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Executives

Alex Spong - Director of Investor Relations

Steve Ells - Chairman and Co-Chief Executive Officer

Monty Moran - Co-Chief Executive Officer

Jack Hartung - Chief Financial Officer

Analysts

Joe Buckley - Bank of America Merrill Lynch

Sara Senatore - Sanford Bernstein

Alvin Concepcion – Citi

Michael Kelter - Goldman Sachs

Karen Holthouse - Credit Suisse

Jeffery Bernstein – Barclays

Chipotle Mexican Grill, Inc. (CMG) Q4 2013 Earnings Conference Call January 30, 2014 4:30 PM ET

Operator

Good afternoon, and welcome to the Chipotle Mexican Grill Fourth Quarter 2013 Earnings Conference Call. All participants are now in listen-only mode. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions) As a reminder, this call is being recorded.

I would now like to introduce Chipotle’s Director of Investor Relations, Mr. Alex Spong. You may begin sir.

Alex Spong

Thanks John. Hello everyone and welcome to our call today. By now you should have access to our earnings announcement released this afternoon for the fourth quarter and full year 2013. 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 projections of restaurant openings, comp restaurant sales increases and growth in catering sales, throughput, food cost trends, effective tax rates, investment costs and capital expenditures as well as statements regarding potential menu price increases and 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 forward-looking statements. We refer you to the Risk Factors in our Annual Report on Form 10-K as updated in our subsequent Form 10-Qs for a discussion of these risks.

Our discussion today will also include non-GAAP financial measures, a reconciliation of which will be found on the presentation page of the Investor Relations section of our website. I would like to remind everyone that we have adopted a self-imposed quiet period restricting communications with investors during that period. The quiet period begins on the first day of the last month of each fiscal quarter and continues until the next earnings conference call. For the first quarter, it will begin March 1 and continue through our first quarter release in April.

On the call with us today are Steve Ells, our Chairman and Co-Chief Executive Officer; Monty Moran, Co-Chief Executive Officer; and Jack Hartung, Chief Financial Officer.

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

Steve Ells

Thanks Alex. I am very pleased with our performance for the fourth quarter as well as for the full year and we delivered revenues of $844.1 million for the quarter, an increase of 20.7% and $3.21 billion for the full year, an increase of 17.7%. The revenue growth came from a 185 new restaurant openings and from comparable restaurant sales increases of 9.3% for the quarter and 5.6% for the full year. All of this led to diluted earnings per share of $2.53 for the quarter an increase of 29.7% and $10.47 for the full year an increase of 19.7%.

Of course we’re particularly pleased that Chipotle’s strength continues to be rooted in our focus on the key drivers of our business. Our unique food culture and our unique people culture and a strong economic model that allows us to do things in ways that are unusual within the industry. Throughout the year and during the quarter we continue to make significant progress in each of these critical areas. We continue to strengthen our food culture through our quest for better ingredients from more sustainable sources and our commitment to preparing the food that we serve using classic cooking techniques.

One example of this is our work to remove all GMO ingredients from our food; another is the addition of Sofritas the all new vegan menu item we’re offering in 40% of our restaurants. We continue to make progress in our efforts to shift our ingredient sourcing to non-GMO options and we will remain focused on this throughout the coming months.

As of now all of our cooking oils used in North America are made from ingredients that are not genetically modified and there are only a few key steps left before all of our food is made without genetically modified ingredients. We’re still working to eliminate them in our corn and flour tortillas a process we expect to be complete by the end of the year.

We’re also continuing to expand the availability of Sofritas, the vegan item we introduced in our San Francisco restaurant last year. When we created Sofritas we wanted to develop a recipe that would satisfy vegetarian and vegan customers and that would also be appealing to meat eaters as well and we have succeeded in doing that. Right now Sofritas are in over 40% of our restaurant and amount to about 3% of our sales. What’s exciting is that about 40% of the Sofritas that we sell are being ordered by people who normally eat meat. We’re pleased with how customers are responding to Sofritas and expect to continue to roll them out as we secure more supply of this very special organic tofu in the coming months.

Many of the issues that concern us such as GMOs or the overuse of antibiotics in livestock farming are complex and sometimes difficult to understand that’s why we create marketing designed to make people more curious about these issues. We believe the more curious they become and the more they learn the more likely they will come to Chipotle.

A recent example of this kind of communicant was last year’s Scarecrow marketing program which included a three minute animated short film and a game for iPads and iPhones. Scarecrow approved very successful in terms of sparking conversation about issues in industrial food production which was a primary goal for this program. It's been viewed online nearly 12 million times and it's companion game has been downloaded nearly 600,000 times. But more than that it has sparked significant discussion about issues in food generating 500 million media impressions through news coverage of the program. Volume of coverage that would costs some $5 million to purchase as advertising. Continuing in the tradition of Scarecrow we have just announced plans to launch Farmed and Dangerous, an original scripted comedy series that hysterically explores the world as industrial agriculture in America. Farmed and Dangerous consist of four 30 minute episodes that will run on Hulu starting February 17th. The series focuses on the introduction of a new petroleum based animal feed created by the fictional agro business company Animoil.

By using satire and doing so in an entertaining way we hope to make people more curious about their food and how it's produced. Programs like Scarecrow and Farmed and Dangerous are one facet of our overall marketing designed to show customers how Chipotle is cultivating a better world and we’re also making progress with other components of our marketing including our traditional advertising and our local marketing programs. We continue to run traditional advertising image totally [ph] markets around the country and just wrapped up a campaign in support of our catering program.

We also have a full slate of local marketing programs planned for markets around the country such as our cultivate festivals which we held this year in San Francisco, Dallas and Minneapolis. Last year these cultivate festivals drew nearly a 100,000 attendees in total and with advertising and PR support they reached significantly larger audiences. What’s more, these programs are proving to be very popular with post-event research showing us that more than 90% of attendees in each market would attend the events again. All of these things that we are focused on our food culture, our people culture, the unique way in which we market Chipotle demonstrate how we are changing the way people think about any fast food, but we also know that to really change food culture and to reach even more people is going to require that we serve more than burritos and tacos. That’s why we developed ShopHouse, which follows the same model as Chipotle by using delicious quality ingredients, classic cooking techniques and emphasizes a culture of top performers being groomed to be the future leaders we will need to support our growth. And it is why we have made an investment in Pizzeria Locale, which we just announced in December.

Pizzeria Locale began as a casual dining restaurant in Boulder, Colorado. It was started by master sommelier Bobby Stuckey and executive chef Lachlan MacKinnon-Patterson, who met while working at the French Laundry, Thomas Keller’s legendary French restaurant in Yountville, California in the Napa Valley. Bobby and Lachlan are extraordinary restaurateurs. Their first restaurant, Frasca Food and Wine, is nationally acclaimed. Since meeting them over 10 years ago at Frasca, we have had recurring conversations about how we can one day work together. When that conversation led us to the possibility of developing a fast casual version of Pizzeria Locale, we knew that was the right opportunity.

In the Chipotle format, Pizzeria Locale uses the same ingredients as the original Pizzeria Locale in Boulder and makes pizzas inspired by the (indiscernible) with exceptional attention to detail. To make this concept work, where volumes are high and customers expect food to be served quickly, we designed a special pizza oven that delivers the results of the Italian wood-burning oven they use in the original restaurant in Boulder while cooking pizzas perfectly every time in less than two minutes. Like Chipotle, Pizzeria Locale has a focused menu and an interactive service format that allows customers to customize their order. In addition to a selection of classic and custom pizzas, customers can enjoy an array of salads, meatballs, sliced order prosciutto, red or Italian wine and a caramel chocolate pudding called hudino [ph].

Under our agreement with Bobby and Lachlan, Chipotle has an equity interest in this new venture and could become the majority owner over time as the concept expands. In addition to providing capital to open additional restaurants, Pizzeria Locale can also draw on Chipotle’s resources and expertise in other areas such as real estate, finance, purchasing and marketing. Bobby and Lachlan and their team are driving this concept and are responsible for all facets of restaurant operations. Not only do Bobby and Lachlan share our vision to change food culture, they are exceptionally capable restaurateurs who can help us achieve that. The first Pizzeria Locale is opened in Denver and we are currently looking at a couple of other additional sites in Denver also.

ShopHouse, which was the first concept we developed to test the notion that Chipotle model could be applied to other kinds of cuisines now has six restaurants opened in Washington DC and Los Angeles. ShopHouse continues to remind me of Chipotle in its earliest days. Customers really love the food and the experience and we are eager to introduce more people to the flavors of ShopHouse. This year, we planned to open more ShopHouse restaurants in Washington DC and Los Angeles.

Finally, our international presence now consists of 16 restaurants in Canada, London, Paris and Frankfurt with few additional restaurants planned for 2014. We remain encouraged by the potential for all of our growth seeds, including the new concepts in the international locations and know that success from any one of them may give us new avenues for future growth, but for the foreseeable future, however, our growth will be driven primarily by opening Chipotle restaurants in the United States.

I will now turn the call over to Monty.

Monty Moran

Thanks Steve. I am super proud of our results this quarter, but I am even more proud of how we achieved them. We have an amazing people culture here at Chipotle and the foundation of that culture is a group of terrific people who are all striving to make the people around them better. Our people are passionate about our mission of changing the way people think about need fast food and they know that the way to accomplish that is to have teams of all top performers empowered to achieve high standards. That is exactly the kind of culture we have been building in our restaurants and throughout Chipotle.

I am so proud to have seen the strength of our people culture become as a finding characteristic of Chipotle and to have witnessed its contribution to our success. Our special culture is responsible for a better unit economic model at nearly every level and this continues to contribute to the strength of our business quarter after quarter and year-after-year. The top performers that we’re developing in our culture are becoming the leaders that we will need to support our growth well into the future. Throughout the quarter we continued to promote new restaurateurs, the elite managers who embody what our people culture is all about. We finished 2013 with over 400 restaurant tourist over seeing nearly 40% of restaurants including the home restaurants and others that they mentor.

We include the field leaders who have come up through the Restaurateur Program those who have been promoted restaurateur to apprentice team lead, team leader, team director. We have nearly 500 restaurateurs leading more than 2/3rds of the entire company of all of our restaurants.

Well the restaurateur position remains a very prestigious one at Chipotle; the program is ultimately about much more than just prestige. Restaurateurs and the restaurateur culture that they are building allow us to deliver consistently better results. They make better tasting food with less waste which leads to lower food cost. They run better and more productive shifts which leads to efficiencies in labor. They maintain and repair equipment more efficiently leading to lower maintenance and repair cost. They are fewer costly and time consuming HR issues because our teams understand their vision for their restaurant and are empowered and happy in their jobs.

They deliver a better throughput because the teams are all top performers and of course better throughput is better customer service. Overall they are the ones who are showing us how every aspect of our business can get better and better.

So the link between our strong people culture and the performance of our company is obvious and is the key driver to our success. To help us continue to build and strengthen our people culture last year we brought our entire field leadership team together to establish very clear expectations for them and to provide them with new tools to help them understand what the most important task of their job is which is developing restaurateurs and restaurateur cultures.

At the center of this effort is a new restaurant diagnostic and planned tool that I developed to help field leaders more effectively recognize what’s keeping a restaurant from achieving restaurateur status and developing a clear plan of action to help their managers achieve this position more quickly.

The diagnosis and planned tool works by promoting field leaders to use symptoms which exist in the restaurant to identify broader themes that are holding the teams back from being excellent. Once they select the appropriate themes in the tool the tool generates a specific plan of action that the manager can employ in order to more effectively establish a restaurateur culture in the restaurant.

To use the tool properly requires that all of our field leaders are in the restaurants constantly interviewing every member of our crew to determine the degree to which we have teams of top performers and power to achieve high standards. During this process our field leaders gain an intimate understanding of the performance of their restaurant and the root causes that are preventing them from being at their very best. Once the plan is written our field leaders follow-up every quarter with another plan and they are watching to see how their teams are evolving and developing towards becoming a restaurateur team.

In using the tool our field leaders become aware of a great deal of information including the strength of the team, the depth of the people pipeline to be sure the restaurant has the right people in place for continued development, the training systems that are in place, the scheduling, the financial metrics and how well the restaurant is implementing the four pillars of great throughput.

Once the plan is written the field leader and GM meet to discuss it's implementation and the field leader specifies how they plan to assist the GM on an ongoing basis. This process is repeated every quarter with the idea of symptoms decline and each store will be getting closer and closer to have a restaurateur culture.

We’re hearing over and over how excited managers are to have this tool in place. For nearly all of our restaurant this tool is providing a new level of understanding as to our expectations and giving clear direction to our GMs about how to become restaurateurs by taking some of the mystery out of what it takes to build this special culture. As of now all of our non-restaurateur restaurants have plans in place to help them on the road to restaurateur and our field teams will create new plans for each restaurant every quarter.

At first having more top performers in place than ever before allows us not only to run better restaurants but also to push into new areas to improve the Chipotle experience for our customers. Most recently this has enabled to roll out of our catering program which we first introduced in our Colorado restaurants in January of 2013. Today we’ve catering available in all of our restaurants except those in New York City which we will add to the program later this year.

Through our catering program customers can setup a portable version of our service line for groups of 20 or more for customers who are looking to accommodate a smaller group we still do offer our Burritos by the Box option. Catering sales are approaching 1% with most this being incremental. In some of our markets like Denver, Seattle, St. Louis and San Francisco, for example, catering sales are averaging about 1.5% of sales. To support catering going into the busy holiday season, we had advertising running at all of our markets throughout December that included digital advertising, print and outdoor. The campaign performed very well during this time more than doubling page views from the Chipotle catering site.

Given the strength we are seeing with our catering programs so far, we are optimistic that we can continue growing our catering sales in the future. Having more top performing teams also helps us drive improvements and throughput. During fourth quarter, we continue to see excellent progress in delivering faster throughput with an average increase of six transactions during our peak lunch hour and an increase of five transactions during our peak dinner hour. What really impresses me is how we achieved our fastest throughput ever, even though the fourth quarter is traditionally a slower sales quarter of the year. This tells me that we are better suited than ever to set new throughput records and have the best customer service that we have ever had as we move towards our busiest sales month, which take ways during the second quarter of the year.

I hope and expect to share good news about our continued improvement on this important aspect of our business at that time. So these increases in throughput are very encouraging and are primarily the result of having more teams, the top performers empowered to achieve high standards as well as our renewed emphasis on what we call the four colors of grade throughput. Not only are we emphasized in the importance of consistent applying the four pillars in all of our restaurants, but we now have tools in place that will help us monitor and track our throughput performance. With these new auditing tools in place, we can tell how frequently each of our restaurants is executing the four pillars and work with our key leaders and individual managers to make improvements for restaurants are not doing as well in this regard. With this added visibility, we are confident that we can address any issue or issues that exist in this area and continue to have better throughput and better service on an individual restaurant basis so that we can continue to improve service in all of our restaurants and drive additional transactions during our busiest times.

Finally, I am pleased to report that our real estate pipeline continues to look very solid and we maintain our belief that we are going to open between 180 and 195 new restaurants in 2014. That means we are building more restaurants than ever before, but importantly, we are also managing our investment cost very efficiently and our new restaurants continue to perform very well with opening volumes at or above our communicated range of between 1.6 million to 1.7 million. With volumes like these, we obviously are providing tremendous returns on invested capital.

For year ahead, we expect new construction sites will account for about 50% of our restaurant openings, up from 43% last year and we are pleased to see that new developments are creating greater opportunity and availability for new Chipotle restaurants. Helping to support this trend, we are seeing more activity for smaller two or three tenant buildings in many parts of the country. Overall, we are going to open about 75% of our restaurants in proven and established markets in 2014 with the remainder of them in the new or developing markets. As we continue to strengthen our food and people cultures with new tools in place to help us more efficiently develop restaurateurs and with the strengthening real estate pipeline, we are confident in our plans for 2014 and remain confident that we are going to advance our vision to change the way people think about any fast food.

And with that, I will turn it over to Jack Hartung.

Jack Hartung

Thanks Monty. We are proud of the results that we achieved during the fourth quarter and for the entire year of 2013 as our empowered restaurant teams continue to provide a great dining experience to all of our guests. As a result, our comps accelerated during the year and reached a high of 9.3% in the fourth quarter. These comps help drive an overall sales increase of 20.7% in the quarter and 17.7% for the full year. And our sales totaled $3.21 billion for the year surpassing the $3 billion dollar and sales mark for the first time ever. The comp was driven primarily by increased customer visits, while our average check increased by about 1%. Average check increased as a result of our catering program which serves a minimum of 20 people per catering order along with an increase in add-ons such as chips and guacamole and extra meat. Catering has now been rolled out in all of our markets, except New York City, where we expect to add catering later this year.

Looking ahead, we will gain one extra day in Q1 due to Easter falling in the second quarter this year. So that will shift about 100 basis points of comp from the second quarter to the first quarter. As a result of the strong comp momentum in the fourth quarter, we are increasing our sales guidance for the full year 2014 from low single-digits to a range of low to mid-single-digit comps. Our comp comparisons will be easiest early in the year and progressively become more difficult as we compare against the strong comps in the third and fourth quarters of 2013. This comp guidance is before consideration of any price increase we may take during the year.

Our average sales volume for restaurants that have been open for at least 12 months reaching an all-time high of $2.170 million and in terms of new restaurant they continue to perform very well opening with sales at or above the high-end of our communicated range of $1.6 million to $1.7 million. We opened 56 new restaurants in the quarter bringing our year-to-date openings to a 185 which exceeded the high end of our guidance range for 2013 and we ended the year with 1595 restaurants and as we mentioned during our last earnings call we plan to open between a 180 and 195 new restaurants in 2014 and we expect that these openings will occur relatively evenly throughout the year. Diluted earnings per share for the quarter was $2.53 an increase of 29.7%. Restaurant level margins increased in the quarter by 100 basis points to 25.6% as we leverage a higher sales comp which more than offset food cost which were 40 basis points higher than the fourth quarter of 2012.

EPS was $10.47 for the full year of 2013 an increase of 19.7% compared to 2012. For the year efficiencies from higher comps allowed to leverage labor and occupancy lines for the restaurant level but margins declined 50 basis points to 26.6% due to higher food cost which were 80 basis points higher for the year. Food cost were 33.9% in the quarter up 40 basis points from 2012 and sequentially higher by 30 basis points compared to the third quarter. Inflation year-over-year was driven mainly from higher avocados cost and to a lesser extent from higher tomato and corn salsa cost.

Avocados prices continue to remain high and are expected to remain elevated throughout 2014 as there will be increased demand putting pressure on relatively flat supply levels for Mexico and from lower supplies from the California growers. We’re also expecting similar supply constraints in beans [ph] as a result of two consecutive years of drought conditions. So as a result we expect food cost to increase over the next few quarters and for the full year we will be around 34.5% of sales or higher before the impact of any menu price increases.

We made no decision on a menu pricing at least for this year and we will continue to monitor trend such as food inflation, our comp trends and general economic and consumer confidence trend but based on these elevated and rising food cost we believe a menu price increase is likely sometime during the third quarter.

Labor cost were 23% of sales in the quarter decrease of 90 basis points from 2012 most of this decline is due to leverage from the higher comp and we also benefited from lower workers comp in the quarter which provided about a 20 basis point benefit. For the full year labor cost were down 50 basis points in 2012 mainly due to leverage from the higher full year comp of 5.6%.

Other operating cost were 11.3% for the quarter which is down 20 basis points from 2012. Lower marketing cost were offset by higher printing cost related to our roll out of catering and Sofritas along with higher cost of local store marketing including local fund raising efforts. For the full year other operating cost were 10.8% were up 30 basis points from 2012 due to higher marketing and promotional cost including the local store marketing. Marketing was 1.2% in the quarter compared to 1.8% in the fourth quarter of 2012 sequentially from the third quarter marketing was down 30 basis points as lower marketing levels coincided with the end of our skillfully made advertising campaign that ended for most markets in October.

While marketing was 1.4% of sales overall in 2013 we expect it will be closer to our targeted rate of around 1.7% in 2014. G&A was 6.6% in the quarter of 40 basis points higher than 2012 due to higher bonus expenses in employee taxes. The fourth quarter included higher bonus expense due to our strong company performance compared to full year bonus targets which represents about a $4 million catch-up in the quarter.

For the full year G&A was 6.3% or 40 basis points lower than 2012 and a decrease as a percent of revenue was driven by cost in 2012 for our biennial All-Manager conference and from lower stock based compensation expense and from greater sales leverage in 2013 primarily are partially offset by a higher bonus and legal cost. The non-cash non-economic stock comp was $65 million for the full year in 2013 and was about $13 million in the fourth quarter. In 2014 we expect G&A as a percentage of sales to increase about 40 basis points due to higher non-cash stock comp expense and from the cost of our All-Manager meeting. In September we will invest about $8 million in our biennial All-Manager conference where we will meet with our 2300 managers and support staff and based on today’s stock price total non-cash stock comp expense for 2014 is estimated to be about $90 million an increase of $25 million. Well total G&A included in the All-Manager meeting and the higher non-cash stock comp will rise as a percentage of sales in 2014 our underlying cash G&A without these two items will be lower as a percentage of sales as a result of our continuing effort to grow our underlying G&A at a slower rate than our sales growth.

Our 2013 effective tax rate was 38.7%, that’s 60 basis points lower than 2012 mostly as a result of the renewal of tax credits including the work opportunity tax credit and the R&D tax credit that were extended in 2013 for both 2012 and 2013. We expect our 2014 tax rate to be about 39.2% and the higher effective tax rate in 2014 is primarily due to the expired work opportunity in R&D tax credits partially offset by lower estimated state tax rates in 2014.

During the quarter, we purchased about $13 million worth of our stock or over 25,000 shares at an average share price of $505. For the full year, we purchased about $110 million worth of our stock and over 336,000 shares at an average share price of $327. And at the end of 2013, we still had about $90 million remaining on our current $100 million authorized share buybacks. Over the past five years, we have invested over $610 million to repurchase our stock at an average share price of $150.

In 2013, our average development costs for Chipotle restaurants in the U.S. were about $8,000. Capital expenditures net of landlord reimbursement totaled about $190 million in 2013 primarily related to new restaurants along with continued reinvestment in existing restaurants and other company initiatives. In 2014, we anticipate CapEx will be around $225 million, the majority of which relates to new restaurant construction. We expect our average restaurant development cost will increase around 5% based on opening more freestanding restaurants during 2014, which are expensive than end-caps and in-line sites and we will open proportionately more sites in our Northeast region where construction cost as well as sales are typically higher.

Our normal reinvestment for existing restaurants, which typically averages about $15,000 per restaurant will be higher in 2014 and will average about $20,000 per restaurant as we will perform a full remodel on many of our oldest restaurants. We also plan to invest about $10 million perform a significant network redesign in all of our restaurants which will enhance the way we communicate and train our restaurant employees and provide better security, improved reliability and greater capabilities including functions such as mobile payments in our restaurants.

We are able to increase our total cash and investment by $228 million during the year and ended the year with $892 million in cash and other related investments. Even after funding the opening of 185 new restaurants and repurchasing stock to our share buyback, it brings totaling $110 million during the year. We continue to believe that investing in our high-returning assets, high-returning new restaurants, remains the best use of our cash and we are confident that the growth options we are exceeding today including ShopHouse, Chipotle and international markets and most recently Pizzeria Locale will provide value enhancing opportunities in the future. In the meantime, we will continue to invest in our high returning domestic restaurants and we will opportunistically repurchase our stock to enhance shareholder value.

Thanks for your time today. At this time, we’d be happy to answer any questions you may have. Operator, please open the lines.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from Brian Bittner of Oppenheimer & Company.

Unidentified Analyst

Hi, thank you. This is (indiscernible) for Brian. Can you talk about the timing of becoming GMO free and how you expect to drive that awareness once you achieve that? And you think that the heightened awareness can drive an increasing demand for Chipotle? Thank you.

Steve Ells

Thanks Brian. We expect to be GMO free by the end of this year. The exact timing is unclear right now, but we are making great progress. In terms of it driving the business, I guess I would answer that as the way I would answer the impact of our Food with Integrity mission overall. Certainly, historically customers come in, because they love the taste of Chipotle, they love the value, the convenience, the ability to customize their ingredients all these kinds of things. And that has always been sort of the top of mind reasons why people say they come in. Food with Integrity, our commitment to more sustainably raised ingredients, which we have been at now for a dozen years or so. And talking about it has become more and more important to customers over the years whether it drives people in or not is not always clear, but what I think is really important is that more and more of our customers are telling us that it's very important to them. They are interested in where their food comes from and how it was raised and that they want to be assured that they are feeding their families a helpful nutrition’s raw ingredients. They are concerned about the environment and a lot of the problems of the commodity kinds of ingredients out there and so going non-GMO I think fits into that food with integrity mission and I wouldn’t point to non-GMO as a single thing that’s going to drive sales but something that’s going to continue to strengthen our bond with customers and increase the trust level and get people excited about our larger mission change the way people think about any fast food and I think when you combine a mission like that with food that’s absolutely delicious but people crave that they want to eat often, then I think you have a winning formula and the two go hand in hand.

Unidentified Analyst

Can I sneak in one more? I’m just wondering if you can kind of talk about how you have been able to drive such strong traffic in the fourth quarter? Most consumer company saw the opposite happening for the third quarter and the fourth quarter and maybe if you have any comments on what you’re seeing in early 2014, what gives you the confidence to go from low single-digit to mid-single-digit top outlook? Thank you.

Steve Ells

There is no one thing that we can point to say that that’s what drove our sales but I think if you look at all the things that we have done including continue to strengthen our people culture so that the experience our customers enjoy when they come in is the best experience that we can possibly provide. Our throughput is the fastest it's ever been including as Monty said seasonally this is not a time when our throughput to get us peak [ph] and yet it did outperform. Our throughput resulted in the summer so our throughput was a contributor to that. Marketing has been connecting with our customers really throughout the year not just are skillfully made marketing which connected with people and people recognized and appreciated that that we really do have raw ingredients and open kitchens and they appreciate that. The Scarecrow created a lot of discussion about Chipotle so there is some awareness about that as well but catering was a part of it. We know that we’re approaching 1% of sales of catering and we know the majority of that is incremental and I think those are the main, LSM we did a lot of LSM throughout the year and our teams actually did more fund raising as we approached the back half of the year which we think just created more awareness that people that haven't been at Chipotle in quite some time.

And I mentioned earlier that our people culture just strengthening our teams is the biggest piece and so if you go through, if you’re going to prioritize all of those items you probably have to put the biggest piece on that even though that’s tough to measure but we just think that that every time our customers come in that these wonderful teams that are anxious to serve them, that’s probably the single biggest piece but to parse out how much of that 9% will be allocated to each of those pieces would be difficult to deal but we feel good about next year just because despite the fact that other restaurant companies and other retail companies have seen some softness in the fourth quarter. We seem to have been able to overcome that and so I think all things we’re doing to create the special experience is working and we’re cautiously optimistic that we will be able to continue to do that in 2014.

Operator

Thank you. Our next question comes from Joe Buckley of Bank of America.

Joe Buckley - Bank of America Merrill Lynch

If you can clarify the comments on pricing, for some of these I’m not sure if I heard you say (indiscernible) take would it slightly be for the fourth quarter but you said during the third quarter maybe just start with that one.

Steve Ells

Yeah Joe I said during the third quarter. Right now we would like to get through this first quarter, we like to see how this current transaction momentum will continue. We just like to get through find out how this weather might affect our ingredients. Right now we don’t know if any of the weather that we have seen in the south has been an affect in some of our ingredients next year and so we would like to get through at least a quarter or so and see how things are falling out both on our ingredient inflation side as well as our transaction momentum. And so we think of that we will be in a position to them raise prices on time in the third quarter.

Joe Buckley - Bank of America Merrill Lynch

Okay. And then you just actually are – I got the impression you were backing away somewhat from the probability of a price increase, is that misinterpretation on my part or they didn’t change the last couple of weeks? And then just one more on the pricing, you historically have a history of sort of taking in single-digit price increases when you infrequently take them when you think you be in that historical mid-single-digit range again?

Steve Ells

Yes. Joe, I don’t know that we are trying to signal either way at ICR. We have really had no intention on changing what we have said at the third quarter, which was we have not made a pricing decision. We will continue to monitor trend as I mentioned during my prepared comments. We actually take a look at our current food cost at 33.9%, continued inflation. It seems more likely. And so I would say that is the update I would say since October, which was I would say that’s the last time we took a stand and we weren’t continuing to change that at ICR. We weren’t very sure and we still haven’t made a decision, but I think right now, we are standing at 33.9% knowing that we have got pressure from stay, if we got pressure from avocados, it looks more likely. Now, things change just like last year or year ago, we were saying the same thing and things change. In fact, our food costs in the first quarter were lower last year than it was in the previous quarter. And so if that changes, we may back off, but right now, standing at 33.9% with continued pressure, it seems likely. And I think a mid-single-digit 3% to 5% Joe. Again, we haven’t made a decision that’s not an unreasonable assumption so maybe somewhere in that ballpark.

Joe Buckley - Bank of America Merrill Lynch

Thank you. That’s very clearly makes sense. Thank you.

Steve Ells

Okay, thanks Joe.

Operator

Our next question comes from Sara Senatore of Sanford Bernstein.

Sara Senatore - Sanford Bernstein

I just wanted to ask about the sales drivers and it seems like you have a lot of these things on marketing and in particular, but also throughput, I know operational improvements, but you mentioned digital as a way that you have chosen to spend marketing dollars? And I think I heard you talk about mobile payments can you just talk about your kind of your approach to that, how you are thinking about that? When we would expect to see rolled out, I know in the past you said you don’t want to do a traditional loyalty program, but maybe something that targets marketing. So if you could just talk about that? And then I have a follow-up.

Jack Hartung

Yes, Sara. We still don’t have much of an appetite or any appetite for a traditional loyalty program at all, but we are experimenting with mobile payments and we have kind of a rough version right now that our employees are able to use right now. And we want to expand that. We know that that there is a lot of activity going on in mobile payments and we want to be part of that. Once we have mobile payments, we can have a different kind of connection in relationship with our customers, where you think we have the ability to. We don’t have this really mined out yet, the ability to communicate with them and maybe provide some kind of unique offerings, for example, the customer has not been to Chipotle in a while or they come to Chipotle often and they never buy chips and guacamole. There are things that we can do that are more unique to that customer. So I think that gives us a unique opportunity that I wouldn’t call a loyalty program, but it’s more of a bond that we can build, a communication that we can build with customers where we can personalize our communication and maybe some of the things we might offer to the person, but I wouldn’t expect to see a traditional loyalty program.

In terms of digital, yes, I mean, we do have a number of things that we are doing. We do some advertising on a number of digital media, social media and we have a whole team of people that respond to e-mails. We have a Twitter account and we are active in the Twitter account. So we are active with a lot of the social media and the digital media, but that’s something we have been doing for – that’s not new, that’s something we have done during 2013 and in prior years as well.

Sara Senatore - Sanford Bernstein

Okay, thank you. And then just a follow-up not on my question, but an earlier one of that sort of the ShopHouse and the Pizzeria Locale, can you just remind us again how you are thinking about growth versus the rate that you saw with Chipotle early on, just with respect to we think that you have more sort of institutionalized competencies around real estate and supply chain and all of these things. So if you could just compare kind of whether you expect some of these new growth seeds to be faster than where Chipotle was at the same stage? Thanks.

Steve Ells

So right now with ShopHouse and Pizzeria Locale. We’re very, very focused on perfecting the experience to introducing all the new people who come through to the uniqueness and specialness of both of these concepts. Both of these concepts are building nicely. We’re expecting to open a couple of few more ShopHouse’s this year. We’re expecting to open a couple of more Pizzeria Locale this year. If I compare the rate of growth so far with both of these concepts it's faster than Chipotle started out. But I think you hit on something, when we’re ready to expand at a faster rate we certainly have the infrastructure in place. You mentioned real estate, well we have so much information on 1600 specific sites now in the U.S. with Chipotle’s and so we know exactly what regions, what markets what intersections we would want to go to with these new concepts.

We have teams who can advise on the best locations for that and I think most importantly we have an extraordinary team of top performers who are empowered to help us expand this quickly and if I think about the biggest hurdles over the last 20 years in growing Chipotle it was on the people side and so with our very, very strong team that continues to get stronger grooming the future leaders I think that’s going to be a competitive advantage that we have and that will help us grow these concepts but again we’re making sure that we’re growing these right at this point. It's not time to unleash them it's time to grow smartly and watch them and make sure that we’re cooking delicious food and serving in a way that excites customers and we’re doing that, we’re very happy with the results.

Operator

Thank you. Our next question comes from Alvin Concepcion from Citi.

Alvin Concepcion – Citi

Comps were obviously very strong in this quarter which is impressive but it didn’t have being better if weather was an issue or customers did less online shopping during the holidays and I guess the question is did you see a noticeable impact from these items at all?

Steve Ells

It's a great question Alvin because we have seen the same things you’ve seen and we’ve seen weather being brought up a lot. We have seen some comments that there has been so much online shopping that people weren’t out about and so they didn’t visit restaurants for example. I don’t think we saw that overall. Yes of course we saw that on individual days and we saw where when there was severe weather in a certain region we saw our sales soften during that time but we have had a history where when the weather gets bad and people doing visit Chipotle one day let’s say the restaurants are totally closed or they just can’t go for lunches and so our sales are way, way, way off. When the weather subsides we tend to kind of over perform we tend to see a greater than average comp and so we tend to have an offsetting effect there and so on a net-net I would say the weather didn’t really have much of a net effect or at least the best that we can tell when you look at the overall quarter.

In terms of the online comments I mean that will be impossible for us to tell but certainly by in fact that we accelerated during the quarter, we accelerated in the fourth quarter compared to the third quarter. We certainly can’t point to any kind of online activity and say that that had a bad effect. And the other thing that we saw was that our sales were better in December than November and I think that once again (indiscernible) as well and I think that’s just a function of our customers enjoying all the experience based on what our wonderful teams and the restaurants are doing that despite the weather despite whether people were not out and about because they are doing online shopping they still decided that they wanted to dine at Chipotle during December and we were delighted to see that trend.

Alvin Concepcion – Citi

And you mentioned things were better in December versus November. Did you see that momentum continue to generate?

Steve Ells

Well okay that’s a little choppy now because we’re talking about some really extreme weather and so it feels like the underlying trend that we saw during the quarter overall average and so let’s call it the 9.3% I would say that the underlying traffic is probably in that same kind of ballpark in that 9.3% but it's very hard to tell. I mean you’ve one week where the comps are not pretty at all and you’ve another week where they look pretty attractive but we’re going to have to let the rest of quarter unfold and see what the underlying trend is but right now I would say that they are trying to do is likely similar to what we saw on the fourth quarter overall.

Alvin Concepcion - Citi

Great. And just one more from me, I know there is some passion in raising prices, because it may impact traffic, but with accelerating traffic growth coupled with being priced at or below your competitors, does that change your view at all on the price elasticity of the consumer or are you been accelerating the timeline for your rollout of the price increase?

Steve Ells

No. I mean, we still think it makes sense to watch what happens with inflation and watch what happens with the economy strength of the consumer and our transaction trends for at least the first quarter. And then once we see that and most importantly during that time we will learn about our ingredient cost, we will learn what affects whether that we are seeing might have in our ingredient cost. And we would rather have that information in hand before we pull the trigger on a price increase.

Alvin Concepcion - Citi

Alright, thank you very much.

Operator

Our next question comes from Michael Kelter of Goldman Sachs.

Michael Kelter - Goldman Sachs

Yes, I think maybe a follow up on that last point, which is with your margins hovering around all-time highs and trends at reaccelerating, why you didn’t take price at all, because even the food costs are higher as a percentage of sales, your labor and rent and other things are lower and you are still making all this profit, why you didn’t take the risk with the brand at all?

Monty Moran

Michael that possibility still exists. And so we have not made a decision. And you remember last year at this time we talked about the price increase being likely and then we pulled back on it. We are not in a hurry and we wouldn’t hesitate if conditions suggest that we shouldn’t take it that maybe will either defer it or take it off the table altogether in 2014. Now at some point we don’t want to be under-priced, okay, so there is a desire to not be so far under what others are charging in the industry that people are wondering, well see I won the Food Integrity thing, how can they claim if their ingredients are better when they are charging so much less than other restaurant companies out there. So we would not want to be in that kind of a situation, but it’s still possible that we may call the menu price off the table in 2014.

Michael Kelter - Goldman Sachs

And then on a different topic, it’s been inching up little by little but your guidance suggested the third consecutive year of new unit opening being in the call it 175, 200 unit range, is there some sort of a soft ceiling that you kind of reached here, whether it’s because of real estate or people for you to be able to actually do it right, location by location, it really doesn’t make sense for you to open that much more than what you are opening now and we should kind of start to expect a lot of large numbers to kick in a little bit?

Steve Ells

No. I mean, we don’t really feel like there is a ceiling or a soft ceiling by the same token we sort of make the decisions based on what fuels right when we look at the kind of real estate pipeline we have and when we look at the development of our people culture around the country and the number of field leaders who are being promoted from restaurateur positions. And so we talk to our real estate teams and we find out how it’s looking in terms of getting a pipeline and creating a real estate and really being very selective with the real estate, to find real estate that we believe where we can open restaurants with terrific volumes, but also reasonable cost. So we balance that and then we also look at how the people culture is developing. I would say, both are going very well, but we feel with this increased guidance of 180 to 195 restaurants that we are increasing and then kind of always sort of pushing to build more restaurants, but we also don’t want to – we don’t want to sort of overdo it, we want to be very careful and measured with that growth to be certain that we are opening restaurants that are of a really, really high quality with terrific customer experiences. And it all is part of our philosophy that it’s much better to allow demand to sort of exceed to be in front of supply so that we are fulfilling, we are fulfilling a demand that we have created in the marketplace. And as it exists – as demand increases, we will be working hard to make sure that the supply can also increase so that we can continue to have great results.

Michael Kelter - Goldman Sachs

And one last one, can you Jack maybe give some figures around the constitution of your workforce and help us understand how you might potentially be affected as the minimum wage does rise to $10?

Jack Hartung

Yes. We don’t pay minimum wage. Our average wages are above $9 for hourly employees. So a move up to $9 would have minimal effect, a move to $10 would have an effect, but not too significant and I would say that the impact on us will be much less than others. And so you would see an impact on our margins, but it will be something that we could certainly absorb.

Michael Kelter - Goldman Sachs

Very helpful. Thank you.

Jack Hartung

Thanks Michael.

Operator

Our next question comes from Karen Holthouse of Credit Suisse.

Karen Holthouse - Credit Suisse

Hi. Congratulations on a fantastic quarter. Going back to your comment earlier about technology investments in stores that would help enable mobile payments and some other things. How should we think about that? Is that more of a back end investment or does that involve actually changing out POS equipment and does it involves the latter is there any concern that there will be a little bit of a short term throughput investment as workers are training on and getting used to the new system. Thanks.

Steve Ells

On technology I mentioned in my comments we’re going to make about a $10 million investment in infrastructure. We have got to redo the networks in our restaurant we haven't done that in quite some time and that will be an enabler for any of the things that we want to do in the future including things like mobile pay. Once we have done that we at this point don’t think it's going to require new POS. There is a device but we will need to add that’s not very expensive, it's a matter of 100s of dollars per restaurant not 1000s or 10,000s.

Unidentified Analyst

Similarly like to a Starbucks?

Steve Ells

Yeah it could be like a Starbucks, it would just be a reader. Those are pretty standard those are there is nothing too fancy about that but you got to make the big investment of several thousand per restaurant with the network, redo the network in order to accommodate that. Redoing the network will give us other advantages as well more secure, it will be more reliable and so it's time to do that but that’s an enabling investment that we do have to make. There is also always the possibility I mean we aren’t against taking look at a new POS solution and there is lots more that are out there, there is some cloud solutions that are at least possibilities to look at and so we’re open to that and we found something that would be a better business alternative but better would be better throughput, not worse. We would not make an investment including things like mobile pay that have the potential of slowing down throughput. So we just wouldn’t make that investment but we would make an investment that would speed up throughput, that would enhance the intuitive ability to train our employees if the technology gave us better information or just was better from an efficiency standpoint, better from a throughput standpoint those are the things that we would look at. We would not want to compromise the customer service that we provide our customers just to be chasing the latest technology gimmick.

Operator

Our next question comes from Jeffery Bernstein from Barclays.

Jeffery Bernstein – Barclays

Two questions just first on the real estate discussion before, in terms of your cost percent [ph] I think you said your cost would be up 5% in ’14 just wondering is it more building cost or are you talking about more from competition for real estate whether it be I mean you may face causality or is there other driving prices higher just because so many people are growing so fast and is that’s the case? Are you increasing the mix of potentially your A sites? How does that play out within that growth for ’14?

Steve Ells

Well most of the increase that we’re predicting in terms of the fact that we’re opening more restaurants in the North East part of the country where the construction cost are much higher as well as the fact that we’re going to open incrementally more free standards which cost more money to build. So we still feel very good about our ability to efficient and economically with building our new restaurants and don’t see it as just leaking upward there is a reason for it.

Jeffery Bernstein – Barclays

And the A sites is that a bigger component this year than last year or?

Steve Ells

With regard to A sites we opened last year in 2013, we opened about 25 A models and like I said in the last call we’re always looking for those because opportunistically we’re always looking for sites that have very low development cost and low occupancy cost and that we can run very, very efficiently. So I think that you will see those sort of the same and sort of numbers this year I think probably smaller as a percentage of growth because of the fact that we have gotten more of our restaurants coming from new construction. But again when we see them we will find them and we will continue to layer those into our portfolio whenever we can.

Jeffery Bernstein – Barclays

And the follow-up with just more broadly on the category, well I’m just curious how you even categorize the category in which you compete and whether you look out as fast casual or more narrowly as fast casual Mexican but just wondering how you think about the category you compete and specifically in maybe the pace of the growth of that category or how you look at your share versus others whether you see your share I’m assuming you see your share growing versus declining but internally how do you think about the constituents of your category and the pace of growth for that category?

Steve Ells

I would say that of all the people who play in this fast casual arena I think Chipotle is different in two very unique ways and that is our very unique people culture which is one that is cultivating a strong force of future leaders. It is a really, really powerful thing that ends up providing a really great customer experience but also our focus on food with integrity and our desire to make available to customers the kinds of foods that really were only available at very high end restaurants or expensive markets or farmers markets and things like this. We’ve always believed that these kinds of food should be available to everybody. No one else is really doing this sort of thing so I think because of that we are sort of in a special category of our own and when I think about the category it's not really about Mexican food of course it's about a model, a model that allows you to source great ingredients and cook those ingredients according to classic cooking techniques served in an interactive format and all delivered via this team of top performers and so that is a model which Chipotle and ShopHouse and Pizzeria Locale fit squarely into.

Steve Ells

All right thanks everyone for joining us today. We appreciate it and we look forward to speaking with you next quarter. Goodbye.

Monty Moran

Thanks everyone.

Operator

Thank you. That does conclude our conference today. We do appreciate your participation.

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