奇波雷墨西哥燒烤 (CMG) 2017 Q3 法說會逐字稿

Greetings, and welcome to the Chipotle Mexican Grill, Inc.

Third Quarter 2017 Earnings Conference Call.

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

I would now like to turn the conference over to your host, Mark Alexee, Manager of Investor Relations.

Good afternoon, 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 2017.

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 regarding sales trends; expected new restaurant openings; new product offerings and the impact of technology initiatives on our business; estimates of future food, labor, occupancy, marketing and G&A cost trends; and statements about possible price increases or 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 and as updated in our subsequent Form 10-Qs for discussion of these risks.

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

The quiet period will begin on the 16th day of the last month of each fiscal quarter and continues until the next earnings conference call.

For the fourth quarter of 2017, it will begin December 16 and continue through our fourth quarter earnings release planned for February 1, 2018.

We will start today's call with prepared remarks and then open the line for questions.

On the call with us today are: Steve Ells, our Chairman and Chief Executive Officer; Scott Boatwright, Chief Restaurant Officer; Mark Crumpacker, Chief Marketing and Strategy Officer; Curt Garner, Chief Digital and Information Officer; and Jack Hartung, Chief Financial Officer.

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

Thanks, Mark, and good afternoon, everyone.

Thanks for joining us.

Last December, I returned to the role of sole CEO, committed to restoring the operational excellence that made us successful.

It's been a challenging year, and the third quarter was no exception, but we are making meaningful progress.

We are entering the fourth quarter with a positive sales trend that I believe demonstrates our strategy is paying off.

During our prepared remarks today, we are going to share with you the progress we've made toward our goals and provide more details about our plans for the future.

Upon my return as sole CEO, I implemented a plan that realigned our organization toward the following 5 essential goals: number one, deliver an excellent guest experience; number two, restore brand trust and drive sales; number three, foster innovation around the menu and the guest experience; number four, restore our economic model; and number five, strengthen our culture and recommit to our purpose.

In order to execute against these goals, we made changes to our Board of Directors, our officer team and our field operations structure.

I'm pleased to report that the addition of 4 new board directors in December 2016 has been extremely productive, and they have provided excellent guidance as we execute against our strategy.

Over the course of the year, we also made several very important additions to our officer team, including one that I'll announce today.

Over the last several months, we added Scott Boatwright as our Chief Restaurant Officer and Laurie Schalow as our Chief Communications Officer.

Both Scott and Laurie have hit the ground running, and we'll hear from Scott directly about his progress toward improving our restaurant operations.

And today, I'm excited to announce that we have retained Mike Malanga to advise the Chipotle officer team and lead our development function.

Mike has been consulting with us on key development initiatives over the past several months.

He's been so insightful and added so much to the team that we asked him to expand our consulting engagement to lead the development team beginning immediately.

Mike will align our development organization with our long-term strategic goals and identify a permanent leader for development.

He has more than 30 years of experience in development, most recently serving as Senior Vice President, Store Development Americas at Starbucks.

During his 12-year tenure there, Mike was responsible for all aspects of development, including real estate design, construction, facilities management and lease administration.

Mike's addition will allow for Mark Crumpacker to focus on addressing our long-term customer strategy in his new role as Chief Marketing and Strategy Officer.

Mark will oversee our marketing efforts and our strategic planning process.

This will include oversight of our NEXT team, which is responsible for innovation of both menu and customer experience.

Mark has been central to the development of the strategy against which we are currently executing, and he will share some details of our longer-term strategy later on the call.

These leadership changes are essential to achieve the strategic goals I outlined earlier, and we will continue to assess the need for additional leadership roles.

With our strengthened board and officer team, we are successfully executing against our strategy.

I'd like to provide some examples of the progress we've made against these goals we set a year ago.

I'll give you a high-level summary, and then Scott, Mark, Curt and Jack will go into specifics during their prepared comments.

We have improved operations throughout our organization by focusing our teams on the customer, redoubling our training efforts and aligning manager and field leader compensation around customer-driven measures.

Under Scott's leadership, we've streamlined our field leadership structure and clarified the roles of our field leaders and restaurant teams.

Scott has our teams focused on the basics of running great restaurants, and he is delivering on a plan for operational excellence.

We still have more work to do, but we're already seeing results in our restaurants.

We've also made important strides in restoring consumer trust and driving sales.

Our third quarter saw the rollout of our largest-ever television advertising campaign, which we used to promote queso.

Not only did this campaign successfully change the narrative about Chipotle, early indications are that it's driving sales at the start of the fourth quarter.

The marketing team continues to be focused on communicating our commitment to serving only the best, high-quality ingredients in the food we serve.

We also drove sales through our ongoing efforts to strengthen digital ordering, which continues to perform near record levels for us.

Since implementing Smarter Pickup Times earlier this year, we've seen a 51% increase in digital orders.

Because our digital orders are made on a second make-line, it allows us to deliver excellent throughput and enhance the experience for our customers who are increasingly moving to digital ordering.

We've also made significant progress toward fostering innovation.

During the year, we created the NEXT team, which is focused on innovations in the kitchen and restaurant design, the menu and the guest experience.

One notable effort of the NEXT team is the addition of the NEXT Kitchen in Manhattan.

The NEXT Kitchen allows us to test operational impact of potential new menu items prior to broader market testing, while at the same time providing some early indications of customer acceptance.

But the NEXT team will also explore new strategic opportunities across the business, including how we incorporate digital technology into the guest experience.

This could include developing a new digitally forward restaurant design, a new remodel program or exploring new customer segments and dayparts.

We have also made significant progress in restoring our economic model.

Clearly, the third quarter was very unusual due to non-recurring events that impacted our performance, including hurricanes that prompted the closure of hundreds of restaurants across 3 states and the cost associated with the data security issue we saw earlier in the year.

In spite of these challenges, we closed the quarter on a positive note with sales trends that we hope will continue during the fourth quarter.

Year-to-date, we have generated revenue of $3.37 billion, an increase of 17% compared to the first 3 quarters of last year, with comparable restaurant sales growth of 8.3%.

Finally, I'd like to address the last strategic goal we had for the year, which is strengthening our culture at Chipotle.

It's always been my goal to prove that food could be served fast without being a typical fast food experience.

Over time, as I learned more about how the ingredients we use are raised, we became a champion for ingredients raised with respect for the farmers, the animals and the environment.

Chipotle continues to lead in choosing ingredients without antibiotics or added hormones, buying local and organic produce when possible, rejecting genetically engineered ingredients and eliminating industrial additives, including preservatives, from our food.

Many of our employees work at Chipotle because we are a purpose-driven company committed to choosing the harder right over the easier wrong, but we have a powerful opportunity to more strongly connect our employees and our customers to our purpose.

I'm pleased to report that we are making significant progress towards strengthening this connection.

We have reengaged our company with our values, connected them to our long-term strategic goals and begun working with all of our leaders to become champions for our purpose and for their teams.

In doing so, we are continuing to reignite the passion our loyal customers have found in our brand.

Last quarter certainly presented its share of challenges and distractions, but we are responding to these challenges and are strengthening our company.

We have built better, stronger teams, refined our strategy with a renewed focus on our guests and committed to innovation inside our restaurants.

I'm confident in our team's ability to return Chipotle on the path of success and sustainable growth for shareholders, all while remaining true to our purpose of cultivating nourished communities where wholesome food is enjoyed every day.

I will now turn the call over to Scott Boatwright.

Thanks, Steve, and good afternoon, everyone.

A little over 5 months ago, I joined Chipotle, and I can't begin to explain how excited I am to be here.

I spent my first few months physically working inside our restaurants, and I traveled to meet our crew, our managers and our field leaders.

Through my time in the field, I was able to observe the many things that make Chipotle truly special, the amount of real cooking we do every single day and seeing the passion from our employees in this brand.

There is an immense amount of pride across Chipotle to bring real, wholesome food to our guests.

I saw this passion again in late August when we held our biennial field leadership conference.

I had the pleasure of meeting all of our field leaders from across the country.

We discussed how the guest experience begins with leadership, specifically the role of the general managers and field leaders as well as training inside of our restaurants.

And we are removing the distractions and tasks that limit us from focusing on the guest.

By narrowing the role of leadership and returning to a culture of training, we will deliver a consistently great guest experience across the country.

Through this time in the field, I have identified several opportunities for improvement.

I have found the general manager and field leader roles to be unclear.

And without defined roles and responsibilities, people are often distracted as they're not focused on the things that ladder to a great guest experience.

As the leaders of the brand, it is incumbent upon us to simplify what we are asking of our field teams.

And while we have great training tools, we are not consistently using them.

Our teams want to deliver an excellent guest experience, and we must be singularly focused on building a culture to support that goal.

The care in which we take in sourcing and prepping our ingredients must now be applied to the care and consideration for how our guests feel when they dine in our restaurants.

Fixing these opportunities will not require a revolutionary change.

The solution is rooted in the way that Steve built our operations years ago: By focusing on the guest first, keeping things simple and acting with an owner's mentality.

We have outlined a plan to achieve these goals and are rolling out a number of changes.

Earlier this month, we reorganized our field leadership teams and operating structure to align our resources with our commitment toward leadership development and training.

To add leadership support closer to our restaurants, we reduced the number of layers at the top of the field hierarchy and added more field leaders directly above our restaurants.

This is more effective when managing large-scale operations, consistent with industry best practices.

Our field leaders will be far more impactful when they are not stretched too thin with too many restaurants, and we have clearly articulated the roles, purpose and responsibilities of field leaders to help them be more effective with smaller spans of control.

In addition, we've restructured our operations support.

We will now have an operation services department responsible for training, facilities, ops integration and new restaurant openings.

This effort will be led by a single Executive Director reporting to me.

This allows us to create a better support model for our restaurant teams and will help minimize the volume of activity coming from our support centers that can ultimately create distractions.

It will also ensure that we only work on those processes, tasks and innovations that will make the GM's job easier and/or allow us to deliver a more consistently great guest experience.

Lastly, we are improving our hiring process so that we can find really great talent.

We hire quickly and get crew members trained thoroughly and properly.

Comprehensive training instills confidence within our managers and our crew members to successfully complete the prep, serve our guest or address any potential issues inside the restaurant.

That confidence helps create a productive culture that attracts hard-working team members.

More importantly, it also helps us retain those great employees who want to be a part of this very unique brand and begin to develop them into terrific future leaders for Chipotle.

During all of these important changes, we have asked our development team to temper our new restaurant openings for the next 12 to 18 months before reaccelerating our growth.

This is designed to give our field teams a greater opportunity to absorb the new operating strategy and structure, restore emphasis on a strong training culture within our existing restaurants and deliver the high standards our guests deserve 100% of the time.

Mark Crumpacker will talk more about this shortly.

Conversations I've had with our restaurant and support teams have reinforced my view that we will accomplish a lot in a short period of time.

I know that our teams are motivated and energized.

And after a challenging couple of years, our teams are hungry to win.

I thank all of our field teams and the rest of the organization for welcoming me, welcoming my ideas and plans for our operations.

Steve has charged me with shifting the mindset in our restaurants to be more focused on our guests and operational excellence.

This is an area in which I have a lot of experience.

I look forward to providing updates on the hard work that we're putting into our operations and the progress we make to ensure our restaurants are the very best that they can be.

I'll now turn the call over to Mark.

Thanks, Scott.

Operational excellence inside our restaurants is fundamental to long-term sustainable growth.

As we work to achieve a consistently great experience, we are also executing against our customer experience strategy.

Building customer trust and loyalty and ultimately, the sales volumes we once enjoyed, will result from a thoughtful evolution of our customer experience combined with consistent operations.

This evolution is ongoing and includes menu innovation, an enhanced digital experience, re-envisioned store environments, more convenient ways to enjoy our food and better hospitality and customer service, all combined with marketing that drives an emotional connection to our brand and to our commitment to making delicious, wholesome food accessible to everyone.

In addition to the work we are doing to strengthen our operations, our strategy and innovation teams are hard at work evolving the customer experience across all aspects of our brand.

In this new chapter, defined by innovation and an evolution of the customer experience, there will be much experimentation, testing and refinement along the way.

Our teams are working on a variety of initiatives including several new menu items, which include frozen margaritas, desserts, new salad greens and dressings and a range of other menu items which are currently in the R&D process.

Our team is also designing a new beverage program for Chipotle, which includes the top-to-bottom redesign of the beverages we serve and how they are merchandised to our customers.

Simultaneously, our design teams are working on evolving our restaurant environments.

This includes design changes that can be applied to existing restaurants as well as designs for new sites.

These enhancements are driven by our customer experience strategy, which emphasizes digital, convenience and hospitality.

During the quarter, our menu and marketing teams launched queso nationally.

The launch followed a large-scale consumer test in more than 350 restaurants during which we experienced encouraging sales and research results.

Unlike nearly every other fast food company, Chipotle rarely adds new menu items, so the addition of anything new generates significant interest, positive and negative.

Nevertheless, our sales data and research results show that many of our customers enjoy our queso made with no preservatives or artificial ingredients, and it was an easy decision to roll it out nationally.

With the national queso launch, we saw an immediate sales lift in the high single digits as a percentage, which leveled off after initial trial.

And when advertising support began at the end of September, we saw another increase before leveling off again.

Currently, about 15% of our customers continue to order queso.

This new menu item not only increased sales with existing customers, it also attracted new and lapsed customers into our restaurants.

About 19% of these new and returning customers are trying queso, while many of the others were simply driven in by the advertising.

We know that each of these visits is essentially a test run of Chipotle and is an opportunity for us to remind our guests of the delicious food, quality of our ingredients and convenience of dining at Chipotle.

Awareness and sentiments around queso are also encouraging, with more than 80% of our customers indicating that they are aware of our queso and more than half of respondents indicating they thought our queso was better than that offered by our competitors.

93% of customers that tried queso on an entree said they like our queso and more than half indicated they would be likely to visit Chipotle more often because of the queso.

The queso advertising campaign, which consists of television, digital and social, continues through mid-November and has included television ads that aired during 12 broadcast premieres, including This Is Us, the second-highest rated premiere of the season, and Sunday and Monday night football games.

Social media support centered around an Instagram campaign called the queso cup, which was very successful in engaging customers with a completion rate of 70% among customers who opted into the week-long challenge to win free queso.

Support for digital and out-of-store ordering continues into the fourth quarter.

Since enhancing our digital ordering capabilities with the rollout of our Smarter Pickup Times initiative, online advertising support for digital ordering is continuing to be very effective, driving more than 40% of all online orders.

During the third quarter, our return on investment for online order advertising is about 7-fold.

We will continue advertising support for online ordering into the fourth quarter as well as advertising support for catering, which sees a historical seasonal lift through the holiday season.

As a follow-up to Scott's comments about new restaurant openings, we expect to open between 130 and 150 restaurants next year, a reduction from this year's openings.

While we still firmly believe that we have the potential to open up 5,000 restaurants in the U.S., we have decided that it is a higher priority right now to focus on operational excellence, including improving our training, culture and elevating our guest experience in our existing restaurants.

Ultimately, we believe this temporary reduction in openings will make us stronger in operations, and we expect the quality and returns of our real estate portfolio will strengthen during this time.

There is still much work to be done rebuilding trust and loyalty, but we are well on our way.

There's no quick fix, but we are evolving our customer experience to be the most compelling of any restaurant brand.

That, coupled with ongoing marketing that reinforces the quality of our ingredients, the deliciousness of our food and our commitment to doing the right thing, will ensure our future success.

I'll now turn the call over to Curt.

Thanks, Mark.

We continue to be pleased with the progress we are making with our key digital commerce initiatives.

Second make-line sales as a percentage of overall sales were 8%, the highest level we've seen for a third quarter, and are up 32% over the prior year.

Importantly, we continue to see strong results in our busiest restaurants, with the top 10% of restaurants seeing second make-line sales exceeding 15% of total sales mix.

We expect this momentum to grow as we continue the rollout of our new technology-enabled second make-line.

We have now deployed the system to 62 restaurants and are accelerating our installations and will have over 200 restaurants live by the end of this year.

We have prioritized the installations so our busiest second make-line restaurants receive this new technology first.

We also have a robust innovation pipeline with several new capabilities set to launch in the near term.

I'm excited to announce that the new Chipotle app, available on both iOS and Android, is scheduled to launch on November 6. In addition to significant improvements that we have made in user experience and ease of ordering, we are launching new capabilities that will enhance the guest experience, our marketing capabilities and speed of service.

As an example, the new Chipotle app offers our guests the ability to rapidly reorder their favorite meals by displaying on the home screen their favorite entrée, nearest restaurant and fastest pickup time.

We are also launching a digital offer platform that allows customers to receive, manage and redeem Chipotle offers directly from their app wallet.

An additional feature that will be available at launch is the integration of mobile payment methods, including Apple Pay, which is one of the most requested items from our customers.

Supporting mobile payments will enable us to remove pay in store as a payment option, which will not only further speed up throughput in our digital channels, but will help customers pay in an easier way.

Heading into the fourth quarter, we also launched a new ordering partnership with Facebook.

Through this partnership, Facebook users can order Chipotle from local restaurants using popular delivery services such as GrubHub and delivery.com, among others.

While it's way too soon to have a sense for how this ordering option will be received, it is very consistent with our belief in finding innovative partnerships that make it more convenient for guests to engage with Chipotle through channels that they choose.

In addition to the Facebook partnership, during the quarter, we completed the integration of all of our delivery partners into Smarter Pickup Times, and we are looking to add as many as 4 delivery partners between now and the end of the year.

While still fairly new, we are encouraged by the potential of these third-party delivery partnerships as delivery orders were up 33% in the third quarter.

We are also confident that catering has the potential to be a sustained growth driver for Chipotle.

Over the last year, we launched several improvements to catering, including online ordering, payment and delivery.

Customer response is strong, with catering sales increasing 14% in the quarter.

And there is much more we can do with this channel.

In the fourth quarter, we will start by piloting new catering offerings.

Currently, the minimum catering order size is a group of 20, and we will introduce a new group size to accommodate a party of 10.

Currently, we offer only one price tier, which is approximately $13 per person, but we're piloting 3 new price tiers, with prices starting at under $9 per person.

We believe that these changes will significantly broaden the appeal of our catering offering and increase the frequency and accessibility of Chipotle catering.

I'm encouraged with the response we've seen with the improvements we've made to the digital experience.

And the new capabilities I've mentioned today, plus the rich innovation pipeline we have in front of us, position us well to continue to see growth across all our channels.

I'll now turn the call over to Jack.

Thanks, Curt.

When you consider all the changes we focused on this year, all of it has been examined through the asking the question, "How can we improve the guest experience?" When a guest visits Chipotle today, we want to make sure we're doing everything we can to provide a delicious meal and provide great service by a talented, well-trained team.

We have made some very important strides this year: strengthening our senior leadership, simplifying our restaurant operations, placing a greater focus on the guest and fostering a culture of innovation.

And while there is still much more to be done, we believe the changes we're making and our renewed focus have us on the right path.

In the third quarter, we reported revenue of $1.13 billion and diluted earnings per share of $0.69.

The third quarter was impacted by several unexpected items as we had unusual impacts related to hurricanes from this summer, historically high avocado cost, store closures and the data security incident.

We believe the combination of these factors negatively impacted EPS by about $1.05 per share.

I'd like to address these unusual impacts first, then provide a sales review, and finally, I'll walk through the highlights of the P&L.

First, our core business was adversely impacted by hurricanes Harvey and Irma that hit Texas, Louisiana and Florida.

About 425 of our restaurants were directly in the path of the storms, and even more restaurants were indirectly impacted by the subsequent rain all along the East Coast.

The safety of our employees and guests is always a top priority when we encounter dangerous situations like these, and we could not be more proud of our field leaders, our restaurant managers, our crew members and our facility staff for taking care of each other during the storms and for getting their restaurants up and running so quickly despite managing their own personal hardships at home.

Due to the downtime from the hurricanes, we estimate that our sales were lower by nearly $6 million or 50 basis points of comp for the entire quarter.

We also have 4 restaurants that remain temporarily closed and 2 expected new openings that have been substantially delayed.

The lower sales impact -- impacted our earnings by about $0.06 in the quarter.

There were $3.3 million of incremental expenses directly related to the hurricanes, from paying all of our hourly employees even while restaurants were closed, from charitable contributions to support recovery efforts, and related to write-offs and repairs associated with the damage to our restaurants.

Expenses directly tied to the hurricanes accounted for an additional $0.07 of EPS impact.

We also had historically high avocado prices, especially in the wake of Tropical Storm Lidia, which in early September began to inundate the western coast of Mexico and continue to move east across the growing regions of the country.

The rains and cooler temperatures in Mexico slowed the maturing process, delaying the harvest of the fruit, which caused a gap in available supply.

This coincided with the end of the growing seasons in California and Peru, resulting in a severe price spike.

In a matter of weeks, our case cost nearly doubled before beginning to ease in October.

The harvest in Mexico is now shaping up nicely, and expectations are for pricing to normalize.

The impact for the full quarter was 40 basis points higher than Q2, even though we had actually expected relief in avocado prices from already high levels in the second quarter.

This impacted EPS in the quarter by about $0.19.

As a historical perspective, the avocado prices in the quarter are about 150 basis points higher than normal levels seen 2 years ago.

In addition to the impact of the hurricanes, we also made the decision to close 2 restaurants and relocate a third restaurant during the quarter, along with the expected closure of 3 additional restaurants in October.

Impairments for these restaurants and other miscellaneous write-offs for equipment total about $4.4 million in the quarter, which impacted EPS by about $0.09.

Lastly, related to unusual items, we recorded a $30 million liability for the anticipated assessment by payment card networks related to the data security incident announced in April of this year, and that reduced EPS by about $0.64.

This expense is an early estimate, and a final determination, which we expect sometime in 2018, could differ from this estimate.

Although our IT security teams identified and isolated this incident in a matter of weeks during March and April of this year, this level of potential exposure is a result of our high daily transaction volumes.

This $30 million expense is included in G&A for the quarter, and we'll continue to assess any possible shift in that potential liability going forward.

For the full quarter, our comps increased 1%.

And adjusting for the Chiptopia revenue deferral from last year, the underlying comp would have been flat.

This 100 basis point benefit will reverse over the next 6 months, and there will be a drag of about 50 to 60 basis points on the comp in both Q4 2017 and Q1 of 2018.

While comps ended up flat overall for the quarter, adjusting for the revenue deferral, the actual daily and weekly comps varied widely.

And I think the best way to provide insight into sales during the quarter is to separate the quarter into 3 distinct underlying sales trends.

Initially, comps in the first half of July were up 4.5%.

Then from mid-July through September 11, just before the unadvertised launched of queso, our comps were down about 2.25%.

And lastly, from September 12 through the end of September, when queso was launched and then advertised, comps were a positive 4%.

I've excluded the hurricane impact from these segments, as those impacts were relatively short-lived and each market impacted bounced back nicely, so the hurricane effect was truly temporary.

In October, comps so far are running in the 2% to 3% range before the negative impact of the Chiptopia deferred revenue.

So the launch of queso has added about 6% to the comp in September, and is adding an incremental 4% to 5% in October so far, when compared to the negative 2.25% trend pre-queso.

The initial comp boost upon national launch as well as just after the advertising launch, came from a combination of increased check as a lot of our existing customers added queso to their entrées, and also from increased transactions as the advertising drove a lot of new and lapsed customers into our restaurants.

And now in October, most of the added comp is coming from increased average check, with about 15% of our customers adding queso to their entrée or adding it on the side.

In the fourth quarter, we plan to expand our price increase that we trialed earlier in the year.

As we've mentioned previously, we have seen little or no resistance to the increase taken last spring in about 500 restaurants.

And we are now going on 4 years without a price increase in most of our restaurants.

In mid or late November, we will increase prices by an average of about 5% in just shy of 900 restaurants, primarily in restaurants located in the Midwest and Texas, with some pockets in the southwest and southeast.

We'll continue to evaluate any potential resistance in these markets.

And if all goes well, we'll decide on a potential increase in the nearly 1,000 remaining restaurants in early 2018.

This pricing will help offset continued high inflationary cost, especially around increased labor wages and higher occupancy rates.

While we typically provide comp guidance for the upcoming year during our third quarter release, we're going to hold off at least until our fourth quarter release.

That will allow us the opportunity to see the sustained impact of queso, the completion of our ad campaign, the response to our new app and monitor the customer acceptance of the price increase I just mentioned, while also continuing to refine our marketing plan for next year and finalize our 2018 field plan over the next few months, all of which will incorporate -- we will incorporate into our expectations for the 2018 comp.

For the quarter, our food costs were 35%, an increase of 90 basis points from Q2, largely driven by higher avocado costs.

Heading into fourth quarter, we believe that our food costs will normalize at just over 34%, and early indications for 2018 are that we may be able to improve even further due to unexpected abundant avocado crop, along with the benefit of the menu price increase.

We continue to make improvements in labor management in the restaurants, but higher wages offset much of that benefit.

In Q4, we'll increase wages during our semiannual merit increase for crew, but we anticipate labor expense as a percent of sales to remain similar to the third quarter.

Heading into 2018, labor will continue to be a challenge in the tight labor market and with rising wages, but we'll continue to search for ways to effectively schedule and manage our restaurant labor to deliver an excellent guest experience while driving labor leverage.

Within other operating costs, our marketing promo expenses were lower versus last year as we lapped the significant investment for Chiptopia from last year.

Marketing promo expenses were 3.3% during the third quarter.

Our combined marketing and promo cost will increase in the fourth quarter to about 4% of sales as the majority of our national ad campaign is occurring in the fourth quarter.

Our G&A expenses during the quarter were $99 million, which included the $30 million estimated charge related to the data security incident.

Excluding this charge, we anticipate that our fourth quarter G&A expenses should be relatively flat in dollar terms to the third quarter.

Noncash stock-based compensation expense was $17 million during the third quarter.

During the quarter, we accelerated our stock buybacks to $102.5 million at an average price of $341 per share, and we ended the quarter with over $548 million of cash and investments.

We also announced today that our board has authorized an additional $100 million in share repurchases.

From a capital allocation perspective, while we'll continue to buy our stock opportunistically, we also believe that the best use of cash is to continue to invest in the Chipotle business.

This includes continuing to build additional Chipotle restaurants, but also includes thoughtful investment in innovations such as digital, new menu options and refreshing or reimaging our restaurants where it makes sense.

Despite what was a noisy and challenging quarter, we've implemented substantial changes to our operational leadership, launched a significant new menu item, rallied our restaurant teams to focus on training.

All of these changes to date and our strategic goals are designed to deliver an excellent guest experience.

As we look to the end of the year and begin to plan for 2018, we're confident we're moving in the right direction and are making the necessary moves to ensure the long-term success for our brand, our employees and our shareholders.

Thank you, and now we'll open up the lines for questions.

(Operator Instructions) Our first question is from Sharon Zackfia of William Blair.

So I guess first on queso, if you could give any perspective on kind of the tail you're seeing in California and Colorado since those were the earliest markets.

And then secondarily, as you slow development next year, Jack, I mean, what's the plan for the extra cash that you'll generate?

It should be, I don't know, an extra $100 million of free cash flow.

Should we build that into share repurchases?

Any thoughts there?

Yes, Sharon.

First on the queso.

Colorado and California both held up.

After the first few weeks, we saw a spike, especially in Colorado.

That leveled off, but it leveled off after just a few weeks, and then it held.

And so what they saw after, I'd say, 3 or 4 weeks, Colorado continued to hold as an incremental comp, even to this day.

Pacific, Southern California, they had a lower overall impact.

But again, things settled after like 3 or 4 weeks.

So we're hoping that what we saw in October, the 2% to 3% comp or so that I mentioned in my prepared remarks, that, that will continue through the rest of the quarter.

In terms of cash for next year, Sharon, yes, the additional cash will either go into strategic investments such as digital, things like remodels.

We won't be able to do much in the way of remodels early in the year because we want to actually have a few reimaged -- reimagined restaurants.

In the first quarter, we'll examine those, and we may decide to remodel more stores in the second half of the year.

But to the extent that we don't have strategic investments in our business, I think you can expect that we'll continue to buy back stock at this higher level that you just saw.

And just to clarify, Jack, Colorado and California, I mean on average, are those at a mid-teens attachment rate?

Is it single-digit?

I mean, any clarity there?

Well, if you average them together, Sharon, they average about what we're seeing at a company-wide level.

Colorado was higher.

Pacific was lower.

But when you add them together, they're pretty close to what we're seeing with the national rollout.

Our next question is from David Palmer, RBC Capital Markets.

You mentioned a few things on the call today that are drivers for sales.

There was even a mention of a food innovation pipeline and obviously, you talked again about digital and delivery and improved operations focus.

If you were to rank order the things or the reasons why sales would climb faster than the industry, and this recovery could be reignited, so to speak, after some of these food safety issues, how would you rank order those?

And what are you most excited about?

Well, I'll start by saying that we've had a lot of change in the last year, a lot of restructuring.

So starting with adding 4 new board members, adding 2 new officers, including Scott Boatwright and Laurie Schalow, we've restructured our field leadership, and this is all toward the eye -- in the eye of making sure that we deliver an extraordinary guest experience because we got away from that, as I stated about a year ago.

We've made a lot of progress.

And I think fundamentally, when we deliver an extraordinary guest experience, it's really compelling, and it's going to bring a lot of people back.

Scott and I were just in the restaurants all last week.

And when we were in excellent restaurants -- and we were in a few that were better than I've seen, maybe ever.

And the way our crews connect with folks, and the way people connect with our food and the experience is extraordinary.

And I know by dedicating ourselves to bringing back operational excellence, we're going to get a lot of customers back, but that's not the only thing we need to do.

We need to be an innovative company.

For the past 24 years, we haven't really been an innovative company.

We have leveraged the excitement around a very focused menu and about sourcing great ingredients.

So we need to continue to do that and bring that back, and then also set ourselves up to be innovative.

And that's where I'll let Mark Crumpacker comment.

Yes, if I were to rank the opportunities, I would say, as Steve said, I would put improving the guest experience at the top.

I mean, there's a tremendous amount of room for us there.

And we've seen that, that when focus on that, we've dramatically changed the trajectory of a restaurant.

Next, I would put enhancements to the digital experience and catering next on the list.

I think those are 2 opportunities that we've not fully exploited for sure in the world of catering, but also in digital.

And as Curt mentioned, we have a new version of the app coming out, new payment methods.

We have that coinciding with the rollout of the digitally enabled second make-line.

There's a tremendous amount of opportunities for us to increase the percentage of digital orders, which has the associated benefit of reducing congestion on the mainline, and we do that well.

And then the third thing that I'd rank would be changes to the menu.

As Steve mentioned, Chipotle is a company that historically hasn't added a lot to the menu.

When we do it, we get a lot of attention for it.

And there's a lot of potential for us to reignite interest, and particularly with lapsed customers, by making relatively small changes to our menu.

It's really untapped potential for us, and so that's the way I would rank those things.

Our next question is from Sara Senatore, AllianceBernstein.

I have a follow-up on the top line and then just a question about margins.

The first is, I guess, I'm just trying to reconcile the comments and the enthusiasm about all of these initiatives with a comp that is 2% to 3% before the deferred revenue, and the implication I think is that basically you're back down to where you were before the impact of the credit card breach, kind of that down 17% from peak.

So I guess I'm just trying to understand how to sort of reconcile what seems to be a lot of enthusiasm, a big launch of queso and also the marketing, all of which would seem to have been very successful, and yet it seems like you're still having difficulty just budging from that volume run rate.

Yes.

Sara, this is Jack.

So look, listen, I'll, start.

We had to suffer through several weeks of negative sales during the quarter, as I had mentioned when I described of those 3 segments.

And so I don't know that we call ourselves enthusiastic about the overall sales trends, but we did change the trend line.

We were sitting on a negative 2% -- like I said, average of negative 2.25% for several weeks during the quarter, and we've been able to change that trend line.

Do we think we're done yet?

Of course not.

Nobody's going to be jumping up in joy for a 2% to 3% positive comp, but it did take a negative 2% comp and turn it into a positive comp, and so it's a starting point.

I think the enthusiasm is more about what we're focusing on, the strategies that we're working on right now.

It's a lot of back to basics.

It's a lot of focusing on our people so that they are well trained, well equipped and confident about delivering an excellent guest experience.

We've got some exciting digital developments, as Curt just mentioned, that are right around the corner.

So we've got a number of things that we think can enhance the guest experience.

So we're optimistic that those things will reignite the sales trends so -- but that has yet to happen.

So until that happens, we're going to continue to focus on these things that'll make the experience better and hope that it will take the 2% to 3% comp up to a whole another level.

And just on the margins, if you could.

Are there any implications for slowing store growth with respect to the lower, sort of less of a drag on margins, but also maybe on the other hand, I think ramping up maturity curves has typically been a little bit of a contribution to comp.

So could you either just talk about those 2 things with respect to the slower unit growth?

Yes, Sara.

It's a very modest impact.

As an example, our non-comp stores right now, those stores that have been open anywhere from 1 month to 11 months, they still generate a margin of about 10% for the year so far.

And so yes, they're lower than the 16% that we just generated but -- so it will have less of a drag effect, but you're talking about a few dozen restaurants or so, maybe 3 or 4 dozen restaurants or so.

So there is a little bit of relief in less of a drag, but it's not that significant.

I'd say the same thing on the comp.

Yes, our newest stores always are the highest comping layer.

And then as you go to the 2-year-old stores, they're the second-highest comp; 3-year-old stores are the third-highest comp.

But again, you're talking about a matter of a few dozen stores and so it will have a bit of an impact, and that would be a negative impact, but really on a base of 2,200, 2,300, 2,400 stores, it's going to be a very, very modest impact.

Our next question is from John Ivankoe from JPMorgan.

The question was on future development.

You -- presumably, opening fewer stores is going to allow you to open better stores.

Can you kind of comment what you think the new unit volumes are going to be going forward?

And secondly, Jack, just to the previous question, just made a helpful comment, you're doing around a 10% margin on the newer stores.

At least by our calculation, the newer stores look like they're tracking somewhere in the $1.5 million, $1.6 million range, which certainly isn't the returns that you used to have.

But would you continue to open stores, even at the new lower pace, if those new unit economics in fact prove to be sticky?

Yes, I don't know that we can comment on what we think the new sales will be.

We're optimistic that as we move the number down, that we'll go after the most risky or the most speculative sites.

And so we do think the volume will increase.

You're right in the ballpark.

Our average volumes are -- for new stores are opening up at about $1.5 million.

We do expect that number -- if not higher.

We do expect that number will go up as we open up fewer stores, but I don't know that I can give you a number.

And in terms of returns, yes, these are respectable returns.

A 10% return at, call it, $1.5 million, $1.6 million volume, that's $150,000 cash flow at a less than $800,000 investment.

It's only a 20% investment.

It's not the 50%, 60%, 70% that we've historically delivered.

But incrementally, that's going to add to shareholder value at that level, especially because those stores do comp at a higher level than other restaurants.

And so you're starting out at 20-ish percent return, and you're going to grow from there.

So these are returns worth investing in.

But right now, we really have to allow our 70,000 employees out there to focus on the existing restaurants, the existing customers, focusing in on training.

That's where the biggest opportunity is for us right now.

So this idea of holding back on openings for this 12- to 18-month period we think is absolutely the right thing to do.

And if I can, is it -- pulling back on 12 to 18 months, is 2018 the bottom or is the run rate of store openings actually going to be the lowest as we kind of finish up '18 and you put the brakes on development, which obviously takes time to slow it down?

Well, there's a tail there, John.

So I think you pull back for 12 to 18 months, and then near the end of the 12 to 18 month period, I think we then start to say okay, let's start ramping up.

And so I think '18 is likely to be the bottom, although you may not see the reacceleration until late in 2019, just because there is a tail to get things ramped up again.

Our next question is from David Tarantino, Baird.

Jack, just a couple of clarification questions.

First, on the comps you're running so far in Q4, you mentioned up 2% to 3%.

Could you talk about maybe the breakdown of the check versus the traffic in that most recent trend?

And then I have a follow-up.

Yes, David, it's hard for me to give you any meaningful insight because we're comparing an October to the biggest (inaudible) month of the year.

And so if you look at just the pure math, the traffic is down a bit and the check is up a bit, but the problem is we were in a heavy promotional period.

We had Love Story, where customers can earn the opportunity to get free food or buy-one-get-one, and so that looked artificial to me.

So there's nothing I can give you meaningful in terms of what the real underlying traffic is and what the real underlying check is.

I think as we move away from comparing against this extremely high promotional period, we'll be able to see what kind of the normal underlying traffic trends and average check trends are.

Okay.

And then if I could have one more question on the margin outlook.

Any way to frame up how you're thinking about restaurant-level margin as you move into next year?

And I know in the past, you've given us a framework that's sort of associated with different levels of same-store sales, but any way you can sort of give some initial thoughts on how 2018 might look at the -- at whatever comp run rate you want to assume?

Yes, David.

I think this is similar to what we talked about in the past.

So this isn't necessarily meant to be guidance.

But at the nearly $2 million volume we're at right now, with normalization of food costs, especially avocados, and then allowing this price increase, and if we're able to push some or all of the remaining stores that haven't had an increase, we're able to increase prices, we believe we can deliver a margin in the 20% range at this $2 million volume.

And the price increase, I don't want you to think that we're relying on the price increase to fund our margins, but it really has been 4 years for the vast majority of our stores that we've put any price increase through, and yet we've absorbed 4%, 5%, 6% of labor inflation during that time, and so our margins have taken a huge hit during the past 4 years.

And so we think allowing us to pass on some of that increase, and it's only a portion of the increase, on through slightly higher menu prices, we think that we can normalize our margins.

So I still believe in the $2 million volume range, we can deliver margins in the 20%-ish range.

Our next question is from Andrew Strelzik, BMO Capital Markets.

I'm wondering, with some of the building out of the overhead structure and adding layers of field at the field level and things like that, how should we think about G&A going forward, the contributions of G&A going forward?

I'll do that.

Hi, Andrew, this is Scott here.

A great question.

We are actually removing layers in our field hierarchy today and removing some of the -- what I believe to be just top-heavy field hierarchy in the work structure.

And instead of it being a G&A grab, we're going to repurpose those dollars to add additional field leaders closer to the restaurants so we can reduce the spans of control.

I was going to say, Andrew, I presume it to be, we haven't done the math yet, net neutral as it relates to G&A spend.

Okay, great.

And then just had a question on taking down the development pace.

Can you help us understand the process you went through to identify that this is the right level of development going forward and kind of where you prioritize or deprioritize?

I knew you gave some of the regions, but just the thought process as you reach this level in terms of the guidance for 2018.

Yes, Andrew.

I don't know that there was a precise science to it, but as Scott really got involved in working with our teams, it was very clear that -- the analogy that I would use is, we're changing the tire while the car's still moving.

And here we have a lot of people that we need to train or retrain how to run a great restaurant, how to deliver great throughput, how to execute our standards at a very, very, very high level.

And yet opening up new stores is a big distraction.

You have to start thinking about hiring people months and months in advance.

You've got to train people in advance of the opening.

You sometimes are taking people from existing restaurants to staff a new restaurant.

Turnover of a new restaurant often is high.

You hire people, and they didn't know what they signed up for.

And so this turnover is very high.

So it's a distraction in a lot of ways.

And so from an ops standpoint, it just makes sense to pull back.

Then you combine that with looking at our portfolio and saying, okay, there are certain areas where the team looks good, the team is able to handle this, the financials are great, the opening sales are great and it's like, you don't want to pull back on that.

And so it's a combination or an intersection of those two imperfect sciences or imperfect arts, if you will, where we come up to what we think is the right number.

Yes, and if I could just expand on that very quickly, I think it's important to note that it requires a great deal of talent, planning to open up the volume of restaurants that we do today, and it has been a strain on our bench right across the enterprise.

And so this will allow us to restore some of the depleted positions throughout the organization, the field structure specifically, and get stronger in our current asset base, but also get us prepared for much additional or larger growth in the future.

Our next question is from Brian Bittner, Oppenheimer & Co.

I have a question on comps and then a question on unit growth.

On the comps, you guys are comping 2% to 3% positive in October, and your guidance is for slightly negative comps for the fourth quarter, at least implied by the full year.

Is that just a function of facing tougher compares in November and December?

Or is that not the case?

Should we really start looking at your trends on a 3-year basis once you get into November?

Any color on that would be helpful.

Well, first of all, we're not predicting negative comps in the fourth quarter.

We're predicting [net of] comps to stay in that same kind of level, that the year-to-date comp will drop down to a 6.5%, but it's not a negative comp.

We had a negative comp --

Okay, thanks for the clarification.

The full year guidance I just had plugged in implied something in the fourth quarter, so if it's not negative --

Yes, we're not expecting any kind of downturn whatsoever.

So it's -- yes.

Okay.

And just on the unit growth, you guys have opened around 500 restaurants since late '15, and I think some of these, or a lot of these, are in existing markets.

The question is, just based on your ability to analyze these restaurants internally, is there any evidence that the addition of these stores over the last 3 years is one of the reasons why you're having a difficult time restoring the unit economics and comping and the recovery that you kind of were expecting?

No.

No evidence whatsoever.

We opened different numbers of stores in different markets, and we're not seeing that the number of restaurant openings has had an impact on our recovery whatsoever.

And it's got -- and that had nothing to do with our desire to pull back at this time.

It really was a, let's focus on the existing 2,300, and so there's no correlation whatsoever that you're suggesting.

Our next question is from Jeffrey Bernstein, Barclays.

Two questions.

Just one, maybe on the broader menu evolution.

I know you mentioned it earlier, Steve, but in the past, it was all about, kind of all about existing menu and fine-tuning for greater efficiency rather than broadening.

And now it does seem like with the competitive pressures and the goal to bring back lost traffic, you guys seem quite keen to expand the menu, whether it's proteins, queso, things like beverages and desserts and whatnot.

So I'm just wondering how you visualize the menu maybe 3 years out, whether we should assume it broadens meaningfully further from here.

I think you mentioned maybe dayparts or segments.

So I'm assuming people are thinking about breakfast and otherwise.

So I'm just wondering what's your vision for the brand menu 3 years out relative to where it is today, and then I have one follow-up.

Sure.

Well, first and foremost, we want to offer items that fit into our Food with Integrity philosophy.

Chipotle is about being able to purchase premium ingredients, the kinds that are in high-end markets and gourmet shops and making these kinds of ingredients available for everybody's everyday fast food.

And we've been doing a really good job at that, making these things available.

And they cost more, but we have an economic model that can support them.

So that -- it's really important to design a system that enables us to continue to do that.

And as we evolve the menu, we also evolve the way we prepare and cook our foods in the restaurant, so we can take advantage of technology.

I think the new, digitally enhanced second make-line is a great example of that, and I've been talking about that for well over a year.

The labor efficiency that comes with this -- with that, allows us to continue to invest in the business.

And so it also is a platform that allows us to create menu items that wouldn't fit into the linear assembly process that we have on the customer-facing make-line.

So our ability to try different kinds of menu items that we wouldn't have been able to in the past, you'll start to see that ability in the future and that's -- and that really opens the doors much, much wider, so that's exciting.

But again, Chipotle has traditionally had a very high frequency, repeat frequency with our loyal guests, and so we want to develop foods that people like to eat often.

And so there's a lot of emphasis on things like salads and fresh veggies and things like this that customers want.

But at the same time, they've asked for indulgent things like queso.

So we're going to have to do both ends of the spectrum and things in between, too.

But again, we've set ourselves up to be very innovative, and we've revamped the culinary development team and staffed it with some really high-powered folks, and so we expect to see some really fun stuff come out of that.

Got it.

Another was, Jack, just -- I know in the past, people have asked about balance sheet leverage.

Just wondering whether you'd consider taking on any -- take advantage of what has been an extended stock pullback, especially if you believe in the underlying, perhaps encouraging, signs in recent results and optimism for the future.

I was just wondering whether that's ever a consideration at this point.

Well, it's certainly something, Jeff, that we've talked about, but it's not something that we put a very high priority on right now.

We know the most important thing we can do is get back to basics in our restaurant, execute our standards 100% of the time, and we know that's going to turn into guests wanting to come in more often.

Right now, our balance sheet has been a strength through this.

We've weathered this storm for a couple of years, it enabled us to buy back a lot of our stock.

We're still able to grow at the appropriate rate, and so the balance sheet has been a strength.

The thing I'd hate to do is take that strength and turn it into a weakness.

And now all of a sudden, we're kind of squeezed by kind of debt covenants or cash flow struggles.

So I would not see us -- expect to see us looking at leverage in the near future.

Ladies and gentlemen, we have reached the end of the question-and-answer session, and I would like to turn the call back to Mark Alexee for closing remarks.

Great.

Thanks, everyone, for attending our call today.

We really appreciate it.

We look forward to sharing our fourth quarter and full year results with you on February 1 of next year.

Thank you so much.

This concludes today's conference.

You may disconnect your lines at this time.

Thank you for your participation.