Good afternoon, and welcome to the Chipotle Mexican Grill First Quarter 2013 Earnings Conference Call. All participants are now in listen only mode. After the speaker's remarks, there will be a question and answer session. At that time, if you would like to ask a question, please press star, then the number one on your telephone keypad. If you need assistance at that time during the conference, please press star zero and an operator will assist you. As a reminder, this conference is being recorded. Thank you. I would now like to introduce Chipotle's Director of Investor Relations, Alex Spong. You may begin your conference.
Thank you. Hello, everyone, and welcome to our call today. By now you should have access to our earnings announcement released this afternoon for the first quarter 2013. It may also be found on our website at chipotle.com in the investor relations section. Before we begin our presentation, I will remind everyone that parts of our discussion today will include forward-looking statements as defined in the securities laws. These forward-looking statements will include projections of restaurant openings, throughput, comp restaurant sales increases, trends in food costs, and other expense items, effective tax rates, and our unit economics and shareholder returns, 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-K, as updated in our subsequent Form 10-Qs, for 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 on the first day of the last month of each fiscal quarter and continues until the next earnings conference call. For the second quarter, it will begin June 1st and continue through our second quarter 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 now turn the call over to Steve.
Thanks, Alex. We are pleased with the first quarter of 2013, which included revenues of $726.8 million, an increase of 13.4%. Comp sales increased 1% in the quarter, and diluted earnings per share was $2.45, an increase of 24.4% over the first quarter of last year. We continue to improve our restaurants by aspiring towards the very high standards that have made us successful, from the ingredients that we use, to our culture of top performers. Our long-term focus on these attributes of our business has made Chipotle a unique and special kind of restaurant company. During the first quarter, we launched our catering service and began testing a new vegetarian menu item called Sofritas in seven of our San Francisco Bay Area restaurants.
We began offering catering to customers in Colorado on January 21st, which essentially involves allowing customers to set up a portable version of the Chipotle service line for groups of 20 or greater. For customers who are interested in something smaller, we also offer catering option of chips and salsa with guacamole. For customers who need smaller group meal options, we are continuing to offer our Burritos by the Box for groups of six or more. Overall, we're pleased with how our catering program is progressing in the Denver market. On April 15th, we expanded it to 144 more restaurants, including the rest of our Rocky Mountain region, as well as restaurants in Philadelphia, Nashville, Wisconsin, and Las Vegas. We are now on track to launch catering to all of our restaurants nationwide by the end of August.
Over time, we believe that catering can help us expand our business while also providing our customers with a fun and convenient way to enjoy Chipotle. Sofritas, which we began testing in seven San Francisco Bay Area restaurants in late January, has also been performing well. On April 8th, we expanded the test of Sofritas to include nearly 100 additional Northern California restaurants. Our marketing team is working on several different fronts to improve our customer awareness and appreciation of Chipotle. In March, our marketing team launched our Skillfully Made advertising campaign, which coincides with the start of our busier times in our restaurants. The campaign focuses on the preparation of fresh ingredients and cooking by hand. This outdoor print and radio advertising is planned for 26 markets throughout the year and supports about 900 of our restaurants around the country.
Advertising buys such as this one are intended to keep Chipotle top of mind with customers, which is one of the key elements of our overall marketing strategy. In addition to this top-of-mind advertising, our marketing team is also using local marketing to connect with customers on a local level to help make our restaurants part of the fabric of the communities they serve. This local effort is made up of market-wide programs implemented by our team of more than 30 marketing strategists in 26 key markets around the country. Our marketing team is also using brand marketing to build deeper connections with our customers and create a dialogue around issues that are important to Chipotle and to demonstrate how we are working to cultivate a better world.
Activities in this category include films such as last year's "Back to the Start" animated short film, as well as events such as our Cultivate Festivals and social media and PR efforts. We have just announced the dates for talent lineups for three Cultivate events this year in San Francisco in June, Denver in August, and Chicago in September. We are also developing other programs for later this year. These programs help customers understand why it's important to know where their food comes from and how it's prepared. The more they know, the more likely they will be to appreciate everything we do at Chipotle. Finally, turning to our longer-term growth opportunities, we plan to open three ShopHouse restaurants in the coming months, with one in Washington, D.C.'s Georgetown neighborhood, and two in Los Angeles, one in Santa Monica and the other in Hollywood.
Similarly, the second Chipotle in Paris is under construction, and we expect to open our first restaurant in Frankfurt, Germany, later this year. This comes in addition to the 6 restaurants we currently have in London, 5 in Canada, and 1 in Paris. While we continue to be optimistic about these future growth options, including ShopHouse and Chipotle in Europe, the focus of our growth for the foreseeable future will be Chipotle in the U.S. I will now turn the call over to Monty.
Thanks, Steve. Throughout the quarter, we continued to make significant strides developing our people and establishing cultures of top performers in our restaurants. I'm very happy to have our two new Restaurant Support Officers, Gretchen Selfridge and Mike Duffy, helping to lead and develop our field and restaurant teams, as well as helping to identify and promote the 45 new restaurateurs that we added during the quarter. I'm also glad to be seeing a higher percentage of candidates being accepted into the program than ever before, as our field teams get better and better at communicating Chipotle's vision to our restaurant teams. One leader who has demonstrated a special ability to lead his teams to create restaurateur cultures is Doug Netzhammer, who was recently promoted to the position of Executive Team Director over our newly created Southwest Region.
Over the past five years, Doug and his team have developed 31 restaurateurs with an amazing selection rate of 94%. As with any of our most successful leaders, Doug knows his success comes from making the people around him better and by developing empowered field leaders who impact the restaurants every day by coaching and inspiring others to be great. During the quarter, we also promoted 43 restaurateurs to mentor additional restaurants, as well as five new apprentice team leaders, eight new team leaders, and two new team directors. To help ensure our restaurateurs are successful when they begin to mentor other nearby restaurants, our training team is developing an R Plus training course for them. We believe this new R Plus training, which is taking place in all of our regions, will set new restaurateurs up for success by helping them become more effective leaders over multiple restaurants.
The accelerated success that we're seeing in developing our people and advancing our culture demonstrates that we have a deeper and stronger bench, and that our teams are getting better at understanding what it takes to develop a restaurateur culture. Elevating and empowering these extraordinary field leaders allows them to have an even greater impact on developing and leading special people cultures. These restaurateur cultures result in better, more efficient operations and a special dining experience for our customers. Of course, one of the ways that Chipotle provides a great customer experience is through excellent throughput. Recall that in 2012, we were able to provide faster throughput during the peak hours of the day as compared to the all-day comp. As we lap the throughput gains we made from last year, these comparisons become more difficult.
In the first quarter of this year, our peak lunch comp from 12 to 1 grew more slowly than our all-day comp, but our peak dinner hour comp from 6 to 7 P.M. did grow slightly faster than the all-day comp. As the second quarter is the busiest time of the year for us, we've asked our field and restaurant teams to bring particular emphasis to the things that lead to excellent throughput. Specifically, we're tasking our restaurant teams and field leaders to make sure that we are fully staffed so that we have solid teams that are capable of serving the additional customers that visit our restaurants at this time of year. Next, we are making sure that our field teams and restaurant teams implement the four pillars of great throughput.
Ensuring that our restaurant teams have excellent mise en place so that they're ready for the peak hours and having everything prepared and the line set up to serve customers quickly. Making sure we have expediters working in all of our restaurants during the peak times who are totally focused on helping our customers move through the cash-out process quickly and efficiently. Seeing to it that we always have a linebacker position in place to allow our teams on the line to focus their full attention on quickly and efficiently creating a customized meal for each of our customers. Finally, making certain that we have aces in their places, meaning that we have our best people at each station, and we're not training new hires during rush times.
We know from our own experience that when our restaurants follow these four simple steps, our customers will enjoy not only faster throughput, but a much better overall customer experience. At our next earnings call in July, we will know much more about the success of our efforts, since some of our busiest times are upon us now. We expect to report to you that we are better at delivering fast throughput as our top-performing teams work to capitalize on this key advantage Chipotle has in terms of delivering delicious food quickly. I want to also update you on our development progress.
In addition to the strength of our people culture and our operations, our development pipeline remains strong, and based upon our great performance in the first quarter, we're confident that we're going to deliver on the high end of our guidance range of 165 to 180 new restaurants this year. Of those openings, we expect about 30 restaurants will be A-model locations, those being restaurants which typically have a slightly smaller footprint and lower development, occupancy, and operating costs. You'll gradually see more Chipotle restaurants developed in non-traditional locations, such as mall food courts. Though we have just a few food courts right now, we've been very pleased with the unit economics of those, as well as our ability to provide a great Chipotle experience in these venues.
We continue to see a slight increase in the pace of new real estate construction, which we hope will give us even more attractive locations for our development teams to consider. In 2013, we estimate that new construction, as opposed to remodeled sites, will represent about 40% of our new store openings, which is up from a low of 30% in 2010. Finally, before I turn the call over to Jack, I want to give you an update on the government's investigations into our hiring practices and related disclosures. This week, we received an additional request for documents from the Civil Division of the United States Attorney's Office for the District of Columbia, requesting work authorization documents for all of our employees since 2007, plus employee lists and other documents related to work authorization matters.
While this is just one of numerous requests we've received from the government in the course of this three-year investigation, we wanted to make you aware of it due to the expanded geographical scope of the latest request. We'll continue to cooperate with the government and its investigations, which we believe will be ongoing for quite a while, as it will take some time to comply with these most recent requests, and it will also take the government some time to digest all the information that we're providing. I will now turn the call over to Jack.
Thanks, Monty. We're very proud of the results we achieved in the first quarter, despite an uncertain economic environment and with the difficult comparisons. Our top-performing crews and managers continue to delight our customers by providing great service while serving delicious food skillfully made with premium ingredients. Our sales increased 13.4% in the quarter to $726.8 million, driven by new restaurant openings and a sales comp of 1%. The comp was driven mainly by increased traffic and was impacted by 2 fewer trading days compared to last year, as our restaurants were closed on Easter and due to Leap Day in 2012. Without the negative impact of Easter and Leap Day, our underlying sales comp for the quarter was around 3%.
Average check in the quarter was up just 30 basis points as the remaining menu price increase of 70 basis points was offset by selling slightly fewer drinks, as a few more customers purchased their meals to go than last year. We've now fully lapped the menu price increase taken in Pacific in March 2012, we will lose the 70 basis points in the comp going forward. In the second quarter, the loss of the menu price impact will be offset by picking up 1 extra day with Easter shifting to the first quarter this year. Taking all these factors into account and considering the still uncertain economy, we reaffirm our full-year comp guidance of flat to low single digits before the impact of any future menu price increase. Restaurant level margins decreased 110 basis points to 26.3%.
The lower margins were primarily driven by higher food costs along with higher occupancy costs. Operating margins increased by 50 basis points to 16.5%, despite the lower restaurant level margins, as G&A costs were 160 basis points lower than a year ago, which I'll talk about in more detail shortly. Diluted earnings per share for the quarter was $2.45, an increase of 24.4%. Food costs were 33% in the quarter, up 80 basis points from the first quarter of last year. Sequentially, food costs were down 50 basis points from Q4, primarily due to lower avocado and dairy costs. In terms of the year-over-year increase, food costs were higher due to inflation in our salsas and other produce, chicken, and dairy, which were partially offset by lower avocado costs.
Over the next few quarters, we expect food costs will be relatively stable and will remain at or perhaps only slightly above the 33% we saw in Q1. If we do see increases, it is likely to come from our steak and from seasonally higher avocado costs as we return to buying avocados from California this summer. In terms of a future menu price increase, we'll continue to monitor food inflation, comp transaction trends, general economic and consumer confidence trends, and the menu prices of competitors. Based on our food cost declining from Q4 and the still uncertain economic environment, any price increase we decide to take won't occur before late summer or early in the fall. Labor costs were 23.6% of sales in the quarter, a decrease of 10 basis points from last year.
Labor leverage is driven by higher sales volumes, which includes the benefit of higher menu prices and from more efficient labor management. We would normally expect labor to de-lever at just a 1% comp, but the effective comp was really more like 3% after taking into account the loss of two days in the quarter, which is in the ballpark of the mid-single-digit comp we typically need to hold our labor as a percent of sales. Occupancy costs for the quarter were 6.6% of sales, an increase of 30 basis points from last year, primarily due to the de-leveraging effect from two less trading days in the quarter. Other operating costs were 10.5% in the quarter, up 20 basis points compared to last year, driven by higher promo and slight de-levering in other restaurant-related costs. Marketing was 1.2% in the quarter or about the same as Q1 of last year.
Overall for 2013, we still expect our marketing expense to be around 1.7% of sales, with relatively higher marketing costs during the second and third quarters. G&A was 6.1% in the quarter, down 160 basis points from last year. Recall that Q1 of last year included a one-time catch-up adjustment of $5.6 million for long-term incentive performance shares that were issued in 2010. Last year's G&A also included about $3 million related to employee payroll taxes on stock option exercises. For the full year 2013, we expect non-cash stock comp to total about $66 million, or about the same as last year. This is lower than our previous guidance of $72 million-$77 million, as the calculation of the non-cash accounting charge related to stock options includes a lower volatility rate than originally estimated.
In the quarter, average restaurant volumes remained very strong at $2.1 million. We're confident that our strong unit economics can get even better as more customers discover and choose to visit Chipotle. Our new restaurants continue to open at or above our $1.5 million-$1.6 million communicated range. During the quarter, we opened 48 new restaurants compared to 32 restaurants at this time last year. Our effective tax rate was 36.3% for the quarter, which reflected the tax benefit from the Work Opportunity Tax Credit and the R&D tax credit related to 2012. In January of this year, these credits were renewed by Washington for both 2012 and 2013.
Our first quarter tax rate will be lower than the overall tax rate in 2013 because we recognize all of the 2012 tax benefit from these credits in the first quarter, which benefited earnings by about $0.10 and resulted in a Q1 tax rate of 36.3%. Each of the remaining quarters for this year will have a higher tax rate of approximately 39.1%, with the overall blended rate for the year estimated to be about 38.5%. We finished the first quarter with over $700 million in cash and cash equivalent, including short-term and long-term interest-bearing investment and no debt on our balance sheet. During the quarter, we repurchased about $51 million in our stock or 164,000 shares at an average share price of $310.
Also, during the quarter, we received an additional 21,000 shares from our accelerated share repurchase program, which ended and settled at an average share price of $287. At the end of the first quarter, we still have about $149 million left on our share buyback program, previously approved by our board of directors. We believe that investing in high-returning restaurants remains the best use of our cash, we'll continue to opportunistically repurchase our stock to enhance shareholder value. Thanks for your time today. At this time, we'd be happy to answer any questions you may have. Operator, please open the lines.
Thank you. If you'd like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. We'll take our first question from Sara Senatore with Sanford Bernstein.
You there, Sara?
Caller, your line is open. If you're on a speakerphone, please check your mute function. We'll move on to Sharon Zackfia with William Blair.
Hi. Good morning. Just curious, I think, Monty, you were talking some about the throughput. Maybe with the lunch throughput, not quite as robust as the overall comps throughout the day. Can you talk about staffing and whether or not there is some sort of logjam with the new governmental requirements you're having to go through, or how we think about labor in the stores and whether there's a step-up investment necessary to push the volumes beyond the $2.1 million per box?
Yeah. Thanks, Sharon. The answer is no, that nothing that the government is doing, none of their regulations are preventing us from getting plenty of applicants and plenty of new hires for our restaurants. The reality, though, is that all of our teams in the field have a vision of creating these restaurateur cultures, the attributes of a restaurateur culture are to have a team of all top performers who are empowered to achieve very high standards. The top performer piece of that means that they are getting better and better at being very selective in who they bring aboard on their teams. While we're getting literally hundreds and hundreds of applications for every available crew position nationwide, especially in light of our new hiring software, Taleo system, still our teams in the field are being very selective in who they bring on board.
Sometimes that can lead to them running with teams that are a little bit more lean than they would like to have because they'd rather wait to hire someone who has all of the characteristics of a terrific performer. When we look at the staffing levels of our restaurants, we're always working to elevate the staffing and always working to make sure that we have full teams. When we do that, yes, that tends to lead to us being much better at implementing these four pillars of throughput, particularly in having the expediter position available and the lineback position available in all of our restaurants. We are constantly looking at staffing. We're wanting to increase our staffing in our restaurants, but we don't want to sacrifice having terrific people in the restaurants in order to do so.
It's just a matter of all of our restaurants having a vision of staying ahead of the game on staffing, particularly as we get in these busier times of year, like the second quarter that we're in now. When we do that, we're very optimistic that we're going to continue to be able to move the throughput needle that we moved so well over the last seven quarters or so, even though this quarter was, I think, a little disappointing in terms of our ability to move the lunch throughput.
Can I ask a follow-up? What kind of ballpark figure percentage would you say is ideally staffed in Chipotle's system at this point?
When you talk about percentage, I don't really know how to put it in percentage terms in the sense that our restaurants have all sorts of different volumes. We're talking about numbers of people per restaurants. I don't really understand how I'd put it in percentage terms.
Hey, Sharon, this is Jack. We don't need to move our labor as a percentage of sales up to get the throughput gains that Monty's talking about. Oftentimes, it's we've got enough people, somebody will call out on a day, they don't show up at the lunch shift, or we've got new people and they're not ready to be an ace in their place on the front line. In terms of labor as a percentage of sales, there's no need for that percentage to go up in order for us to get the throughput gains that we know are possible.
Okay. Thank you.
Thanks, Sharon.
Thank you. We'll go next to Nicole Miller with Piper Jaffray.
Thanks. Good afternoon. Looking at the results, trying to understand the share repurchase, and how that would look for modeling purposes for the rest of the year. Can you talk to us about if in fact, you're a serial share repurchaser? Can we model it in? What would be the magnitude? Because to your point, Jack, even though you have accelerated development as well, you're still sitting with $700 million on the balance sheet.
Right. Yeah. Nicole, we've always been opportunistic, since we're still a growth company, and we still think that we've got significant opportunity over the long term to invest in some high-returning assets. We've planted growth seeds, which aren't growth strategies today, but we think will turn into growth strategies in the future. We know that the best way we can add shareholder value over time, is to invest in these very high returning assets. The share repurchase has been more of an opportunistic thing for us. While we've got the cash in the balance sheet, we've taken advantage of inflection points in our stock. When the stock has pulled back like it did last year, we got very aggressive. The stock has run up recently, and so, we're less aggressive when the stock has run up.
We don't consider ourselves to be perfect at figuring out exactly what our stock should be worth at a particular point in time. Because it moves up and down throughout the year, we get very aggressive on the way down and we get less aggressive on the way up. I would not extrapolate our purchases over the last quarter or two where we've been very aggressive. Maybe it's been the last three quarters now. I wouldn't extrapolate that and say we'll continue that, unless there's an inflection point in the stock. Based on the fact that now we've recovered, I think it's about $100 since the low point back in October. That should lead you to expect that we would be less aggressive in the buyback. Every dip that we see throughout the year, we're going to be in there buying aggressively.
Okay. Thank you.
Thanks, Nicole.
We'll go next to Jeff Farmer with Wells Fargo.
Jeff, you there?
Can you hear me?
Hey, Jeff, you there?
Yeah, can you hear me?
Yep. Now we can.
Okay, great. I apologize for that. Not quite sure what happened, Jack, I was just looking to see if you're willing to provide any additional color on the intra-quarter same-store sales trends, or how it played out as you moved through the quarter, and then as you rolled into April. Anything would be helpful.
Yeah, Jeff, in terms of during the quarter, there's not really a pattern I can share with you that would add a lot of value. I've seen a lot of other companies say that it got tougher, then it got better. Frankly, January was a better month in the quarter than we expected, and it looks like better than other companies as well. When I look at kind of the underlying take out, whether this year, whether last year, take into account that, you've got a holiday and we lost a day here and there. I think an underlying 3%, adjust the 1% back up to three is a pretty good guide of what the underlying comps was throughout the quarter. April's been a tough read as well, because the first week we were post-Easter. We always do really well post-Easter.
When we close our restaurant for a day, the very next day is a very busy day for us, and the next few days are busy as well. The first week of comp in April was a nice week for us. The second week, though, we're comparing against the week after Easter from last year, and so we're comparing against a tough week last year. When I sort through that, I don't see anything, Jeff, that tells us that there's been a change in trend, either up or down from kind of the underlying 3% that we saw in the first quarter.
Okay, helpful. Thank you.
All right. Thanks, Jeff.
We'll take our next question from John Glass with Morgan Stanley.
Thanks. First, Jack, could you just clarify your comments on the food cost outlook? 33%'s better than it was last quarter. Was this a good run rate to think about, and is it before contemplated price increases, or did you get some one-time benefits because avocados were less expensive and maybe it goes up from here?
Yeah. John, when we talked at the last quarter, food cost in the fourth quarter rose faster and to a higher level than we expected. At that point, we were thinking, "Okay, here we go." We expected additional inflation on top of that. Although we did say in the quarter that food cost peaked during the middle of the fourth quarter and then was starting to retreat a little bit. It continued to retreat, we were pleased to see that it came, instead of holding flat, which is about what we thought it might do at the 33.5, it came all the way down to 33. Now our outlook right now looks reasonably stable. Looks more stable at this 33, than it did early in the year. We do think that there's some pressure.
It doesn't seem that severe, there's some pressure with our steak. We will see seasonally higher costs for avocados. That's where we see the pressure. It seems like it's fairly benign, the increases don't seem like they're going to be too terribly significant over the next quarter or two. If that's the case, we'd like to kind of stand pat on any kind of a menu price increase with that kind of inflation. It doesn't mean the menu price increase is off the table, I think at one point we were thinking it could be kind of a mid-year price increase, we don't think we'll do anything that quickly.
It changes your timing view. Does it also change your magnitude view of pricing as well?
No, because when we do increase prices, John, we will take into account inflation. If inflation, the actual inflation and the expected inflation, is high enough to suggest or lead to a menu price increase, I think we're still in kind of the order of magnitude that we've talked about, kind of in that 3%-5% kind of range. If inflation is more benign, we'll just hold off and wait. The other key factor is to compare what our prices are like compared to our competitors. We'll want to make sure that, one, we have pricing power, which we feel like we do, and two, we don't want to be overly greedy. I think the range of the price increase would probably be similar. It's, at this point, more of a timing thing.
Okay. If you could just finally explain the G&A one more time. Is the core G&A actually still growing at the rate that it was prior? It sounds like this is a valuation change on options, not an underlying change in the number of options. Was it one time? Was it voluntary, or does this carry through to future option grants as well, if you change your volatility assumptions?
Okay. I'm going to assume you're not talking about the one-time stuff from last year. You're just talking about the fact that our stock option's going to be $66 million instead of $72 million-$75 million. Every year, John, we recalculate the accounting charge for the grant for that year. We did that this year. Volatility did move down, and it looks like it was because we do a three-and-a-half year. It's a fairly complicated calculation, but the biggest part of it is based on a three to three-and-a-half year volatility. By cutting off kind of the oldest part of that three-and-a-half year and replacing it with the last year, volatility moved down. If our volatility stays at that kind of rate, we would expect similar kind of calculations in the future. We didn't change materially the number of options that we granted. That number was about the same.
It's really just a function of the volatility. We'll do this every single year, and if volatility stays in check, I would expect some similar kind of results in the next year or two as well.
Great. Thank you.
Thanks, John.
Thank you. We'll take our next question from Jason West with Deutsche Bank.
Yes, thanks. Just a quick follow-up on that last question. There wasn't sort of a catch-up in the calculation that helped you materially in the first quarter. It's sort of a lower level throughout the year than you'd originally thought it would be?
Yeah. No, again, we're just talking about stock comp for this year, the $66 million.
Right. Sorry. Yep.
Yeah. No, there's no catch-up. We took the number of options that we granted, just like we did last year. We valued them just like we did last year. It just so happens that the valuation for each option that we granted was lower than we expected, and it was all just because of the formula. In the formula, using a lower volatility rate just resulted in a lower value.
Okay, great.
Keep in mind, this is all non-economic. It's a journal entry. It has no impact on our cash flow whatsoever.
Can you remind us how you guys target the core G&A growth, excluding options? I mean, is that still expected to be some % of sales growth, or how do you guys think about that now?
Well, our target is always to have our underlying G&A growth, not counting stock options, grow at a slower rate than sales. We've been successful in doing that pretty much every single year, as long as you take out these stock options. That would be our goal going forward. We don't want to grow our G&A or our headcount either at the sales growth rate or at a faster rate than the sales growth. We always want to grow our G&A at something less than our sales growth.
Okay. Then just the last thing on the marketing spend. I think you're lapping a pretty low level of spend in the second quarter, so I'm assuming that line's going to be under some pressure this quarter as you lap that. Then just overall, you guys talked on the last call a lot about more traffic-driven initiatives and more outdoor and things. Can you say how that's going? Is it moving the needle? Is it something that is tough to measure? If you could just talk a bit about the success rate on that incremental marketing and the changes you made there.
Yeah. Jason West, I'll start. On the marketing spend, you're absolutely right. In the Q2 of last year, we spent 0.7% of sales on marketing. This year, we'll spend quite a bit more. The fact that we think that we'll, overall for the year, spend about 1.7%, and we think we'll spend more than that in the second and third quarter. I would think in terms of something in the 2%, perhaps even more than that in the second or third quarter. You're right, there's at least 130 basis point or more incremental marketing that we'll spend in the second quarter of this year. Then I'll let Steve Ells talk about your other question about marketing.
Sure, Jason West. In regards to more traffic-driving marketing, let me just back up a little bit and say that we sort of lump our marketing into three different categories. The top-of-mind kind of advertising, which would be more traditional transaction-driving stuff, outdoor radio, print, direct mail, that kind of thing, our local marketing, and our brand marketing. In terms of our top-of-mind advertising on outdoor radio and print and so forth, we have a new campaign that we're calling Skillfully Made, it's really building on our last campaign that talked about the quality of the raw ingredients. It talked about where our ingredients come from and the importance of sustainability and things like that. The Skillfully Made campaign just started recently and will carry us through the summer and into early fall in some markets.
It really speaks to how we prepare our food in the restaurant, which we think is really unique and a differentiator. We have really great pictures and great taglines to accompany these pictures that show how we prepare food in our restaurants, they're not the typical kinds of food pictures that you would see. They're sort of close-up shots of prep, where you see cutting boards and knives and pots and pans and people making salsas, people adding herbs to salsas, people grilling chicken and sautéing fajitas vegetables. It really is sort of mouth-watering and very appealing, it has a very sort of reality kind of look to it in that it's not staged. We just took a camera into one of our restaurants and shot pictures. That's all very much traffic-driving kind of advertising.
What we're doing with our brand marketing is we're adding a traffic-driving component to that. The brand marketing includes things like our last year you saw us introduce our Back to the Start video. We have 2 more videos that we're doing, or 2 more films that we're doing this year that are in production. One is a series called "Farmed and Dangerous," it's a series that's going to come out in September. There are traffic drivers that are embedded into that include ways to redeem currency and photos, and things like that. The other video is a short, in duration similar to Back to the Start, that builds on that theme also. It also has the traffic drivers built into that. This is something different than we were doing last year.
Of course, in our local marketing, there's traffic driving in that, in that we're connecting with customers on 1 sort of way. We have 30 local marketing strategists around the country. As we build relationships with our communities through different organizations or sports teams or schools, things like this, we use, again, our marketing currency to drive traffic. Really this year, definitely an emphasis on doing things that drive traffic. Again, we're just sort of starting our top of the mind advertising, that's going to be running all the way through summer and into fall. Results to come later.
Great. Thank you.
Thank you. We'll take our next question from Michael Kelter with Goldman Sachs.
Hey, guys.
Hey, Michael.
How are you? I wanted to ask, you said the underlying run rate of same-store sales was running in the 3% range. You take out all the moving parts. That's below the rate of growth that you previously said you'd need to hold profitability levels. I guess my question is, in the absence of a price increase, if things are running at 3%, should we expect deleverage on margins for the balance of the year?
3%, food cost is going to do what food cost is going to do. 3% is a little lower, Michael, than normal. I've always talked about we need kind of more of a mid-single digit. We did add a little bit of leverage at that 3% in labor, but that could have gone the other way. We picked up 10 basis points that could have gone the other way. Normally, occupancy costs at 3% or so, we should be able to hold onto that line. You're talking about the other line items. 3% is right around where we'll either slightly delever or maybe just hold on to our margin. It'd be handy, especially if it's all transaction, if we're getting 3% and none of it's price.
That is right around where it's touch and go on whether we can hold on to our margin or whether we might delever slightly.
On a different topic, could you just talk more about your experience with catering so far? Obviously, it's doing well for you to roll it out across the system. Maybe you can give us some metrics around it at the store level.
Well, I don't think we're ready to give specific numbers, what I can say is that customers are really enjoying it. We're getting tons of positive feedback. I'll also say, which I think is very important, that our crews are successfully helping to roll this thing out. It is, I don't want to say easy, but it's relatively easy to serve our customers through catering, rather than have them come in through the line, through the regular service line. It's much more efficient. In terms of breaking down sort of detailed numbers at this point, I think, again, it's too early to do that. I can say that we are happy with the success so far, and we'll continue to roll that out. As we're in more and more markets, I think we'll be in a better position to talk about how that's affecting the economics.
One last one. As I understand it, you're experimenting more with breakfast hours. I guess I'm curious, two questions on that. One, is it just expanded hours, or are you considering some breakfast-specific items at this point? Secondly, where you have expanded to breakfast hours, what has that done? Are those hours productive hours for you before 11 o'clock?
Let me talk about breakfast specifically. We only have 2 restaurants that we open up at sort of a traditional breakfast time. They're both in airports, one at Dulles Airport. There we're serving our regular menu. At the Baltimore Airport, where we serve a breakfast menu, which includes a new item that we have, which is actually really delicious. It's called frittatas. We have 2 varieties of frittatas, a chorizo frittata and a vegetable-based frittata. That's very popular and gaining more popularity as we continue to serve it. Those are the only 2 places
Really that I would consider us having breakfast. We do open our restaurants earlier in areas where there is demand. I don't know if that's what you're referring to when you say more breakfast hours. Our restaurant managers watch carefully the traffic and the activity in their particular neighborhoods, and we can open up as early as 10 o'clock. I'm not sure if we open up much earlier than that. If there is demand in those areas, they certainly do take advantage of that and open up. That's in a number of restaurants in all of our markets.
Thank you very much.
Thanks, Michael.
We'll take our next question from John Ivankoe with J.P. Morgan.
Good afternoon. Thanks, guys. This is [Amode] filling in. The first question was on new unit volumes, and kind of the trend over the next few years. 2012, you obviously had some difficult laps, I think, from the 2011 portfolio. Can you talk a little bit about some of the puts and takes? I think, Monty, in the prepared comments, you remarked about considering more mall units. Also considering more A-models and new construction versus remodel construction. What are some of the kind of puts and takes behind the new unit volume trend?
Well, as we said, we opened 48 restaurants during the first quarter. We're confident in the real estate pipeline that's coming for the rest of the year. In terms of your question about the mall locations, we've only opened a few of the mall locations so far, what we're really pleased about is that the investment cost of those locations tends to be substantially below what a traditional Chipotle cost to open. The volumes of those restaurants tends to be at or above what a traditional location brings in. The unit economics of those mall locations is really, really good.
That has given us the confidence to look more aggressively towards mall locations, where we can open them in a way that is really good for our trade dress, really good for our brand, and where we can have the confidence that with a relatively low investment, we can get a really nice return. You'll be seeing us do a substantial number more of those during 2013, which will increase our portfolio of mall locations quite a lot during this year over the handful that we've done historically. Other than that, our real estate portfolio is sort of very similar in terms of the types of locations we're going into, with mostly end-cap locations with a decent mix of free standers as well, then storefront locations. A few inline locations. That balance has stayed relatively similar.
We have also seen the amount of restaurants that we're putting into new centers increase as more money becomes available for developers to build those sites. It's kind of the pendulum is swinging back towards the way it was several years ago, when the vast majority of our restaurants, something like 70% of our restaurants, were being built in new developments, new structures. For a time, especially during the recession, the pendulum swung such that we were building most of our restaurants in remodeled locations. Despite the fact that more of these new centers might be coming online, and I think I said during my comments, it might be as much as 40% for our 2013 portfolio. Despite that fact, we are very optimistic and aggressive about what we can do with the continued focus on our A-model strategy.
We are going to be continuing to bring emphasis to really looking for these locations that may have been less attractive to us in the past because of being off the beaten path or having less demographic certainty, and looking to open those as A-models because our experience in doing so has shown us that we can derive very favorable returns on investment by going into those locations. That's something that will be a continued focus for us. Really, I think it's all very positive.
Our new store unit productivity has been really terrific, and it's been terrific despite the fact that we've opened up our willingness to experiment with different types of locations quite a bit more with those few airport locations, with a few mall locations, with a lot of A-model locations, and continuing to pursue the traditional Chipotles, either in new construction or in remodeled locations. That's why we're bullish and why I suggested that we'd probably succeed in being towards the top end of our guidance of 165 to 180 restaurants this year, and with hopefully very favorable returns.
Okay. That's very helpful. Just on a different tack, could you talk a little bit about the learnings from Farm Team and whether or not some sort of revamp or increased emphasis on loyalty should be expected at some point this year?
I think that we're going to maintain our position that doing a sort of a traditional loyalty program as one would expect, it looks like sort of a buy nine, get one free or however it is they work, is probably not the way we think about building loyalty. If I think about the best way to build loyalty, it's not through perhaps a specific program, but by doing what we do really, really well. We score very high when we do research and interview our customers relative to our competition because of the kind of experience that we provide, and it's really based on the sourcing of great food
Preparing it in front of customers and served by an empowered team of top performers. When I think about loyalty, that's probably the most important thing that we can do. Farm Team was a way to engage our customers and bring them in and teach them more about how we source our food. This loyalty program somehow got attached to that, and I'll take responsibility for it. It was not meant to be a traditional loyalty program, though. Again, what we do really, really well in our restaurants builds great loyalty, and I think we're going to continue over the years to build on that by providing people with the very best sustainably raised foods, and served by a team of top performers that they won't be able to find anywhere else in any other kind of fast food environment.
Thanks, guys.
We'll go next to Nick Setyan with Wedbush Securities.
Yeah, hi. Thanks for taking my question.
Yeah. Hey, Nick.
Just to kind of look outside the U.S., your international business, and just look at ShopHouse. It does seem like you guys are accelerating the pace of development there. How can we think about the contribution there in terms of the unit growth going forward? When should we think about it becoming a more meaningful contributor? Maybe you can talk about the kind of economics you're seeing in the different geographies internationally as well.
Yeah, Nick, we don't really have a projection or a forecast to tell you that, okay, next year or the year after or so it's going to contribute meaningfully to our unit growth or to our growth overall. Right now, our focus is on building the team, building customer awareness, allowing people to discover what's special about Chipotle, making sure the Chipotle brand really comes through in a special way, the way it does in the U.S. So far that's going well. We're going to be very patient before we turn the dial, and when you say, "Looks like we're accelerating," we don't think about that we're accelerating at all. We think about it in terms of we're still planting seeds. ShopHouse has one restaurant. We're planting a few more seeds.
Sure, we're going from one restaurant to four, that might seem like that's going really, really fast, to us, it's still planting seeds. It's another seed in a different trade area in D.C., it's planting a couple seeds and introducing the ShopHouse brand to new customers in the L.A. area. That's, again, just building customer awareness, allowing people to discover ShopHouse. Customers that have been to ShopHouse in D.C. so far love it. The people that have come to our Cultivate events, where we've had some sampling of ShopHouse food, they like it as well. We're really pleased with the response so far, we're still in this very early stage, not a growth strategy.
When it's time where we think that it's time to ramp it up, meaning we feel like the teams are ready, the customer acceptance is ready, the awareness is ready, we will then provide that kind of a forecast with you. That's not a near-term horizon right now. I'd say the same thing for the international development as well. It's a lot of seed planting, it's a lot of introducing the brand and building the teams, not growth mode for the foreseeable future.
Thank you.
Thanks, Nick.
We'll go next to Matthew DiFrisco with Lazard Capital Markets.
Thank you very much. One of the things that I noticed with the catering was, in a two of the markets that we've tried it at, you've done some things, sort of a bounce back, helping incentivizing people to bring back the Sterno and bring back some of the materials by giving a free burrito. Is there a sort of a let's wow them first and worry about cost later approach, or are the margins pretty strong already on the catering business as far as looking at it as an executable, not just leveraging the cost of the store, but looking at it as the amount of labor that you put into it and the equipment cost? I know some other peers, maybe the casual dining guys, had problems before with takeout, with the packaging being a little bit unwieldy and expensive.
I'm just curious on what your learnings have been early on so far on the cost side of it.
Sure. Well, there's no question that there's a cost associated with the setup for catering. The catering labor wise is much more efficient. We would rather serve 30 people through catering rather than bringing them through the line. It's very, very easy, it's very, very fast, and it does not take the same amount of labor by a long shot. The desire to have people bring back some of the catering equipment, setup stuff, by offering them a burrito really wasn't driven by economics so much as we don't want to waste. We don't want to throw these things into the landfill. It's just a part of being a more green company, I suppose. Additionally, anything that we can do to bring customers back into our restaurants, I think helps.
We think that perhaps there's an opportunity again to just bring people back who might not be a regular Chipotle customer, but who might have tried catering to bring them in for an in-store experience.
Great. I also thought the reusable bags obviously were pretty strong. I thought that was appealing that you're not using a lot of waste. I appreciate it as well. Looking at it as far as structurally, is there anything that would inhibit you from or preclude you from looking longer term maybe to do delivery? Or are you thinking right now you like the person coming into the store and having that connection with them rather than delivery?
I don't know if it's so much a connection, but I think about it perhaps this way. When we offer catering, and I'll make this up, let's say that eight out of 10 people will sign up for your catering, and maybe there's only two people who would not use it because we don't deliver. However, if we started out by delivering, maybe eight people would take the delivery option, and then you've added all that expense. I think as we're introducing this, it's a much better economic model, to have people come in, and then, at a later time, it could be years down the road when we want to build a catering business even more, then there's a delivery option. The expense of delivering, I think, is not something that makes sense at this point.
There are plenty of people who will stop in to pick up their catering order.
Understood. Thank you. Can I ask another question to Jack about pricing if I can?
Sure.
Jack, you said in the past about pricing roughly, I don't think you don't like sort of taking baby steps. You sort of like to get it done with and then move on. I guess the number sort of thrown out there in the past was a little north of 3% would be something if you were to take price. Given the current environment where COGS have come down a little bit now, a little bit more favorable maybe than the last time you guys have spoken, is your strategy still to sort of take that meaningful sort of price increase, but maybe take it later in the year now, or have that option to take it rather than take something but take a less of a price increase?
Yeah, I think you said it well when you said, it's an option. Right now, taking a price increase is always an option, and leaving it as an option, meaning, don't pull the trigger, and that's why, in my prepared comments, I said, if we do anything, it won't be before late summer or early fall. The fact that inflation has stabilized a bit, the fact that our food cost actually improved in the quarter, the fact that the economy is sending mixed signals again. It seems like the economy's off to a great start, every time about this time every year for the last few years in the spring, we get mixed signals on consumer confidence and job creation and things like that.
I think the idea of being patient and let some time pass and let's see what happens with inflation over the next few months. Let's see what happens with our transaction trends. Let's see what happens with consumer confidence in the economy. When we do an increase, I still think we'd like to do kind of one increase and not multiple per year. We don't want to keep nickeling and diming people. I think in terms of the order of magnitude, this isn't a decision that we've made. I think somewhere in that 3%-5% that I mentioned earlier is probably the order of magnitude considering inflation and considering what would be a fair increase, considering what our competitors are charging. Nothing imminent, nothing this summer.
We'll keep an eye on it and the earliest we would do something would be late summer or early fall.
Excellent. Thank you.
Okay, thanks.
We'll go next to David Tarantino with Robert W. Baird.
Hi, good afternoon. Just a couple of quick ones. I guess first on the quarter and the comps in the quarter. Jack, I think you talked about an underlying trend of 3%, but you didn't really talk much about the weather impact in the quarter. I was wondering if you took a stab at maybe quantifying what the year-over-year impact of the weather might have been during Q1.
Yeah. David, I can't tell, to be honest. It looks like we probably got a weather benefit in January. Not that January was a great month, but it wasn't a super bad winter, and I think the winter before may have been a little bit more extreme, and then I think that went against us in February because February last year was really, really mild. I don't see that weather stands out as a significant negative, even though it was a tough comparison. I guess when we look at what our trends are in the second quarter, I might have a better idea depending on what the second quarter ends up being.
Right now, it feels like, David, that weather bounced around a lot during the quarter, but I don't know that it had a net impact that we could point to and say for sure, "Here's what the impact was.
Okay, thanks. Maybe one more quick one on the pricing and the cost relationship there. I guess I'm just wondering what your overall philosophy is on managing the cost line. If I look at the 33% that you're running on the food cost line, that would be the highest level you've seen in 10 years. I'm just wondering if that's a level that you find acceptable or is that something you'd like to see managed lower over time? I guess I'm just trying to figure out how you're thinking about that longer term.
David, 33% is a little on the high side. I think we've had quarters at higher numbers than that. Maybe you're talking about for the whole year. We've had it at or in the ballpark of a 34% or so. We think our model works better when it's more like in the 32% range. Of course, it's even better still at 31% or lower. This is more on the high side. It's not that we're thinking, "Oh, 33% is perfect, and we're just going to never increase prices as long as we're at 33%," but it's more of a it stabilized, and let's see what the next chapter of inflation is. Our margins are still extraordinarily high. Our returns are still extraordinarily high. We do think we've got pricing power. We think that we are priced at or below our competitors.
We think we have the ability, or we should be able to charge higher prices because of our food integrity, the higher cost of our ingredients. I'd like it to be lower than 33%. We're just not going to be in a hurry to push it lower right now.
Great. That's helpful. Thank you.
Okay. Thanks, David.
Due to time restraints, this concludes our question and answer session. I'd like to turn the conference over to Mr. Alex Spong for any additional or closing remarks.
Great. Thanks, everyone, for joining us. We look forward to speaking with you again.