

Joseph Buckley, Bank of America.

Two questions. One, curious what the second make line today is contributing to sales? Is that -- are the sales of that second make line a significant part of the business today?

About 6%, Joe.

Okay. And then, bigger picture question, as you shift the focus next year to a little bit more on unit level economics, are you coming to accept that the base level of average unit volumes or base level of restaurant margins may be lower and resetting that is the bar from which you will grow going forward? Is it somewhat of a concession that recovering the full sales level seems less likely?

No, no we are not conceding at all, Joe, that our top-line sales can't be dramatically improved over the coming years. We are just recognizing that, in the meantime, though, it behooves us to do everything we can to be as efficient as we can be so as to drive the very best margin possible, even during that time where our volumes are still negatively affected.

But like I said in my remarks, we are not going to drive those costs down to the point where we are negatively affecting the guest experience or the ability that our field teams have in order to continue to create really great restaurant teams and have great restaurant operations.

okay. Thank you.

Nicole Miller, Piper Jaffray.

What level of share repurchase is accounted for in fiscal 2017 earnings guidance? And then, also, what will the cadence of new store development look like?

I would expect a similar buy as what we have seen in the last month or two. We bought about $1 billion worth aggressively, and that took us through like about April or May or so. But I would expect us to be at more of the kind of steady level. We want to keep a strong balance sheet somewhere in the $500 million or a little higher on the balance sheet, and then we will take excess cash flow and use that.

So, if in your model, if you take excess cash flow and assume that we kind of keep what is on the balance sheet or about what is on the balance sheet today and you can access to buy back stock, I think you'll be in the ballpark of what we will actually do.

Now, we will be opportunistic, and we will be more aggressive if the stock drops and less aggressive if the stock increase. But generally that is the approachable thing.

And to answer the question with regard to the new restaurant openings, we have said that it would be between 195 and 210 restaurants for 2017.

And the cadence will be fairly level loaded throughout the year, Nicole, if that is what you are asking.

Yes. They tend to pile up a little bit in Q4 typically, but we will level load as best we can.

Thank you.

That concludes today's question and answer session and brings to the end our conference. We thank you for your participation. You may now disconnect.