chipotle mexican grill (cmg) earnings report: q2...
TRANSCRIPT
CompanyName:ChipotleMexicanGrillIncCompanyTicker:CMGSector:ServicesIndustry:Leisure
EventDescription:Q22015EarningsCallMarketCapasofEventDate:21.05BPriceasofEventDate:673.07
©2014TheStreet,Inc.Al l R ightsReserved Page1of21
ChipotleMexicanGrill(CMG)EarningsReport:Q22015ConferenceCallTranscriptThefollowingChipotleMexicanGrillconferencecalltookplaceonJuly21,2015,04:30PMET.Thisisatranscriptofthatearningscall:
CompanyPart icipants
MarkAlexi;ChipotleMexicanGrill;IRManageSteveElls;ChipotleMexicanGrill;Chairman,Co-CEOMontyMoran;ChipotleMexicanGrill;Co-CEOJackHartung;ChipotleMexicanGrill;CFOMarkCrumpacker;ChipotleMexicanGrill;ChiefMarketing,DevelopmentOfficer
OtherPart icipants
DavidTarantino;RobertW.BairdandCompany;AnalystSaraSenatore;SanfordC.BernsteinandCompany;AnalystDavidPalmer;RBCCapitalMarkets;AnalystNicoleMiller;PiperJaffray;AnalystJasonWest;DeutscheBank;AnalystSharonZackfia;WilliamBlairandCompany;AnalystKarenShort;DeutscheBank;AnalystJohnGlass;MorganStanley;AnalystBrianBittner;OppenheimerandCo.;AnalystJeffreyBernstein;BarclaysCapital;AnalystAndrewCharles;CowenandCompany;Analyst
MANAGEMENTDISCUSSIONSECTION
Operator :
Goodday,andwelcometotheChipotleMexicanGrillsecond-quarter2015earningsconferencecall.(OperatorInstructions)Asareminder,thisconferenceisbeingrecorded.Thankyou.IwouldnowliketointroduceInvestorRelationsmanagerforChipotleMexicanGrill,Mr.MarkAlexi.Youmaybeginyourconference.
MarkAlexi(IRManage):
Thankyou.Hello,everyone,andwelcometoourcalltoday.Bynowyoushouldhaveaccesstoourearningsannouncementreleasedthisafternoonforthesecondquarter2015.ItmayalsobefoundonourwebsiteatChipotle.comintheinvestorrelationssection.
Beforewebeginourpresentation,Iwillremindeveryonethatpartsofourdiscussiontodaywillincludeforward-lookingstatementsasdefinedinthesecuritieslaws.
Theseforward-lookingstatementswillincludestatementsaboutourpotentialbusinessresults,growth,andshareholderreturns,projectionsonanumberofrestaurantsweintendtoopen,trendsindevelopmentcosts,estimatesoffuturecomparablerestaurantsalesincreases,orcomps,andsupplychainandothertrendsreflectingfuturecomps,projectionsregardingtrendsinfood,labor,inG&A
CompanyName:ChipotleMexicanGrillIncCompanyTicker:CMGSector:ServicesIndustry:Leisure
EventDescription:Q22015EarningsCallMarketCapasofEventDate:21.05BPriceasofEventDate:673.07
©2014TheStreet,Inc.Al l R ightsReserved Page2of21
costs,ourexpectedeffectivetaxrate,statementsaboutstockrepurchases,aswellasotherstatementsofourexpectationsandplans.Thesestatementsarebasedoninformationavailabletoustoday,andwearenotassuminganyobligationtoupdatethem.
Forward-lookingstatementsaresubjecttorisksanduncertaintiesthatcouldcauseactualresultstodiffermateriallyfromtheforward-lookingstatements.WereferyoutotheriskfactorsinourannualreportonForm10-K,asupdatedinoursubsequentform10-Q,foradiscussionoftheserisks.
Iwouldliketoremindeveryonethatwehadadoptedaself-imposedquietperiodrestrictingcommunicationswithinvestorsduringthatperiod.Thequietperiodbeginsonthefirstdayofthelastmonthofeachfiscalquarterandcontinuesuntilthenextearningsconferencecall.ForthethirdquarteritwillbeginSeptember1andcontinuethroughourQ3earningsreleaseplannedforOctober20,2015.
OnthecallwithustodayareSteveElls,ourChairmanandco-ChiefExecutiveOfficer;MontyMoran,co-ChiefExecutiveOfficer;JackHartung,ChiefFinancialOfficer;andMarkCrumpacker,ChiefCreativeandDevelopmentOfficer.Withthat,IwillnowturnthecallovertoSteve.
SteveElls (Chairman,Co-CEO):
Thanks,Mark.I'mpleasedwithourperformanceduringthesecondquarterandfirsthalfof2015.OntheheelsofwhatwasarguablyourbestyeareverasapublicCompanyin2014,wehavecontinuedtopoststrongresults.
Duringthequarter,wegeneratedrevenueof$1.2billion,anincreaseof14.1%oncomparablerestaurantsalesgrowthof4.3%andtheopeningof48newrestaurants.Thisproduceddilutedearningsof$4.45pershare,anincreaseof27.1%.
Theseresultsareparticularlystrongconsideringtheverydifficultcomparisonswefaceandkeepusonpacewiththeguidanceweprovidedfor2015.
Thestrengthofourbusinessistheresultofourfocusonouruniquefoodandpeoplecultures,andinanincreasinglycrowdedandcompetitiveindustry,theseuniqueandcompellingattributescontinuetodifferentiateChipotleanddriveoursuccess.
Duringthequarter,wetookasignificantsteptoimprovethefoodweservewhenwecompletedourtransitiontousingonlynon-GMOingredientstomakeallthefoodweserveinourrestaurants.WebeganthisefforttwoyearsagowhenwemadethedecisiontovoluntarilydisclosetheGMOsinouringredients.
Followingthatmove,weworkedtoeliminatethelimitednumberofGMOingredientswewereusingtomakeourfood,whichincludesoybeanoilandsomeingredientsinourtortillas.Today,allthefoodweserveatChipotlerestaurantsismadewithnon-GMOingredients.
Whilethatdecisionwasmadewithsomecriticism,mostofwhichwastiedtothenotionthatGMOfoodsdonotpresentanyhealthriskstopeoplewhoconsumethem,amajorityoftheresponsetoourdecisionwasoverwhelminglypositive,andwebelieveitwastherightthingtodoforanumberofreasons.
First,webelievethatafewGMOingredientsthatwereonourmenuwerenotmakingourfoodanybetterinanyway.Second,thattherewasconsiderabledebateaboutlong-termimpactassociatedwithGMOfarmingsystems.
Andthird,thatmoreresearchisnecessarytofullyunderstandtheimpactsofGMOfood,particularlystudiesthatarelong-termandindependentinnature.OurpositiononGMOsverymuchalignswithconsumersentimentonthisissue.And,quitesimply,ChipotleistheonlynationalchainwhereconsumerscaneatanythingonthemenuwithoutworryabouteatingGMOs.
CompanyName:ChipotleMexicanGrillIncCompanyTicker:CMGSector:ServicesIndustry:Leisure
EventDescription:Q22015EarningsCallMarketCapasofEventDate:21.05BPriceasofEventDate:673.07
©2014TheStreet,Inc.Al l R ightsReserved Page3of21
Thisdirectionisnotnewforus,andthedecisionisveryconsistentwithouroverallcultureofservingFoodWithIntegrity.Thereareanumberofingredientsthathavebeendeclaredsafetoeat,includingartificialflavoringsandcoloringsforexample,thatarealsonotenoughfood.Simplybecausesomethingisdeemedsafedoesn'tmeanthatit'snecessaryorthatitmakesourfoodbetterinanyway.
Withourfoodnowmadeentirelyfromnon-GMOingredients,wehavesetoursightsonmakingbettertortillas.These,ourseasonaltortillas,aremadeusingonlyfiveingredients:flour,water,starter,vegetableoil,andsalt.Andwhenyouconsiderthatthestarter,whichistheleaveningagent,ismadefromflourandwater,it'sreallyjustfouringredients.
Whilethismightsoundlikearelativelysimpleundertaking,it'sactuallyquiteachallengebecauseonehastoaccountforanumberofvariables:moistureintheflour,temperatureandhumidityinthebakery,strengthofthestarter,etcetera.Andmanyofthechemicaladditivesincommercialtortillasaredesignedtomitigatethesevariabilities.Sowhileourtortillasnecessitatesakeeneyeandhandofourbakers,weknowthatskilledbakerscanmakebetter-tastingtortillasmoresimilartohomemadetortillasthanwecurrentlygetatcommercialscale.
Tortillasmadecommerciallygenerallycontainartificialadditivesincludingpreservativestoextendtheirshelflifeanddoughconditionerstogivethemstrengthandtheabilitytostretchinordertoeliminatetheneedfornaturalfermentationprocessofdough.
Thenewtortillasareworking--thenewtortillasweareworkingtodevelopthroughapartnershipwithWashingtonStateUniversity'sbreadlabwillhavenoartificialingredients,butratherwillhaveonlyafewrealwholeingredientsthathavetraditionallybeenusedtomaketortillas.
Returningtothisfreshorsimplertortillaessentiallyrequiresthatwereinventthewaytortillasaremadeonalargescale,andthat'sexactlywhatwe'redoing.
Whileweareintheveryearlystagesofthisproject,thetortillasthatwe'remakingaredeliciousandperformverywell.Laterthisfall,wewillbescalingtheprojectupforcontinuedtesting.ThisisconsistentwithouroverallFoodWithIntegritymission,onethatrespectstheenvironment,farmers,thebakers,ourcustomers'health,andultimatelytheirtastebuds.
Wehavealsomadesignificantprogresstoresolveourporkshortage,whichbeganinJanuary.Asyoulikelyrecall,wesuspendedoneofourprimaryporksupplierswhenaroutineauditfoundthatasupplierwasnotadheringtoallfacetsofouranimalwelfareprotocol.Wehavefoundanewsupplier,KarroFoodGroupoftheUK,andhavebegunservingporkfromKARROinmostofourFloridarestaurants,alittleover100restaurantsintotal.
Whileithasalwaysbeenourpreferencetosourcemeatsdomestically,thequantityofporkthatmeetsourstandardsissimplynotavailablerightnowfromdomesticsuppliers,asthevastmajorityofporkraisedintheUnitedStates--morethan95%basedonourestimates--isnotraisedtoourstandards.
TheporkwearegettingfromKARROFoodsmeetsorexceedsallofouranimalwelfarestandards,includingthatthisporkcomesfrompigsthatarebornonpastureandraisedindeeplybeddedbarns.However,KARROadherestoadifferentantibioticprotocol.
UnderKARRO'sprogram,pigscanbegivenantibioticsunderveterinarysupervisionandcanremaininthesupply.Whatisimportanttonoteisthatantibioticscannotbeusedsub-therapeuticallytopromotegrowthatKARRO.ThisprogramiscommonintheUKandhasbeenendorsedbynumberofanimalwelfare,scientific,andveterinaryorganizationsintheUnitedStates.
Duringthecomingmonths,wewillbesourcingmoreporkfromKARROandreturningcarnitastothe
CompanyName:ChipotleMexicanGrillIncCompanyTicker:CMGSector:ServicesIndustry:Leisure
EventDescription:Q22015EarningsCallMarketCapasofEventDate:21.05BPriceasofEventDate:673.07
©2014TheStreet,Inc.Al l R ightsReserved Page4of21
restaurantsaroundthecountryonamarket-by-marketbasisuntilwearefullysuppliedagain,whichweexpecttohappenbeforetheendoftheyear.Weknewwhenwemadethedecisiontosuspendpork--tosuspendaporksupplier,thatitwouldleaveuswithoutenoughporkforallofourrestaurantsandthatourdecisioncouldimpactcustomers'perceptionsofChipotleandhaveanimpactonoursales.Weareextremelypleasedbythereactionfromourcustomers,manyofwhomapplaudedusfortakingthisprincipledstand.Aswecontinuetorampupourporksupply,weexpecttoregainanylostsalestiedtothisoutage.
WearemakingthesechangestoimproveouringredientsaswecontinueonourFoodWithIntegrityjourney.Formorethan15years,we'vebeenworkinghardtochangethewaypeoplethinkaboutandeatfastfood.Inrecentmonths,anumberoffoodcompanieshavemadepledgestoremovesomeartificialingredientsfromtheirfood,primarilythingslikeartificialcolorsorpreservatives.
Thisreality,however,isthattheseingredientsmakeuponlyaportionofthethousandsofadditivesusedinprocessedfoods.Asidefromourtortillas,noneofourfoodsincludeanyoftheseadditives.
Withcompetitorsmakingvaguepledges,wearestrengtheningourmarketingmessagetocontinuetoshowthecontrastbetweenwhatChipotlehasalwaysdoneandthechangesothersarepledging.Sowe'vealwaysandwillcontinuetomakeourfoodwiththeverybestingredientswecanfind.Andonceourtortillaprojectiscomplete,wewillnotrelyonanyoftheartificialingredientsthataresoprevalentinprocessedfoods.
Tohighlightthisdifferentiation,todaywelaunchedanewprogramcalledFriendsOrFaux,spelledf-a-u-x,whichisanintegratedcampaignthatincludesaninteractivedigitalgamethatinvitescustomerstolearnaboutthedifferencebetweenChipotle'singredientsandthosecommonlyusedtomakefastfoodandprocessedpackagedfoods.Toplaythegame,consumerschooseaChipotlemenuitemandarepresentativetraditionalfastfooditem,andtheycompareandmatchtheingredients,identifyingwhichitemscontainwhichingredients.
Theonlinegamewillincludealimited-timeBOGOpromotionforparticipantswhileencouragingcustomerstolearnmoreaboutFoodWithIntegritymission.Inadditiontothegame,thecampaignisalsosupportedbyextensiveonlineadvertisingwhichbeginstoday.
Constantlyworkingtoimprovethequalityandtasteofthefoodweserveisembeddedinourculture,andourtrackrecordtoimproveourfoodisunmatchedintheindustry.WiththestrengthofourfoodcultureandauniqueandcompellingpeopleculturethatfurtherseparatesChipotlefromotherrestaurantcompanies,webelievewehavethepiecesinplacetocontinuetochangethewaypeoplethinkaboutandeatfastfood,andtodeliveroutstandingresultsforourshareholders.
IwillnowturnthecallovertoMonty.
MontyMoran (Co-CEO):
Thankyou,Steve.Ourexcellentresultsarepossiblebecauseofthestrengthofourveryspecialpeopleculture.Byhiringteamsoftopperformers,empoweringthemtoachievehighstandards,anddevelopingthemtobeleadersforourCompany,weareprovidingaconsistentlyextraordinaryrestaurantexperiencewhilealsorunningourrestaurantsinawaythathelpsusmaintainastronguniteconomicmodel.
Havingthebestteamsrequiresthatweprovideextraordinaryopportunitiesforourpeople.Themostuniquebenefitthatweprovideistheopportunityforourpeopletodevelopintothemosteffectiveleaderstheycanbewiththemostrewardingcareerpossible,andthisisatthecoreofourculture.Butwealsoinvestinbenefitsandcompensationpackagesthatmatchthetalentatourteams.
CompanyName:ChipotleMexicanGrillIncCompanyTicker:CMGSector:ServicesIndustry:Leisure
EventDescription:Q22015EarningsCallMarketCapasofEventDate:21.05BPriceasofEventDate:673.07
©2014TheStreet,Inc.Al l R ightsReserved Page5of21
Duringthequarter,anumberofup-and-comingleaderstookadvantageoftheopportunitiesaswepromoted39managersintorestaurateurpositionsandalsopromoted16newfieldleaders,includingnineapprenticeteamleaders,threeteamleaders,andtwoteamdirectors.Thesepromotionsarewhatwe'vecometoexpectatChipotle.
Currently,morethan90%ofourrestaurantmanagerscomefromwithintheranksofourcrew,andwehavepromoted5,900peoplewhostartedascrewintomanagementpositionsjustthisyearontopofthe10,500peoplewhostartedascrewandwerepromotedintomanagementpositionslastyear.
Withourstrongabilitytodevelopourleadersfromwithinandtheimportanceofestablishingrestaurateurculturesinallofourrestaurants,ourpeopleculturecontinuestobeaprimaryassetleadingtoourgrowthandalsogivesusgreatoptimismthatwewillcontinuetoexperiencestronggrowthgoingforward.
TheleaderswearedevelopingareabletoattractothertalentedpeopletoourCompanyandaredeeplycommittedtohavingthesenewpeoplereachtheirfullpotential.Byhiringonlytop-performingemployeesdevelopingthemtobeattheirverybest,weareabletodothingsthatotherrestaurantcompaniessimplycan'tdo.
Notonlydoourteamsrunextraordinaryrestaurants,preparingdeliciousfoodusingclassiccookingtechniquesandprovidingexceptionalcustomerservice,theyalsoelevatethepeoplearoundthem.Thisapproachtorunningourrestaurantsiswhatenablesustocreatesuchanoutstandingdiningexperienceandtodeliversuchstronguniteconomics.
Tohelpperpetuateourcultureandthedevelopmentofourtopperformers,weheldameetingduringthequarterwithfieldleaders--someofthemnewtotheCompanyandotherswithlongcareershere--todiscussandclarifytheroleofallthefieldleadersatChipotle.Wewerepleasedhowcommittedourleadersaretotheconceptofachievingsuccessbymakingothersbetter.
Ourfieldleadersseemoreclearlynowthaneverthattheirsuccessdependsonthesuccessofthepeopletheylead.There'snoambiguityastotheprioritieswehaveforourleadersatChipotle.Theyknowthattheirjobistodeveloprestaurateurs,andtheyhaveaveryclearunderstandingastohowtodothat.
We'vetoldourfieldleadersthatwedefinetheirsuccessbylookingatthreethings.First,thateachgeneralmanagerthattheyleadmustknowexactlywhytheyarenotarestaurateur.
Second,eachoftheirgeneralmanagersmustbeabletoclearlystateexactlywhattheirplanistobecomearestaurateurandwhattheirprioritiesareinordertodoso.
Third,thegeneralmanagersmustbeactuallydevelopingintorestaurateurs.
Themostimportanttoolfieldleadershavetohelpthemsucceedinthistaskistherestaurateurdiagnosisandplantool.Usingthistoolallowsourfieldleaderstouncoverthepositiveandnegativethemesthatmayexistineachrestaurantandtomakeaspecificplanforhowtobesteliminatethosenegativethemes.
Withthetoolnowwell-established,fieldleadersareusingitasthebasisforeachvisittoarestaurant,and,withtheproperprogressupdates,ithasallowedourfieldleaderstochartthedevelopmentpathforrestaurateurcultures,witheachvisitandeachrevisiontotheplanservingasanewchapterinthedevelopmentstoryforthegeneralmanager.
Ofcourse,allofthesestoriesshouldhavethesameending:anotherteamestablishingarestaurateurcultureandaddingtoourgroupofeliteleaderswhoarechangingthewaypeoplethinkaboutandeatfastfood.
CompanyName:ChipotleMexicanGrillIncCompanyTicker:CMGSector:ServicesIndustry:Leisure
EventDescription:Q22015EarningsCallMarketCapasofEventDate:21.05BPriceasofEventDate:673.07
©2014TheStreet,Inc.Al l R ightsReserved Page6of21
Duringthequarter,wetooksomeimportantstepstostrengthenourcompensationandbenefitsprograms,particularlyatthecrewlevel.Wecompletedafirstinstallmentofourtwice-annualmeritincreasesforcrewandmadeaone-timecompensationadjustmentforourkitchenmanagersandservicemanagerstoensurecompensationforthosepositionsisconsistentwiththeveryhighexpectationsthattheserolescarry.
Wealsomadeimprovementstothebenefitsweofferhourlycrewbyincreasingpaidvacationandaddingpaidsickdaysandbyexpandingourtuitionreimbursementprogramtoincludeouremployeesinadditiontothesalariedmanagerstowhomthisbenefitwasalreadyavailable.
Oneofthegreatestbenefitsofhavingsuchstrongculturesinourrestaurantsisthatitenablesustodeliverexcellentcustomerservice,whichgeneratesgreatthroughput.Ourteamsunderstandthequalitiesthatmakeforgreatthroughputarethesamequalitiesthatprovidetheverybestcustomerservice,havingeverythingreadyintherestaurantbeforecustomersarrivesothatwearepreparedforserviceparticularlyatourbusiesttimes,aswellasclear,authenticcommunicationwithcustomerstokeepourlinesmovingquicklywithoutmakingpeoplefeelrushed.
Duringthequarterwehaveanationalthroughputcompetitiontoemphasizetheimportanceofthefourpillarsinourrestaurants.Weachievedanumberofnewone-hourthroughputrecordsbyreiteratingthefundamentalsofthroughput,andwecontinuetoincreasethenumberofrestaurantsthatareimplementingthefourpillarsduringourpeakdinnerperiods.
Asaresult,wewereabletolargelymaintainthesubstantialgainswemadeduring2014toourthroughputduringourpeaklunchanddinnerhours.Thisissignificantbecauselastyearwasatremendousyearinwhichwedelivereddouble-digittransactioncompsthatcreatedaverytoughcomparisonforthisyear.
Ourrestaurateurscontinuetofindopportunitiestoimproveourstandardsthatincreasethroughput,andweknowthatweareinastrongerpositiontodayaswearebetterpreparedtoutilizethefourpillarstoprovideamorefavorablecustomerexperience.
Finallyonthedevelopmentfront,wearewellontrackthroughoutthefirsthalfoftheyeartowardsourguidanceofopening190to205newrestaurants.Actually,thepaceofopeningsduringthefirsthalfoftheyeargivesusconfidencethatwewillfinish2015atorabovethehighendofourguidancerangeforthefullyear.
Duringthesecondquarter,weopened48newrestaurants;that'satotalof97sofarfortheyear,bringingourtotalnumberofrestaurantsto1,878.Aftertheendofthequarter,wealsoopenedonenewrestaurantinLondon,whereChipotlecontinuestobuildastrongcustomerbase.Withthefirstweekofour--ofopeningofourseventhrestaurantintheUK,ourteamhasalreadybeattheexistingUKthroughputrecordwith229transactionsduringitspeaklunchhour,whichisveryencouraging.
Andfinally,Canada'sperformancehasbeensosuccessful,wenolongerconsiderittobeagrowthseedbutratheragrowthstrategy.ThismeanswenowviewCanadaasaprovenmarketandwilllooktoaccelerateourpaceofdevelopmentinCanadianmarketsoverthenextyear.
WealsojustcompletedthesecondofourthreeCultivateFestivalsfortheyear,asthemostrecentfestivalconcludedinKansasCitylastweekend.Thisyear'seventinKansasCitywasaterrificsuccess,andconsumerswereabletotryPizzeriaLocaleatthefestivalaheadofournewrestaurantopeningtomorrowinKansasCity.
WecontinuetofurtherdevelopourgrowthseedswithaPizzeriaLocaleopeninginCincinnatiandanewShopHousetoopeninChicago.Soheadingintothethirdquarter,weareinagreatpositionfroma
CompanyName:ChipotleMexicanGrillIncCompanyTicker:CMGSector:ServicesIndustry:Leisure
EventDescription:Q22015EarningsCallMarketCapasofEventDate:21.05BPriceasofEventDate:673.07
©2014TheStreet,Inc.Al l R ightsReserved Page7of21
developmentperspective,andwecontinuetohaveaverystrongrealestatepipeline.
Weareexcitedaboutourresultsforthequarterandforthefirsthalfof2015.Withastrongfoodculture,auniqueandempoweringpeopleculture,andthebestuniteconomicsintheindustry,wearechangingthewaypeoplethinkaboutandeatfastfood,andwearedeliveringoutstandingresultsforourshareholders.
IwillnowturnthecallovertoJack.
JackHartung (CFO):
Thanks,Monty.Weareproudofourperformanceforthefirsthalfof2015inwhichwecontinuetohavepositivecompsalesonannualrestaurantvolumesthatnowaveragemorethan$2.5millioneach.WhileourcomparisonsthisyeararethetoughestwehavefacedasapublicCompany,Iamconfidentthatourtop-performingteamswillcontinuetoattractmorecustomersastheyprepareandservedeliciousfoodmadefromhigh-quality,sustainablyraisedingredients.I'vebeenveryactivesinceourlastearningscallvisitingfiveofoureightregionsandspendingtimewithourfieldleadershipandrestaurantteamsandpromoting17newrestaurateursduringthattime,whichgivesmegreatconfidencethatwehaveastrongbenchofup-and-comingfutureleaderstosupportourgrowth.
Oursalesincreased14.1%inthequarterto$1.2billion,drivenbynewrestaurantopeningsandasalescompof4.3%,whichisrightinlinewiththeQ2guidanceoflowtomidsingledigitsweprovidedinApril.Thecompwasdrivenmainlybyourpriceincreasefromlastyearwhichcontributed4%tothecomp.
Wehavenowfullylappedthepriceincreasetakeninthesecondquarterof2014,sothe4%pricingbenefitweenjoyedinQ2isgone.CompsalestransactioncountsinJulysofarremainapositiveterritoryinthelowsingledigits.
Wearestillwithoutporkinabout40%ofourrestaurantstoday,butJulysalesarebenefitingslightlybyabout60basispointsfromatargetedpriceincreaseonsteakandbarbacoa.
Aswediscussedduringpriorearningscalls,wedecidedtotakethistargetedmenupriceincreaseinsteakandbarbacoaasbeefpricingremainsathistoricallyhighlevels,andourmenupricegapbetweensteakandbarbacoaversusotherentreesdidnotcoverthishighercost.Theaverageincreasewasjustabout4%,orabout$0.30perentree.Wehavenotyetincreasedbeefpricesinabout40%ofourrestaurantswhichhavenotbeenresuppliedwithcarnitas.
Weheldoffinthosemarkets,aswewantedtoavoidtheunintendedconsequenceofhavingcustomerstradefromcarnitastosteakorbarbacoaandthenbeforcedtopaymorefortheirmeal.Ourintentionistoraisebeefpricesinthesemarketsoncecarnitasisbackinsupply.Thepriceincreasewaseffectiveearlierthismonth.Andwhileit'sstillearly,wehavenotseenanyresistancesofar.
Forthefullyear,wecontinuetoexpectcompstobeinthelowtomid-singledigits,includingthetargetedpriceincreaseonbeefIjustdiscussed.Thisassumesourcompsremaininthelowsingledigitsfortherestofthisyear.AsStevementioned,werecentlyaddedanewporksupplier,andwehopetobebackinfullsupplyofcarnitasinallmarketsbyearlyinQ4.
InApril,weestimatedaporkshortagemayhaveimpactedourcompbyasmuchas200basispoints,andwebelievethenetimpactforQ2wasinlinewiththisestimate.Andwhilewe'reoptimisticthatbringingporkbacktoallmarketswillhelpourcomp,wehavenotincludedanybounce-backrelatedtocarnitasinourguidance.
Grossnetlevelmarginsincreased70basispointsto28%,amongourhighestmarginsasapublicCompanydespitebeingalessthanstellarquarterforourlaborexecution.Highermarginsweredrivenby
CompanyName:ChipotleMexicanGrillIncCompanyTicker:CMGSector:ServicesIndustry:Leisure
EventDescription:Q22015EarningsCallMarketCapasofEventDate:21.05BPriceasofEventDate:673.07
©2014TheStreet,Inc.Al l R ightsReserved Page8of21
ourlowerfoodcostof33.1%,whichwere150basispointsbetterthanlastyearand80basispointsbetterthanthefirstquarter.
Thelowerfoodcostsaretiedtoourmenupriceincreasefromlastyearalongwithlowerpricingfordairyandavocados,aslowerdairywasdrivenbycontinuedstrongproductionandastrengtheningUSdollar.AndtheavocadosupplierbenefitedfromanincreasedharvestofMexicanavocados.Thesecostsheldrelativelystableinthequarterbutremainedsubstantiallyelevatedfromhistoricallevelsandaddednearly100basispointstoourfoodcostscomparedtolastyear.
Wehopeourfoodcostscanremainataboutthislevelthroughthebackhalfoftheyear,butwedoexpectsomepressurefromavocadosaswepurchasemorefromtheCaliforniagrowersandperhapsalsofrombeef,whichhasbeendifficulttopredictandcouldremainvolatile.
Laborcostswere22.6%ofsalesduringthequarter,anincreaseof80basispointscomparedtolastyear.Whilelaborratesareincreasingatafasterratethantheyhaveinaverylongtime,whichIwilltalkaboutalittlelater,themajorityofthishigherlaborrelatestoineffectivelaborschedulingandexecution.
Wewerehamperedduringthequarterbyaninterruptioninourlabor-managementreportingasaresultofimplementinganewworkforceenterprisesystem.Ourinvestmentinouroperationalsystemsarealong-terminvestmentthatwillallowformoreeffectiveschedulinginthefuturebutisnotwithoutsomeshort-termhurdlesthatcanbetypicaloftheseintegrationefforts.
Thishascausedustotemporarilylosesomeoversightofourlaborscheduling.We'venowreestablishedmostofthemanagementreportingnow.AndsofarinJuly,wehaverecapturedabouthalfoftheopportunity,orabout40basispoints,andweexpecttocapturetherestoftheopportunityduringthethirdquarter.
Sothethirdquarterwillstillhavesomewhatelevatedlaboraswearerecapturingthelossoflaborefficienciesthroughoutthisquarter,butweexpecttobebacktonormalforallofQ4.
WebelievethislaborchallengehasnegativelyimpactedEPSduringthesecondquarterbyabout$0.16.Whilewe'redisappointedwithourlaborexecution,ourfieldteamsarecommittedtobringourlaborbackinlinequickly,andtheyaregoingwellbeyondthattoensurethatallofourrestaurantmanagersandourfieldleadersbecomeexpertsatwritingandexecutinggreatschedules.
Soourlabordeploymentwillbegreatwithorwithouttheavailabilityofoversightreportinginthefuture,soIamconfidentwewillfullyrecapturethisopportunity.
Hourlylaborratesincludingourhourlymanagersincreased4.2%inthequarter,thefastestwehaveseeninmanyyears.Therehasbeenageneralincreaseinwageratesinmanyofourmarkets.Andbecausewedesireandexpecttoattractandrewardonlytopperformers,veryimportantforustostayaheadofthecurveandpayattractivestartingwages.
Wealsocontinuallymonitorthepayofourtopperformersalreadyinourrestaurantsastheyprogressthroughthemanagerrankstoensurewearepayingfairwagesinlightoftheirsignificantcontributionsuntilthisisalsoacontributingfactortotheincreaseinthequarter.
AsMontymentioned,wealsoenhancedthebenefitsofferedtoourcrewbyaddingatuitionreimbursementprogramandbypayingforsicktimeandincreasingvacationpay.Byfar,thegreatestbenefitweoffertoourpeopleisthesignificantopportunitytoadvanceintheirleadershippositionswithinChipotle.
Buttheseenhancementsrepresentimportantinvestmentstoensureweareattracting,retaining,andelevatingtheverybestpeopleintotheseleadershippositions.
CompanyName:ChipotleMexicanGrillIncCompanyTicker:CMGSector:ServicesIndustry:Leisure
EventDescription:Q22015EarningsCallMarketCapasofEventDate:21.05BPriceasofEventDate:673.07
©2014TheStreet,Inc.Al l R ightsReserved Page9of21
Weknowthatourspecialpeopleculturewiththerestaurateurasacenterpieceleadstoabetterdiningexperienceforourcustomers,better-tastingfood,fasterthroughput,thedevelopmentofextraordinaryfutureleaders,betterbusinessresults,andultimatelythecreationofsignificantshareholdervalue.
Soit'simportanttonotethatimprovingourspecialpeoplecultureoccursthroughgreatleadershipandhavingarestaurateurvisionandcannotsimplybeboughtbythrowingadditionaldollarsatourteam.Butakeycomponentofourpeoplecultureistoattractandretaingreatpeople,sowemaketheseinvestmentsknowingitwillmakeourCompanystronger.
Weexpecttheincrementalcostoftheseinvestmentstobeabout$2.5millionincrementallyonaquarterlybasisbeginninginthethirdquarter.
Wetypicallypayaboveminimumwageinallofourmarkets,soanormalincreaseinlocalwagesusuallyhaslittleeffectonus.Butinsomelocalmarkets,theminimumwagehasbeenorsoonwillbepushedwellaboveournationalaveragerate.IntheSanFranciscoBayarea,forexample,theminimumwagewasrecentlyincreasedtoover$12anhour.
Thisincrease,coupledwithhigheroccupancyandotheroperatingcostsexcludingfoodcostscontributetoanoverallcostofdoingbusinessof30%ormorecomparedto30%ormorehigherthanouraverageChipotle.ButourmenupricesintheSanFranciscoareawereuntilrecentlyonlyabout4%abovethetypicalChipotle.Andwe'relowerthanmostcompetitorsinthearea.
Soasaresultoflookingatallofthesefactors,wedecidedwewereunderpricedinSanFrancisco.Werecentlyincreasedpricesby10%inthe10restaurantswithinSanFranciscoandby7%forthe74restaurantsoutsideSanFranciscointheBayArea.
Theserelativelymodestincreaseseffectivelypassalongonlysomeofthehighercostofdoingbusinessinthatarea.Becauseonly84restaurantswereaffected,theimpactontheoverallCompanywillbeabout30basispointsonanannualbasis.
Wewilltakeasimilarapproachwhentheoverallcostsofdoingbusinessinamarketareescalatingonacase-by-casebasis,whetherthesehighercostsaredrivenbylegislativechangesorbymarketforces.
Asanexample,althoughtheminimumwageinMarylandrecentlyincreasedtoover$10anhour,ouroverallcostsofdoingbusinessarereasonablethere,andsowedonotplantoincreaseourpricinginthoserestaurants.Ourobjectivewillalwaysbetokeepourmenuaccessibletoourcustomerswhilebeingabletorecruitthebestpeoplewecanwithcompetitivewagesineachmarketandalsowhileconsideringtheoverallcostofdoingbusinessandcompetitorpricesinthearea.
(inaudible)costsforthequarterwere5.4%ofsales,flatcomparedtolastyear.Otheroperatingcostswere10.9%duringthequarter,down10basispointsfrom2014.Marketingwas1.8%duringthequarter,slightlylowerthanthesecondquarteroflastyear,andwecontinuetoexpectourmarketingexpensetobearound1.7%ofsalesoverallfortheyear.
G&Awas5.9%inthequarter,down120basispointsfromtheprioryearduetolowernon-cashstockcompexpense.Full-yearnon-cashstockcompisexpectedtobeslightlybelowthe$80millionwepreviouslyforecasted,andthisexpensewillbemoreevenlyweightedthroughouttheyear.
Oureffectivetaxrateduringthequarterwas38.8%,andweestimateoureffectivetaxrateforthefullyearwillbeabout38.7%.Andthatcomparesto37.6%forthefullyear2014.LastyearbenefitedfromanincreaseintheestimatedusablestatecreditsandfromtheworkopportunityandR&Dfederaltaxcreditswhichhavenotbeenrenewedfor2015.Ifthosefederalcreditsareextendedto2015,weestimateourtaxratewouldbenefitbyabout30basispoints.
CompanyName:ChipotleMexicanGrillIncCompanyTicker:CMGSector:ServicesIndustry:Leisure
EventDescription:Q22015EarningsCallMarketCapasofEventDate:21.05BPriceasofEventDate:673.07
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Dilutedearningspershareinthequarterwas$4.45,anincreaseof27.1%.Wefinishedthesecondquarterwithnearly$1.5billionincashandcashequivalents,includingshort-termandlong-terminterest-bearinginvestmentsandnodebtonourbalancesheet.SinceourlastearningscallonApril21andthroughyesterday,weinvestedmorethan$100milliontorepurchasenearly164,000sharesofourstockatanaveragesharepriceof$621.
Thisismorethan4timesthedollaramountinvestedduringthefirstquarterandnearly5timesthenumberofsharespurchasedduringQ1whenaveragepurchasepricewas$675.Thisisagoodexampleofwhatwemeanbybeingoptimisticwhenthetiming--withthetimingandthemagnitudeofoursharebuybacks.
Whilewecontinuetobelieveinvestinginourhigh-returningrestaurantsremainsthebestuseofourcash,wewillalsocontinuetoinvestopportunisticallyinrepurchasingourstock.Andtoday,weannouncethatourBoardhasauthorizedtheinvestmentofanadditional$100milliontorepurchaseourstock,whichbringsourcurrentunusedauthorizationasofyesterdayto$170million.
Thanksforyourtimetoday,andwewillbehappytoopenthelinesforanyquestions.
QUESTIONS&ANSWERS
Operator :
(OperatorInstructions)DavidTarantino,RobertW.Baird.
DavidT arantino (Analyst-RobertW.BairdandCompany):
Jack,Ijustwantedtofollowuponsomeofthecommentaryaboutrecentsalestrends.IthinkyousaidJulyhadstayedpositiveoncomps.Couldyouconfirmthatthatalsoimpliesthattrafficistrendingpositivelyoratleastflatsofarthisquarter(multiplespeakers)?
JackHartung (CFO):
David,bothsalesandtransactionsarepositiveinJuly.Thereinlowsingledigits,butthey'rebothpositive.
DavidT arantino (Analyst-RobertW.BairdandCompany):
Great.Thankyou.Andthenmyotherquestionisaroundthecarnitasissue.AndIwasjustwonderingifyoucouldsharewhatyou'velearnedsofaraboutthecustomerreactiontothatintermsofthetraffictrends.
AndthenIthinkyoubroughtthatbackinatleastonemarketrecentlyinManhattan.Socouldyoutalkabouthowlongittakesforcustomerstorespondtothatcomingbackinyourconfidencelevel,thatyouwillbeabletowinthatbusinessbackwhenyougetthefullchainrolledoutonpork?
JackHartung (CFO):
Yes,David,it'sreallyearlytoknowwhattheexactresponseisgoingtobebasedonthisnewsupplythatStevetalkedaboutfromKARROintheUK.Butwhenwesawthemarkets,youremembersinceJanuarywhenwefirstranout,wehadthisrollingblackout.
Soeveryseveralweeks,wewouldhaveonemarketrunoutofcarnitasandthenwewouldreplenishthesupplyinanothermarket.Andwhenyousawthat,ittookseveralweekstogetthefullproductmixback.Andso--andIwouldsaythat'sanywherebetweenthreeweeksatthelowsideuptofiveorsixweeksonthehighside.
CompanyName:ChipotleMexicanGrillIncCompanyTicker:CMGSector:ServicesIndustry:Leisure
EventDescription:Q22015EarningsCallMarketCapasofEventDate:21.05BPriceasofEventDate:673.07
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soweareoptimisticthatwewillstarttoseesomeofthatrecoveryaswecontinuetorollmarkets.Butwe'regoingtorollmarketswiththisnewsupplyofcarnitasfromnowthroughoutthesummerandthenintoearlyinthefourthquarter.
Andsohopefullywhatwewillseemarketbymarketisthattheproductmixwillrecoveroverseveralweeksandthatwe'llstarttoseesalescompsrecoveraswell.
DavidT arantino (Analyst-RobertW.BairdandCompany):
Great.Thankyouverymuch.
Operator :
SaraSenatore,Bernstein.
SaraSenatore (Analyst-SanfordC.BernsteinandCompany):
Ihadacoupleofquestions,actuallymoreaboutonthemobileside.Iknowyou'vebeenmakingsomeinvestmentsthere.Iwaswonderingifyoucouldtalkaboutthatasa--theprogresspotential--apotentialcompdriver.
Andrelatedtothat,maybeanythingyou'vedoneonloyalty.Itoccurstomethatthatisprobablyarichsourceofdataonyourcustomers.Andparticularlynowwhenyouhave--whenthecarnitashasbeeninshortage,youcouldcommunicatewithcustomersdirectlyandyouwouldknowwhoisorwhoisn'tbuyingcarnitasatyourstores.
Itjustfeelslikeanuntappeddatapoolthatmaybeyoucoulduse.Sojustanupdateonmobile,ApplePay,loyalty--thatwholeecosystem,please.
MarkCrumpacker (ChiefMarketing,DevelopmentOfficer):
Sure,Sara.ThisisMarkCrumpackertalking.Yes,infact,webeeninvestinginmobileonanongoingbasisforquiteawhile.
We'restillintheprocessofevaluatingthelevelofeffortthat'sgoingtoberequiredtoimplementApplePayinparticular.Andwecertainlyseethatasbeingasignificantbenefittousoncewecangetthatenabled,especiallyifitinanywayspeedsthroughputatourrestaurants.
Butwe'llalsocontinueonacontinuingbasisupdatingourmobileorderingapptobemoreefficient.Infact,wedidanupdatejustacoupleofmonthsagoandwehaveanotheronecomingupwhichmakestheorderingmoreaccurate,whichwe'relookingathavingasignificantimpact.
AndonethingIwilldirectyoutothatisnotnecessarilyrelatedtomobile,butit'salsooureffortsaroundcatering,whichcurrentlycannotbeorderedonlinenorcanitbepaidforonline.That'sanotherinitiativethatweareworkingonwhichweexpectwillhaveanimpact.
Withregardtoloyalty,that'satrickysubject.Wehavestudiedthisindepth,andwedon'tbelievethegeneralsuppositionofloyaltywillmakelessfrequentcustomersmorefrequent.Westudiedthatandjustsimplydon'tbelievethattobetrue.
However,whatyousaidistrueinthatyoulearnatremendousamountofinformationaboutyourcustomers.Andsoweareplanningondoingthat,butnotthroughatraditionalloyaltyprogrambutratherthroughmobilepayment.
Sowewillprovideourcustomersatsometimevariousoptionsthroughwhichtheycanpayfortheirfood,
CompanyName:ChipotleMexicanGrillIncCompanyTicker:CMGSector:ServicesIndustry:Leisure
EventDescription:Q22015EarningsCallMarketCapasofEventDate:21.05BPriceasofEventDate:673.07
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andwewillcapturedatafromthem,whetherthat'sthroughathird-partyorthroughour--theabilitytouseourowngiftcards,andthatwillgiveusatremendousamountofdataaboutthosecustomers.
SoIcan'ttellyourightnowwhenthosethingsaregoingtobecomplete,butweareinvestigatingandpursuingallofthem.
SaraSenatore (Analyst-SanfordC.BernsteinandCompany):
Thankyou.
Operator :
DavidPalmer,RBC.
DavidPalmer (Analyst-RBCCapitalMarkets):
Justbuildingonthat,IjustdidthatFriendOrFauxquizonline,whichIguesswaskickedofftodayorrecently.Andattheend,itincludedaBOGOcoupon,whichcouldbetextedtome,andthenitalsosignedmeupforittogettextupdatesfourtimesamonth.Whatwillbethenatureofthosetextsthatwewillbegetting?Arethosegoingtobealsovalue-orienteddeals?
MarkCrumpacker (ChiefMarketing,DevelopmentOfficer):
Well,we'veactuallyhadatextdatabaseofanumberofourcustomersforquitealongtime,andwesendthemavarietyofdifferentcommunications.Theysometimesarepromotion-based,anditreallydependsonwhat--obviouslyonwhatwe'retryingtoaccomplish.Othertimes,wewillsendtheminformationaboutupcomingeventslikeourCultivateeventsifit'sintheircity.
Formostofourtextdatabasesubscribers,weknowwheretheyare,sowecanlocalizethosemessages.Butweareconstantlytryingtoexpandourmobiledatabase.It'saveryeffectivewayforustoefficientlyreachourcustomers.
Infact,theFriendOrFauxgamethatyoumentioned,justsinceitlaunchedtoday,morethan0.5millionpeoplehavealreadyplayedthegame.Soit'sreallygotextraordinarypower.Soyes,therewillbeoffersinthose,butcertainlynoteveryoneofthecommunicationswillbeanoffer.
DavidPalmer (Analyst-RBCCapitalMarkets):
Okay.Thankyou.
Operator :
NicoleMiller,PiperJaffray.
NicoleMiller (Analyst-PiperJaffray):
Ijustwantedtobetterunderstandwhatcompsyouneedtooffsetinflation.Ihatetocalloraskinanormal--quote,unquotenormalenvironment,butcanyouhelpusgaugethesecond-halfstore-levelmarginsinwhatispresumablyalowsingle-digitcompenvironmentgiventhatinQ2youstilldidhavesuchgreatleverageinstore-levelmargin?
SteveElls (Chairman,Co-CEO):
Yes,Nicole.Foodcostswillnotchangebasedonourcomps.Sofoodcostswilleitherchangeorremainstablejustbasedoncommoditypriceandthepricingoftheingredientsthatwebuy.AndasImentionedinmycomments,wearehopingthatthosewillremainstableandstayataboutthelevelwedecideinthe
CompanyName:ChipotleMexicanGrillIncCompanyTicker:CMGSector:ServicesIndustry:Leisure
EventDescription:Q22015EarningsCallMarketCapasofEventDate:21.05BPriceasofEventDate:673.07
©2014TheStreet,Inc.Al l R ightsReserved Page13of21
secondquarter.
SotherestoftheP&Lhassomevariableandsomefixedcostsinthere.Fromalaborstandpoint,wetypicallyneeda--kindofthemid-single-digitcompsinordertojustholdourlaborasapercentageofsales.Sosomewhereinthat4%to6%range.Solowsingle-digitcompswouldimplythatwearegoingtodeleveronthelaborline.
TherestoftheP&L,alowsingle-digitcomp,itdependsonwhetherit'sa1%ora3%.Ifit'sinthe3%range--2%or3%range,unlessthere'ssomethingunusualwithenergycostsorit'ssomethingunusualthatwouldaffectutilities,weshouldbeokay.WeshouldbeabletoaboutholdtherestofthecostsonourP&Lasapercentageofsales.Soitreallycomesdowntolabor.
Now,keepinmindwedidannounceallthesebenefits.Andsoregardlessofthecomp,wearegoingtoseeanincremental$2.5millionaddedtoboththethirdquarterandfourthquarter,andthatwillcontinueasanadditionalcostofprovidingthebenefits.Andsothatwillcausesomeslightdeleveringaswell.
NicoleMiller (Analyst-PiperJaffray):
Thankyou.
Operator :
JasonWest,CreditSuisse.
JasonWest (Analyst-DeutscheBank):
Justwantedtocomebacktothepricingoutlook.Jack,youtalkedaboutacoupledifferentpieceswithSanFranciscoandthensomeofthebeefcostpressures,butthensomeofthatisgoingtogetdelayedasyouwaitforcarnitastorollout.Socouldyouhelpusoutwithmaybewhattheaggregatepriceincreaseisgoingtolooklikeoverthenextfewquarterswiththesedifferenttimingissues?
JackHartung (CFO):
Yes,aswerollcarnitas,there'sabout40%ofourrestaurantsdon'thavecarnitastoday.Andsothat'sgoingtobeapriceincreasethatwillbeintheballparkofthis4%.Andourbeef--ourstakeandbarbacoaissomewhereinthe30%rangeintermsofproductmix.
Sowearerightnowrunningabout60basispointsofincrementalcompbecauseofraisingpricesonbeef.Whenwerolltherestofthe40%,thatwillgetussomewhereinthe100,110basispointsorsomethinglikethat.Andthenanyotherthingsthatwedorelatedtolocalcostofdoingbusiness,Iwouldexpecttoberelativelymodest.
TheexampleIgaveyouwasSanFranciscoandtheBayArea.Thataddsanadditional30basispoints.There'snotmuchelsegoingonreallybetweennowandtheendoftheyear.
SoIwouldsaywe'regoingtobebetweenthe--ifyoutakethe[60]onthehighercostofsteakandbarbacoa,add[30]fromSanFrancisco,that's[90].
Theremightbeanother30,40basispointsorsothatwillrollinoverthenextseveralmonths,andthatwouldbeaboutitforthisyear.There'sanadditionalstructuralcost--highercostofdoingbusinessthatwewilllookatnextyearlikewedidinSanFrancisco.Butjustbecauseminimumwageisincreasinginthemarketdoesn'tmeanwe'regoingtoraiseprices.
TheexamplethatIgaveinMarylandisagreatexample.AnotheroneisinChicago.Chicagojustrecentlyimplementedahigherminimumwage,andwedon'texpecttoraisepricesthereinthenearfuture,
CompanyName:ChipotleMexicanGrillIncCompanyTicker:CMGSector:ServicesIndustry:Leisure
EventDescription:Q22015EarningsCallMarketCapasofEventDate:21.05BPriceasofEventDate:673.07
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probablynotatallthisyear.
Sowelookatitmarketbymarket,andtheremightbesomecaseswherewhenyoulookatallofourhighercostofdoingbusiness,thatwemightdeemthatit'snecessarytotakeapriceincreaseinthosemarkets.ButIwouldn'texpectthattobeasignificantadd-ontoourcomporsignificantadd-ontothemenupriceincrease.
JasonWest (Analyst-DeutscheBank):
Okay.Thanks.Andthenjust--that'sreallyhelpful,bytheway.Onthelaborside,theincremental$2.5millionperquarter,isthatinclusiveofsomeofthewageinflationthatyou'retalkingaboutthat'ssteppeduplately?AndIthinkyouraisedwagesforcertainpositions.Oristhatseparatefromthewageinflationthatweareseeing?
JackHartung (CFO):
It'sinclusiveofthestuffthatMontytalkedaboutwherewelookedatourkitchenmanagers,servicemanagers,wherewetookalookatallofourfolksthatarealreadyonboard.Someofthathitinthesecondquarter,andthenincrementallyadding$2.5millionontothethirdandfourthquarterwillcoverallofthat.
Whatitdoesn'tnecessarilyincludeisifthere'sjustgeneralmarketforcesinamarketwherewagesareincreasingfasterthanexpected.Thatisn'tnecessarilyincludedinthat,andthatwouldbedealtwithcasebycase.Butthe$2.5millionwillconsideralloftheadjustmentsthatwe'vedonefromabenefitstandpointandfromawagestandpointtoallofourinternalfolks.
JasonWest (Analyst-DeutscheBank):
Great.Thankyou.
Operator :
SharonZackfia,WilliamBlair.
SharonZackf ia(Analyst-WilliamBlairandCompany):
Hi,Jack.Justkindoffollow-upontheSanFranciscoexample,whathastheconsumerreactiontoldyouinSanFranciscosofarabouttheabilitytotakethatkindoftargetedpriceincreaseifitmakessensegiventhepressuresinthemarket?Andthensecondarily,ontheporkfromEngland,isthatasimilarmarginprofiletowhatyougetintheUS?
JackHartung (CFO):
Okay,soonSanFrancisco,Sharon,IwasjustoutinSanFranciscoafewweeksago,visitedabunchofourrestaurants,talkedtoourteamsthere,talkedtosomecustomersaswell.NoreactionwhatsoeverfromwhatIcantell.Wedon'tseeitinanyofthesalestrends.Wedon'tseeitwithanyoftheanecdotalfeedbackwe'regetting.
Frankly,Ithinkwe'vegotlotsmoreroomtoincreasepricesifweneedto.ThecostsofdoingbusinessaresoextraordinaryinthatwholemarketthatIthinkwe'reunderpriced,andwecouldincreasepricesmore.Asyouknow,wehaveneverwantedtobetooaggressiveatanyonetime,butthere'smoreroomtodothat.
Soifthecostsofbusinesscontinuetoremainelevatedoriftheyincreasefurther,we'vegotmoreroom.Iwouldn'texpectustodoanythinginsideof12months.Idon'tthinkwewoulddotowithinayear,butI
CompanyName:ChipotleMexicanGrillIncCompanyTicker:CMGSector:ServicesIndustry:Leisure
EventDescription:Q22015EarningsCallMarketCapasofEventDate:21.05BPriceasofEventDate:673.07
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thinkwe'vegotlotsmoreroom.
Andthenthemarginonpork,verysimilartoourmarginforthedomesticpork.
SharonZackf ia(Analyst-WilliamBlairandCompany):
Okay,great.Thankyou.
Operator :
KarenShort,DeutscheBank.
KarenShort (Analyst-DeutscheBank):
Justaquestiontofollowupontheloyaltyphilosophy.Iguess--Idon'tknowthatInecessarilyunderstandyourphilosophyonbeingreluctantorunwillingtointroducesomeformofloyaltyoraffinityprogrambecauseIguessthewayIseeitisyouincurcostsassociatedwiththeBOGOsortheFriendOrFauxfreeburritosandthingslikethat.
Soyoucouldrecoupcostsifyouareintroducingsomekindofaffinityprogramthatdoesinvolvesomefreegiveaways,butthenyougetthebenefitofhavingthatmuchmorerobustdataanalytics,Iguess.Somaybejustsomecolorthere.
JackHartung (CFO):
Iwilltakeashotatpartofthis,andthenIthinkMarkwillwanttoaddsomethingin.Karen,wehavedoneaverythoroughanalysisofthetraditionalloyaltyprograms.
AndtheproblemisChipotlealreadyhassomanyloyalcustomersthatthefixedcostsofimplementinga--anongoingloyaltyprogramaresoextraordinarythatyouhadtogetaprettybigincrementalcompjusttocoverthosecosts,andthenyouhadtogetacompontopofthatandthenmaintainitforittobeprofitableatall.
WhatwefoundiswehavebeenabletobuildloyaltythroughmoreorganicmethodsbyencouragingpeopletolearnmoreaboutChipotle,bypiquingtheirinterestabouthowfoodisraised,byhavingthemcomeintoChipotleandbetreatedtoanextraordinarydiningexperience.Sowe'veseenourloyaltygoupovertheyears.
Andwethinkthat'sabetterwaytodoitthanputtinginastructuralframeworkthatwedidn'tthinkwasgoingtobeprofitableatalland--ormaybewouldbeabreak-even,oryouhavetomakeanextraordinarycomptomakeitpayout.
Nowhavingsaidthat,thecustomerdataisvaluable.Idon'tknowMark,ifyouwantedtomakeacommentaboutthat.Wedefinitelytreasurethatinformation.
MarkCrumpacker (ChiefMarketing,DevelopmentOfficer):
Yes,withregardtoourtraditionalloyaltyprogram,inthepastthethinkingthereisthatifyoucantakeaninfrequentorlapsedcustomerandmakethemcometoyourrestaurantjustonemoretime,youwouldpayfortheprogram.Ourresearchhasindicatedthattherearevirtuallynoloyaltyprogramsthatactuallyachievethat.Whattheydoistheyrewardyourmostloyalcustomers.
Andsowefiguredoutotherwaystodothat.WehaveongoingwaystogiveourmostvaluablecustomerandwaystointeractwithChipotlewheretheylearnalittlebitmore,andwegivethemsomefreefoodinexchange.
CompanyName:ChipotleMexicanGrillIncCompanyTicker:CMGSector:ServicesIndustry:Leisure
EventDescription:Q22015EarningsCallMarketCapasofEventDate:21.05BPriceasofEventDate:673.07
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Butonthedataside,you'reabsolutelyright.That'swhatwewant,andwebelievethatwecanachieveperhapsnotthesamelevelofgranularityintheinformation,butenoughinformationthroughapaymentsystemthatwillgiveuswhatwewantessentiallywithoutthedownsidesoftheongoingweightoftheloyaltyprogram.Sothere'snotquiteasmuchdataifyougetinaloyaltyprogram,butit'senoughthewayweenvisionitthatitwilldothetrick.
KarenShort (Analyst-DeutscheBank):
Okay,that'sveryhelpful.Thanks.
Operator :
JohnGlass,MorganStanley.
JohnGlass (Analyst-MorganStanley):
Justfirst,adetailedquestion.Jack,canyoujustbeexplicitaboutthetrafficandthemixinthesecondquarter?
JackHartung (CFO):
Yes.Theyareverysmallnumbers,John.Thecompwas4.3%,menupricingwas4%.Ofthe0.3%,itwasaveryslightnegativetraffic.0.3%negativetraffic,andthatwasoffsetby60or70basispointsofmix.
Andthemiximprovementwasgeneratedalittlebitbycatering,alittlebitbysides,andalittlebitbykids'meals.Wereformattedthekids'meals,andwearenowservingafewmoreofthem,andthepricingstructurehappenstobealittlebithigher,especiallytheonesthatourcustomersarechoosing.Theyarechoosingtobuildyourownmorefrequently,andthat'salittlebitmoreexpensive.Sothosearepieces,buttheyareallvery,verysmallnumbers.
JohnGlass (Analyst-MorganStanley):
That'shelpful.Thebiggerquestionisonthenewerconcepts.IfIrecallcorrectlythehistoryofChipotle,yougotarealfirst-moveradvantageinmanymarketsbyenteringbeforeyourkeycompetitors.Andwhenyoudidso,youdidbetter;andwhenyouweresecond,youdidlesswell.Maybeeventuallydidbetter,butmaybeinitiallynotaswell.
Whenyoulookatthenewerconcepts,andparticularlypizza,youarenowbadlylaggingbehindseveralchainsthatareinthatcategory.Whyisn'tthatincentivetobemoreurgencytodevelopfaster?Isthereotherconcernsyouhaveabouttheconceptandyou'renotreadytodothat?Doyouthinkit'sgoingtobedifferentforpizzathanitwasperhapsforyourcoreconcept?Oristhisfirst-moveradvantagemaybeanoverblownadvantage?
MarkCrumpacker (ChiefMarketing,DevelopmentOfficer):
Well,it'sinteresting.Weusedtopayalotofattentiontothefirst-moveradvantagetheory.WhenwewerepartneredwithMcDonald'stheyweretellingushowimportantitwasintheirdevelopment.
Althoughifyoulookatourhistoryandoursalestrendswhenwecomeintomarketsandwe'renotthefirstmover,wedefinitelypassthem.Californiaisthebestexamplewherewehadtwobigcompetitors,andweseverelylaggedbehindthem.
Overtime,though,throughgreatexecutionandthroughagreatpeoplecultureandsharingwithourcustomerswhatmakesChipotlefoodspecial,wequicklytookthelead.
CompanyName:ChipotleMexicanGrillIncCompanyTicker:CMGSector:ServicesIndustry:Leisure
EventDescription:Q22015EarningsCallMarketCapasofEventDate:21.05BPriceasofEventDate:673.07
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Ithinkthebest--themostimportantthingwecandoistohaveconceptsthatreallyresonatewithcustomers.Andwespend--havespentalotoftimerefiningthePizzeriaLocaleconcept.We'vegonethroughacoupleofiterationsofdough,andwethinkwehaveperfecteditnow.It'sreallyexcellent,andthat'sbeenintherestaurantsnowforacoupleofmonths.
AndwefeelconfidentthataswestartwiththisdoughintwonewmarketsinKansasCityandinCincinnati--KansasCityjustinacoupledaysonWednesday,actuallytomorrow,andthenCincinnatiinthefall--thatwe'regoingtoprovetocustomersthatourpizza,ourdough,ourmethodofthisnewwaytoservepizzaissuperiortothecompetitionoutthere.
Howlongittakestolaptheirsalesvolumes,Idon'tknow.Butifhistoryisanyindication,stickingtothethingsthatreallymatterlikeputtingteamsoftopperformerswhoarereallyempoweredtoachieveextraordinarythingsandgivingthemleadershipopportunitiessetsthefoundationsotheycandeliveranexcellentdiningexperience,andthat'sexactlywhatwe'redoing.
JohnGlass (Analyst-MorganStanley):
Thankyou.
Operator :
BrianBittner,Oppenheimer.
BrianBittner (Analyst-OppenheimerandCo.):
Ihavetwoquestions.Firstwasonjustthecash.Itwaslikeyouhavealmost$600milliononthebalancesheettoday,andyouareontracktodoover$500millioninfreecashflow.Idefinitelyappreciatethesharerepurchasesthatyou'vedoneandannounced.
Butwiththatmuchcash,whynotbemoreaggressivewithrepurchasesratherthanbeopportunistic?Andwhynotdothatratherthanhaveitsitonthebalancesheet?
JackHartung (CFO):
Well,Brian,Ithinktheansweristhatwedowanttobuyourstockback,butwedon'twanttojustbuyitbackatanypriceatanytime.Wearemuchhappier,andwethinkit'sabetterboosttoshareholdervaluetobepatient.Ourstockhasalwaysbeenvolatile.It'salwayshadrun-ups;it'salwayshadcorrections.
Andwethinkthebestthingtodois[buying]thecorrections,andIthinktheexamplethatwejustsharedwhereoverthelastthreemonthswhenthestockhadcorrectedforaperiodoftime,webought$100millionworth.Soit'smanymultipletimeswhatweboughtinthefirstquarter.
Now,hadwejustdecidedtobuy$100millioninthefirstquarter,itwouldhavejustnotgoneasfar.Andsowethinkit'sabetterwaytodoit.Wewillgetmoreaggressiveasthepricedoesdrop.Wedohavemorecashthanweneed.WeknowthatthebestwaytoaddtoshareholdervalueistoreadytheseproceedstobepromotedtogrowthstrategiesjustlikeCanadawas.
WeknowthatasweopenupmoreChipotles,we'reopeningtheChipotlesatextraordinaryreturnsandacash-on-cashreturninthe70%to80%range.Weknowthat'sthebestwaytocaptureshareholdervalue.Withthecashthatwehave,wewillbuyback,butIthinkwewillcontinuetobuyopportunistically,andwethinkthat'sabetterwaytobuildshareholdervalueovertime.
BrianBittner (Analyst-OppenheimerandCo.):
Okay.Andmysecondquestionisonthecomps.Again,you'veclearlyseenanaccelerationintraffic.
CompanyName:ChipotleMexicanGrillIncCompanyTicker:CMGSector:ServicesIndustry:Leisure
EventDescription:Q22015EarningsCallMarketCapasofEventDate:21.05BPriceasofEventDate:673.07
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Obviouslyontheone-yearbutevenonthetwo-yearbasis,itappearsasthoughyouhaveseenanaccelerationintraffic.Whenyoulookatthingsinternally,whichyoucandoandwecan't,whatdoyouthinkhasreallydriventhatimprovementinthetrend?
JackHartung (CFO):
Well,ifyou'relookingat--thetrendsthatIwouldencourageyoutolookatareathree-yeartrend.AndItalkedaboutthisonthelastcall,soIwon'tgointoitagain.Butthiscurrenttrendthatweareinisthethirdyearofathree-yeartrendthatstartedin2013.
Ifyoulookatthethree-yeartrends,thethree-yearstackforthesecondquarterismorethan200basispointsbetterthanthethree-yearstackforthefirstquarter.Ithinkthatthat'smoreweather-driven.SoIwouldsayrightnowwe'renotnecessarilyseeinganaccelerationotherthaninrespecttotheworstweatherinthefirstquarter.Westillthinkwearebeinghamperedbynothavingcarnitas,andwethinkthatcouldbeasmuchasacouplehundredbasispoints.
Andsowelookatitasmoretheyearisunfoldingthewaywethoughtitwas.Wethoughtthatwewoulddo4%inthequarter;ourguidancewasexactlythat.Wewerepredictinginternallyabout4%duringthesecondquarter,andthat'swhatit'sdoing.
Wehadalsopredictedthatinthethirdquarter,whileit'searly,thatwewouldbeinthelowsingledigits,thatitwouldn'tbenegative,thatitwouldbeclose.Andsothingsare,Iwouldsay,moreplayingoutasweexpect.
BrianBittner (Analyst-OppenheimerandCo.):
Okay.Thanks.
Operator :
JeffreyBernstein,Barclays.
Jef f reyBernstein (Analyst-BarclaysCapital):
Actually,justfollowinguponthatquestionwithregardtothethree-yeartrends.Iknowyougaveusalotofcolorlastquarter,theideabeingthegoaltore-acceleratethosetrendspresumablygoinginto2016perhapsandmaybestartanewcycle.
I'mjustwonderingifyouareanyclosertoconsideringorhowyouprioritizetheopportunitywhetherit's--Iknowthere'stalkaboutanewproteinlikechorizoornewdaypartlikebreakfastorgreaterpushoncatering.I'mjustwonderinghowyouprioritizethosedifferentopportunitiestomaybejusttosetthenextpathforareaccelerationinthecomp.
JackHartung (CFO):
SoJeff,mostofourfocus--andthevastmajorityofourattentionistohavethebestteamswecan,developingthebestleadersintherestaurants,hiringanddevelopingtopperformersineveryrestaurantbecauseweknowthatthere'sadramaticdifferencebetweentheexperience,thequalityofthefood,tasteofthefood,justthethroughput,thebusinesscontrols,everythingwhenwehavegreatleaders,restaurateurleadersthathavealltopperformers,whetherit'sacultureofempowerment.
Andtheseteamscandeliverhighstandardsineverysingleway.Andsothat'sstillandalwayswillbethevastmajorityofwhereourattentiongoes.
WearetestingchorizoinamarketrightnowinKansasCity.Itwill--it'searly;we'veonlyhaditinmarket
CompanyName:ChipotleMexicanGrillIncCompanyTicker:CMGSector:ServicesIndustry:Leisure
EventDescription:Q22015EarningsCallMarketCapasofEventDate:21.05BPriceasofEventDate:673.07
©2014TheStreet,Inc.Al l R ightsReserved Page19of21
forseveralweeksrightnow.Wejustthisweek--Mark,Ithink,startedadvertising.Ifthat'ssomethingthatlookslikeit'seitherattractingnewcustomersorit'sencouragingtheexistingcustomerstovisitmoreoften,thatmightmoveupintheprioritylist.
Ifallchorizodoesistakeourexistingcustomersandsplitthemamongadditionalmenuitems,thatwillbelessappealingtousbecausethatjustmeanswehavemoremenuitemsservingthesamecustomers,andthatmakesitmorecomplicatedandmoredifficulttoserveallthisdeliciousfood.
SoIcomebacktoitintermsofpriority.Thedifferencebetweenagreatrunningrestaurateurrestaurantwithanamazingteamcomparedtoonethathasalotofteamsthat--MontytalkedabouttheBBT,arestaurantthathasalotofthemesandtheyhavesomelowperformersontheteamandempowermentisnotgreat.Thedifferenceinthequalityandtasteofthefood,thedifferenceinhowcleanthatrestaurantis,justthedifferencein--whenyouwalkin,youfeellikeyou'rewelcomedbyateamofpeoplethatknowyouandaregladyouarethere--thedifferencewhenyoucomparethatexperiencetoarestaurantthatdoesn'thavealltopperformers,itdoesn'thavethecultureofempowerment,isdramatic.Andwebelievethatthatisthesinglebiggestthingwecandotobuildoursalesovertime.
Theotherthingwithmarketingiswestillbelievethat--westillknowthatthere'slotsofpeoplethathaveneverbeentoChipotle.Somethinglike35%to40%ofpeoplehaveneverbeentoChipotle.Weknowthatwhenwestudyourexistingcustomers,thatthereislike55%ofourcustomersonlycomeacoupletimesayear.
Andsotheyare--themorewecaneducateandentertainandthingslikethisBOGOwhereifwecanenticecustomersthatdon'tcomeveryoften,onceortwiceayear,tolearnmoreaboutouringredientsversuscompetitors,traditionalfastfood,andgetaBOGOtoenticethemtocomein,andthatcausesthemtosay,ohmyGod,Ihaven'tbeenhereinsixmonths,thisfoodisdelicious,andIdidn'tknowallthisinformationabouttheingredients.
Ifwecanconvertthatpersonintocomingthreetimesayear,fourtimesyear,wethinkthat'sabigopportunityaswell.Sothevastmajorityofourattentiongoesondoingwhatwedobutdoitbetterthanever.
Jef f reyBernstein (Analyst-BarclaysCapital):
Understood.Thankyou.
Operator :
AndrewCharles,CowenandCompany.
AndrewCharles (Analyst-CowenandCompany):
Justcuriouswhatyou'reattributingthetrafficbounce-backto.Obviouslyduringthequarterwasslightlynegative,butjustpickupsofarinJulywhatyouthinkisdrivingthat.
JackHartung (CFO):
Otherthancomparisons,it'sreallyhardtotellbecauseitfeelslikewe'restillatadisadvantagebynothavingpork.Soitstillfeelslikewearebeingheldbackabit.
Andso--butIcan'tpointtoanyspecificreasonswhywewereslightlynegativeinthesecondquartercomparedtosofarinJuly.Wearehappywiththeresults,butthere'snothingspecificIcanpointto.
AndrewCharles (Analyst-CowenandCompany):
CompanyName:ChipotleMexicanGrillIncCompanyTicker:CMGSector:ServicesIndustry:Leisure
EventDescription:Q22015EarningsCallMarketCapasofEventDate:21.05BPriceasofEventDate:673.07
©2014TheStreet,Inc.Al l R ightsReserved Page20of21
Okay.AndjustMonty,justIknowtrafficobviouslywasalittlebitofanissue.Butdoyouseeanyimprovementoranyworkoranythingtocalloutonthethroughputinitiativeswiththequarterintermsofhowmanyincrementalcustomersyouhavegot?
MontyMoran (Co-CEO):
Intermsofincrementalwhat?
AndrewCharles (Analyst-CowenandCompany):
Intermsofincrementalcustomersyougotthroughtheline.
MontyMoran (Co-CEO):
Theimprovementswesawinthisquarterwerespottythroughoutthecountryascertainteamsrespondedreally,reallywelltoourthroughputcontests.ButCompanywideandoverall,likeIsaidinmyopeningcomments,basicallyIthinkweweregladtohangontothesignificantgainswemadeduring2014wherewehadtheverysignificantincreasesinthroughput.Butwedidn'tseeanincreaseinoverallthroughputCompanywideduringthequarter,whichit'salwaysdisappointingnottoseethat.
ButIthinkweare--likeJacksaid,wearedoingslightlynegativecomps.WhathappensIthinkwithourteamsisit'smoredifficultforthemtobreakthroughputrecords,anditbecomesalittlelesstopofmindforthemastheystarttofocusonotheraspectsofthebusinesswaitingforthattraffictoincrease.
Soitcertainlyisalotmorefuntogooutandsetthroughputrecordswhentheyareshatteringthemonadailybasis.Andwhenthereisaslightfalloffintraffic,evenifit'stheflatteningoftrafficevenforashorttime,Ithinkthatsometimesoureyeisnotontheballtothedegreeitcouldbe.
Sowedoseeimprovementsinalotofourfourpillarsofexecution,whichisgreat.Weseesomereallygood15-minutetransactionnumbersandrecordsinareas.Butoverall,IthinkthatIwouldbeeagertoseeourteamspushharderonthethroughputsuchastodeliverevenincrementalincreasesinthethirdquarter.Sowewillkeepworkingonthat.
AndrewCharles (Analyst-CowenandCompany):
Okay.Thankyou.
Operator :
Andthatdoesconcludetoday'squestion-and-answersession.Mr.Alexi,atthistimeIwillturntheconferencebacktoyouforanyadditionalorclosingremarks.
MarkAlexi(IRManage):
Great.Thankyouforparticipatinginthecalltoday.Weappreciateyourtime,andwelookforwardtospeakingwithyounextquarter.
Operator :
Thisdoesconcludetoday'sconference.Thankyouforyourparticipation.
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EventDescription:Q22015EarningsCallMarketCapasofEventDate:21.05BPriceasofEventDate:673.07
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