Download - Chipotle Mexican Grill (CMG) Earnings Report: Q2 …s.t.st/media/xtranscript/2015/Q3/13226725.pdfChipotle Mexican Grill (CMG) Earnings Report: Q2 2015 Conference Call Transcript The

CompanyName:ChipotleMexicanGrillIncCompanyTicker:CMGSector:ServicesIndustry:Leisure

EventDescription:Q22015EarningsCallMarketCapasofEventDate:21.05BPriceasofEventDate:673.07

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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




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.




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




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.




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.




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




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




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.




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.




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.


Great.Thankyou.Andthenmyotherquestionisaroundthecarnitasissue.AndIwasjustwonderingifyoucouldsharewhatyou'velearnedsofaraboutthecustomerreactiontothatintermsofthetraffictrends.

AndthenIthinkyoubroughtthatbackinatleastonemarketrecentlyinManhattan.Socouldyoutalkabouthowlongittakesforcustomerstorespondtothatcomingbackinyourconfidencelevel,thatyouwillbeabletowinthatbusinessbackwhenyougetthefullchainrolledoutonpork?

JackHartung (CFO):

Yes,David,it'sreallyearlytoknowwhattheexactresponseisgoingtobebasedonthisnewsupplythatStevetalkedaboutfromKARROintheUK.Butwhenwesawthemarkets,youremembersinceJanuarywhenwefirstranout,wehadthisrollingblackout.

Soeveryseveralweeks,wewouldhaveonemarketrunoutofcarnitasandthenwewouldreplenishthesupplyinanothermarket.Andwhenyousawthat,ittookseveralweekstogetthefullproductmixback.Andso--andIwouldsaythat'sanywherebetweenthreeweeksatthelowsideuptofiveorsixweeksonthehighside.




soweareoptimisticthatwewillstarttoseesomeofthatrecoveryaswecontinuetorollmarkets.Butwe'regoingtorollmarketswiththisnewsupplyofcarnitasfromnowthroughoutthesummerandthenintoearlyinthefourthquarter.

Andsohopefullywhatwewillseemarketbymarketisthattheproductmixwillrecoveroverseveralweeksandthatwe'llstarttoseesalescompsrecoveraswell.


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,




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?


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




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,




probablynotatallthisyear.

Sowelookatitmarketbymarket,andtheremightbesomecaseswherewhenyoulookatallofourhighercostofdoingbusiness,thatwemightdeemthatit'snecessarytotakeapriceincreaseinthosemarkets.ButIwouldn'texpectthattobeasignificantadd-ontoourcomporsignificantadd-ontothemenupriceincrease.


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.


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




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.


Yes,withregardtoourtraditionalloyaltyprogram,inthepastthethinkingthereisthatifyoucantakeaninfrequentorlapsedcustomerandmakethemcometoyourrestaurantjustonemoretime,youwouldpayfortheprogram.Ourresearchhasindicatedthattherearevirtuallynoloyaltyprogramsthatactuallyachievethat.Whattheydoistheyrewardyourmostloyalcustomers.

Andsowefiguredoutotherwaystodothat.WehaveongoingwaystogiveourmostvaluablecustomerandwaystointeractwithChipotlewheretheylearnalittlebitmore,andwegivethemsomefreefoodinexchange.




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.


That'shelpful.Thebiggerquestionisonthenewerconcepts.IfIrecallcorrectlythehistoryofChipotle,yougotarealfirst-moveradvantageinmanymarketsbyenteringbeforeyourkeycompetitors.Andwhenyoudidso,youdidbetter;andwhenyouweresecond,youdidlesswell.Maybeeventuallydidbetter,butmaybeinitiallynotaswell.

Whenyoulookatthenewerconcepts,andparticularlypizza,youarenowbadlylaggingbehindseveralchainsthatareinthatcategory.Whyisn'tthatincentivetobemoreurgencytodevelopfaster?Isthereotherconcernsyouhaveabouttheconceptandyou'renotreadytodothat?Doyouthinkit'sgoingtobedifferentforpizzathanitwasperhapsforyourcoreconcept?Oristhisfirst-moveradvantagemaybeanoverblownadvantage?


Well,it'sinteresting.Weusedtopayalotofattentiontothefirst-moveradvantagetheory.WhenwewerepartneredwithMcDonald'stheyweretellingushowimportantitwasintheirdevelopment.

Althoughifyoulookatourhistoryandoursalestrendswhenwecomeintomarketsandwe'renotthefirstmover,wedefinitelypassthem.Californiaisthebestexamplewherewehadtwobigcompetitors,andweseverelylaggedbehindthem.

Overtime,though,throughgreatexecutionandthroughagreatpeoplecultureandsharingwithourcustomerswhatmakesChipotlefoodspecial,wequicklytookthelead.




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.


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.


Okay.Andmysecondquestionisonthecomps.Again,you'veclearlyseenanaccelerationintraffic.




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.


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




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.





Okay.AndjustMonty,justIknowtrafficobviouslywasalittlebitofanissue.Butdoyouseeanyimprovementoranyworkoranythingtocalloutonthethroughputinitiativeswiththequarterintermsofhowmanyincrementalcustomersyouhavegot?


Intermsofincrementalwhat?


Intermsofincrementalcustomersyougotthroughtheline.


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.


Okay.Thankyou.

Operator :

Andthatdoesconcludetoday'squestion-and-answersession.Mr.Alexi,atthistimeIwillturntheconferencebacktoyouforanyadditionalorclosingremarks.

MarkAlexi(IRManage):

Great.Thankyouforparticipatinginthecalltoday.Weappreciateyourtime,andwelookforwardtospeakingwithyounextquarter.

Operator :

Thisdoesconcludetoday'sconference.Thankyouforyourparticipation.

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