Earnings Call: Q1 2014

Apr 17, 2014

day and welcome to the Chipotle Mexican Grill First Quarter 2014 Earnings Conference Call. All participants are now in a listen only mode. After the speakers' remarks, there will be a question and answer session. As a reminder, this conference is being recorded. Thank you. I would like to turn the conference over to Chipotle's Director of Investor Relations, Alex Fong. You may begin your conference. Thanks, Renee. Hello, everyone, and welcome to our call today. By now, you should have access to our earnings announcement released this morning for the Q1 2014 and may also be found on our website at chipotle.com in the Investor Relations section. Before we begin our presentation, I will remind everyone that parts of our discussion today will include forward looking statements as defined in the securities laws. These forward looking statements will include projections of restaurant openings, throughput, catering growth, restaurant margins, comp restaurant sales increases, growth in average restaurant volumes, trend in food costs and other expense items and effective tax rates as well as other statements of our expectations and plans. These statements are based on information available to us today and we are not assuming any obligation to update them. Forward looking statements are subject to risks and uncertainties that could cause our actual results to differ materially from the forward looking statements. We refer you to the risk factors in our annual report on Form 10 ks as updated in our subsequent Form 10 Qs for a discussion of these risks. I'd like to remind everyone that we've adopted a self imposed quiet period restricting communications with investors during that period. The quiet period begins in the 1st day of the last month of each fiscal quarter and continues until the next earnings conference call. For the Q2, it will begin June 1 and continue through our Q2 release in July. On the call with us today are Steve Ells, our Chairman and Co Chief Executive Officer Monty Moran, Co Chief Executive Officer and Jack Hartung, Chief Financial Officer. With that, I'll turn the call over to Steve. Thanks, Alex. Well, I'm extremely pleased with our sales performance during the Q1. We ended 2013 with nice sales momentum and that momentum strengthened in the Q1 as our restaurant teams continued to do a great job of delighting our customers who visited Chipotle during the quarter. Our revenues were 904 $200,000 for the quarter, an increase of 24.4 percent driven by an increase in same store sales of 13.4% and from the opening of 44 new restaurants. This produced diluted earnings per share of 2 point an increase of 7.8%. What I'm most pleased about is that our constant pursuit of creating an extraordinary dining culture along with the best people culture in the restaurant industry is resonating with our customers and they're rewarding us with their loyalty. Our food culture continues to focus on finding the very best ingredients with an eye towards sustainability and great taste and preparing them using classic cooking techniques. This allows us to constantly improve our already delicious food. Our unique people culture is centered around hiring top performers who are empowered to achieve high standards and developing them to be the future leaders of Chipotle. Although our focus and emphasis two carry on these two key areas is not new, we're more confident than ever that building a strong food culture and a strong people culture is helping us change the way people think about any fast food, while leading to significantly better business results. During the quarter, we announced plans to continue to roll out Sofritas. This is our delicious vegan tofu offering and we expect to have Sopritos in all of our restaurants by the end of the year. Sopritos is an organic tofu and it's braised with chilies, Chipotle adobo, garlic, cumin and oregano. It's been very popular with our vegan and vegetarian customers, but we're delighted that about half of our sales come from customers who are meat eaters. Soapritos is in nearly 1,000 restaurants and accounts for 4% of our entree product mix in those restaurants. We continue to make progress on our quest to use only non GMO ingredients in our food. Just over a year ago, we became the 1st national company to voluntarily disclose GMOs in our ingredients and vowed to find non GMO replacements. To date, we have eliminated virtually all of the GMO ingredients in our food. Our corn and flour tortillas are the only foods we currently serve that are made using ingredients that contain or could contain trace amounts of GMOs. And now we're testing new non GMO recipes for these tortillas and we hope to be able to roll them out by the end of the year. Removing GMOs is just one of the many improvements we're making as we continue to pursue the sourcing of high quality sustainably raised ingredients. We're proud of these efforts and we're also proud of the marketing, which is designed to encourage people to be more curious about their food and where it comes from and how it's raised. We also want to educate our customers so they'll appreciate that these better ingredients prepared using classic cooking techniques is the reason our food tastes so good. Ultimately, it's our belief that the more people know about their food and how it was raised and where it comes from, the more likely they will be to eat at Chipotle. Farmed and dangerous is a good example of our commitment to entertain, while creating curiosity about how food is raised in this country. Farmed and Dangerous is a 4 episode satire produced, which ran online on Hulu and Hulu Plus. The day the first episode posted to Hulu along side some of the most popular television shows, it was among the top 5 viewed shows. After the first episode was released, the show exceeded Hulu's audience projections for the entire run of the show and coverage of the show and related issues in the news media generated millions of impressions. So we're really pleased about the attention that Farmed and Dangerous is getting, but more importantly that it is creating curiosity and sparks a dialogue about how food is raised. Another great opportunity to engage people in a celebration and dialogue about food is our Cultivate events. Recall that our Cultivate festivals are day long festivals of food, music and ideas and bring together great bands, some of the country's best known chefs and other attractions. These festivals speak to issues like the difference between whole and processed foods, the use of GMOs and the difference between pasture based versus more industrial based animal agriculture. We recently announced that our Cultivate events will be held in San Francisco, Dallas and Minneapolis this year. Last year, about 100,000 people attended Cultivate events in Chicago, Denver and San Francisco, but millions of additional consumers were reached through related advertising, social media and PR. We continue to be encouraged by the reach and response of these events with more than 90% of attendees saying that they would attend again the next year and would recommend the event to others. We'll also continue to do more traditional advertising, which is designed to keep Chipotle top of mind with our customers. Our new campaign entitled Better Ingredients is currently running in many Chipotle markets around the country. The creative content focuses on our use of great ingredients and classic cooking techniques and includes print, online ads and outdoor. Finally, we're encouraged by the growth seeds that we have planted, including our international expansion, Shophouse and Pizzeria Locale. Since our last call, we recently opened our 3rd restaurant in Paris and we now have 10 restaurants open in Europe, including 6 in London and 1 in Frankfurt. I should remind you, however, that we review our portfolio of growth seeds as opportunities for long term growth potential and that our growth will be driven by the development of Chipotle restaurants in the United States for the foreseeable future. I'll now turn the call over to Mont. Thanks, Steve. I'm really proud of the results our restaurant teams delivered during the Q1. While many restaurants and retailers have talked about a tough consumer environment, either because of the bad weather or the tepid economy, our teams have created such a warm and welcoming environment that our customers visited at an accelerated rate during the quarter. This terrific environment, our customers discover when they visit Chipotle is a result of the special people culture our managers are creating in our restaurants. It's a culture that emerges when you hire only terrific people who believe in and are committed to where Chipotle is headed, who have a desire to learn how to cook delicious food made from high quality ingredients and who thrive in a culture where they're empowered to contribute to their absolute fullest potential, including becoming the future leaders of Chipotle. Of course, this is the culture that customers discover when they visit our restaurant tour restaurants and every one of our managers throughout the country is intently focused on creating this very same restaurant tour culture in their own restaurants. Today, we have more than 500 restaurant tours including over 90 in field leadership positions, but we have more than 1200 managers who are working hard to become restaurateurs soon. In fact, every single one of our managers has targeted becoming a restaurateur within the next 12 months, most of them sometime during this year. We know this because the plan tool that you've heard me talk about during the past two earnings calls identifies a specific plan of action by which each GM will create a restauranteur culture in their restaurant. These are realistic plans created based upon themes our field leaders have identified when visiting each restaurant and meeting with each and every crew member on the team. Executing the plan helps our managers ensure they have the right people on their team, that they have a compelling vision that everyone on the team is committed to, that a culture of empowerment exists in the restaurant and that the entire team understands our high standards. When all of that exists in the restaurant, top performers who are empowered to achieve high standards with a compelling vision, that restaurant can count on a visit from Steve or me or one of our other officers for a restaurant tour interview. I'm really excited about the positive impact this plan tool is having in creating a clear roadmap for achieving this elite level of restaurant tour. I'm more confident than ever that our few leaders are spending their time wisely and productively by helping to create special people cultures rather than swatting away symptoms. And I'm more confident than ever that each of our restaurants has the opportunity to become restauranteur very soon. Each restaurant has already received 2 quarterly plans and they will receive an updated plan from their field leader each quarter, so that they can see the progress they're making in reducing the amount of negative themes in their restaurants and advancing towards restaurant tour. As you know, the restaurant tour program is the cornerstone of our people culture where our very best managers run extraordinary restaurants and have demonstrated the ability to elevate and develop the people around them. Many of our restaurant tours have expanded their leadership beyond their home restaurant, showing they can elevate the people and culture in nearby restaurants and many have advanced into field leadership positions such as ATL where they oversee the cultures in as many as 8 restaurants or the team leader where they oversee an average of 12 to 15 restaurants. A few of our restaurant tours have even gone beyond team leader into team director roles with leadership responsibility for around 50 restaurants and overseeing over 1,000 people. And I'm pleased and proud to announce that we've achieved a first during this quarter. For the very first time, we've had a leader who started out as crew, advanced to GM, then restaurateur through the field leader ranks to the position of Executive Team Director. Pedro Hachappa is the first person at Chipotle to make the journey from crew member to Executive Team Director and we are certain there will soon be more. Pedro began working as a crew member in Denver. He proved himself to be a top performer with a knack of making the people around him perform at their very best and became a restauranteur at our Alameda and Logan restaurant in Denver in 2007. In 2009, Pedro was promoted to apprentice team leader after all three of the restaurants he mentored as a restauranteur became restauranteur themselves on the very same day. From there, Pedro progressed to a team leader position in very short order. In 2012, he was promoted to Team Director in Arizona, where he helped develop deep bench of strong future leaders. Now he has been named Executive Team Director, where he will lead our restaurants in Arizona, the San Francisco Bay Area, Seattle, Portland and Vancouver. We're extremely proud of Pedro and his accomplishments and are certain that he will have an even bigger impact on the company in his new capacity, where he'll continue to do what he does best, which is elevate and develop the people around him. Pedro's story is special and that he is the first person that fully to make the journey from crew to Exec Team Director, but others are ascending all the time from crew to restaurant management and field leadership. In fact, we recently promoted along with Pedro, 4 other longtime leaders to Exec Team Director positions. Ron Cedillo became an Exec Team Director as did Pete Olds, Frank Evans and Barry Koch, bringing us to 9 Executive Team Directors nationwide and giving us a stronger field leadership team and better development opportunities in markets around the country. Empowered teams of top performers do everything better. They prepare and cook better tasting food. They create a wonderful environment where the restaurant is clean and inviting. They lead a team that's warm and hospitable and they deliver terrific customer service. One important element of delivering great customer service, as you've heard us say over and over, is faster throughput. And once again, faster throughput contributed during the quarter as we saw an average increase of 7 transactions at our peak lunch hour from 12 to 1 p. M. And we also saw 7 additional transactions during the peak dinner hour between 6 and 7 p. M. With the dinner comp that during that hour growing faster than the all day comp. And in one of our busiest days of the week, Friday, we saw an increase of 11 transactions during our peak lunch hour between 12 and 1 p. M. Our restaurant teams have focused on great execution of what we call the 4 pillars of throughput, which has once again led to record throughput during a season, the Q1, when throughput is historically at a low point during the year. We attribute this better execution to our ability to observe and report on how well each restaurant and each field leader is delivering on each of these 4 pillars. As a reminder, the 4 pillars of throughput are using a linebacker at peak hours, proper mise en place, having aces in their places and using a dedicated expo or expediter at peak times. By knowing exactly what's happening in each of our restaurants and where to focus our efforts to drive better execution and understand what might be holding us back, we have been able to make consistent progress in this very important area of our customer service. Over the past year, we've seen our execution for 3 of the 4 pillars of throughput, that is to say, X Bow Linebacker and mise en place, improved from an average score of around 65% to 70% during the first review to over 90% during our most recent review. So we think our field teams have done a great job focusing on and driving this important initiative over the past year. We're excited that our teams are ready to break new throughput records as the Q2 of the year, which is typically our busiest time of year, comes and we can build on the throughput momentum that we've developed during the past few quarters. Customers in all of our markets except New York City can now enjoy Chipotle Catering and we plan to roll catering to New York City later this year. Catering sales continue to approach 1% of our total sales and we're optimistic that catering will ramp up in the Q2 with the graduation season approaching, so more people can have a chance to try it. As we gain momentum with our catering, we still think we can get better at improving the program from an operations perspective. While most of our customers really enjoy the customer experience we're providing with catering, we want to focus on making sure that all of our orders are ready on time, that they're filled completely and accurately and that there's a seamless handoff to our restaurants from the customer order process. As we continue to execute this program through our high standards and as more customers discover and experience catering for themselves, we're encouraged that we're going to see continued growth from catering. Overall, we're very pleased with the Q1 and believe that we have the pieces in place, both in terms of our food culture and people culture to continue to deliver a terrific dining experience our customers and strong results for our shareholders. I'll now turn the call over to Jack. Thanks, Monty. We're delighted that more and more people are choosing to visit our restaurants every day. Our top performing crews and managers continue to provide an exceptional dining experience to our guests by providing great service and serving delicious meals made from premium ingredients. And this has led to our strong sales momentum, which accelerated into the Q1. Our sales increased 24.4 percent in the quarter to $904,200,000 The sales increase was driven by a very strong sales comp of 13.4 percent and from new restaurant openings. We're very happy to report that the 13.4% sales comp represents the highest quarterly comp we've experienced in nearly 8 years since the Q2 of 2006. Back then, our average restaurant volumes were under $1,500,000 while this strong comp has pushed our average volumes above $2,200,000 for the first time. The comp was driven primarily by increased customer visits. And while weather in the quarter certainly created volatility, we believe there was not a net overall negative impact from weather in the quarter. While sales were understandably down during days of extreme winter weather, when the weather improved, our sales recovered to a higher level than before the extreme weather for a few days before settling back into a normal sales trend. The comp also benefited from an increase in the average check of about 2% and we benefited by about 1% from an extra trading day as Easter was in the Q1 of last year. Average check-in the quarter was up from last year due to an increase in side orders, mostly chips and guac and extra meat and from an increase in catering. Catering continues to represent just about 1% of sales and the average catering order is nearly $300 so it has an obvious positive impact on the average check. Based on this strong comp momentum, we've increased our comp guidance and now expect our comp to be in the high single digits for the full year before the impact of any price increase, which I'll talk about a little later. While the Q1 comp benefited by 100 basis points from the additional trading day this year, we will lose that day with Easter moving to the 2nd quarter. So there is effectively a 200 basis point expected drop when moving from Q1 to Q2 just based on this trading day shift. And the comp comparisons become more challenging each quarter as the Q1 comp from last year was 1% and a complement of increased each quarter to 5.5% in Q2, 6.2% in Q3 and 9.3% in Q4 of last year. Restaurant level margins decreased 40 basis points to 25.9%. The lower margins were driven by higher food costs, partially offset by favorable sales leverage in labor and occupancy costs. Operating margins decreased by 150 basis points to 15%, primarily from higher G and A costs and lower restaurant level margins. G and A costs were higher by 130 basis points than a year ago, which I'll talk about in more detail shortly. Food costs rose a little faster than expected to 34.5% in the quarter, up 150 basis points from the Q1 of 2013 and sequentially they were up 60 basis points from the Q4 of 2013. The sequential increase was due to higher beef and dairy costs. And in terms of the year over year increase, food costs were higher primarily due to inflation in beef, avocados and cheese. Beef prices are expected to continue to move higher as supply remains tight, while livestock producers try to rebuild their herds and recover from 2 years of record trouts. And generally U. S. Beef prices has set recent all time highs. And our steak prices have also hit all time highs recently, rising 11% in the quarter compared to Q4 and they have spiked another 14% in April so far. So our steak is up 25% already since the Q4. Cheese prices are also expected to be up over 10% this year. And avocado costs will also continue to rise as we're just now entering the season of buying avocados from California again. California production of avocados is expected to be down about 30% compared to last year, even though demand is expected to increase. And while we haven't felt the effects of the recent hog virus on the supply of pork, supply challenges and pricing pressure may happen later this year. With all of this rising inflationary pressure, our food costs will be nearly 36% during April and are likely to push past that 36% over the next two quarters before the impact of any price increase. With all of this food inflation we have seen so far and expect to continue to see, we've decided to increase our menu prices. It's been nearly 3 years since our last company wide price increase and while we want to remain accessible to our customers, we're at a point where we need to pass along these rapidly rising food costs. We're currently reviewing our menu prices on a market by market basis compared to competitors and based on our analysis so far, we plan to increase prices on average somewhere in the mid single digits. We expect we will start installing new menu boards with higher prices later this quarter and finish installation by early in Q3. Labor costs were 23% of sales in the quarter, a decrease of 60 basis points from last year. Labor leverage was driven by higher sales volumes, partially offset by stronger management staffing ratios and normal wage inflation. Our restaurant teams have done a better job of having the right number of staff and managers in the restaurants, which leads to developing a stronger pipeline of future leaders as well as better restaurant execution, including better throughput. Oxy costs for the quarter were 6.1% of sales, a decrease of 50 basis points from last year, due to favorable sales leverage. Other operating costs were 10.5% in the quarter or flat as a percentage of sales. Marketing was 1.3% in the quarter our combined marketing and promotional costs as a percent of sales were the same as last year. Overall for 2014, we expect our marketing expense to be around 1.6% to 1.7% of sales with relatively higher marketing costs expected during the 2nd and third quarters as we kick off our better ingredients advertising campaign in over 30 markets and over 1,000 restaurants. The campaign will help customers better understand and connect how cooking with natural and high quality ingredients leads to better tasting food. G and A was 7.4% in the quarter, up 130 basis points from last year. G and A was higher as a percentage of revenue, primarily from higher non castnoneconomics.com and from about $2,500,000 in higher legal costs, in part due to a recent settlement. Stock comp expense was $28,000,000 in the quarter, which is up $12,000,000 from last year. For the full year 2014, we expect non cash stock comp to total about $98,000,000 or an increase of about $33,000,000 over last year. Now this is higher than our guidance from the last earnings call of $90,000,000 as the non cash accounting charge related to stock options increased when our stock price surged after our Q4 earnings release, but just before the options were granted. The number of options granted has grown only modestly each year, but the non economic non cash stock comp has increased significantly over the years as a result of the accounting charge being calculated based on our rising stock price. As a result of the higher non cash stock comp expense and our all manager conference in the 3rd quarter, we expect our G and A cost in 2014 to increase about 50 to 60 basis points overall over 2013. Now this is slightly above the 40 basis point increase we talked about in February and that's due solely to the higher non cash stock comp I just described. So just one last point about the stock comp. As I mentioned, the full year non cash charge will total about $98,000,000 but a disproportionate amount or about $62,000,000 will be expensed in the first half of the year. This is because the accounting rules require that we fully expense the charge for any employee who is eligible for retirement over 6 months rather than amortize the charge over the 3 year vesting period. Most of our senior management team qualifies for retirement or they will qualify before the end of the 3 year period. During the quarter, average restaurant volumes increased to a new record of $2,226,000 and we're optimistic that our average store volumes can continue to improve as more people discover Chipotle and become loyal customers. Our new restaurants continue to perform very well with new restaurant volumes opening at or above our $1,600,000 to $1,700,000 communicated range. During the quarter, we opened 44 new restaurants compared to 48 restaurants at this time last year and our full year guidance remains at opening between 180 and 190 5 new restaurants in 2014. Our effective tax rate was 39.1% in the quarter and we expect our annual effective tax rate will also be 39.1% and that compares to 38.7% in 2013. This rate increase is a result of the expiration of the work opportunity tax credit and the R and D tax credit that benefited us in 2013, and it's partially offset by a lower estimated state tax rate. Effective tax rate of 39.1 percent in the quarter is 270 basis points higher than Q1 of last year. As remember, last year's Q1 reflected the tax benefit from the work opportunity tax credit and R and D credit on a retroactive basis for all of 2012. Diluted earnings per share for the quarter was $2.64 an increase of 7.8%. Our balance sheet continues to remain very strong and we finished the quarter over $1,000,000,000 in cash and cash equivalents for the first time ever, including short term and long term interest bearing investments and with no debt. We continue to believe the best use of our cash is to invest in our high returning new restaurants, but we'll also opportunistically buy participate in share buybacks and will continue to nurture our growth seeds, Shophouse, Chipotle in international markets and Pichiribokale, each of which we expect will provide future opportunities to invest in growth. During the quarter, we purchased about $13,000,000 in our stock or over 23,000 shares at an average share price of $5.48 At the end of the Q1, we still have about $77,000,000 left on our share buyback program previously approved by our Board of Directors and our Board recently approved another $100,000,000 share buyback. Over the past 5 years, we've invested over $622,000,000 to repurchase stock at an average price of $153 Thanks for your time today. At this point, we'd be happy to answer any questions you may have. Operator, please open the lines. This is actually Eric Gonzalez in for David Palmer. Congrats on the strong traffic growth in the quarter. Thanks. Thank you. Hi. Thanks. We were wondering if you could focus on marketing for a second. You recently mentioned how you were changing your local store marketing efforts. And maybe if you could talk about the changes you made and maybe assess what's worked well for you? And then on the digital side, do you expect an increased usage of digital marketing in the near term? Is that something that could be a 2015 event? And then maybe what you've learned on the digital side so far? Digital marketing. Digital. Digital marketing. Digital. Yes. Digital marketing. So you want to add digital marketing? Yes. So in terms of the local store marketing, we revamped the way we deploy the team. We now have 36 marketing specialists across the country. They each create detailed plans based on the market experiences and the needs of the restaurants. Most importantly though, I think the most impact has been derived from the marketing specialists spending time with restaurant managers and the restaurant teams, developing ways that they can customize programs and reach out directly to individual customers, local businesses, schools, sports teams, hospitals, community events like races, foot races, bicycle races, things like this. So there are a number of customized programs that they develop. And then we usually develop custom currency that we can distribute during these events. So it's not a one size fits all. In fact, it's for a company the size of Chipotle, it's very unique and that we're super, super nimble and able to reach out to folks on a very individualized basis, which I think has really gone to creating a very, very strong bond and a trust with our customers. It reminds me of the way I used to reach out to the local community when I ran just one restaurant. And I think to be able to have 1600 restaurants plus in the United States that act like individual mom and pops where the restaurant manager or restaurant tour and his or her team can be part of the community in that fabric just helps to strengthen the specialness of Chipotle. So on digital, there's really a lot of elements around digital. And so I'll try and touch on all of them. First of all, we've always done some marketing on a number of digital outlets. We're active on Twitter. We're active on Facebook. We provide digital offers as well. So we'll continue to do that. I wouldn't say necessarily that will ramp up. But one of the things I think that we're really proud of is that our marketing has sparked conversation. And so when we do things like Farmed and Dangerous, when we do things like the Scarecrow, it creates conversation that people are curious about, people are interested in. And so we see lots of activity that our customers are engaging in through Twitter, through Facebook kind of on their own. And so is that really marketing? I guess not technically, but it's really exactly what we had intended when our marketing team when Mark Crum back on his team come up with things like Farmed and Dangerous. It really says very little about Chipotle. It's not really marketing in the traditional sense at all. But boy, oh boy, does it spark conversation and that spark that conversation with social media such as Facebook and Twitter really cascade very, very quickly. And so there's discussion about where food comes from and how it is raised. And we have this belief that the more that curiosity is sparked, the more that conversation carries on, the better it is for Chipotle. And then the final piece is, you've heard us talk about we've been testing a mobile payments opportunity. That's going well. We expect that we will introduce that to our customers at least in one market sometime this summer. And we think that once we start engaging in a mobile payments opportunity like that with our customers, we now have an opportunity to have personalized conversation with them as well and we communicate with them through text messages and through other opportunities once we have kind of this relationship between us and their mobile payments app. So. Thank you. It's very helpful. Thanks, Eric. Thank you. We'll take our next question from David Tarantino with Robert W. Baird. Hi. Good afternoon and congratulations on the sales momentum you're seeing. Maybe Thanks, David. It's still morning though, David. I wanted to ask about maybe the cost outlook. And Jack, I think you mentioned that you're continuing to see upward pressure on commodity prices, so you've decided to take a price increase. Could you frame up where you think the cost ratio might be heading without that price increase in the second half? I thought you said over 36%. But maybe if you can provide some more granularity on how you think this plays out, so that we can model it more precisely? Yes. We think, David, that April alone, even though we're not done with the month, but just based on the commodity costs we've seen so far with avocados are up because of buying from California. Steak is up for the reasons I mentioned and that's not a Chipotle only thing. Beef prices in the U. S. In general are at all time highs right now and so those have really spiked recently. And then based on expected price increases in cheese, we think April will be right at about 30 6%. We think we could push in the second and third quarters push past that hopefully not too far past that. We're hopeful by the Q4 that will settle a little bit. The avocado pricing pressure we're seeing is more of a cyclical based on buying from California and based on this year in general. Supply is going to be a little bit low. You've heard us talk in the past that avocado supply tends to be in every other year thing that when you have one good year, the next year seems to be a little bit light and we're in kind of that light year this year. So we're hopeful that the 4th quarter will settle a bit and be something under 36%. I don't think I'd do a very good job of predicting it precisely, but I would guess it would be in Okay. Thank you. And then, as I think about pricing, so you haven't raised prices in 3 years. And I just want to kind of come back to your long term philosophy on raising prices. And once you implement such price increase, you could continue to see pressures and things like on some of these items. So I'm just kind of curious to know how quickly you'd be willing to come back to the market on pricing if you needed it in 2015 or 'sixteen or Well, I would say neither, David. And what I mean by that is, we don't focus very much on the timing. And so we don't kind of think today let's raise prices and then raise them again or let's raise prices now and not raise them again for 2 or 3 years. What we think more about is making sure that we earn pricing power. And if we focus on that, if we focus on creating a wonderful restaurant experience and cooking and serving delicious food that will have the permission to raise prices. And if we know if we do a good job with that, then picking the timing of it is less relevant. It's just not that important. And generally, we've been patient in terms of raising price. We've had this luxury of being patient. Now what we've seen so far in looking at market by market pricing, we believe we've got a lot of pricing power. We feel very comfortable that if we raise prices somewhere in that mid single digit range, we still got room. So we're not going to spend all of the pricing power we've built up over time. We still have some in the bank. And so if we need to come back at some point in the future, let's say next year, we would have the ability to do that and then we'll go through the normal process that we go through considering inflation, considering transaction trends, considering remaining accessible. Because as you know, we want to remain accessible to our customers so that everyone can enjoy to dine at Chipotle. We'll go through that same consideration. But the thing that we're pleased about is that we have built up quite a bit of permission to raise prices and yet we won't cash in on all that pricing ability right now. So we'll still have some in the bank. Great. That's helpful. Thank you very much. Thanks, David. Thank you. We'll take our next question from John Glass with Morgan Stanley. Thanks very much. And I was so badly trying to find fault and great quarters. But in this case, there were I think a number of cost issues and they didn't just relate to food. So I just want to explore those. 1st, Jack, when you look at the labor ratio, your labor dollars per store grew at the highest rate it's grown in several years. Even in other quarters, we've had very strong transaction driven comps. So was there something unique in the did we run out of initiatives this quarter? So you just were seeing labor inflation? Did you have was there some inefficiencies in store? What happened in labor this quarter? Yes. A couple of things, John. One, last year, we were benefiting during most of the quarters from a reduced overtime compared to the year before. And so that ran out, that ran its course. And so we're not getting any kind of benefit from doing a better job of managing overtime. We had parts of the country mostly in the Northeast that had excessive overtime costs in 2012. And so as we compared in 2013 and doing a better job of managing over time, our labor leverage was better each of those quarters. That kind of ran its course. In terms of inefficiencies, we probably have about 20 or 30 basis points or so in an ideal theoretical calculation of what's possible of additional labor leverage. And the reason that didn't happen is our teams have been focused on doing a better job of staffing their restaurants. And so if their sales volume suggests they should have 28 people on their team instead of 24, we're now doing a better job of getting close to that 28 and they're giving them the hours. They're staffing for the 4 pillars. And so we're doing a better job of having the right number of people on the roster and that's both at the crew level and at the manager level. And so we have a deeper bench of top performers that we now are confident can be promoted up to kitchen manager, service manager, etcetera. And so our teams are better staffed. Our schedule and we're scheduling a full team, especially during our peak hours. And so we're getting better results. And so I will trade that 20 or 30 basis points, that's theoretical, for better throughput for a deeper bench and a fuller staff of crew and managers in a heartbeat. It's possible over time, but we're not going to rush into it. It's possible over time we might be able to capture that 20 or 30 basis points, but I would consider that to be a relatively small inefficiency or investment to get the operating results set that we've seen. That's helpful. And then on the G and A line, I think even excluding the stock based comp and the litigation, G and A dollars grew and a rough calculation is like still up 30%. I'm not sure if that's right or not. But is there anything unusual in G and A other than those two items that would have grown faster than it will grow rest of this year? No. I mean, we did have our bonus is up a little bit, John, partly because the quarter was good. It was up a little bit just as a true up from last year's bonus. There's a couple small things here and there. I think if you take out the non cash stock comp and take out for the full year, I'm talking about now. If you take out the cash.com, take out the manager conference, which will cost $8,000,000 this later year later this year and you look at it year over year, I think we'll have some slight leverage in our G and A. So I think our spending is in pretty good shape. We have added a number of people to our ranks in the past year to support our growth. But I would say there's nothing out of the ordinary underneath our G and A. It's still leveraging slightly. And over time, hopefully, we'll have the opportunity to leverage it even more as we kind of grow into the recent headcount additions. Okay. And then just I guess the capstone of that is, does the pricing take care of all this? In other words will operating margins expand in the back half given food inflation and given all the other things we just talked about is it enough to do that? Well, it depends on what happens in the back half of the year. But based on our expectations, yes, I would expect our margins would expand. Great. Thank you. And we'll take our question from Jason West with Deutsche Bank. Yes. Thanks guys. Can you hear me okay? Yes. Yes. Okay, great. Yes, just Jack, I didn't quite hear if you said any sort of update on where things are running in the Q2. It's hard to be so short term, but just with the comparison being tougher, I know we've got a 200 basis point swing on the trading day. Just any help you can offer on kind of how to model the Q2 so far? Yes. In April so far, I would say that the underlying trends are comparable to what we saw in the Q1. And so I think if you take into account that we're losing a couple of 100 basis points compared to the Q1 in terms of trading day, it's a tougher comparison. But if you adjust for those, the underlying kind of transactions that I'm seeing and the underlying sales that we're seeing are comparable to the Q1. Okay, great. And then just when you enter the pricing timing, can you a little bit fast, can you run through that just one more time in terms of when the pricing will be fully rolled out to the system, the kind of mid second quarter? Is it end of the quarter? Just things like that. No. I would expect it will be fully rolled out to all of our markets by early in Q3. I I suppose it's possible we might be able to accelerate and get it done by the end of the second. But I would say by early in Q3, we'll have new menu boards with the new prices in all of our markets. Okay, great. And then just one other quick one. Monty, you talked about the throughput improvements at peak periods. Can you remind us what your average peak lunch transactions are and peak dinner transactions just so we have kind of a foundation there? Yes. Well, we usually don't talk about specifically what those numbers are, but they're sort of in that between 110, 120 range during Fridays at peak lunch and a little lower than that when you look at Monday through Friday. And that's for the Q1. We expect that in the Q2 and probably Q3 as well, we'll see those increase hopefully even substantially because the Q1 is our slowest time of year in terms of what we would expect in terms of throughput and yet we drive these wonderful throughput improvements, where even our peak lunch and dinner hours nearly kept up with our all day comp numbers in terms of being able to put more people through at those peak hours, which is really difficult. In fact, in terms of the absolute number we put through, number of people per hour of the day, we had had bigger games during lunch and dinner than any other time of the day. We have 7 more people that we put through the line on average per restaurant during those times of day when our lines are longest. So we're very, very proud of our field teams for accomplishing that. But we also know that our field and our field teams know that now is really when that game begins because now is when our peak season is descending upon us, when we'll be busier and we'll have an opportunity to really, really hit ball out of the park on these throughput numbers as we execute the 4 pillars hopefully as flawlessly as we ever have and thereby give a much, much better customer experience to everybody. So we're proud of the absolute numbers, but I think particularly in light of the fact that the Q1 is not one of the places where we usually set records and we did. Okay. Thanks a lot. You bet. And we'll take our next question from Nicole Miller with Piper Jaffray. Please go ahead. Thanks. Good morning. Awesome quarter. When you think about catering, what kind of customer feedback are you getting? And I'm specifically wondering if you would consider delivery or test it? Yes. I mean thanks, Nicole. And with catering, most of our customer I mean, a lot of customer comments are coming in that are just very delighted that we have it in the 1st place. Something less than 1% of comments are still frustrated with it being late or things not being put together correctly. And I think that we're still working out some bugs in that regard, but we're proud of generally how our restaurant teams are accomplishing catering. In terms of delivery, it's not something we're particularly excited to get involved with at this point throughout the country with the possible exception of Manhattan. But really with catering right now, our customers are pleased to be able to come in and carry in these very we package things in a very easy way where our customers can carry even a fairly large catering order out and take it home with them. And I think that while some people would like us to deliver, our fear would be that putting in place a delivery model would change the unit economics of the catering program and make it more difficult for us to price it competitively. And I think if you put delivery in, I mean, let's say, 1 out of 10 people would like delivery right now. I think that if you offer delivery, 6 out of 10 might take it. And so I think that it's something like that and we're just making these numbers up. But basically, we don't want to put delivery in place and end up costing us the ability to be really competitive and to deliver this food to folks at this terrific price and in this really fun way. We don't want to drive the prices up by wrecking the unit economics of it. So I don't think you'll see us do a wholesale delivery program in catering for the foreseeable future. Very helpful. And I also forgot to ask, are most of those catering orders coming in online? Well, it's a combination of online and also through a call service that we have in place. Right. Is it weighted towards 1 over the other? It comes through a call center that's a 3rd party vendor and then they pass it on to the restaurants and make sure that it's taken care of. Okay. I just didn't know if there was online. Well, online, I mean, catering per se doesn't come in online. We have online orders for multiple orders and Jack is telling me right now, it's coming. So in terms of being able to do online orders for catering, that's still something we're working on. Fantastic. Thanks for the time. Thank you. And we'll take our next question from Andy Barish with Jefferies. Please go ahead. Hey, guys. Hey, Jeff. A couple of things just wondering your impressions on. Sort of have the value gap for Chipotle kind of widened, meaning the time you've taken between pricing increases has shown up in customers' perceived value being a lot higher? And then secondly, just on the throughput, again, sort of more theoretical, but how are you balancing speed versus kind of the hospitality side of things in the restaurants, if you could? Well, I'll answer the throughput question and pass it on to Jack to talk about the pricing value proposition. But with regard to throughput, I think the notion of fast throughput somehow degrading the customer experience is the wrong we look at that as being the wrong way to look at it. And in fact, the way we work on throughput is basically to understand that those things that are best in terms of hospitality, things like clear communication, great eye contact, friendliness the line, efficiency along the line, sense of urgency, all of those things are the things that compose a great customer experience at Chipotle. And that's why we're so insistent on having top performers and aces in their places online and all of that. However, not only are those things the things that generate the best possible customer experience, those same things happen to be the things that generate the fastest throughput. So I would literally tell you that as our throughput gets faster, you can count on our hospitality not only not degrading, but actually getting better, us having better and better communication, being more and more prepared, so that our actions on the line look not hurried, but fluid. And we're not operating with a sense of panic, but rather we have a team of top performers who look very, very comfortable and are very comfortable serving customers. If you look at our fastest throughput restaurants in the whole country, those restaurants tend to be the ones that actually have the best customer service. So if you were to go survey everyone in our lines, they would all want that to pass you through. But and while occasionally we do get a comment from someone who's perhaps very new to Chipotle who says I felt rushed through the line. When we look into those comments and contact those customers, it's almost really never that they were rushed. It's because we did something wrong or didn't listen to them carefully or didn't give them what they wanted, not because of the speed. So fast throughput equals great customer service through and through. And Andy on the consumer view of the price value, when we dig into why consumers think that Chipotle is a good value, sure price is a piece of it, but the bigger piece of it is the experience. It's the quality of the food. They trust where the ingredients are coming from. They can see the open kitchen and so they feel good about seeing their food made in front of them. And so and they love the taste of it of the food. We get lots of comments about how friendly our crew are, how hospitable our crew are. And so most of the value comes from the experience. Our pricing certainly is affordable. And in fact, when you compare our pricing to others in the fast casual, we're often cheaper and we should be able to be more expensive because we spend more on our ingredients for sure. But our customers don't place a big part of the value that they value scores that they gave us, which are very, very high. A smaller part of that is attributed to price alone which is different than what customers of other restaurants might say. So we feel good that if we focus on the things that we focus on great experience, great food, great teams, they're creating a wonderful dining experience that our customers will continue to see Chipotle as a great value and they'll continue to be willing to spend a little bit more money and it really is just a little bit more money for this wonderful dining experience that we offer them. Appreciate it. Thank you. And we'll take our next question from Keith Signer with UBS. Please go ahead. Thank you. And congratulations to the restaurant tours that are the ones out there managing that transaction growth on a day to day basis. It's very impressive. Monty, thank you very much for all the color around the 4 pillars, how this is helping increase the customer service and the throughput. Aside from the 4 pillars, are there other opportunities to grow the transactions? How is the use of say the online order ahead? Is this helping contribute to the traffic growth? Are there other alternatives aside from just the 4 pillars that could be opportunities to keep that transaction growth and growing? Thanks. Yes, it's a great question. I mean, we've looked at it in different ways over the years. I think when we first really started to put our eyes on throughput in 2,006, we were a little I would say a little bit more gadget focused. We were concerned about having a second cash register and how that would increase throughput. And if you look back far enough, you'll see a comment from me 8 years 7 or 8 years ago saying that a second cash register can increase our throughput 40%. In fact, that was true at the time. But then what we started to discover is there were places where we'd add the 2nd register and throughput would go up 40%. And we'd remove the 2nd register and throughput would stay the same or go even higher. And so we knew there was something more to it. Then later we added cash excuse me, change machines that would automatically dispense the change to the customer. And that did increase throughput a little bit because it took a second or 2 or 3 off of the job that our cashier had to do. And so that was an effective thing. And then we tried the handheld ordering system, which is still in operation in a few restaurants. But what we kept finding is no matter how much of these sort of gimmicks we added or how much we tried to use technology to increase our throughput, nothing could compete with the restaurants that had, I guess, I'll say 2 things. 1 is having a restaurant to our team, having a team of all top performers who are empowered to achieve high standards. To make a long story short, great teams are just faster and better. But another thing was the teams that did best were the teams that were aware of and efficient at implementing these 4 pillars of throughput. And so as we started to notice that the 4 pillars dwarfed any other efforts that we put in place to increase throughput, we decided that that has to be our focus, particularly because we still have a significant number of restaurants that don't consistently execute the 4 pillars. There are some other things though that we're looking at. One thing is credit cards continue to be a more and more significant part. They grow in terms of the percentage of our transactions that are paid for by credit cards and that helps us because credit cards are still faster than cash. And we've done a lot to make sure that that's true over the years and making sure that the time between a swipe and a printout of a receipt is very, very fast. And now it's just a few seconds it's pulled away. And as you know, we don't require signatures except over a certain dollar amount. So that's set us up. I think also through online ordering, that gives us a great opportunity to increase throughput as well because we prepare those orders on our second make line. And when those folks when they come in, they are not in our main line and so that allows that throughput to go quicker. So certainly online ordering is an ongoing opportunity that we're consistently working to increase. So, yes, those are a number of things. I think you can also in we'll work on, of course, the technology to make credit cards still faster with the chip and pin and tapping the credit cards and whatnot. So anyway, there's a lot of things we're always focused on. But I think you'll see for the foreseeable future, the execution of these four pillars will be the top priority. Well, I should say the second priority. The first priority is having a restaurant to our team who can carry it off. Thank you. Thank you. And we'll take our next question from Nick Setyan with Wedbush Securities. Thank you. I want to ask a question on the minimum wage, especially in California later this year. And ex pricing, how we should think about that impacting the labor line going forward? I know there's another one coming next year again, plus you have the health care headwinds kicking in a little bit more next year. So maybe you can just kind of remind us what the impact we should expect is? Yes. The California minimum wage this summer is going to increase to $9 and then it's actually not next year, it's 2 years from now in 2016, we'll increase again to I believe it's to $10 We've already been paying. We've always been above minimum wage. We've been hiring in California between $8 $9 and starting at the 1st of this year, we've been hiring at $9 So we've already been kind of early adapting this first wave. And so there's very little effect. I would call it at a company wide level, negligible effect. There will be a bigger effect when the minimum wage increases to $10 in California in a couple of years, but even that is in the range of a few $1,000,000 not tens of $1,000,000. So we can certainly absorb that. And I'm sorry, Nick, what was the second part of your question? Just the health care impact. If you guys could remind us what that I guess is expected. Yes. Okay. So the health care impact that will depend we are planning on offering health care to all of our hourly crew that meet requirements that work to 30 hours or more per week, which most of our crew more than half of our crew do work more than 30 hours. We're planning on offering an insurance plan, a credible insurance plan to those folks. What we don't know is how many will accept it. Our estimate is that this will cost somewhere around or below 1% of sales, but we won't know that for sure until we offer the insurance and then we can see how many people adopt it versus how many people decide not to take the insurance. Got it. And then just shifting a little bit on the unit growth side. Are you guys seeing more opportunities with some of the construction increasing? I know in the past that's been a little bit of a limit on how fast you can add new units, but it does seem like it's becoming a little bit more of a tailwind. So could we potentially see the unit growth or the additions at least increase a little bit going forward? Yes. I mean right now, what gives us great optimism is the fact that the impact from new restaurants that we build is very, very, very low. It's below 1% and has been below 1% every year for quite some time. And so and in terms of the pipeline of new restaurants that we're able to find and build, we have a significant new pipeline and believe we'll be able to level load our restaurant openings throughout the rest of this year, and which will put us well on pace to hit the numbers that we've suggested that we will hit in terms of new store openings. So we feel very, very good about that. Now in terms of being able to accelerate that number, there's always the possibility to accelerate that number. And what we always do is sort of balance the quality of the real estate we're able to find with the with our ability to have great people to run those restaurants. And we're feeling, as I talked about during my opening comments, we're feeling very, very good about the pipeline of leaders that are moving up through the ranks and the probability of having an even faster pace of restauranteur development due in large part to the use of the plan tool and our field leaders use of that device to help people make sure they have plans in place. And so the people pipeline we feel is really strong. The real estate pipeline is very strong. So I think you'll see us continue to be careful and measured in terms of how we add restaurants, so that we can continue to have these really delightful new store openings that deliver great customer experiences. Thank you very much. Thank you. And we do have time for one final question. We'll take our last question from Matthew DiFrisco with Buckingham Research. Please go ahead. Hi. This is Catherine Han filling in for Matt here and thanks for taking my question. I just have a question on the G and A line. I think you said it will be up 50 to 60 bps, but you are keeping the $90,000,000 non cash stock based comp. So since you have higher in 1Q, does it mean it will be evenly spread out meaning lighter in the remainder quarter? And then also can you talk about the litigation costs like what's in it? And then should we consider it as a one time nature? Thanks. Yes. So on the non cash stock comp, it's actually $98,000,000 in total for the year, dollars 28,000,000 hit in the Q1, dollars 62,000,000 will hit in the first half of the year. That means $34,000,000 will hit in the Q2. And that will level off to around $20,000,000 in the 3rd quarter and around $15,000,000 in the 4th quarter. And so telling you the Q4, the non cash stock comp is close to half of what it will be in the Q1. So that's why the G and A in the Q1 is quite high, but it will level off over time and normalize over time. And keep in mind that's all non cash to journal entry. Those amounts are never paid. And so but it is spread unevenly throughout the year. And then your second question, I'm sorry, was? It's on the litigation front. Litigation, one side. Yes, we're not going to comment on specifically what that was about. We did have more activity during the quarter. And so we don't feel like the activity that happened in the quarter will be something that will occur. Litigation is hard to predict perfectly. But we do think that the quarter was a little bit unusually high and we would hope that it would settle back down to normal charges for the rest of the year. Okay. If I have if I can just have one more follow-up. Can you talk about the volume that you're seeing in Shophouse and Pizzarello Cow and also the international? Yes. We're not commenting specifically on the volumes. There's lots of attributes that are really important about Pizza Rilocale, about Chap House and Chipotle International. And the volumes is just one of them. What I can tell you is that the volumes for all of our gross seats are they're behaving similarly in general to how we saw Chipotle going into early markets back when Chipotle was kind of unknown back in the early 2000s or so. And so there's a discovery process. And so the restaurants don't open up at the same levels that Chipotle in the U. S. Does. But as the discovery process happens, we're seeing more and more people come in. We're seeing the traffic increase and we're seeing patterns that are very similar to what we saw with Chipotle in the early days. And we find that to be very encouraging. And so but we're not disclosing volumes. That's just one very small piece, one little sound bite of everything that we're looking at in terms of the quality of the food, the quality of the people, the quality of the customer experience. And so we're not talking about specific volumes. All right. Thanks everyone for joining us. We've exceeded our time for the call, but we thank you joining us and we look forward to speaking with you next quarter. Thanks everyone. Thank you. Thanks everyone. That does conclude today's conference. We thank you for your participation.