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Chipotle Mexican Grill, Inc. (NYSE:CMG)

Q4 2007 Earnings Call

February 14, 2008 5:00 pm ET

Executives

Chris Arnold - Investor Relations

Steve Ells - Founder, Chairman and Chief Executive Officer

Monty Moran - President and Chief Operating Officer

Jack Hartung - Chief Finance and Development Officer

Analysts

Jeffrey Bernstein - Lehman Brothers

David Tarantino - Robert W. Baird

Glen Petraglia - Citi

Jason West - Deutsche Bank

Steve Rees - JP Morgan

Jeff Omohundro - Wachovia Capital Markets

Dean Haskell - Morgan Joseph

Mitch Speiser - Telsey Advisory Group

Bryan Elliott - Raymond James

Nicole Miller - Piper Jaffray

Paul Westra - Cowen

Operator

Good day, and welcome to the Chipotle Mexican Grill, Inc. Fourth Quarter 2007 Earnings Call. (Operator Instructions).

It is now my pleasure to turn the floor over to your host, Chris Arnold, Investor Relations for Chipotle Mexican Grill. Please go ahead.

Chris Arnold

Hello, everyone and welcome to our call today. By now you should have access to our earnings announcement release this afternoon for the fourth quarter and full year 2007 ended December 31, 2007. 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 will include forward-looking statements within the meaning of the securities laws. These forward-looking statements will include of projections of restaurant comp sales, the number of restaurants we intend to open, earnings per share, certain expense items and other statements of our expectations and plans.

These forward-looking statements are based on the 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 on our annual report on Form 10-K for 2006 as updated by our subsequent 10-Q, and the 10-K we expect to file around the end of February for a discussion of the risks that could impact our future operating results and financial condition.

Our presentation today may also include non-GAAP financial measures as defined by the Securities and Exchange Commission. Reconciliation of those non-GAAP financial measures can be found in the supplemental information at the end of our earnings release.

I want to remind everyone that we've adopted a self-imposed quite period restricting communications with investors during sensitive periods. This quite 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 1st and continue until our first quarter release in late April.

On the call with us today are Steve Ells, our Founder, Chairman and Chief Executive Officer; Monty Moran, our President and Chief Operating Officer; and Jack Hartung, our Chief Finance and Development Officer.

After their comments, we will open the call for questions. With that out of the way, I would like to turn the call over to Steve.

Steve Ells

Thank you, Chris. I’m really proud of our accomplishments during the fourth quarter and full year 2007. We generated a 10.6% comp for the quarter and a 10.8% comp for the year making this our 10th consecutive year of double-digit comps. Our diluted earnings per share grew by 61% for the quarter and 66% for the full year. These are extraordinary accomplishments for Chipotle, accomplishments that are the direct result of the hard work of our restaurant managers and crews and the loyalty of our customers.

But they are also the direct results of our relentless focus on our vision to change the way the world thinks about and eats fast food. Chipotle is changing food culture in this country by bringing consumers a new kind of dining experience, something that they never had before and something most never would expect from a chain restaurant. But we are also changing food culture through our Food with Integrity initiative.

Again this is our philosophy of selecting the very best raw ingredients we can find with an eye toward great taste, sustainability, care for the animals, land and farmers who raise the food. We continue to care more about the quality of the food that we serve than our consumers do. And while they are not asking for these better ingredients, we strongly believe that they will continue to develop a greater appreciation for what we are doing, which will only strengthen the bond that our customers have with Chipotle.

Most of our customers are not aware of our Food with Integrity mission. They come to Chipotle for great tasting food and great service in an interesting restaurant environment. But with more access to information than ever before and more attention being paid to issues associated with food and farming, people are becoming more aware of what they eat. This awareness combined with an impact on consumer behavior will continue to build trust between Chipotle and our consumers.

We fully intend to stay ahead of that curve always evaluating our own practices and protocols we have established for the food we serve and always looking for ways to provide better tasting more wholesome food.

When we first introduced the idea of Food with Integrity, people told us it was impossible to do this on a large scale that customers wouldn't appreciate and pay for these better ingredients. But our success so far makes it clear that this direction has been the right one. As a result of investing in these premium ingredients, we had the highest food costs in the industry as a percentage of revenue, but our discipline and our strong unit economic model allows to thrive even with these higher food costs and while remaining affordable and accessible to everyone producing attractive margins.

One of the questions we hear most frequently in our meetings with analysts is what are you going to do next to drive sales? And each time we provide the same answer that we're going to do the same things we do now, but we are going to do them better. Quite simply, this is the best way for us to improve shareholder value, to remain focused on just a few things and to do them better than anybody else.

This disciplined approach impacts our business in many ways. It allows us to serve better tasting food. It allows us to allocate labor more efficiently to design and build better, more efficient and environmentally-friendly restaurants, and to provide a better customer experience. That's what keeps our customers coming back and that’s what makes Chipotle appeal to new customers as well.

While this direction has worked very well for us, I want to be clear to our investors that we still have a long way to go. And to help us get there, no innovation is beyond the realm of consideration.

There will always be better ways to raise or grow food and Chipotle will always be the first in line to buy those better ingredients. There will be better ways to cook food, to employ labor, to design and build restaurants and to serve our customers. And we will always be looking for ways to improve in all these areas.

And finally, as Monty will discuss in more detail, we will continue to work to build a better culture that appeals only to the highest performers.

In fact, we've recently made some additions to our senior management team and our regional field structure; changes we think will have a significant impact on our restaurant operations.

First, we promoted two of our executives, Rex Jones and Bob Blessing to officer positions. Beginning March 1st, Rex will be Chief Development Officer and starting May 1st, Bob will be Restaurant Support Officer. Rex and Bob have both been with us for years and have a deep understanding of our culture and our vision. We believe that the impact of their leadership will be even greater in these new roles.

We have also changed our regional structure, dividing the country into five operating regions instead of three, and adding three new internally promoted regional directors. This new structure will allow us to strengthen the oversight of our restaurants around the country and also provide new opportunities for other strong performers to take on new leadership roles.

Finding or creating new opportunities for our highest performers remains one of the hallmarks of our culture. And these changes demonstrate our commitment to doing that. We remain committed to fundamentally changing food culture, to change the way the world thinks about any fast food. We understand the magnitude of that challenge, but we also believe we are the right company with the right people and at the right time to be working towards this very lofty goal.

I will now turn the call over to Monty.

Monty Moran

Thanks Steve. Steve talked about our vision and our discipline, our focus on doing just a few things, but doing them better than anyone else. While our customers might not immediately notice the results or the benefits of this focus, it is at the heart that what makes Chipotle special.

Another thing that might not always be apparent to our customers but which strongly colors the experience that they have is the attention we pay to the hiring and development of our people.

For years, we have been a place that people want to be a part of, but we're consistently working to improve in this area as well, by creating a culture which rewards our top performers and empowers them to rise into position where they can have a stronger impact on our company.

By creating this sort of culture, we are laying a foundation that will continue to support an increasingly relevant and exciting dining experience and which will allow us to add more restaurants so that we can bring this new way of eating to more people. This foundation starts with hiring the best people.

At Chipotle, we look for a certain sort of attitude and a sense of hospitality and maturity that are nearly impossible to train and then we teach these people how to cook and how to provide great customer service. Once they start working with us, our highest performers quickly move to the ranks and become effective leaders within our company.

We are already seeing great results from this approach especially within our restaurants where our turnover is low and where our crews and managers are more effective than ever.

Two years ago, we started a program called the Restaurateur program. Basically what it did was elevate the status of those restaurants managers who demonstrated the ability to develop and empower their crew. Since then, we’ve had great results. The food is better, the service is better, turnover is lower and our facilities are better maintained than ever before. So it is clear to us, as we look at our field support staff that they have to be focused on developing and empowering more restaurateurs.

Just like we identified our top managers as restaurateurs based on their ability to develop people, we know that our very best area managers are the ones with a proven ability to develop restaurateurs. So we are going to elevate those best area managers to a new position, which will be called team leader. These team leaders will earn incentives when they develop restaurateurs and will supervise 12 or more restaurants. This is significantly more than our current average of about 8 restaurants per area manager. This is possible only because restaurateurs require less oversight, allowing our team leaders to take on additional responsibility.

This new structure benefits our employees, who will now have even greater opportunities to develop their crews at Chipotle. But it also benefits the company, which will be able to develop a stronger bench of talent at all levels.

Today, our turnover rate among managers is around 25%, which is well below the industry average. And more than half of these managers have come from crew positions. Of course we do expect that this percentage of managers who come from our own ranks will increase, as we attract and hire better crews and as our managers become stronger and better at developing these people into managers.

We ended 2007 with 78 restaurateurs, total. That means about 11% of our restaurants are currently being managed by this elite class of managers. We have about 25 more restaurateur candidates currently slated for interviews and our operation team tell us that they have got 110 potential candidates for development over the next six to 12 months. But every restaurant manager aspires to become a restaurateur someday, so all of them are focused on hiring and developing great crew.

All of these changes will continue to fuel our culture. Built around great managers and crews, who served delicious food, provide outstanding service and keep our customers coming back.

Building a strong bench of talent will be very important to us this year, as we're going to open 130 to 140 new restaurants. Being able to better develop our people, and to do so more quickly, gives us the confident that these new restaurants will be run well, right from the start. Certainly that tends to further drive our strong economics.

Finally, I would like to speak for a moment about the regional realignment that Steve mentioned. Our move to creating five operating regions, instead of three gives us stronger oversight of our restaurant operations and creates new opportunities for three of our outstanding performers. Phil Petrilli, Michelle Small, and Bobby Shaw, each of whom will be a Regional Director in this new structure. In their previous positions, each of these people worked very closely with our restaurant managers and crews, helping to develop people and improve our operation.

In addition to recognizing their accomplishments, these promotions will reinforce for all of our people, just how much our employees can grow their careers with Chipotle.

I will now turn the call over to Jack.

Jack Hartung

Thanks Monty. We are proud of what Chipotle has accomplished during 2007. These are accomplishments driven by the significant efforts of our restaurant management and crew. And we are especially proud that we're able to achieve these results in such a difficult operating environment in the restaurant industry. Our restaurant economic model continued to strengthen during the fourth quarter and full year 2007, with higher average top-line sales and higher restaurant level margins.

You have heard us talk often about how we focus intently on the strength of our restaurant economic model. It's important to us for two key reasons. First, our strong economics at the restaurant level allows to invest in the premium ingredients that Steve talked about earlier. In other words, efficiencies we generate from a focused menu and economies of scale from higher sales in each restaurant, are reinvested into higher cost premium ingredients. So, we can afford to invest more in food as a percent of revenue than other restaurant companies because of the strength of our model. It funds our vision of changing the way world thinks about any fast food by making these premium ingredients successful and affordable to everyone.

Our restaurant economic model is also critically important to us, because the stronger it becomes, the more value we can create as we continue to open new restaurants. As we continue to thoughtfully expand the Chipotle brand across the US, we know we are not only making Chipotle acceptable to more people, we are investing with expectations of generating high restaurant level returns.

So let's take a look at some of the highlights of what we accomplished in 2007. Our average restaurant, now generates $1,734,000 in sales, and that's for the nearly 600 restaurants which have been open for at least 12 months. Restaurant level margins increased by 140 basis points to 22.3% for the full year, compared to 20.9% last year, and that's even though we lost 50 basis points in food costs due to higher commodities.

We opened 125 new restaurants in 2007 exceeding our guidance of 110 to 120 opening. We finished the year with 704 restaurants, all company owned. We achieved our 10th consecutive year of double digit comp increases with a full year comp of 10.8%, so revenues for 2007 increased by 31.9% to $1.1 billion.

Operating income increased by 250 basis points to 10% in 2007 and our full year diluted EPS grew 66% to $2.13 over last year's $1.28 per share. As you saw in the release that includes a $0.01 non recurring cash charge in the fourth quarter, which I'll talk about later.

Our balance sheet remains strong as we ended the year with $171 million in cash and available for sale securities. We invested a total of $139 million in capital expenditures, which includes $5.6 million for the purchase of eight franchise restaurants early in the year and it was fully funded by cash generated from operations of $140 million for the full year, an increase of about 41% from $100 million generated in 2006.

Average development cost per restaurant were about $880,000 slightly better than our $900,000 projection and we expect development costs in 2008 to be slightly above $900,000 per restaurant, which will be the fifth consecutive year with average investment costs right around $900,000. And we have been able to achieve this relatively flat average investment costs in the phase of construction cost inflation, by building fewer freestanders, by developing smaller restaurants and by carefully managing our costs. Capital expenditures in 2008 are estimated to be about $150 million, the majority of which will be invested in new restaurants along with reinvestments in existing restaurants and corporate capital requirements.

We opened 10 restaurants in five new markets during 2007, including Philadelphia, Salt Lake City, Birmingham, Iowa City, and Oklahoma City. We are now in all major markets across the US and our focus will be on developing strong team and a strong Chipotle brand in the markets we're in, while introducing Chipotle to a smaller adjacent market.

Our development teams have continued to build a healthy real estate pipeline to support our previous opening guidance of 130 to 140 new restaurants in 2008. Though we expect to open about the same number of new restaurants in the first quarter, as we have opened last year, around 28, we expect to open more in the remaining three quarters which will be relatively reasonably level loaded for the rest of year.

For the quarter, our comp sales increased 10.6% on top of 10.1% for the fourth quarter of last year. The 10.6% comp was mostly driven by increased customer visits, while menu price increases related to the rollout of naturally raised meat contributed about 3.3% in the quarter.

This menu price impact is up from the 2.6% in the third quarter, as a result of introducing naturally raised chicken and beef in Phoenix, Tucson and Las Vegas in the fourth quarter.

Total revenues increased 31.5% to $289 million in the fourth quarter as a result of new restaurant openings, including 37 in the quarter, along with the 10.6% increase in comps. Restaurant operating margins improved 180 basis points in the quarter to 22.1% compared to 20.3% last year, primarily due to labor efficiencies and menu price increases associated with the introduction of naturally raised meat. As we predicted, the labor leverage is significant in the quarter, it began to decline as we started to lap improvements from the labor matrix, which was introduced late in the third quarter of 2006.

Food, beverage and packaging expenses were 31.9% of restaurant sales in the quarter, the same percentage of last year and a modest 20 basis points better than the third quarter.

We expect cost pressures to remain throughout the course of 2008 for a number of reasons. First, we began to pay current market prices for cheese in 2008. There remains strong demand for corn, which impacted our chicken and beef prices and higher wheat prices will increase the cost of our tortillas. In fact, higher cheese and tortilla costs alone will add about 50 basis points to our food cost.

Labor improved 120 basis points during the quarter to 26.8% versus 28% last year. We continue to benefit from our national labor matrix, along with higher than average restaurant sales, which together drove about 90 basis points of the improvement. While the balance was driven by lower insurance costs, due to being self insured. With the labor matrix fully lapping in 2008, we expect little additional leverage on labor over the course of 2008.

Occupancy costs were 7.1% of sales the same as last year. As economies of scale from higher sales were offset by the higher occupancy cost of new restaurants. Other operating costs decreased 60 basis points to 12.1%, primarily as a result of reduced promotional costs. In 2006, we gave a free burrito away with the purchase of a $25 gift card.

G&A as a percent of sales was 7.1% third quarter compared to 7.6% in the fourth quarter of last year, primarily due to efficiencies from higher sales. And as I mentioned last quarter, G&A as a percent of revenue is expected to slightly higher in 2008 in that low 7% range, while we expect to see slight G&A leverage in G&A before non-cash stock-based compensation charges in 2008, that will be more than offset by the increase in the non-cash accounting charge, which will be higher for each share or option granted in 2008 due to the higher stock price. We will not know the full impact until the equity grants are approve by our compensation committee, which will occur during the first quarter, but as a perspective if similar grants are issue this year as in 2007, our non-cash stock comp will be in the $16 million range or roughly double to 2007 stock comp. We'll be able to give you a clearer picture of the stock comp for their fourth quarter release.

Interest income was 6.1% for the full year 2007 with most of that interest earned on tax exempt securities. With the current much lower interest rates, we expect our interest income in 2008 to be reduced nearly in half. Income from operation increased 77% to $27.5 million, compared to $15.5 million last year and our operating margin improved 240 basis points to 9.5% in the fourth quarter.

Our effective tax-rate was 39.3% for the quarter and included a $500,000 non-recurring charge associated with the secondary offering and split-off transaction in 2006, which were again non-deductible, therefore increasing the rate for the quarter. This charge resulted in a $0.01 reduction in the fourth quarter and full year diluted EPS. Without this non-recurring charge, our tax-rate would have been 37.7% for the year compared to 39.3% for 2006.

Our effective tax-rate in 2007 benefited from our increased investment and tax free security, together with a decrease in the state statutory tax-rate. We expect our 2008 effective tax-rate to be right around 37.7% as the reduced benefit from tax exempt securities is offset by other tax saving opportunity.

Net income for the quarter increased by 62% to $17.5 million, up from $10.8 million last year. And diluted EPS was $0.53 for the quarter, 62% higher than last year. Excluding the one time tax charge, EPS would have been $0.54 right in line with our comments at the two analyst conferences we had last month. For the full year 2007 net income increased 17%.

So finally, as we look in to 2008 we reiterate our expectation for comp increases in the low to mid single-digit range, with our strong real estate pipeline, we expect to open between a 130 and 140 new restaurants in 2008. It is a tough environment to hold on to margins. but we are cautiously optimistic that if the commodity cost hold reasonably steady for the rest of the year, that with relatively modest menu price increases mostly associated with additional rollout of natural meats, that we can hold most, if not all of our current margin. And though we face significant challenges in the near-term over the long-term we remain confident that we can grow diluted EPS at an average annual rate of at least 25%.

So thanks for your time today. Now we will be happy to answer any question you might have. Operator, please open the line.

Question-and-Answer Session

Operator

(Operator Instructions). And we will go first to Jeffrey Bernstein with Lehman Brothers.

Jeffrey Bernstein - Lehman Brothers

Great, can you hear me?

Steve Ells

Yeah, Jeff. Go ahead.

Jeffrey Bernstein - Lehman Brothers

Couple of questions. First, your final comments you talked about reiterating the long-term guidance for at least 25%, but obviously noting significant near-term challenges. Just wondering based on the comp and the unit growth assumptions you laid out there and like you said hoping to maintain most of it, if not all the margins. As your model should have any concern around reaching that target at least for '08 or at this point you still comfortable with at least 25% for '08 as well?

Steve Ells

Well Jeff, you heard the comment exactly right. We are very confident over the long-term. We just don’t have a great crystal ball for 2008. If commodities stay relatively stable, from hereon now and so far, we know that we're going to lose 50 basis points on our food line. To cover that 50 basis points, would only require about an increase in menu prices incrementally of about 1.5%. Based on the increases we took last year, we will run about another 1.5% increase just based on the increases we took last year. So with a combined about 3% price increase, we know we can hold the margins, we know we can cover that 50 basis points. And looking at what other restaurant companies are doing, they are generally raising prices quite a bit more aggressively than just a 3%.

And our main purpose in saying that, there is a little bit of -- I don’t want to say doubt, but in the short-term there I think we can't control, because there maybe individual quarters for example, where commodities spike up, they spike up unexpectedly. And we've often said that we're not going to react suddenly or in a knee-jerk reaction into rate prices. Just to save a particular quarter or to say a particular period. So, if things hold pretty steady, Jeff we are confident that even in 2008 that we get the 25%, but if things happen unexpectedly, yes, its possible we may fall short.

Jeffrey Bernstein - Lehman Brothers

Okay. And actually just kind of follow on to that, you kind of reiterate the constant low digits in '08. This is the fourth quarter '07 was tremendous up close a 11%. I am just wondering whether you think '08 are likely, I mean its likely to prove conservative or, have you seen a maybe a sequential decline in 4Q or something early '08 that might give you more cautious in terms of '08 kind of breaking that double-digit record?

Steve Ells

Well, listen, we certainly hope that approved to be conservative. What I can tell you Jeff, the way we do this is, we take a look at just our dollar sales through the fourth quarter and we push them out and then we adjust for seasonality to come up with this kind of guidance and the comp guidance is exactly the appropriate guidance and so I think that low to mid is still the right guidance. We’ll be able to update you as the year unfolds.

Now, I can tell you, our business is as strong as ever. We finished the fourth quarter as you saw with a very strong better than 10% double-digit comp, that’s in the phase of other restaurant companies having difficulties. So our business continue to be very, very, very, strong and so there is not being really any kind of noticeable decline in our business. But for the time being it’s the best guidance we can give, its difficult really to workout of pattern so far in this first quarter, because the weather throughout the country has been very, very difficult and so I think the best I can say is as the year kind of unfolds and as we layer each quarter we can give you more update, but right now I think is right guidance to give.

Jeffrey Bernstein - Lehman Brothers

Okay. And then just lastly we get a lot of questions as I’m sure you guys do on Class A versus Class D, just wondering whether there is any newfound plans to merge, obviously there is a great disparity in the shares and has been in the past and business really seem justified I’m just wondering if you have any thoughts potentially make a change to that? Thanks.

Steve Ells

I’m sorry Jeff, I miss part of it, make a change to what?

Jeffrey Bernstein - Lehman Brothers

To the CMG versus Class D shares obviously the disparity significant being justified, just wondering whether you might merge those share or what your thoughts are?

Steve Ells

Yeah, I’m sorry, just inter part of it. We can do anything contractually until October of 2006 and that’s an agreement we have with McDonalds during the spilt off. I’m sorry 2008, so, two years from these split off, which was October 2006 we put it October 2008. So, we can do anything contractually until then. After then it still not a slam dunk that we will be permitted to do anything and we would have to do one of a few differ things like for example get an IRS ruling to say if we did something with the stock that it wouldn't jeopardize original deal to split-off that McDonald's did with tax rate. Another possibility is to get an opinion from a law firm that says, if we go ahead and collapse the shares that there wouldn't be any impact to that to the split-off, the tax free nature of the split-off that McDonald's executed.

So there are certain circumstances and those are not small hurdles that we would have to overcome to even attempt to do something with the share and the penalty if it goes against us is really severe, meaning we indemnify McDonald's that if we do anything that would jeopardize the tax free nature of the split-off, we indemnify them, which is a significant penalty in that neighborhood of hundreds of millions of dollars. So, we can't do anything until October 2008, and after that, we at least will be able to look at whether we can class the shares, but there is some hurdles for sure that we have to get over.

Jeffrey Bernstein - Lehman Brothers

Thank you.

Operator

Thank you. We'll take our next question from David Tarantino of Robert W. Baird.

David Tarantino - Robert W. Baird

Hi, good afternoon. Could you give us an update on the Food with integrity and the rollout of naturally raised meats and what you might see in '08?

Steve Ells

Yes, David, as you heard us talk about in the past, it's difficult to predict and then tell you exactly when we might rollout natural meat. We are doing great with more than 80% chicken and about 50% beef. We for sure, have additional supply, coming on board we sure have markets that we have tentatively lined up during the year.

Its one reason why I feel pretty good that an incremental 1.5% or so price increase, mostly related to the rollout of natural meats is feels pretty good. But in terms of specific markets and when we might roll, we are very cautious not to communicate that because we're very, very particular about making sure that supply is exactly meeting our specs and so we are really very patient with that. So I hesitate to say exactly which markets and when that might happen. But for sure there will be more activity there.

David Tarantino - Robert W. Baird

Okay. Thanks. A follow-up to that. What is your philosophy on taking pricing outside of Food with Integrity? I know you have not done that in the recent past. But would you ever raise prices if commodity pressures dictated that?

Steve Ells

Absolutely. We have always said that strategically, we prefer to raise prices when we have Food with Integrity opportunity. The opportunity to rollout natural meat. But for sure, we are beginning to see that, like everyone is, that these commodity cost increases don't seem to be cyclical. They seem to be more fundamental shifts in the cost. We have been very fortunate that we found lots of efficiencies where we could increase the quality of our ingredients, increase the cost of these ingredients, still bear the higher cost of commodities of non-naturally raised ingredients and still raise our margins. But it's getting tougher, 2008 is going to be tougher. We have some markets that have all natural meats right now and for sure we are prepared to raise prices when it makes sense to do that, even without a rollout.

David Tarantino - Robert W. Baird

Okay. Thanks. And then, Monty, can you talk about what the potential drivers of throughput might be in '08?

Monty Moran

Sure. The things that will continue to drive throughput predominantly are those same things that we have already identified in the past. Basically, two different categories; training our people, and then the equipments that we work with. On the training side, really good scheduling, having our top crew people in the right places in the line, having all hands on deck during peak hours, so the people aren't doing prep work, which could have been done before the rushes of lunch and dinner.

Having an expediter next to the cash register at all those times, having great [knees and claws], in other words, having everything setup and ready to go before the shift begins or before the lunch rush brings and then continuing to focus on 15 minute periods of time, so that even if we don't have a line for an entire hour, we're still charting and encouraging. We are charting 15 minute periods and encouraging our managers to work on throughput even during shorter periods of time.

On the equipment side, we're still working on our tortilla warmer and we anticipate we'll start rolling out some more of our new tortilla warmer, which will help us. We're still making changes to the POS stations, you've heard about the coin machines which are in all of our restaurants now, and we continue to work and test this handheld POS, which we're now going to roll out in 50 restaurants over the next eight weeks or so.

Beyond that, our customers continue to become more and more familiar with how to use Chipotle, and they are more familiar with what they want, how to put it together, how to order, especially multiple orders and that's helping. Additionally, we're continuing to work on more and more business through fax or DSL order, which allows us to make the food off of the main line or a second make line, which keeps those transactions out of the way of the busy lunch line.

We believe that we will continue to see gains and throughput. Frankly, this is a pretty tough time of the year to look at that, because our fourth and first quarters are lower transaction times of year, and so what we're working on now is making sure that we get everything in place, get the handheld for US well understood and well trained, so that when April, May and June comes we can really address those crowds with the best possible training, the possible equipment, the best possible techniques we can in order to continue to make those strides in throughput.

David Tarantino - Robert W. Baird

Great, thank you.

Monty Moran

Thank you.

Operator

Thank you. We will take our next question from Glen Petraglia with Citi.

Glen Petraglia - Citi

Thanks. Can you hear me?

Monty Moran

Hi Glen. Yes, we can hear you.

Glen Petraglia - Citi

Thanks. I am travelling, so I apologize if you have had to repeat some things. But Jack, first, you made a comment that interest income I think in 2008 would be about half of what it was than it was in '07. I was hoping maybe if you could repeat exactly why that might be. I missed that?

Jack Hartung

Yeah, Glen, it's just interest rates. We have invested all of our cash in very-very safe, very short-term instruments, and the yield has just dropped dramatically. Last week we were able to get tax free MUNIs for example, in 3.5%, 3.6% range or something like that. Right now those rates are below 2% and so just nothing we can control, but our interest is going to be lower because of that.

Glen Petraglia - Citi

Sure and in terms of the G&A realignment, in terms of the restaurateurs and having your area managers cover 12 stores I think it was versus 8. I guess how quickly can that happen if you have only got 78 restaurateurs now. Are you anticipating being able to view that over the course of the next couple of years, and I guess what concern is there that -- that's just too much on one area manager's plate, whether it is a restaurateur or not. And it perhaps got the other way, is this something that you have tested already?

Steve Ells

Yeah, well, great question. Basically we sort of have tested it. I will answer the last question first. We sort of have tested it, but let me describe it in a little bit more detail. Basically what's going is our restaurateurs are very, very good and very self sufficient. The area managers we have, who have been able to develop a lot of restaurateurs, find it pretty darn easy to manage more restaurants and so we have got some area managers, for instance, who have developed five restaurateurs and those area managers are able to spend more and more of their time just developing those managers who aren't restaurateurs and focusing on perhaps taking up additional responsibility in other areas of their job.

Basically, those folks come to us wanting more work to do. If an area manager has no restaurateurs and has sort of average managers, it certainly creates a lot more work for them and puts a lot more work on their place. When I talk about 12 restaurants per team leader, this is something only our team leaders, which are essentially the elite area managers, are going to get 12 plus restaurants. We will continue to have "regular" area managers, who will still have something less than that and we will not make area managers into team leaders until they've demonstrated the ability to develop additional restaurateurs.

When they do that, what the team leaders will do is, when they have 12 restaurants, you would think well, that means they have 12 managers reporting to them, right. Well not really, because what happens what we're going to do is ask our restaurateurs, our best restaurateurs to mentor a restaurant, a neighboring restaurant or two, if they can handle two or perhaps more in the future. But we're going to start with just one additional one per restaurateur.

So, what will happen is, you will be leveraging the restaurateurs. They are going to remain in their restaurants, they are going to stay general managers. We're not taking them and making them "multi unit people". But they will spend some time mentoring a neighboring restaurant and bringing that restaurant up to the sort of standards that they demand and that they are used in their restaurants.

So, these are area managers who become team leaders, are going to be able to leverage their top restaurateurs to help them oversee more restaurants and they will be incentivized for doing that and two bonuses related to their restaurant performance and also two bonuses relating to the amount of restaurateurs they are able to develop in that position.

So, in terms of G&A, this wouldn't be something where anyone should expect that certainly we're going to have a significant drop in G&A. As a result of all of our area managers taking on 12 stores, it's just not going to happen that way. But like we have gradually layered on restaurateurs and now we are up to 78. We will gradually lay on the team leaders and in time will have more and more of them. Over time, as we have more of them, we will see some real benefits on the G&A side as we are going to have fewer managers, managing managers so to speak, and we have less people doing more by really focusing on these top performers.

Glen Petraglia - Citi

Okay. Jack, I don't know if you mention this or not, I didn't hear it, but I know that the average unit volume is about 1.734 million. Are the new stores still opening at about 85% of that level and as you go out into smaller neighboring markets from the major market that you are in, are the economics replicable even at a lower, presumably lower average unit volume?

Jack Hartung

Yeah Glen, there are things right in that same range kind of that mid 80s percent of the existing stores. Even though existing store volume continues to increase. The economies do vary by markets, but we have great unit economics in areas like Ohio and in faraway areas, remote areas in Ohio, where we've got $1.8 million, $1.9 million, $2 million restaurants. And so, we haven't found any area, anywhere in the country that we know we will be enormously successful.

We do have some markets that started out a little slowly, but even markets today that are underperforming; they are less than $1.7 million for example, $1.734 million and they are comping, they are comping very well. And so, we could see the momentum building, and so we have not seen an area in the country whether it urban or suburban, remote, small towns or major suburbs. We haven't seen any area where we start building Chipotle and start adding restaurants where we don't feel like we will be successful.

Glen Petraglia - Citi

Okay. And then just last one. Elasticity of pricing, I think you are up in the $9.50 to $10 average check range in general, that's getting up there. I know you have answered the pricing question before, but is there anyway to test how consumers react, if they don't understand that you're are doing Food With Integrity and they're not asking for these things, you're not running the risk, but as you raise pricing more that they just think it becomes too expensive.

Steve Ells

We actually just did a study and we did it in Arizona, because we just rolled on natural meats Arizona. Now, if you think about Arizona for example that's a market that I had mentioned in the past has been a little soft for us, not as soft as other restaurants that accommodate, but it has been soft. When we rolled natural beef and natural chicken out in the fourth quarter, we had not raised prices in nearly four years in Arizona just because we were generating efficiencies and building margins without raising prices. So, we raised prices by 10% in this market that is economically sensitive. We did not see, the Arizona had fallen off in terms of a transaction as I mentioned previously but increased prices, we didn't see any additional fall off whatsoever in transaction.

We went and talked to customers and 70% of the customers said they're willing to pay more based on our Food With Integrity inititative, based on the fact they understood that we're offering natural meat, natural beef and natural chicken. We also talked to them about the value, the money that you're spending for Chipotle meal and 90% of the people that we surveyed, said that, Chipotle was good for the money or lot of food for the money.

And so 90% of the people felt really good about the money they are paying, it is because they felt that is a lot of food or it was very, very high quality food .So, and we kind of feel like that was a tough market to do this in, a very, very high price increase in a market that's economically sensitive and so this is reinforces a fact that if we communicated well, we talk about our high quality ingredients with our customers and they are willing to pay a little bit more.

And keep in mind, a little bit more doesn’t means a little bit more than they were paying before. If you compares the Chipotle prices to other restaurant and you can figure out which restaurant you want to compare it to, but other kind of fast gradual restaurants, our menu price is right there with them yet our food quality is dramatically higher. Adapt casual restaurants, our menu prices are right there with them, yet our food quality is dramatically higher.

Glen Petraglia - Citi

And are the Arizona customers typical of the rest of the system?

Steve Ells

Well, that’s hard to say. I think they are typical as anybody, the volumes there are right about at average. There is nothing unusual in Arizona. We've done this type of thing, although not as formal of a study before, when we talk to customers and we found very, very similar results.

Glen Petraglia - Citi

Okay. Thank you.

Operator

Thank you. We will go next to Jason West with Deutsche Bank.

Jason West - Deutsche Bank

Yeah. Thanks a lot. I just wondered if you guys could provide a little more color on the commodity outlook. I believe you have said in the past that you had cheese contract rolling of the end of '07. I just wonder if you decided to re-up that or if you are just in the open market right now and then also can you talk about on the protein side, what the contracting status is there?

Jack Hartung

Yeah. On cheese, we have not locked in, we were considering it. You probably heard us talk about we are considering it in the fourth quarter. We have not locked in. We are considering it still. But we are watching the market very, very closely. The impact is in that 50 basis point that I mentioned. In fact, most of that 50 basis points impact is from cheese. And in terms of meat, we don’t really have any lock on meat, mostly because we want to serve less commodity meat and more natural meat and its very difficult to lock in natural prices.

Now, on chicken, though, we do have very, very stable prices with our natural meat. Generally, they are not as volatile as commodity, just because they are not affected by world markets. They are not effected by world prices, if you will, and so generally they are stable but in terms of a real lock, a really forward contract, we have not really done that for say, with our meat.

Jason West - Deutsche Bank

And with the bulk of the commodity pressure, do you expect to be in the first of the year since that’s when cheese will have a tough compare or is it that you guys are thinking about that as more balanced?

Jack Hartung

In terms, was that a question on cheese or on beef?

Jason West - Deutsche Bank

Just across the food line.

Jack Hartung

Well, from what we know right now, nothing else changes, we think its going to be roughly 50 basis points. We're as pretty much across the air from where we are today.

Jason West - Deutsche Bank

Okay. And that's based on lot of mid single-digit comp?

Jack Hartung

Yes.

Jason West - Deutsche Bank

Okay. Thanks a lot.

Operator

Thank you. We'll go next to Steve Rees with JP Morgan.

Steve Rees - JP Morgan

Hi, thanks Jack. You mentioned the unit volume continuing to open the discount, which is actually a nice part of the story as those ram up over time to contribute the comp. So can you perhaps comment on how your traffic is holding up in some of your more mature markets that you’ve been in for say four or five years?

Jack Hartung

Yeah, our older stores in general, not even going by market, they generally comp a little bit less than our new stores. But even our older stores still comp, like in the fourth quarter thye are comping kind of in that generally mid single-digit. Its not that we don't have stores in the low single-digits, we do but generally, if you take store opening by class and take somewhere older market, there is still comping in that at least that mid single-digit kind of range.

We have market that we’ve been in for a lot longer than five years, there are very high volume, much higher volume than average that are comping above average, they are comping above kind of that 10% range, as well. So generally there is this the older the store, generally the comp is going to be lower, but it still very, very respectable and then we have a exceptions to that as well.

Steven Rees - JP Morgan

Okay, and so for the '08 comp forecast that just based on a slower ramp up period for the new units or is that just in a lower comp over all entire base?

Jack Hartung

Its just our best estimate, first of all not great, but its our best estimate of what we think the comps will be. Frankly, if we don't get better as Mark and Steve talked about in running better restaurants, serving better food, that is the comp that we will deliver. The only way we will beat that is to run better restaurant.

The same situation, when we looked at our sale last year and then gave the same kind of a guidance, the outlook looked very similar, meaning we would do a comp in that kind of a guidance unless we get better, unless we are going to track more new customers in to our restaurants, unless we can invite our existing customers in to our restaurant more often. So we have to continue to get better, so that we can continue to kind of raise that comp line.

Steven Rees - JP Morgan

Okay. Great thank you very much.

Jack Hartung

Thanks.

Operator

We will go next to Jeff Omohundro with Wachovia.

Jeff Omohundro - Wachovia Capital Markets

Thanks. Just wondering what other changes like the shift from three to five regionals or perhaps in infrastructure, you might be contemplating to manage this growth?

Monty Moran

We sort of – that's sort of yes. We try to think long and hard of about how we want to structure this, who we want to put in positions and we very deliberately did all of this sort of in one fell swoop, so that we feel like all the positions throughout the country is well covered and that we had the right people in them. So you are sort of looking at it.

Jeff Omohundro - Wachovia Capital Markets

Great, thanks.

Monty Moran

You bet.

Operator

Thank you. We will go next to Dean Haskell with Morgan Joseph.

Dean Haskell - Morgan Joseph

Thank you very much. As you are expanding in 2008, how much of that expansion will be in existing markets versus new markets? How do you expect that to positively impact pre opening expenses hopefully down? And then I have one more question.

Steve Ells

Okay. First of all Dean, most of the restaurant openings are going to be in existing markets. Some 90% or so will be in existing markets and that is just because we've entered most large market throughout the country. I would not expect to see really much of an impact in the pre-opening cost at all. If you look at pre-opening cost they average somewhere in kind of that $70,000 to $75,000, about 60% of that, 59% of it to be exact, is non-cash, its related to straight line rent. Okay. So, that’s just the calculation, that even though we're not paying rent during the construction period, the accounting rules require us to go take the rent over the entire lease period and then basically straight line it over that entire period, including about 3.5 month construction period. And so, we got this $70,000 $75,000 per store number, but 59% of it is non-cash and so, we're kind of stuck with that. Most of the rest of that, very little of it actual rent that we pay. The rest of it is like marketing expenses and its local store marketing, its sending out mailers to surrounding businesses and, doing things to invite people into our restaurant for the new store opening. So, I would expect that the pre-opening cost would stay relatively intact.

Dean Haskell - Morgan Joseph

Okay. And the last question is, as you continue to expand, are you having a tweak your real estate model any, to push the edges as you entered new and different demographics?

Steve Ells

Well, I don’t know what you mean by push the edges. We are -- when we go into a market, and ones we've been there for a while, we have found that we can go further and further into the outskirts of the market. And we have found that we can go into lower income area. So, we might go into an area to begin with and look for more of the higher income area.

But as the brand gets established and as we develop loyal customers, we're able to find that we can push out to the outskirts both in terms of income and in terms of geography and do exceptionally, exceptionally well. And so, yes, as our brand, becomes more well known, we are finding that, we can push out and be a little bit more aggressive. Well, we generally do that in markets that we're already in, that were very successfully and the brand is very well known.

Dean Haskell - Morgan Joseph

Okay. Thank you very much.

Operator

Thank you. We'll go next to Mitch Speiser with Telsey Advisory Group.

Mitch Speiser - Telsey Advisory Group

Thanks very much. Two questions. First, I believe you said you went into five new markets in '07?

Jack Hartung

Right.

Mitch Speiser - Telsey Advisory Group

Could you tell us about the experience, the sales ramp up of the new stores in new markets versus the new stores in existing markets, if there is any difference? And then I have a separate question?

Jack Hartung

It varies a lot by new market. So it's a lot more volatile, I would say. Of the five markets that we entered, two of them were above that mid 80% range, you know that I talked about. We talked about new stores opening up kind of in that mid 80% range. Two of them opened above that, two of them opened up a little below that, within striking distance and one of them opened up quite a bit below that, one of them opened up slow. So one of the five opened up, what we would say is slow. But that's not unusual. I mean that will happen and if we are going into markets that our brand is not very well known and it will take a little bit of time for us to get customers to come in the try Chipotle and then they become loyal customers. So generally, those five markets opened up pretty representative. Overall on average, they opened up above what a typical new market would open up at.

Mitch Speiser - Telsey Advisory Group

Great, thank you. And then secondly, I believe that if I do the math right in '08 given about $150 million in CapEx, you should be able to meet those cash needs with cash flow from operations. You do have over $170 million of cash in the balance sheet. I guess a two part question, would you consider doing like a stock split or so to increase your flow and then perhaps at some point, you are buying back some stock, is that in the thought process in the foreseeable future?

Jack Hartung

On the stock buyback, we do have certain restrictions, its really related to the A versus B question that was asked before, that we are prohibited from taking certain actions that might change our capital structure and so buying back stock for sure in a short medium term, we would not be able to do. Generally that's high in our list. Even if we are allowed to do it, even once we get past this contractual restriction later this year. Just because we are a growing company, we've got a lot more growth ahead of us than we have behind us. We are only at 700 restaurants right now, we've got potential 4,000, we are going to enter Canada later this month. And so we think we've got --

Monty Moran

Later this year.

Jack Hartung

Later this year, sorry. We've got lots of market growth ahead of us and so we don't have any specific plans to get capital back. We know if we can take that capital and invest it in the very, very high cash and cash returns, which are in the 40% range. That would be the best way to add to shareholder value, rather than just give it back to shareholders.

In terms of a stock split, no, we're not considering a stock split either. We don't think that really does anything to add to shareholder value. We think that the way to add to shareholder value is focused on running great restaurants, serving great food, developing our people, so that we can constantly improve the experience and that's where most of our focus is.

Mitch Speiser - Telsey Advisory Group

Thank you.

Operator

Thank you. We'll go next to Bryan Elliott with Raymond James.

Bryan Elliott - Raymond James

Good afternoon. Jack, I wanted to circle back to make sure I understood what you were trying to convey. You talked about the 50 bits of food cost margin pressure, let me find my notes here, and then you said, I think, if we can get 3% pricing, we can hold our margins, where you hold most, if not all of our current margins on price. Were you referring to the food cost line or were you referring to restaurant or were you referring to the EBIT line when you talked about margins in that statement?

Jack Hartung

Mostly restaurant levels, Bryan, which when you hold it at the restaurant level and as long as we manage our G&A, which we did say that there will be a little bit of negative leverage in G&A, but that's all because of non-cash stock options. We ought to be able to come close to holding our margins at the op income level as well.

Bryan Elliott - Raymond James

Okay. And so, you are basically saying food cost will be up 50 bips even with pricing, but with the pricing impact and the leverage on the other line items that even with the 50 bip headwind after pricing, essentially I guess this is my question. You are indicating if commodity stays current, you think you will have 50 bips of pressure even after 3% pricing, but you can offset that at the restaurant line? Is that what you were -- did I get that right?

Jack Hartung

No. Let me clarify. If we do no additional pricing, we will see 50 basis points of higher food costs and that's because of higher cheese and higher tortilla prices. For us to completely offset that at the food cost line and then more than offset that at the restaurant level line, we would need to raise prices sometime throughout the year to give us like an effective 1.5% menu price increase throughout the year. Now the 3% came in, Bryan, where we are already running at a rate such that just the menu price increases we took in 2007, just letting those roll out, that will have an effect of about 1.5%. Menu price increase next year. So layer on another 1.5 that I just talked about that covers 50 basis points and then we have our margins covered.

And we feel good about that. Now we don't know what commodities are going to do, but we feel like 3% is a really modest menu price increase in today's environment. Many restaurant companies are increasing a lot faster than that and keep in mind our increases are associated with a significant increase in the quality of our food.

Bryan Elliott - Raymond James

Sure. So I am sorry, because I am a little confused. So if we do assume a 3%, we will see a little bit of food cost pressure less than 50 bips, will make that up or more at the other line items at the restaurant. So we will be flattish restaurant and then we have down cash G&A but we've got the non-cash stock pressure that you referenced earlier, did I get it right now?

Jack Hartung

No. The 3%, if you build in 3%, 1.5% you're growing off from last year, 1.5 incremental, we have covered the 50 basis points of pressure.

Bryan Elliott - Raymond James

Okay, okay.

Jack Hartung

Food costs will be the same.

Bryan Elliott - Raymond James

But then we'll have up margins at the restaurant then, right?

Jack Hartung

That's right.

Bryan Elliott - Raymond James

Okay, so we won't cover, our margin will improve our margin.

Jack Hartung

If no other commodity surprises, and my point is we're not specifically 1.5%, but 1.5% is very reasonable, I'm very confident that that's a reasonable incremental price increase due to expect. That will cover it at the food cost line and more than cover it at the restaurant level line, that's right.

Bryan Elliott - Raymond James

Got it. Okay, thanks very much.

Jack Hartung

Okay. Thanks Bryan.

Operator

Thank you, we'll go next to Nicole Miller with Piper Jaffray.

Nicole Miller - Piper Jaffray

Good afternoon.

Steve Ells

Hi, Nicole.

Jack Hartung

Hi, Nicole.

Nicole Miller - Piper Jaffray

Hi. Congrats on a great quarter.

Steve Ells

Thanks Nicole.

Nicole Miller - Piper Jaffray

Monty, can you give some example of that POS results? Like, I mean, walk us through a couple of stores and what you saw and why you're so confident moving forward and some kinks you've worked out?

Monty Moran

Yeah, well Nicole, you are talking about the handheld POS, right?

Nicole Miller - Piper Jaffray

Yeah.

Monty Moran

Yeah, keep in mind this is something we've only been experimenting with half dozen stores so far. But basically, what this allows us to do is send one of our employees out into the line and bring up transactions and give them a receipt in the line. So that the process of paying for the meal is totally over with. So they then just go through the line, order their food and when they are done getting their food, present the receipt to the cashier and walk away without having to ring up the order.

In our restaurants, that have very, very busy lunch time and very long lines, this is a really neat thing that we can do to really improve customer service by having someone talk to someone in the deep line and perhaps assure them that the thing moves quickly, especially with new customers. And our customers really like it.

So number one, first and foremost, it's a way of improving customer service. And our customers really are saying that they like it. But in terms of pure throughput we have seen in some of our experimentation that this speeds up as many as four transactions per 15 minutes. But that I just want to caution you that four transactions per 15 minutes and then extrapolate that in any real way, because that would be at the very-very busiest restaurants, during the busiest lunch times with the optimal use of this device.

So it will help the throughput we believe. It will only help with throughout at our restaurants that generate really long lines during lunch, but it's worth going in to the line to ring up the transaction. But we look at it as just a nice positive way to improve the experience for your customers.

Nicole Miller - Piper Jaffray

And what percentage of the base that we considered a really busy restaurant that could benefit somewhere close to this four transaction per 15 minute?

Monty Moran

Yeah, it's kind of too early to say what that is, Nicole. Right now, what we have done is we have looked at the 50 restaurants that we think have the greatest opportunity to benefit and we are going to roll it out over the next eight weeks or so, in to those 50 restaurants, and once we get that -- we are going to learn a lot from that obviously and that will give us a much better idea, so that we can let you know how deep we would like to go beyond that 50 restaurants. We think the handheld will be relevant, will be useful and will be an advantage in significantly more than those 50 restaurants, but we are going to go ahead and do that first and learn and find out what we learned before rolling it further.

Nicole Miller - Piper Jaffray

Okay. Great. What should be we expect from the new ad agency, what is going to change? What might be new?

Steve Ells

Yeah, Nicole far too early to tell. As you, we have engaged DeVito/Verdi, and in fact they are in the offices today, they have been here this week. And basically, we are just getting to know each other. They are going to really do deep dive, travel around with us, understand our culture, what makes Chipotle tick understand from the customer perspective what Chipotle is all about. And then we will go into the process of talking about what kinds of advertising things, what kind of creative we might be going after. But we are just in the very, very early exploring stages right now with DeVito/Verdi.

Nicole Miller - Piper Jaffray

Okay. Thank you. Jack, what should we expect on a development new units on a quarterly basis, what's kind of a fair cut in each quarter?

Jack Hartung

Yes Nicole, the first quarter will be a little lighter than perfect level loading. So, to be close to what we opened last year, last year I think we opened 28 in the quarter. So, it will kind of in that ballpark. The remaining three quarters, Q2, Q3 and Q4 will be heavier and reasonably level loaded between those three quarters.

Nicole Miller - Piper Jaffray

And how many have opened quarter to date please?

Jack Hartung

We haven’t disclosed that yet.

Nicole Miller - Piper Jaffray

Okay. I think that’s -- one last question on the guidance. I am sorry being jumping aroung on some calls tonight. I saw the guidance in the press release, but are you also basically still reaffirming your long-term 25% earnings growth goal?

Jack Hartung

Yes.

Nicole Miller - Piper Jaffray

Okay. Thank you so much.

Jack Hartung

Thanks, Nicole.

Operator

Thank you. We have time for one final question, and we will take that question from Paul Westra with Cowen.

Paul Westra - Cowen

Great, thanks. How are you guys today?

Jack Hartung

Good.

Paul Westra - Cowen

Most of the questions answered, but just back to Brian's question on 3% pricing, just I have a little bit more into the labor line, particular in line would be below the food cost line. How would expect to get some leverage there, assuming mid single-digit comps, which would be modest traffic gains. How would you expect to getting labor leverage in particular?

Steve Ells

Just very little bit, Paul. We got so much leverage, really much more leverage than either even we internally expect last year. We discuss the labor chart so fast, so I think with kind of normal wage inflation and because most of our comp growth we expect to be transaction driven at lease partially transaction driven we have to add labor to deal with the additional transactions. So I think the combination of wage inflation and adding some labor for the additional transactions and within our comp range, I would expect not to see labor leverage, not to see much if any labor leverage, the way I would describe it.

Paul Westra - Cowen

And what is the wage inflation rate looking like in the trending….

Steve Ells

Well, in the past, year or so, it’s been, it’s picked up, its been more in kind of that 3.5% range. So if we get wage inflation kind of 3.5% range and if you have got comp that are just a little bit higher than that. And you need to add some labor to handle the additional transactions. You can see whereas its not going to be much room for leverage. Not much you can do higher comp than what our guidance is.

Paul Westra - Cowen

And then I had a follow-up question on your, you really averaging the volume distribution, I think you talked about the left side of the bulk curve is open out 15% below averaging. Just trying to see if anything stalling out on the rate side of the bulk curve, are you seeing stores start to clamp when they hit $1.9 million to $2 million from a age standpoint or you are seeing, as you mentioned some are just going through?

Steve Ells

No. Just the opposite. We do not see these high volume stores are leveling off and so we have restaurants that are well beyond $3 million. We have entire market that are well beyond $2 million and still comping at company average comps, sometimes higher. So, no, we are not seeing any thing in terms of these high volume restaurants saying that’s it. Once we are inviting more customers into our restaurants, our restaurants can handle lots and lots of volume.

Paul Westra - Cowen

Do you see stores opening this year at $1.5 million, 15% below your $1.7 million that you don't – may be not down the road as far as body count, you don't see -- you could envision $2 million stores you're opening today.

Steve Ells

Yeah, yeah, absolutely, because you probably heard us say the ballpark, we have entire markets that are doing $2.5 million in volume and they are comping really, really well. So, yeah, there is nothing to tell us that there is kind of a leveling off point where okay, that's it. You hit $1.08 and you're done. So it's really a matter of bringing more customers in and we still feel like lot of people either don’t know about Chipotle or don't know about our Food With Integrity and we have an opportunity to convert lot of people that just don't know much about us into a more loyal customers. So we think we've got lots of opportunities.

Paul Westra - Cowen

Okay. Then last question on $5 share cash. You mentioned you might be in the balance sheet for a while, why not chase them better yield than its going to be on there and I think you have all the short-term investments?

Steve Ells

Well, Paul, the best feel that we can get is investing one of our restaurants, which is not going to be about 40% yields or so. In the meantime, we really are going to play it very, very safe. We were thinking that way even before this whole credit problem, since this credit problem were being even more diligent to make sure that we've got out money invested in very, very, very safe instrument. And so we're not going to move the money around to try and chase not a 50 or 10 basis points for sure.

We really want to put the money to use, but we want to make sure we opened the right amount of restaurants based on finding great real estate and having great managers to run those restaurants. The best thing we can do to better utilize our capital, frankly is to really accelerate this restaurant to a program as Monty talked about, because the extent that we have more great managers available will dial it up in terms of real estate, they go get more real estate and then we'll put this capital use and we know that the best way add to shareholder value.

Paul Westra - Cowen

Great. Thank you.

Steve Ells

Thanks Paul.

Operator

Thank you. At this lime I'd like to turn the call back over to presenters.

Chris Arnold

Well, that concludes our call for this quarter. Thanks all for tuning in.

Steve Ells

Thank everybody, everyone.

Operator

That does conclude today's conference. You may disconnect your lines at this time.

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Source: Chipotle Mexican Grill Q4 2007 Earnings Call Transcript

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