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Executives

Chris Arnold – Investor Relations

Steve Ells – Founder Chairman and Co-Chief Executive Officer

Monty Moran – Co-Chief Executive Officer

Jack Hartung – Chief Financial Officer

Analysts

John Glass – Morgan Stanley

Jeffrey Farmer – Jefferies & Co.

Steven Rees – JPMorgan

Jason West – Deutsche Bank

Lawrence Miller – RBC Capital Markets

Craig Bibb – Jasper Funds

Matthew DeFrisco – Oppenheimer & Co.

Sharon Zackfia – William Blair

Jeffrey Omohundro – Wachovia Capital Markets

Nicole Miller – Piper Jaffray

David Tarantino – Robert W. Baird

Paul Westra – Cowen and Company

Bryan Elliott – Raymond James

Jeffrey Bernstein – Barclays Capital

Chipotle Mexican Grill Inc. (CMG) Q1 2009 Earnings Call April 22, 2009 5:00 PM ET

Operator

Good afternoon, and welcome to the Chipotle first quarter 2009 earnings conference call. (Operator Instructions) I would now like to introduce Chipotle's Communications Director, Chris Arnold. You may begin your conference.

Chris Arnold

Hello, everyone, and welcome to our call today. By now, you should have access to our earnings announcement released this afternoon for our first quarter 2009. 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 within the meaning of the securities law. These forward-looking statements will include projects of our restaurant comp sales trends, the number of restaurants we intend to open, the timing and amount of our planned share repurchases, and expectations regarding our new advertising campaign, as well as other statements of our expectations and plans.

These forward-looking 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 for 2008, as updated in our subsequent 10-Qs for a discussion of the risks that could impact our future operating results and financial condition.

I want to remind everyone that we have adopted a self-imposed quiet period restricting communication with investors during sensitive periods. This 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 second quarter it will begin June 1 and continue until our second quarter release in July.

On the call with us today are Steve Ells, our founder, Chairman and co-Chief Executive Officer, Monty Moran, co-Chief Executive Officer, and Jack Hartung, Chief Financial Officer. After their comments, we will open the call for questions. With that out of the way, I'd like to turn the call over to Steve.

Steve Ells

Thanks, Chris. We're pleased with our first quarter performance, particularly in light of an overall operating environment that remains challenging. For the quarter, we delivered a 2.2% comp, compared with a 10.2% comp in the first quarter of 2008, and we saw revenues increase 16.1% from a year ago. This brought our revenue to $354.5 million for the first quarter, and diluted earnings per share of $0.78, a 50% increase from the first quarter of 2008.

Our ability to grow our business in this difficult economy is a direct result of our disciplined and focused business model which emphasizes doing just a few things, but doing them better than anybody else. It is also the result of our belief in constant improvement, and taking a hard look at everything we are doing, with an eye toward doing it better.

While there are many things that we are always looking to improve. I would like to discuss a couple of specific areas that we have been reviewing over the last several months. The first is our menu, which has remained largely unchanged since I opened the first restaurant nearly 16 years ago. The other is our marketing, which has not kept pace with our food and people culture improvements that we have made over the last several years.

Before I discuss the details of these changes, I'd like to go over some findings from a research project we completed at the end of 2008, because this research was a factor in leading us to try some new things. The goal of the research study was to learn more about how Chipotle fits into the lives of our customers. What factors influence their choice of restaurants, and what parts of the Chipotle experience they like and dislike the most?

While the research reinforced many things we already knew about Chipotle, for instance, that our customers love our food, our service and the value of what we offer, it also taught us some things that were new to us.

We learned that while our customers prefer our food to that of our competitors, most of them were not aware that the superior quality of our raw ingredients is one of the reasons for the great-tasting food. We also learned that there are some drawbacks to our simple menu design.

Our current menus display the individual ingredients, and leave it to the customer to figure out how to combine them. We found that this design leads to a perception of limited variety and is often very intimidating to new customers. We also found that it actually discourages experimentation, even with our most regular customers. Others commented that, due to the lack of a kid's menu, they perceived Chipotle as a less kid-friendly place than other restaurants.

In response to these findings, we are testing a new menu design in all of our Denver area restaurants. This new menu includes new entree options, several featured items, new, smaller, lower priced options, and a complete kid's menu. Collectively, these changes and the resulting changes to the design of the menu boards, themselves, are intended to address much of what we learned from our research study.

They are intended to present greater variety, offer suggestions to customers who do not understand how to customize their order, provide options for customers who want something smaller, or who want to spend a little less money and to be more welcoming to families and kids, all while preserving the simplicity and efficiency of our streamlined service format.

Please understand that we are in the very early stages of this test. We will learn a lot from it, but we know that it's unlikely that we will love everything about it. Instead, we are looking at this as a chance to better understand our customers and to improve the experience they have in our restaurants. When we are comfortable that we have a clear understanding of the effect of this new menu, we will decide what, if anything, to do next.

In addition to the changes to our menu, we are launching a new advertising campaign in many of our major markets early next month. The campaign, called My Chipotle is designed to help us engage directly with our loyal customers in a way we never have before. We are very lucky to have an incredibly passionate customer base who chooses to talk about Chipotle in a way that's so genuine.

This has always been a big part of our marketing – building the brand through word-of-mouth. Through this new campaign, we are capturing the enthusiasm and passion of our customers and harnessing that to bring more influence to that word-of-mouth marketing.

The new campaign will use many traditional forms of media, including radio, print, outdoor and a significant online component. The centerpiece of the online campaign is a Website called mychipotle.com. At mychipotle.com, customers will be asked to tell us what they love about Chipotle, and to upload images, audio clips and video about their favorite Chipotle items. Customer submissions will be featured on the site, where they can be rated, discussed and shared with other customers.

Some of the content created by our customers may become part of our ongoing My Chipotle advertising campaign, and be featured in print, on the radio or online. This campaign is the beginning of our effort to form a deeper, more meaningful connection with each and every one of our customers.

We believe that our food and people cultures are strong and will continue to be key drivers of our business. Our commitment to fine-tuning these and other elements of our business, will help us continue to deliver strong performance, and increase shareholder value over the long term.

I'll now turn the call over to Monty.

Monty Moran

Thanks, Steve. You've all heard me talk about the people culture that we're developing at Chipotle, a culture that appeals only to the highest performers. And you've heard me talk about the priority we place on moving our highest performers into the highest impact positions. The Restaurateur Program, and the newly created Team Leader position are examples of changes that we have made to reward top performers, and to help guide them into positions where they can be even more effective.

This culture has really taken hold in our restaurants, and it seems that every time I visit our restaurants, our top-performing teams are raising the bar higher and higher in terms of the strength of their teams, the way they prepare and cook their food, and the extraordinary customer service that they deliver.

Our customers recognize the difference, as we've seen in the number of positive comments regarding customer service double since the same time last year. And we've also seen the number of negative comments decline.

You've also often heard us talk about the discipline that we bring to our business, our continuous efforts to identify ways that we can become more efficient, to use our resources more responsibly, and to improve the quality of our customers' restaurant experience.

I'm pleased to report that we continue to see real, tangible benefits from this commitment and from the programs that we have developed. These benefits are apparent throughout our business model, and in nearly every facet of the customer experience. For example, we're providing better customer service and better food while improving the cost of labor and food and reducing our G&A expenditures.

Since the creation of our National Labor Matrix in the second quarter of 2007, we've enjoyed a very efficient labor model with labor costs lower than most restaurants even though our employees do so much more food preparation and real cooking in our restaurants.

With our new restaurant teams, with their focus on attracting and retaining only the top performers have proven that they can beat this labor matrix, even while continuing to create better experiences for our customers.

Another consequence of having higher performing teams in our restaurants than ever before, is that we're able to reduce the average size of our restaurant crews. In 2006 for example, the average crew size was 22 people when our average volume was around $1.5 million per restaurant. Today we have an average of 19 people working in each of our restaurants, no, I'm sorry, 19 crew people working in each of our restaurants with an average volume of $1,750,000.

Top performing teams can accomplish more with fewer people. And when our managers reduce their crew size by removing lower performers, they can spend even more of their time developing our future leaders from the crew ranks.

Our restaurant teams are also doing a better job of managing food, ordering the right amount of each ingredient, ensuring each ingredient is delivered to the restaurants in a way that meets our very high standards and preparing and properly cooking the right amount of food so it's always fresh and tastes great while minimizing waste.

So this high performing culture that we continue to build in our restaurants is clearly paying off in our financial performance. We're providing a better customer dining experience and better business results at the same time.

Without this strong culture in our restaurants, I'd be concerned that finding these efficiencies would lead us to compromise our customer experience in some way. And we're getting these better results even while our field support ratios continue to improve. Where area managers supervised five restaurants on average about five years ago, our team leader area manager group now oversee nearly 10 restaurants each today. These greater field ratios combined with a culture of top performers in our corporate office have allowed us to continue to improve what we're doing while delivering G&A efficiencies each year.

While we can't do anything about the economy, we will continue to strengthen our brand and our business by continuing to build this culture of top performing people in our field and in our office, empowering our restaurateurs and team leaders to constantly raise the bar in terms of great food, great service and the strong business.

The strength of our food culture combined with our people culture, along with our constant drive to improve everything we do will allow us to emerge from this recession stronger than we were when it began. And I'll now turn the call over to Jack.

Jack Hartung

Hey, thanks, Monty. Our restaurant managers and their teams are working harder and smarter than ever. Treasuring each customer who visits Chipotle, running their business with discipline and strengthening their teams by hiring and developing only top performers in their restaurants. They respect the fact that in this tough environment you have to earn every single customer visit. And while we're pleased with the overall results of the quarter, we know our customers are watching every dollar they spend, and we're focused on making sure they feel rewarded each time they dine at Chipotle.

Our results for the quarter continue to demonstrate that we're operating a business, the business in a disciplined manner so we can remain financially strong. Our already strong balance sheet continues to strengthen and our superior unit economic model has allowed us to continue to open restaurants with expectations of superior returns, funded by operating cash flow, while we continue to opportunistically pursue our $100 million share buyback.

Our revenue increased 16.1% in the first quarter to 354.5 million from 305.3 million last year, and our comps increased 2.2%. Menu price increases from last year contributed about 8.5% in the quarter with no new price increases during the first quarter. Traffic was down about 4.5% in the quarter. An average check was up about 7% from last year, less than the full 8.5% menu price increase.

As we mentioned last quarter, it's very difficult to quantify how much of the decline in traffic is due to the economy and how much is resistant to our price increase. This is especially true because we began to see traffic declines in the third quarter of last year before the price increase.

Overall for 2009, the price increases taken last year will result in an effective increase of about 6% for the full with effective pricing of around 6% for the second and third quarters and less than 3% in the fourth. Based on transaction trends we have seen so far this year, and assuming the economy does not worsen significantly, we continue to expect sales comps in the low single digits for the full year.

The second quarter comp will include a number of pushes and pulls, specifically; we lose a day as a result of being closed on Easter this year. And we lose about 2% as we lap menu price increased from last year. On the positive side we've begun to see the benefits of comparing to a softer comp last year and as we're about to roll our new advertising to several other major markets, we hope it would be a benefit there as well.

Restaurant level margins increased 230 basis points over the first quarter of 2008 to 23.5%, as the menu price increase more than offset the deleveraging from fewer transactions. More than half of the improvement, about 120 basis points came from lower advertising expenses in the first quarter this year versus last year. We expect that benefit to reverse over the next few quarters as the advertising campaign Steve talked about is rolled out.

For the year, we expect our total marketing and advertising costs to be about the same as a percentage of sales as it was last year. Food, beverage and packaging costs for the quarter were 31%, 140 basis points lower than Q1 of last year, and down 110 basis points from the fourth quarter of 2008. The decrease on fourth quarter 2008 is mainly due to the impact of menu price increases in that quarter along with some easing in many commodity costs along with effective management of our food costs.

While the climbing cost environment has stabilized significantly in the past few months, we do expect modest upward pressure from a few key ingredients including avocadoes and meats. Labor costs were 26.4% for the quarter, down 30 basis points from last year. The positive effects of our menu price increase on labor were largely offset by inflation and the deleveraging effects of declining transaction.

Nonetheless, we drove leverage on the already efficient labor line as a result of our continued focus on hiring outstanding crew and managers, which has allowed us to run better restaurants with fewer labor hours as Monty outlined. Occupancy costs for the quarter were $27 million or 7.6% of revenue, up 40 basis points from the same quarter last year. The increase continues to be driven by opening proportionately more restaurants in more expensive, densely populated areas such as Boston, New York, Philly, and Florida combined with lower comps.

Other operating costs were 11.5% for the quarter down 110 basis points from last year. And this decline is due to the difference in the timing of our advertising expenditures this year versus last. We expect this timing benefit to reverse over the next few quarters as our new marketing campaign is rolled out across many of our major markets.

G&A for the quarter was $23.7 million or 6.7% of revenue down 40 basis points from last year due to the impact of menu price increases from last year and a managed reduction of spending in travel, in meetings and outside services. And this was offset by increased stock comp expense. We anticipate our stock comp expense to be around 15 million in 2009, up from 12 million last year.

Pre-opening costs for the quarter were $1.9 million or 0.5% of revenue, down from 2.8 million or 0.9% of revenue for this quarter last year. Last year's pre-opening costs were high in Q1 as a result of a significant number of restaurants under construction to support the 49 openings in the second quarter of last year. We expect total 2009 opening expenses to be similar to 2008.

Interest rates continue to remain at historic lows, causing our interest and other income to decline to just 0.1% of sales in the quarter, down 30 basis points from last year and we have no expectations that interest rates on the safest liquid instruments will increase this year.

Our effective tax rate for the quarter was 38.5% compared to 38.4% last year. And we expect our effective rate to be at this 38.5% rate for the full year. We opened 26 restaurants, new restaurants in the quarter and continue to expect to open 120 to 130 for the full year.

Delays have caused our timelines to be extended, and about 2/3 of the restaurants will open in the second half of the year with a majority of those in the fourth quarter. So with that in mind, along with the growing financing and leasing challenges facing developers, there may still be risk in this guidance which is outside of our control and we'll provide updates as needed.

Our new restaurants continue to open with annualized sales in the $1.350 million to $1.4 million range. With stabilized and commodity inflation and resulting rebound in our margins, we can invest in opening new restaurants even in this difficult environment with expectations of generating returns in 35% to 40% range within a few years. When the economy fully recovers, our return expectations will move back about 40%.

We made good progress on a $100 million share repurchase plan we announced in October. Through the end of last week we repurchased 1,170,000 shares for little over $54 million and this was at an average price of just over $46 per share. And this includes about $29 million invested in the first quarter. It's difficult to predict when the buyback will be completed as it's dictated by the market and is dependent upon the share price and the trading volume.

Our repurchases did slow down further over the past several weeks based on price and trading volumes. So I caution you against simply extrapolating our progress so far and predicting when we might finish the repurchase. I want to close with an update on our progress in investigating the possibility of collapsing our class A and class B shares into a single class, and we've been working very hard on this issue.

We've contacted the IRS. We've hired additional outside counsel, a law firm that recently led the successful collapse of a dual class structure. And we've spoken with McDonalds. After discussions with outside tax counsel and the IRS, an IRS ruling in favor of a class looks unlikely as a result of the technical and procedural issues. So we've moved on to pursue an opinion of counsel as required under our separation agreement with McDonalds.

Our tax counsel just recently provided an initial working draft of an opinion letter which is currently under review. And as a reminder the separation agreement requires that the opinion needs to be an unqualified opinion that the class will not jeopardize the tax free nature of the split off and the opinion must be acceptable to McDonalds.

And because of the significant potential liabilities involved, I'm sure you can appreciate the very high comfort level that we must achieve. We'll continue to work closely with our counsel and with McDonald's and try to resolve issues that come up. And we'll continue to provide updates as we get more information. Thanks for your time today.

At this time we'd be happy to answer any questions you might have. Operator, please open the line.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from John Glass – Morgan Stanley.

John Glass – Morgan Stanley

Two questions, first Jack, just on your commentary about comps and the second quarter, just to be clear. You're talking about the benefits of the easier comparisons. Does that mean you're actually seeing comps improve relative to the first quarter results and if you're making those comments is it with or without Easter?

Jack Hartung

Yes John. In the second quarter so far, which is just a few weeks, last year we saw our comps begin to soften in the second half of April and as we're going against those softer comps we are seeing some improvement relative to the first quarter. I'm not including Easter in that and so, John the way I would think about it is Easter – it hits us negatively by about 1 percentage point or so overall for the full quarter. Menu pricing that we're lapping hits us for another 2% or so, so we're down about 3%. But overall for the quarter we did do a 7% comp last year versus 10 of the first quarter.

And so hopefully the positive and the negatives kind of offset there. And then we're optimistic about what we might see from advertising. So that's the way I would think about the comps.

John Glass – Morgan Stanley

And then just what is the timing of the testing of these new menu boards? What's a reasonable timeframe for you to test them and then to consider rolling them out system wide? Is that something you would expect to do this year or is it really a 2010 event? How long does it take?

Steve Ells

Yes John, we'll be testing in Denver for about four weeks now and we're about halfway into that test today. We don't have enough information yet though to determine what parts of it will be rolled out nationally. There are some things that I think we might like about it and some things that might not be perfect. But the test really does incorporate a lot of different things and so we'll pick and choose from those things that might be applicable for a national roll out. But that hasn't been determined yet.

Operator

Our next question comes from Jeff Farmer – Jefferies & Co.

Jeffrey Farmer – Jefferies & Co.

Jack, I apologize if I missed this, but did you provide an update on the full year restaurant level margin guidance that had been 19 to 20?

Jack Hartung

No, I didn't John.

Jeffrey Farmer – Jefferies & Co.

Are you willing to provide an update?

Jack Hartung

Not a specific update. We did that last year, John. It was the first time we ever did it because we were raising prices. We were trying to offset the impact of commodity inflation and there were a lot of ups and downs with that. What I did do though, would tell you, this quarter was a great quarter and we're very proud of the results.

I did point out one item – advertising was unusually low in the first quarter. We only spent about 1% this year versus last year we spent about 2.2% and overall for the year we'd expect to spend about 1.75% for the full year. And so that's something that I would point out as being maybe a little bit on the unusual side. Other than that it was kind of a normal quarter.

Jeffrey Farmer – Jefferies & Co.

Okay. And then a final question from me. It's my understanding that in early March several markets ran a newspaper insert promotion offering a free burrito. Assuming it's true how widespread a promotion was that? Have you ever done anything like that before? And did that have an impact on your traffic?

Jack Hartung

Yes, John we've done that a lot. We've always been willing to invite customers in to Chipotle. We'll do this a lot in new markets. We'll do an existing market just to kind of create some excitement. We just did that on a market by market basis. You probably saw that more in the central region, which is where we did a bunch of it in the first quarter. And it's a nice way to one, reward our customer. And it's one way to bring new customers or customers that haven't been in in a while to come back and eat Chipotle. Generally that's been a good experience for us. And we've done it a bunch and we'll continue to do stuff like that from time to time.

Operator

Your next question comes from Steve Rees – JP Morgan.

Steven Rees – JP Morgan

I just wanted to ask a little bit about your philosophy on pricing. There's 6% I guess in hindsight was maybe a bit aggressive given where the cost turns are coming in now and I guess as you look back in hindsight would you have taken that much anyway? Did you think you had a pricing gap relative to the competition and what have you learned through your experiences for this price increase that may shape your future increases down the road?

Monty Moran

You know Steve, our pricing philosophy is that we want to remain accessible. We have the highest quality ingredients – or higher quality ingredients than any of our competitors, but historically we've still manage to remain priced at or below the prices of our competitors. That's been a deliberate act on our part and we've done that because we want to make sure that we can bring this new way of eating to a broad, broad group of people instead of making it elitist.

So at the time we raised prices, in the drought fourth quarter it was a time when we were looking at commodity pressures which looked to be in that sort of mid-single digit range at the time in terms of inflation, which gave us a lot of concern obviously because normally we don't like to raise prices unless we have a food with integrity story. Like if we're adding naturally raised chicken and naturally raised beef to a market; in those cases we would bring the new prices into that market in order to retain our margin on those items.

And so in this case – and we had told you guys about this that we might have to do this and it came to a point where we did have to do this in order to allow our margin to remain solid. Now that being said, when we raised prices, we only raised prices so that they matched our competitors; we actually did not price ourselves higher than our competitors, even though it was a pretty significant price increase. But yes, in hindsight had we known everything we know now we may have taken a different approach, at least a slightly different approach to the way we raised prices.

Steven Rees – JP Morgan

Okay and then just finally for Steve I appreciate the color on the upcoming advertising campaign. We definitely look forward to it. But what have you learned so far in terms of how important is a value message in the current environment to drive traffic? Do you think that's important or are your consumers scored around value okay?

Steve Ells

Certainly value is important and I think there's a lot of different ways to provide value. One of the ways that Chipotle has been providing value for the past 16 years is to provide customers with something that they can't get anywhere else. And that is food that's prepared in front of them according to classic cooking techniques, super high quality raw ingredients that are raised sustainably. People know it's good for them. They see it. They feel it. And so to be able to provide that on a sort of a mass scale in our efficient delivery system I think is very much a value.

And certainly the transaction degradation that you've seen is due to a tougher economy, for sure. But there are ways that we can compensate for that and make sure that people really see the value in what we offer through great execution, through improving our teams and making sure that we're delighting every single customer that walks in.

Our advertising campaign My Chipotle is leveraging the excitement from our loyal customers and these are the customers that throughout the years have been helping us build our business. In fact they've been the most important part of our marketing. So this new My Chipotle campaign really systematizes and leverages on the excitement of those customers and will encourage new trial. The value is built into that as they go through the chipotle experience.

Operator

Our next question comes from Jason West – Deutsche Bank.

Jason West – Deutsche Bank

Jack, I was wondering if you could go through again the comp breakdown on the quarter. I just missed the numbers there, exactly what the traffic and ticket was.

Jack Hartung

Yes, in comp for 2.2, menu price increase effect was 8.5%. Transactions were down 4.5% and the check only went up 7% instead of the 8.5%, so we lost a little bit on the check. You're within 20 basis points or so. There's some rounding that can get us exactly there.

Jason West – Deutsche Bank

And can you give us any help just given how volatile the environment's been out there just on the trend of traffic through the quarter. I know you guys don't like to talk about monthly comps but just if you could give us any help on that, that would be great.

Jack Hartung

Yes, Jason, it was pretty steady throughout the quarter. It was pretty consistent in that same kind of low single digit range. We saw a period in the first half of February where we had great weather throughout most of the country and comps did pick up during that period. And then, but for the most or the rest of the quarter, they were pretty steady in that low single digit kind of range and yet they kind of continued as we left the quarter.

And then, as I mentioned in response to an earlier question, they picked up a little bit as we're now going up against softer numbers. So I would say our traffic has been relatively steady. Other than like weather and Easter and things like that it's been relatively consistent.

Jason West – Deutsche Bank

And a couple on the food side, any way you could help us understand the leverage on the food line? How much of that was reduced waste versus lower commodities?

Jack Hartung

Well, gosh, there's so many moving pieces, Jason. We're always working to improve our food quality to make sure we serve the freshest best tasting food we can while minimizing waste. That's always been a balancing act. Our teams have just gradually quarter by quarter by quarter just always done a better job and so I don't know that we want to spell out exactly how much that is.

But commodities pulled back and we expected to already see some pressure in a number of areas and we got breaks. And we didn't get any huge breaks in any commodity, but all the things that we thought would tick up a little bit if anything stayed flat or ticked down. And we thought we'd be closer to that maybe 32% range or 32.1% that we saw in the fourth quarter, and so we were delighted at the combination of better food controls and better commodities knocked that down 100 basis points so we were able to eke out this 31%.

Jason West – Deutsche Bank

And last one, can you just update us, I don't know if you said this, on where you see aggregate commodity inflation for the full year. I think you had been low single digits on February.

Jack Hartung

I called it modest pressure Jason, and I think low single digits is probably the best guess right now. And we do feel some pressure is likely in avocados and likely in meats and so I think a low single digit from here, from the first quarter through the rest of the year is probably a pretty good estimate at this time.

Operator

Your next question comes from Larry Miller – RBC Capital Markets.

Larry Miller – RBC Capital Markets

Could I just follow-up on the commodity picture? Should we be thinking about kind of an even sort of inflation picture for the rest of the year? Is there some contracts that come in and out that we should be aware of?

Jack Hartung

Well, there are some minor contracts, Larry, that do come in and out. I think thinking about it relatively even right now is probably the best way to think about it. The contracts that do end later this year include rice, corn and soy oil and then for the fourth quarter we may see some change there but I don't know what to expect right now. We'll know as we get closer to the fourth quarter.

In cheese, cheese should actually get a little better for us. We locked in for six months and then we just recently locked in for the third quarter and we'll get a little bit of a break there. So there's little ticks up and ticks down or possible changes later, Larry, but I think kind of an even in places throughout the year is probably a fair way to do it right now.

Larry Miller – RBC Capital Markets

And then I might have missed it, but when does the advertising start and how much of that 120 basis points of lower cost comes in in say Q2 versus Q3 or do you spend that up front? And then, just to close the advertising loop, is it your intention to use that messaging to talk about the new menu at some point in 2009?

Jack Hartung

Well, let me first hit the how we spent last year and then I'll turn it over to Steve. We're not going to say exactly what we're going to spend quarter by quarter this year, Larry. I mean, we're still figuring that out. We want to give ourselves a lot of room there.

But what I can tell you is last year we spent 2.2% in the first quarter, 2.5% in the second quarter, 1% in the third and 0.7% in the fourth. Overall for the year, we spend 1.75% last year. Overall this year, we expect to spend about 1.75% and in the first quarter so far, we only spent 1%. So we expect our advertising to tick up, we expect overall to average 1.75%, so you get an idea of the different comparisons. The advertising started in Denver two weeks ago.

Steve Ells

So I think I understand the question, there was sort of two parts to it. Will you use the advertising – in the advertising campaign will you talk about the new menu? Well, there are two things. There is My Chipotle which starts early next month and My Chipotle is about harnessing the enthusiasm for Chipotle from our existing customers. They're going to be helping drive new people into the restaurant and increase frequency through sharing their passion for Chipotle and the combinations of things that they make when they go in to visit. And so that's one piece.

The other part is this new menu and that is the test that's going on in Denver. And we don't know the results of the test. There are a lot of new components to the menu board. There are new items. There are low-priced things like single tacos and cups of soup and side salads and a kid's menu. So there are lots of things, lots of moving parts now and we're going to really dig in and make sure we understand what part of that test delivered good results and what things might not be applicable for roll out.

So we'll decide when that test is over if there's something that we might want to roll out nationally. But that would be independent of My Chipotle campaign that starts early next month.

Operator

Your next question comes from Craig Bibb – Jasper Funds.

Craig Bibb – Jasper Funds

Could you guys break out the non-comp revenues?

Jack Hartung

Do you mean from new stores?

Craig Bibb – Jasper Funds

Correct.

Jack Hartung

Well, if it's 2.2% of the increase, 2.2% came from the comp. The rest of it came from the new restaurants. We don't typically do a further breakdown than that.

Craig Bibb – Jasper Funds

You guys actually were until third quarter.

Jack Hartung

Are you talking about the average restaurant volume for new stores?

Craig Bibb – Jasper Funds

Well, I'm trying to get to what's going on with the AUV on the non-comp stores.

Jack Hartung

Okay, well in my prepared comments I said that new stores are still opening up an annualized greater than $1.350 million to $1.4 million. All right, so that's our new stores and so that is still intact. Okay, and then our comp stores, we did put in the release that they're averaging I think it's $1.755 million.

Craig Bibb – Jasper Funds

The non-comp, the new units, are not opening – they're opening at a slower pace than they were a year ago or '07 but not a slower pace than –

Jack Hartung

They're not opening up at a lower level than a year ago. A year ago at this time we started talking about they were not keeping pace as a percentage of our mature restaurants. But a year ago at the time we talked about our new restaurants opening up in this $1.350 million to $1.4 million range and they've been really opening for the last year at that same kind of annualized level. So we've held very, very steady.

Operator

Your next question comes from Matthew DeFrisco – Oppenheimer & Co.

Matthew DeFrisco – Oppenheimer & Co.

To go back on the commodity costs in COGS here, did you have in the quarter by any chance a switchover to chicken or were you off of naturally raised for a short period of time at all during 1Q?

Monty Moran

I'm sorry, oh yes. We had, I would call it slight interruptions in our supply of naturally raised chicken. It wasn't such that any whole market was without it, but we had patches that had to go without it for a couple of days at a time a couple times.

So and the reason for that was just supply issues which came from some of the suppliers having a difficult time financially, justifying raising enough birds because of the lack of demand for the breast meat. So we did have some supply issues for a while, but it's been steady since that time.

Matthew DeFrisco – Oppenheimer & Company

I guess on a year-over-year of basis, is anything of meaning? Did you have more interruptions than you did last year? Is that potentially something? I'm just a little perplexed by the degree of the beat on the COGS line, given your February update of around 2% to 3% inflationary pressures.

Jack Hartung

Well, Matt, none of this, the supply parts that Monty talked about, it doesn't really impact our cost of sales, so it's more of a supply interruption where we've had to, like Monty said, for a few days, in a handful of stores, where we had to switch over to commodity chicken for a while.

We certainly don't like doing that. We never really ran out of chicken where we weren't able to serve to chicken, but we did have to switch over and we had to put a message, in the restaurants saying that we're temporarily serving – we are temporarily not able to serve naturally raised chicken so. But in terms of impact on the cost of goods sales line there really isn't any impact at all.

Monty Moran

Yes, and just to be clear, this is just a few restaurants on two different occasions, for a couple of days each. So this is literally not material at all in terms of our cost of goods sold. I mean, if it were we would have probably done something with our pricing if we were going to have a long term reduction in the amount of naturally raised chicken that we serve. But this is one time was a couple of days, the other time might have been three or four days that we had to be without that chicken in a 20 store or 25 store market. Absolutely not material at all to our food costs

Matthew DeFrisco – Oppenheimer & Company

And also I guess with respect to the comment about you're losing a little bit average check. How is that happening, with little variation on the menu or customers not dancing around the menu? Are you seeing less bulk orders or people just not buying beverages? Where are you seeing the – how is the average check going down, if people aren't really trading around your menu too much?

Jack Hartung

Yes. First of all it's a very small adjustment, it's about $0.15 and, when you break it down, it is. It looks the group sizes are just ever so slightly smaller, and literally like 1% smaller. Typically it looks like our group sizes are about 1.33 customers in a transaction and that moved down to about 1.31. That had a very slight, matter of a few pennies impact, on our average check. And people are buying fewer drinks and that's been a trend we've seen really over the last several quarters and the last few years and so that had an impact as well, and that knocked off a few pennies.

And we are seeing fewer orders through our fax and online ordering, which means you're losing some of those bigger orders as well and we think that's got to do with the economy, where you don't have these business meetings where they're ordering a lot of food to be brought in and so we're losing some of those larger orders. So all those things have each contributed a few pennies here and there and it's added up to about $0.15 in total.

Matthew DeFrisco – Oppenheimer & Company

And then looking at your stores, is there anything to be concerned about with the weight of stores in the back half? Is doesn't seem as balanced as in prior years. I know you're always had the fourth quarter a little heavier, but is this a byproduct of the slower over all macro and you're giving yourself more lead time, or is it the markets you're going into, that they need that time or they're seasonally, that's their growth period is in the fourth quarter is when construction's easier to get done?

Jack Hartung

Matt, it's really a function of the developers and the struggles that they're going through, and some deals are falling to the wayside completely, and that's why we pulled back on our opening guidance a few quarters ago, to 120 to 130. And a lot of our developers, they're not moving the developments through as quickly and so a lot of them are just sliding. So these deals continue to slide to the fourth quarter. It's outside of our control.

In terms of concerns there's not really concerns on our end. We feel we're ready to build these restaurants, we're ready to go in and have our teams go in and finish the restaurants, from our standpoint. We're ready to go in and staff the restaurants. Our people culture is doing great.

There is P&L pressure in the fourth quarter temporarily because new store P&Ls are really inefficient. And so if we have a bunch of openings, disproportionate number of openings in the fourth quarter, that is going to impact our margin temporarily. But in terms of concerns from a long-term basis or anything like that, no, there's not really any concern on our end.

Matthew DeFrisco – Oppenheimer & Company

And are these sites similar to what you've opened in the last couple of years? Are you skewing a little bit more maybe to an older, retrofitting a QSR or taking over an old Starbucks? I mean, obviously, the size of a Starbucks doesn't make it applicable, but –

Jack Hartung

No, it's a good point, Matt. They're similar in size, they're similar in terms of the market that we're going into – 2/3 of them are still in mature markets. But there is a skew in that, moving more away from new development and into existing sites, where a tenant went out of business and we're taking over and existing site, and so there is a slight mix change, from that standpoint.

Matthew DeFrisco – Oppenheimer & Company

Then my last question, just on variation of markets, you've been pretty forthright about the correlation between unemployment and your same store sales, so I'm just curious, where you're seeing the larger job losses, are you seeing also the traffic fall off? And given your substantial surprise on the commodity cost side or COGS, is it an opportunity maybe to get more competitive on the menu there, because you made a comment and I was curious. The competition, you're below, you're always below competition.

I'm from New York and I'm sitting here and I can't really find a place you're cheaper than – Qdoba is the only thing that looks like you guys, but I mean, there is no real competition for you also here, so you might open up your demographic by lowering the price point or bringing in a different type of menu there. That's what I was just curious about.

Monty Moran

Yes, with regard to the first part of the question, basically are we seeing regional differences in sales, with regard to parts of the country that are having a tougher go of it or higher unemployment in various parts of the country. We've spent a lot of time looking at that and, overall we do certainly see some correlation between national unemployment numbers and our sales. That we have seen.

When we try to pin it down, by looking at the places that have been the hardest hit by unemployment, such as California or basically the West Coast and Nevada or Ohio or that kind of thing, I mean, the correlations are that good, aren't that true. So basically I would say no, there isn't a true correlation between those areas of the country with the most significant unemployment and our sales attracting, although there is a national correlation.

Matthew DeFrisco – Oppenheimer & Company

So a sentiment issue probably more than a tangible direct correlation?

Monty Moran

I think that's right, yes, yes. I think so.

Operator

Your next question comes from Sharon Zackfia – William Blair.

Sharon Zackfia – William Blair

So two quick questions, for the ad spending, just so I'm clear on that, I know you don't want to give out quarter by quarter what you're planning this year, but should we expect it to peak in the June quarter? It sounds like you're doing a larger launch here in June or am I misunderstanding that?

Jack Hartung

Yes, I wouldn't expect a peak yet. I mean, we really want to give ourselves room to see how things play out and decide how we want to spend and where we want to spend it. I mean, really the best I can tell you, Sharon, is we're going to spend 1.75% for the year, we only spent 1% in the first quarter, we're going to make that up over the next three.

So assume it's going to be relatively level, but we're going to make it up along the way, so we'll update you as the quarters unfold. I gave you what last year's quarters were so you can get an idea of what we're up against and that's really the best detail I can give you at this time.

Sharon Zackfia – William Blair and Company

And then one more quick question; so presuming that you stay at this kind of low, single digit rate of comp, do you anticipate continuing to get labor leverage throughout the remainder of the year?

Monty Moran

Well, no, in a word. We had the labor matrix we put into effect in 2007 and we are delighted that, like I said, that we've actually been able to beat that. When I say we've been able to beat it, it's really not we, it's really our very best restaurant managers throughout the country have found ways of staffing their restaurants more efficiency, allocating their labor more efficiently and undertaking their tasks in the restaurant more efficiently. So they've actually been able to beat the matrix, while delivering great, great sort of operational results and customer service in their restaurants and we're delighted by that.

Certainly, we will continue to work hard to build an even better people cultural, make sure that we are appealing even more top performers and in hopes that what our very best managers are doing today becomes more or the norm in the future. But short-term I certainly wouldn't anticipate that you're going to see a drastic increase or a substantial increase in labor leverage at a low single digit comp.

Sharon Zackfia – William Blair and Company

What, out of curiosity, would anticipate your breakeven comp to be to hold labor?

Steve Ells

Well, Sharon, it depends on the environment when you're talking about a low price increase environment we had always talked about you need like a mid single digit kind of a comp. You know in this environment you've got 8% pricing and that offsets, you have to get deleveraging first because of lower transaction and the lower check and those two along with inflation kind of offset each other.

So and when we work through all those pieces we did eke out some leverage and so with this kind of pricing a low single digit comp in this kind of range we were able to eke out the 30 basis points. We had hoped to be able to kind of keep at about that level. Can we get more? God we'd love to but I wouldn't count on that is the way I would think about it.

Operator

We will now go to Jeffrey Omohundro – Wachovia Capital Markets

Jeffrey Omohundro – Wachovia Capital Markets

Thanks, on the advertising effort, I wonder if you could just help me understand your thinking around the goals of the campaign regarding building brand awareness versus building traffic, and to the extent it's designed to build traffic, what elements of it do you think will achieve that. There was a reference to mychipotle.com, maybe you could expand a little bit upon that. And if the traffic gains were not to materialize, what you're thinking might be around enhanced affordability options, thanks.

Steve Ells

To answer the last question first, we are doing this test in Denver now where there are lower priced items, single tacos, side salads, soups. We have a new entree called the chicken posole which is priced at $5.55 which is less than the traditional burrito or bowl or salad. So we will know the results of this test in a few weeks time, and so having that information will help.

To mychipotle.com it certainly intended, the goal is to drive traffic to increase sales, to get more people into Chipotle. You know, one of the things that we found through our research is that people are not aware of all the different varieties, all the different varieties we have, all the different combinations that you can make. A lot of people who have never been to Chipotle don't get a sense for what Chipotle is and mychipotle.com is leveraging, again, our passionate customers who are the ones who have built the business in the past through word of mouth marketing.

But this is a sort of turbo charged version of that where it's a very systematized approach to taking their passion and delivering it out through different media, outdoor billboards, Internet base, things like this, and so we know that we expect it to deliver more transactions.

Operator

We'll now go to Nicole Miller – Piper Jaffray

Nicole Miller – Piper Jaffray

I came across channel checks in the space like in the kind of premium convenience space in different regions of the country. For example the northeast had really bad weather in the first quarter. Some concepts that were similar to yours were reporting drops in traffic, whether it was just less positive or even in the negative territory, but then in the less like the central U.S. seem to be doing quite a bit better. Did you see that same kind of variation?

Jack Hartung

Well Nicole, we saw variations in weather, so you know watch the weather come and go and then you look for the trend without the weather, but I would say in terms of northeast weak and central strong, I'd say no, I'd say anything if I was going to comment on those two, we saw strength in the northeast relative to central.

Nicole Miller – Piper Jaffray

Okay, and any certain reason why there then, especially given the weather being what it was?

Jack Hartung

No, I mean northeast has always been strong for us. We've typically seen most of our strength, Nicole, in terms of comps, in terms of volumes, in terms of brand acceptance on the coast, on the West Coast on the East Coast and in the South, and so that's been kind of a trend that we've seen for awhile.

So it's not really a new trend so but I just think we've been in those, a lot of those areas for a long time. The South, we're newer in the South, but we have great brand awareness. We have great teams out there and those have generally performed well for us.

Nicole Miller – Piper Jaffray

Okay, and then back on the advertising, because I'm just so extremely curious and excited to see how this like starts to be represented, I'm thinking back to food integrity and always kind of top of mind for your concept. And you know in good times right, pre-recession I think the challenge or what you guys always talked about was like getting a credit for food with integrity. And now obviously things aren't as good and in fact like we have a survey and it's – albeit a team survey, I think it's still interesting, where values' moving up over like even convenience or nutrition as a source of influence.

And so I'm just wondering like how is your marketing going to address food with integrity? How much focus do you allocate to that? How much are you going to focus like in actual price point and value and then how much to just to product themselves? And then finally, how does the food with integrity philosophy changed if at all I guess so that you can get credit for that?

Steve Ells

Well first Nicole one of the things that we found in our research is that we have not been getting credit for the food with integrity initiative. People understand that Chipotle food tastes better. They don't necessarily associate higher quality ingredients, sustainably raised ingredients, with this food with integrity that they're not making that connection.

And so again I think through all of our messages going forward we're going to get away from – in the past we talked about antibiotic free chicken, dairy that was raised without rGBH, these kinds of things are important we think in how we source our food, but our customers tell us this is not the kinds of things that are important to them.

So, we're making sure that we're now going to combine the message that our food tastes great because we have great quality raw ingredients, and that's the connection that we failed to make in previous marketing efforts.

Operator

Our next question comes from David Tarantino – Robert W. Baird

David Tarantino – Robert W. Baird

A question on the mix it sounds like that might have emerged in Q1 is that right, or have you seen that prior to Q1?

Jack Hartung

You mean the impact on the check? Yes, we did not see that really emerge until Q1.

David Tarantino – Robert W. Baird

And your low single digit comps guidance for the year are you contemplating that continuing for the balance of the year?

Jack Hartung

Yes.

David Tarantino – Robert W. Baird

Okay, thanks for that clarification. And then another clarification on the cost line, the cost of sales you mentioned a couple of – or at least low single digit inflation from here so would that imply that you would expect the ratio to increase as the year progresses?

Jack Hartung

Yes, David you know like 2% if it ends up being 2% it would be about 60 basis points so I would expect kind of just steadily throughout the year, but it's modest inflation and we expect that some inflation in the first quarter didn't happen so maybe we'll get lucky, but the areas of avocados and meats do. Everything we read and everything we see suggest there's more upward pressure that flat or down.

Operator

Our next question comes from Paul Westra – Cowen and Company

Paul Westra – Cowen and Company

Just wondered if we could dive a little bit more into the consumer research and the tests in Denver just a couple of questions, first is how will you be defining success both from a qualitative and a quantitative perspective?

Jack Hartung

Paul, there's the obvious stuff that we're going to look at, sales and product mix and trade down and stuff like that, but we're also doing a bunch of customer surveys because frankly we're worried about, or we're very concerned about the impact on the brand. We're throwing a lot of changes all at one time. We're doing things that we don't know if it's going to enhance our brand even if it does enhance our sales line.

So we're going to ask customers who try the new items, you know, try the kid's meal, try the posole, try the new items, what their reaction is and is it consistent with the brand and what's their overall experience. But we're going to ask people that come in and don't try the new items, you know, what do they think about the experience and is this, these new things that we're trying, is it somehow taking away from their experience?

And we're going to be really thoughtful in the way we look at this. We're going to be really patient. We're not in any hurry to take anything from what we're doing in Denver and try it anywhere else throughout the country because we want to do a really, really thorough analysis of exactly what the impact is, of course on our financial results but also the impact on the brand which is more of a longer term thing that we really want to be careful with.

Paul Westra – Cowen and Company

You answered my second question which is what is the acceptable cost, I guess, in labor cost, speed of service cost and unintended consequences. So I guess I assume you're willing to take some hit on some labor costs and speed of service if the obviously the payoff is large enough.

Steve Ells

Well, but I don't think it's a speed of service issue. I mean some things actually help speed of service now. I mean for instance there are on this test menu, there are featured items. One can come in and get the classic burrito, or one can order a chicken posole and that's all you have to say. And so the crew can then go ahead and make that and deliver that final meal to you without any further interaction and if every customer, say, ordered a classic burrito that would dramatically increase throughput.

However, you know, when kids go through with a kid's meal that take a little bit more, especially kids who are curious and ask a lot of questions. So again it's going to – we need to do a lot more research to figure out the effects of speed of service, but it's on both ends. Some things are actually making it more efficient and some things might make it less.

Paul Westra – Cowen and Company

Yes, are you moving towards a second warmer and I'm just curious, any new equipment that you're testing as well?

Steve Ells

Well, we actually are testing, I mean completely independent of this new menu yes, we have different warmers and configurations of the kitchen that we're working on but that's a completely different topic, but nothing to report on that.

Jack Hartung

Yes, nothing that you meant, Paul, in terms of the [inaudible] test did we add a tortilla warmer or something like that. No, we have not done that. That would be something if we identified a throughput issue where customers love what we're doing but we have a throughput opportunity, you know, we would then look to equipment or look to the way that our operations run on the line. We would look at all that.

But you're right I think in your original question, you know, what are you going to look at? We're going to look at everything and we're going to be very thoughtful. We don't have any pre-determined approach here where we're in a hurry to get this thing rolled out to any market over any kind of timeframe. We're going to be very thoughtful and we're going to look at every single angle here before we take another move.

Paul Westra – Cowen and Company

Okay and then related less to the test and more to the research, I mean is the opportunity for day part perspective, you mentioned families and kids and women, is it more of a dinner opportunity do you think and it pre-balances your sales throughout the day and –

Steve Ells

Certainly the dinner business is where we would see more kid's meals served Monday through Friday for sure. I think you're going to see kid's meals served all day at – on weekends. But we're not ready to report any of these findings and this is just sort of casual observation so far.

Operator

Your next question comes from Bryan Elliott – Raymond James.

Bryan Elliott – Raymond James

Good evening. I wanted to address the new unit volumes. From your disclosure and just from doing some simple arithmetic it appears that we've seen AUVs drop a couple percent here in this quarter give or take and first meaningful decline ever and wondered if that relates to whether the performance in some of these retrofitted versus the new strip centers might be? What's impacting that?

Jack Hartung

Yes, they're actually not down, Bryan, and so I don't know. You have to make certain assumptions to calculate what the impact of new stores, non-comp stores are, including things like when they open during the quarter because we don't provide that. What I can tell you is that when we take the new stores, the non-comp stores that we've opened over the last 12 months and we annualize those, we're still right smack in that $1.350 million to $1.4 million range and we've been in that range really for the past year.

I have noticed that the analyst models generally end up being a little bit higher than our numbers so I can't tell you mechanically why that is, whether it's an assumption on the timing of the opening, what –maybe there's a seasonality. I mean if you're comparing the openings in June to the openings in January there's seasonality in there and so I don't know how you consider that in your model, but I can tell you that the annualized volumes that we're looking at, and we haven't changed the calculation in that at all, had stayed steady right in that $1.350 million to $1.4 million range.

Bryan Elliott – Raymond James

All right. The 12 months AUVs that you do disclose dropped almost a point.

Jack Hartung

Yes, well, that's just a function of these new stores are coming in at $1.350 million to $1.4 million and our average last quarter was in the $1.760 million range or something like that and so when you're layering in these new layers and new openings at $1.350 million, $1.4 million and we only had a comp of 2.2%, the 2.2% is not enough to offset bringing in these new stores at the lower volumes. And so that's why you're seeing the slight slide in the last few quarters in our average mature volumes.

Bryan Elliott – Raymond James

So wouldn't the same thing be impacting the zero to 12 month stores?

Jack Hartung

Well, but it's not because that's a separate calculation that we take all those stores and we do it every single month and we do it every quarter and it stayed – those restaurants that stayed $1.350 million to $1.4 million. But actually to your point, Bryan, what's happening is we used to be at the 85% range and we kept pace and then we weren't keeping pace but we stayed at the $1.350 million, $1.4 million, but what's going to happen is they're going to start moving up to the high 70s and maybe low 80s and so they're going to be catching up again, if you will, as the averages kind of decline.

But we're going to stop talking about the new stores as a percentage because what's more important and the way we've always looked at it is, what is the opening volume? What are the comp expectations? What are the margin expectations and what's our investment?

And as long as those combine to give us high confidence we can generate within a few years, a superior return on investment, which in good economy times was better than 40%. In today's time with this kind of a margin it's in the 35% to 45% range. That's how we look at it and that's how we'll continue to report on it.

Operator

Your next question comes from Jeffrey Bernstein – Barclays Capital.

Jeffrey Bernstein – Barclays Capital

Thank you. First, just kind of big picture take away from what we've learned in the Q&A here, the upside to the earnings was pretty significant versus what people were expecting. I know you had previously said you thought expectation for modest EPS growth in '09, but nowhere near kind of the 25% that you guys have historically targeted. The comps are still up low single digit. I'm just wondering if you can isolate perhaps the greatest changes or surprises since the middle of February?

I think you mentioned that COGS came in below your target. I'm just wondering whether you'd say that was the biggest surprise? It seems like the other operating line was also well below plan. I wasn't sure if the marketing represented 75 basis points of that? What were the biggest surprises relative to what you were thinking a couple of months ago?

Jack Hartung

Well, I would put them in three categories. The first one was our expectation for food and place and commodities and in every commodity that we thought we'd see some pressure and some move up we saw either flat or declines. So that obviously helped our food line.

The second thing is deleveraging is a very damaging thing to the P&L and if you go through the math and you go through your modeling and you look at what it looks like to take out 4.5% transactions and another 1.5% out of the check, that can have a devastating effect on the margins and that's been an environment we've not been in before.

And so we had very significant concerns about the impact of deleveraging and so we're delighted with the fact that we were able to manage the business and as transactions have been falling with this economy and whatever resistance to the price increase, that our teams have done a nice job of running the business.

And then the third bucket is just our top performers are leading the way in terms of what efficient labor looks like while you're delivering a great experience and what effective management of food line is and so we've really challenged our teams to strengthen the business in this environment and they have done that. And so those were concerns we had at the time and we're fortunate that the top performing culture has delivered when we've asked our teams to raise their game and make the business stronger while delighting our customers.

They did both and so our positive customer comments are up; negative customer comments are down and our business is stronger than ever and so we have to attribute that to our field teams and that's in essence those are the three buckets that I would describe as what we achieved or over performed compared to what we were concerned about just a few months ago.

Jeffrey Bernstein – Barclays Capital

That's helpful and on the cost of goods you said you'd love for it to come in at those levels again, but you wouldn't expect it. But the other two lines, the other two buckets I should say, are those reasonable to assume you could see further leverage? I mean should we still assume that the top performers are going to deliver more efficient labor and better managing of the business less deleverage for the rest of the year.

Jack Hartung

We would hope that we could keep this kind of level. You've got to do it every single day and every single week and you've got to do it while delivering a superior customers experience, so we feel good that we delivered this quarter the right way, you know, without squeezing the line item and worrying about customer experience. So we think these types of results are sustainable, but you've got to do it and 850 some restaurants and every single customer visit and every single day. And so it's not a guarantee but we certainly hope we could deliver these types of results.

Jeffrey Bernstein – Barclays Capital

Yes. And did you say something about – I mean I know the margins were up 230 basis points. If you just streamlined the marketing spend it would have been 1.75% each quarter and you only spent 1%, so that helped your margin by 75 basis points? Is that reasonable?

Jack Hartung

Well, there's two ways to look at it. Compared to last year it helped it by 120 because last year we spent 2.2%. This year we only spent 1% so we picked up 120 when you compare it year to year, but if you were going to just average it we would spend the exact same percentage each quarter and that would be about 1.75%. So depending on how you're looking at it you could look at it one of two ways.

Jeffrey Bernstein – Barclays Capital

And then just lastly, I think in your comments earlier you said it's obviously very difficult to tell in terms of pricing how much that drove down the traffic versus just the broader macro. I was just wondering from your own surveys and whatnot, I mean what's your best guess or what are your surveys telling you in terms of the magnitude of macro versus pricing? Just so that you – I'm assuming that you would like to know that for future price increases?

Jack Hartung

Well, we didn't do surveys to ask that specific question. Our survey's more around trying to understand what our customers love about Chipotle and don't understand about Chipotle so that we can come up with this ad campaign that Steve talked about.

I really don't know. It's kind of not that important right now in this environment. What is important is that our customers are under pressure. We did have to raise prices. We didn't want to but we had to last year and so the reality is we have to make sure every one of our restaurant managers, every one of our crew, feels like they have to earn that price increase and earn the customer's business in this kind of environment every single time.

And that's what our focus is on and so we're not really spending any time trying to figure out how much is resistance and how much is due to the economy. If we do our job with satisfying or delighting the customer every single time, our business will be strong.

Operator

And that is all the time we have today for questions. I'd like to turn the conference back over to our presenters for any additional or closing remarks.

Chris Arnold

That's all on our end. Thanks everyone for joining us.

Jack Hartung

Thanks everyone.

Operator

This concludes today's presentation. Thank you for your participation and have a wonderful day.

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Source: Chipotle Mexican Grill Inc. Q1 2009 Earnings Call Transcript
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