Earnings Call: Q4 2010

Feb 10, 2011

Good afternoon, and welcome to the Chipotle Mexican Grill 4th Quarter 2010 Earnings Conference Call. As a reminder, this conference is being recorded. Thank you. I would now like to introduce Chipotle's Director of Investor Relations, Kate Geehaw. You may now begin your conference. Thanks, Carla. Hello, everyone, and welcome to our call today. By now, you should have access to our earnings announcement released this afternoon for the Q4 and full year 2010. It may also be found on our website at chipotle.com in the Investor Relations section. Before we begin our presentation, I'll remind everyone that parts of our discussion today will include forward looking statements within the meaning of the securities laws. These forward looking statements will include projections of the number of restaurants we intend to open, restaurant development costs, comp restaurant sales increases, food cost trends, stock comp expense and effective tax rates as well as other statements of our expectations and plans. These forward looking 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 10 Qs for a discussion of these risks. I want to remind everyone that we have adopted a self imposed quiet period, restricting communications with investors during sensitive periods. This quiet period begins on the 1st day of the last month of each fiscal quarter and continues until the next earnings conference call. For the Q1, it will begin March 1 and continue until our Q1 release in April. On the call with us today are Steve Als, Founder, Chairman and Co Chief Executive Officer Manthi Moran, Co Chief Executive Officer and Jack Hartung, Chief Financial Officer. And with that, I'll now turn the call over to Steve. Thanks, Kate. We believe that our performance continues to be driven by our focus on doing just a few things, but doing them better than others. Among the areas where we continue to focus our attention are on building a people culture that is based on recognizing, empowering and rewarding our top performing people and our quest to serve the best tasting food made from ingredients from more sustainable sources and prepared using classic cooking methods. These two elements of our business are the cornerstones of our efforts to change the way people think about and eat fast food. Since we first started serving naturally raised meat more than a decade ago, we have made considerable progress in our effort to find better, more sustainable sources of all the ingredients that we use. In 2010, we used more than 70 £5,000,000 of naturally raised meat, meat from animals that are raised in a humane way, never given antibiotics or added hormones and fed a pure vegetarian diet with no animal byproducts. This year, we expect to use £100,000,000 of naturally raised meat. We are also making progress on our efforts to source organically grown produce. Right now, about 40% of all the beans are organically grown, as is over 75% of our cilantro and we continue making progress with this as well. This year, we will also buy beans that are grown in a very special way, a way in which that reduces the negative impact on soil and soil erosion, helping to preserve this soil conditions, reduces erosion and helps preserve the environment in which they are grown. As we start to develop relationships with these farmers, we expect that about 5% of our beans will be grown using this method this year. We believe it is important for dairy cows to have access to pasture rather than spending much of their time in confinement as most dairy cattle do. In the Q4 of 2010, 76% of our cheese was made from milk from cows that were given regular access to pasture. While we have been using sour cream and cheese that are made with milk from cows that are not treated with synthetic growth hormone RGBH, in 2011, Chipotle will be serving 100% pasture raised cheese by year end, all of which is made from milk from cows that have daily access to pasture, and we will also be working towards serving 100% pasture raised sour cream as additional supply becomes available. Since beginning our efforts to serve locally grown produce in 2007, we are making great progress here too. In 2010, we raised the bar on our local program by buying produce from farms within 3 50 miles of our restaurants. Even with this more rigorous standard, we were able to serve more than over £9,000,000 of locally grown produce in 20 10, exceeding our goal of locally grown produce in 20.10, exceeding our goal of £5,000,000 and achieving a threefold increase over the prior year. And we look to serve even more locally produce grown produce in 20 11. We are looking at every ingredient we use with an eye toward getting them from better, more sustainable sources, but we are also working harder to educate our customers about why we think this is so important to us. We believe that the more our customers understand this, the more it will deepen their trust in Chipotle. In 2010, we realigned most of our marketing to speak to food with integrity and help our customers understand the decisions we make about the food we serve and the reasons we make those decisions. Our research has shown that these efforts were effective in associating Chipotle with food with integrity. In particular, we saw significant numbers using ingredients from animals that are never given artificial hormones, using organic ingredients and serving ingredients from local farms. In 2011, we will continue to focus our marketing on differentiating Chipotle based on our commitment to serving food with integrity, but we will include specific programs to educate our very best customers in order to make them informed evangelists. This year's marketing programs will include traditional advertising, including outdoor radio and print, increased in store communications about rewarding visits as most loyalty programs do, increased social media programs to educate people about food with integrity and our 1st coordinated national event based on food with integrity. With the U. S. Chipotle business healthier than ever and the people in place to make sure that it stays that way, it allows us to consider potential new growth opportunities for the future without distracting the core business. In 2010, we opened our 1st European location in London. We also opened our 2nd Toronto restaurant. We have been able to open these restaurants with very little overhead and a tremendous amount of confidence because they're being opened and operated by restaurant tours. They are introducing the Chipotle brand in these new markets, building teams to provide the leaders that we will need to expand, developing relationships with local suppliers and providing exceptional customer in these markets that we are looking for additional locations. In fact, we plan to open our first restaurant in Paris later this year and are looking for additional locations in London as well. We are also looking to test how the Chipotle model will work with other cuisines. I have always believed that our model, using sustainably raised food, cooked according to class cooking techniques in an open kitchen, served in an interactive format so that customers get what they want not only for taste, but for diet too and all wrapped up in an environment that says something about the food. This model can work with other kinds of cuisine as well. And our plan to open an Asian restaurant this year is a chance to prove this theory. And like our expansion into Canada and Europe, we will open this new restaurant with 1 of our restaurant tours as we look to build this concept with the same people culture that we have used at Chipotle. We believe that our continued focus on a few things that really drive our business, combined with our efforts to test future growth opportunities, call over to Monty. Thank you, Steve. 2010 was a special year for us. We're proud of the financial results we achieved for experience and to become our future leaders. Nothing is more gratifying than seeing people who are fulfilled, happy and excited working in our restaurants. And it really makes me happy that more and more of our people are feeling this way each year at Chipotle because I know our customers will be treated to a terrific experience when our restaurant crew and managers are happy and excited about their future with us. I never get tired of working to build a culture here, which is all about recognizing and developing high performers. It's exciting to see that as our people grow, it will dramatically improve every aspect of our business. Each year, we provide better service, cleaner restaurants, higher sales and better tasting food. And as our business grows and improves, it allows us to build more restaurants and to provide more and more opportunities for our people. I have said many times that we are developing the future leaders of the company from within the ranks of our crew. While this is happening now more than ever before and it's very inspiring. More and more of our leadership positions are being filled by people who started with Chipotle as crew. So, what used to be our dream is now a reality, as every day we have more high performers in roles where they have greater and greater impact on our business and on the restaurant experience we provide our customers. Our culture is personified best by our restaurant tours, our most elite managers who have demonstrated the ability to run great restaurants and to develop people from within the ranks of their crew to become managers. Steve and I promoted 72 managers to Restauranteur during the year after interviewing these excellent candidates and their crews throughout the country. As you may remember, our Restaurateurs are paid bonuses for each crew person that they develop into a General 5 years later, 2010, we finished the year with 181 restaurant tours and paid them bonuses for developing managers totaling nearly $1,000,000 Today, these restaurant tours, along with restaurant tours who have been promoted into mid management positions, are overseeing more than half of our restaurants. And because all of our managers are working hard to become restauranteurs, this program is improving the quality of all of our restaurant operations. Chipotle as crew and after reaching the restauranteur position are empowered by expanding their proven leadership through multi unit or regional leadership positions. Once a manager becomes a restaurant tour, they may be asked to mentor an additional restaurant. And if they're able to build a special culture in that additional restaurant, they might oversee a third and then perhaps even a 4th restaurant. And if they can do that effectively and develop another restaurant during their patch of 4, they are then able to become an apprentice team leader. This is a very elite position and we're pleased to say that while we started 2010 with not a single apprentice team leader, we now have 15 of them throughout the country with the promise of many more to come this year. Nearly all of these apprentice team leaders come from CRU and they are excellent at developing restaurant tours and creating great restaurant experiences. We've even promoted 2 of our former restaurant tours, Leslie Rittel and Saul Flores strategy is paying off and that we are developing the kind of culture that will set us up for a bright future, not just at the restaurant level, but also at the mid management and senior management levels as well. All of this gives me confidence that we are developing stronger future leaders than ever before. And it's reassuring to know that we build our next 1,000 restaurants and as we begin to enter more locations and markets outside the U. S, that we have many talented emerging leaders who will be ready to provide a great Chipotle dining experience to each and every customer in every new restaurant we open. It's also clear to me that our special people culture provides many more than developing our future leaders as critically important as that is. Our top performing managers allow us to own and operate our own restaurants without having to resort to franchising. What this means is that Chipotle retains the financial rewards of running our own restaurants, which allows us to invest confidently in our future growth and also provide huge career opportunities for the top performers among our teams. Also, our restaurant tours and the managers who are working to become restaurant tours run better restaurants, prepare and cook better food and provide better customer service, all of which result in better customer loyalty and higher sales. Our top performers also run more efficient businesses, including lower labor costs than most other restaurants, even though we do so much prep and cooking from scratch in our restaurants, because these ambitious top performers simply get more done with fewer resources. And empowered top performing managers need less supervision, which means our mid management ratios have increased from 1 mid manager or area manager overseeing 6 restaurants 6 years ago, before we began the restaurant tour program to about 14 restaurants permit manager today. So this has contributed to our G and A efficiencies each and every year. While our restaurant teams have been busy hiring and developing our future leaders, our development team has been doing a great job finding great new restaurant sites these future leaders to operate. Our development pipeline is the strongest that it's ever been, in part because our successful A Model strategy. We opened 36 A Models last year, all of them in proven markets, which generated sales nearly as high as our traditional openings. But with a much lower investment cost is under $700,000 and lower occupancy and operating costs, the return potential of our A Models is much higher. With the early success of A Model, we're pleased to be able to expect an increase in our openings from 120 to 130 the past 2 years to a range of 135 to 145 in 2011. Roughly a third of our openings will be A Models in 2011, and we will even begin to open some of these A Models in developing markets. The developing markets typically open with lower average volumes and build over time, the lower investment and operating cost of the A Model should produce better financial results than our traditional openings in developing markets. As a reminder, customers visiting an A Model restaurant will not notice a difference. They'll be treated the same dining experience and the same great service and same menu as they would enjoy in any other Chipotle. Before I turn the call over to Jack, I want to briefly address some of the press coverage you may have seen recently about an immigration inspection in Minnesota. There's not a lot to share with you about the inspection. What I can tell you is that despite our extensive efforts throughout the country and in Minnesota to scrutinize employees documents and properly complete all I9s for all new employees, and We had to hire hundreds of new employees and we are in the process of training these new employees to provide a great Chipotle experience to our customers in Minnesota. We also received a similar notice of inspection for our restaurants in Virginia and Washington DC and we are in full cooperation with ICE officials there. This has not been an easy process for anyone involved, but we're navigating our way through it and we're learning as much as we can so that we can avoid this sort of disruption in the future. I'll now turn the call over to Jack. Thanks, Bonnie. We're extremely proud of the results that our restaurant teams delivered during the Q4 and for the entire year of 2010. While achieving these strong results is quite an accomplishment, what's more important is that our food culture, our people culture and our business model are all the strongest they have ever been. Our economic model has emerged from recession with the highest average restaurant sales, the highest restaurant margins and the highest cash on cash returns we've ever enjoyed. And we'll continue to focus on and invest in further strengthening our food culture, our people culture and our economic model as we continue toward our vision to change the way people think about and eat fast food. Sales for the 4th quarter increased 24.5 percent to 482 was percent to $1,840,000,000 which again was driven by new restaurant openings and increased comp growth of 9.4%. Our comps held up well throughout the 4th quarter, but have been pretty volatile so far in 2011 with extreme weather throughout much of the country. While we believe the underlying transaction trends are healthy, we do compare against progressively tougher comps each quarter and therefore we reiterate our guidance of low single digit comps for the full year of 2011. Our average restaurant sales increased to $1,840,000 for the 12 months ended December 31, 2010. The strength of our comps and our new restaurants entering the base at higher levels has helped drive the increase. Our new restaurants have historically opened between $1,350,000 $1,400,000 and most recently have been opening at or above the top end of that range. Diluted earnings per share for the quarter was $1.47 an increase of 40 8.5% from prior year. EPS in the quarter benefited by $0.03 as a result of a non recurring catch up adjustment for state unemployment tax refunds and a FICA tax credit related to the HIRE Act during the quarter. EPS was $5.64 for the full year of 2010, an increase of 42.8% from the prior year. Efficiencies from higher comps, which were partially offset by higher food costs, drove restaurant level margins to 25.9 percent for the quarter, an increase of 100 40 basis points. That includes the 30 basis points attributable to a non recurring benefit on our labor line from state unemployment tax refunds and the FICA tax spread as I mentioned earlier. For the year, restaurant level margins increased 180 basis points to 26.7 percent, largely driven by efficiencies related to the comp growth. These margins far surpassed the record level margins we delivered in 2,009 and are directly the result of efficient business. Food costs were 31% during the quarter, which was up 90 basis points from last year and up 40 basis points versus the 3rd quarter. Prices for avocados, beef and cheese were higher in the quarter, which were partially offset by expect continued inflationary pressure on many of our ingredients, especially chicken, beef and avocados during the year. Though we have contracted for most of our corn for our salsa for the year, reports of a continuing or even worsening supply shortages of corn will only add to inflationary pressure on the meats that we serve. Using the 4th quarter food costs of 31% as a starting point, we anticipate additional overall food cost inflation will likely climb to the mid single digits during the year. In addition to the growing underlying food inflation, we're in the process of sorting through pack of recent freezes in Mexico and Florida, where our tomatoes, green peppers and tomatillos are currently grown. The cost of these items has surged 3 fold as a result of severe crop loss, which if we remain fully supplied would increase our food cost by over 200 basis points. Over the next few until the Florida harvest season resumes normal production, we will evaluate the quality and quantity of tomatoes, green peppers and tomatillos available and make sure we only serve high quality produce that our customers have come to expect from Chipotle. And during this time, we may experience shortages or surging food costs or both. So it's obvious that food inflation is real and it appears we'll get worse before it gets better. But what's not obvious is the exact timing and magnitude of inflation on the items we serve, how much is sustainable versus driven by temporary conditions such as weather, and perhaps most importantly, what's the appetite our customers have to absorb these higher costs. While we continue to believe we have as much if not more pricing power than other restaurants, we plan to hold off any menu pricing decisions until later in the year, which will allow us to see how inflation plays out on a sustained basis and allow us to see how consumers react to price increases from other restaurants and grocers. Labor costs decreased 90 basis points to 24.8% in the quarter and 70 basis points to 24.7% for the year. The decrease for the quarter and the year was a result of labor leverage driven by the comp increase along with the 30 basis points in the quarter of non recurring benefit mentioned previously. Occupancy costs decreased 80 basis points in the quarter to 7%. For the year, occupancy costs were 7 percent, a 50 basis point decrease from the prior year. The decrease for the quarter and the year was mostly driven by leverage from higher average restaurant sales. Other operating costs were 11 0.2% for the quarter, a decrease of 70 basis points, driven by comp growth and reduced promotional expenses due to a change in how our BooRito Halloween promotion was run. Historically, all customers who came into our restaurants dressed as a burrito or really anything close to a burrito on Halloween received a free burrito. This year, customers who came in as a horrifying processed food item received their burrito for $2 with the proceeds benefiting the Jamie Oliver Food Revolution. The lower promo cost in the quarter contributed to about half of the seventy basis point benefit. Marketing was 1.1% for the quarter and 1.4% for the year, both of which were relatively flat compared to the prior year. We anticipate our marketing spend will return back to historical levels around 1.75 percent of sales during 2011. For the year, other operating expenses were 11.1%, which was 40 basis points lower than the prior year. And similar to the quarter, the decrease was driven by comp growth and a decreased promotional expense, partially offset by higher credit card fees. G and A was down 50 basis points for the quarter to 6% and the decrease was driven primarily by the higher growth. Though G and A included an additional $1,000,000 charge for the BooRito charitable contribution to Jamie Oliver's Food Revolution, it was more than offset by a reduced stock based compensation expense related to performance shares, which vested late in Q3. For the year, G and A was 6 point 5% of sales, which is flat to last year. The leverage resulting from the increased comp growth was offset by the impact of higher stock based comp, the biannual all manager meeting and hiring more employees. We anticipate non cash stock compensation to be around $40,000,000 in 20.11, which is almost $18,000,000 higher than 20.10. Though stock options are not granted until later this month, this expected higher non cash charge is directly attributed to the issuance of a similar number of options at a much higher stock price. Our effective tax rate for 20.10 was 38.1% and the 20 11 estimated annual effective rate is expected to slightly higher at 38.3%. We plan on opening between 135 145 new restaurants in 2011 with about 30 percent being A Models. Most of the A Models in 2011 will open in proven markets, but we will explore opening a few A Models in developing markets. Our openings similar to past years be weighed more heavily towards the second half of the year. Our inventory is strong. However, we will likely open only about half of the restaurants in the Q1 this year compared to the Q1 of last year, but we will catch up in the Q2. Our development costs came in around $795,000 for 20.10, which is the lowest average development cost we've had since before we became a public company over 5 years ago. The lower cost of A models, which continue to cost under $700,000 along with our more efficient new restaurant design combined with better negotiating leverage due to the economy have allowed us to reduce our investment costs over the past few years. As we continue to open A Model restaurants and incorporate the new design elements in all of our new restaurant openings, we anticipate our development costs to remain consistent or perhaps slightly below 795 $1,000 in 2011. With our lower investment costs combined with higher opening sales, higher margins and a better more efficient design, our new restaurants are the best they have ever been in every way. For the year, we expect total CapEx costs to be around $130,000,000 to $135,000,000 primarily related to new restaurants along with continued reinvestment in existing restaurants. As a quick update on the status of our current $100,000,000 stock repurchase through today, we've repurchased around $38,000,000 worth of stock at an average price of about $176 per share. During 2010, we generated cash flow from operating activities of $289,000,000 We invested $113,000,000 in capital expenditures mostly for new restaurants. We repurchased $126,000,000 of our stock and we still were able to add $80,000,000 to our cash reserves. We continue to believe that investing in high returning restaurants remains the best use of our cash. However, we will continue to opportunistically repurchase our stock enhance shareholder value. Before I conclude, I want to share with you how we think about our business and in particular our margins over both the long term and the short term. We tend to think about and plan our business strategies with a very long horizon knowing we have thousands more restaurants to open in the U. S, not to mention our potential outside the U. S. And our opportunity with other restaurant concepts following the Chipotle model as Steve discussed. Our success so far and our success going forward is largely built on creating customer loyalty by serving great tasting food, made with high quality ingredients, raised with respect for the environment and the health of our customers, prepared and served by ambitious energetic high performing crew and managers. And a dining experience our customers have become loyal to must be wrapped in a a business model, which allows us to generate attractive returns, while remaining affordable or easily accessible to our customers. And so far, we've achieved a great balance of remaining affordable, generating industry leading margins and returns, while continuing to invest in higher quality premium priced ingredients. We know our approach has the potential to add significant shareholder value for a very long time. While in the short term, we face challenges to our model, including growing commodity inflation, inefficiencies related to retraining hundreds of new employees in Minnesota, as well as severe winter weather across most of the country, longer term, we believe our margins and our returns are largely sustainable. Inflation in particular could be at least partly, if not wholly offset by immediately raising prices. But we worked hard to regain the strong transaction comp momentum and with tougher comparisons ahead of us as we progress throughout the year, we're not in a hurry to risk interrupting those trends by raising prices on what might be a fragile consumer. In addition, while difficult to predict with certainty, we expect commodity inflation will steadily increase our food costs during each of the next 2 or 3 quarters. So rather than strike preemptively by raising prices now, we plan to hold tight on our menu pricing till the second half of the year, both to allow our transaction to hold as strong as possible and to allow us to fully see the timing and magnitude of sustained inflation, even though this means our margins will be pressured over the next few quarters. Longer term, assuming we possess the pricing power with our customers we think we do, we continue to believe our margins and returns are sustainable. Thanks for your time today. And at this time, we'd be happy to answer any questions you may have. Operator, please open the lines. And we'll take our first question from John Glass with Morgan Stanley. First on the labor issue in Minnesota, is there anything that would be different about the way you hire document workers in that state versus other states? And maybe if you can talk about why wouldn't this become a system wide issue for you? And are you just going to proactively address that preemptively? And Jack, can you quantify when you talk about hiring and retraining workers what the is there a way to look at it on a per restaurant or per person basis that cost? Yes. John, with regard to labor in Minnesota, everywhere in the country, we have always taken immigration compliance very seriously. We have made significant investments of time, energy and money for many, many years. We have a very strict policy against hiring anyone who's not authorized to work in the United States. We have extensive training of our general managers and our HR professionals to review documents, to detect forgeries and to properly complete the I-nine forms. We have an anonymous call line, we have a full time lawyer who is Director of Compliance, we have a guidebook that we provide to all the managers after the training and the training is ongoing, so that they're always updated. So, we've always taken this stuff very, very seriously. It's we're certainly based on what happened in Minnesota going to work to make our programs even better and learn what we can from it, including implementing a paperless I-nine system to reject I-nine which are not properly completed and use the Minnesota situation to get better. But again, this is a new situation for us to find out that there were a significant number of undocumented workers in Minnesota and we're working with ICE and with a number of experts and professionals to make sure that the disruption that occurred there is not something that takes place in the future for Chipotle. And then, John, on the labor piece, we're still working on that. We're still training. I can tell you there's lots of extra people in a restaurant, kind of like a new store. It feels like we have a lot of new employees like we would in a new store. And in most of our restaurants, that means we may have as many as 20% to 30 percent more crew hours or more hours in total in those restaurants. So, it's pretty significant training effort going on in Minnesota itself. Across the country, that ends up being maybe an extra 20, 30 basis points or so of extra cost. And if we again use new stores as a guide, that's likely to level off over a couple a few month period. And John, I might add, I was this is Steve. I was in Minneapolis on Tuesday Thursday of this week, visiting a number of restaurants. And while this situation has been very difficult on the team out there, I will report that they have hired a really great new team. And as Jack said, it does feel like the feeling you would get in a new Chipotle. And the quality of the surface ramps up very quickly over the few weeks since they get together to provide what most customers are accustomed to as the typical Chipotle experience. So I was very pleased with the hard work and the results of hiring the new teams out there. They've done an exceptional job and it really shouldn't be a surprise, I guess, to us their ability to hire such high performing new crews because over the past few years, our culture of developing the highest performers and identifying those kinds of people who are high performers has gotten much, much better. So I was quite pleased with the results of their very, very hard work and want to congratulate them. If I could just ask one more, Jack, you've talked about a 31% food cost the 4th quarter as being a starting point. Were you inferring that you could see it go up by a couple of 100 basis points in the first half before it starts to settle in or before you take pricing? Is that what you were thinking? Well, I don't know about there's a couple of things that I was talking about, John. One, there's kind of underlying inflation that we're all seeing, we've all seen over the last several months. And it seems like, if anything, it's heating up, not cooling down. That feels like from the 31% that there is the likelihood that that's going to step up over the next few quarters to something in mid single digit kind of inflation. And then in addition to that, we've got this weather related, which we hope is a temporary situation, a couple of months situation, where if we can remain fully supplied with tomatoes, with tomatillos and green peppers, the prices of those have tripled and that could add 200 basis points all by itself. But that is something that we view as something more temporary and that we hope will last for a few months and then kind of level off. But underneath all that, John, we do see kind of that mid single digit inflation on top of the 31. We see that kind of stepping into our food costs over the next 2, 3 quarters. And from a pricing standpoint, yes, we'd like to see that play out. We'd like to see does the weather affect on the items that I just mentioned, does that play out and kind of return to normal? Does the underlying inflation on our meats does the impact of corn have kind of that mid single digit level? And then after we get a sense for all that, that's when we're going to take a price increase and it's likely in the second half of the year. Thank you. Thanks, John. And now we'll hear from Michael Kelter with Goldman Sachs. Yes. Just following on this part of the conversation, maybe you could help. You mentioned you're locked on addition, Michael, we're not able to lock that much. In addition to corn, we did lock most of our beans. We locked our tortillas for most of the year. We locked some of our aluminum needs for the year. But the vast majority of what we buy, which are the meats, the avocados, we're not able to. There's an inability to lock. We have in the past decided to lock cheese. That's something that we have been able to lock in the past. We haven't locked that. We've been floating with cheese as well. So the vast majority of what we buy is subject to the spot rates. Thanks. And then one other thing, if your comps have been driven mainly by traffic, 10% or so traffic, I'm wondering if maybe you're running up against any capacity issues the lunch day part or if there's still some slack in the system and you'd still be able to continue at this rate for the foreseeable future? Yes. I mean, the answer is really no. There really aren't any constraints. And in fact, if you look at our comp in this last in the 4th quarter, more of the comp came from lunch than it had in recent quarters before that, where most of comp was driven at lunch and dinner excuse me, at dinner and at other times of the day. So, for the first half of twenty ten, in fact the first three quarters of 2010, we had a dramatic difference between the amount of comp driven at dinner and other times of day rather than at lunch, and lunch was by far the weakest. Dinner and other times of day still are very, very strong, but lunch has caught up a lot. So, what that would tell us is, obviously lunch is the most dramatically during the lunch hour during the Q4 along with those healthy comps we had in the Q4. So, no capacity issue in that sense at all. Also, our throughput has during the Q4 of 2010 held up better than it has held up in any prior year. In other words, throughput usually follows seasonality and so we're fastest during the second and third quarters and slower during the first and fourth quarters when our traffic falls off a little bit. And year, our throughput during the Q4 held up very, very nicely, so that it's about the same on average as it was during the busiest times of the year, the second and third quarter, which really pleases us and shows us that our teams in the field are more and more comfortable with producing great throughput, such that I that we'll see those numbers hopefully get even better as traffic picks up during the middle of 2011. And so really, really no with Robert W. Baird. Hi, good afternoon and congratulations on a great year. Hi, David. Thanks. Jack, just a question on the quarter to date trends that you mentioned. You said they've been volatile. Can you give us a settled in below the double digit run rate? Maybe if you can give us some direction on that, that'd be helpful. And David, it's really, really, really hard to tell. I would describe it as a roller coaster, because not only are we seeing severe weather this year, you might remember at about the same time in early February, we saw severe weather last year. And so we're seeing really wild swings market by market across the whole company. There's nothing that tells me that the underlying trends have gotten any worse or any better, David. I mean, that's about the best that I can read from it. What I can tell you though is that, as we go against tougher comparisons, I expect our comps to level off. And so that's the best read we can get from it. No weakening, no strengthening, but very, very, very volatile. That's helpful. And then I guess a follow-up to that. You keep mentioning that you expect your comps to get softer as you cycle some of the tougher comparisons. Yet you've cycled little bit tougher comparisons in the last couple of quarters in a row and comps have gotten better each quarter. So, I'm wondering what maybe is driving your thought process on why they might slow as we get out into maybe Q2 or Q3? Well, the real challenge, David, is, okay, we're going up against a 4% for the Q1, but then an 8.7% in the second, that sets up quite a bit. And then we compare against an 11% and then a 12%. So second half of the year is a very, very tough comparison. And so the only kind of reasonable comparison is really this Q1. Other than that, it's a tough year. So we're very optimistic, very happy with the transaction momentum, happy with the way that our teams are staffing and running restaurants, happy with the customer response so far. I mean, everything looks good, but we're just fresh kind of climbing out of this recession. And so we just it's kind of a new pattern that we've now got to build going up against these very, very tough numbers. And we hope we'll climb above them and have look back on it and say with no trouble comparing to them. But right now, looking ahead a couple of quarters 11s 12s tells us that it's going to be pretty tough math for us. Great. Thank you very much. Thanks, David. Moving on, we'll go to Deutsche Bank, Jason West. Yes. Thanks, guys. Just a quick clarification and then a couple of questions. Just Jack, you mentioned the 20 to 30 basis points on the potential labor costs. Was that just related to the Minnesota issue or is that if you have to make some changes nationally? That's just related to Minnesota, but it's an impact at the company level. Right. Okay. And is there a sense yet if there's going to need to be some national changes in rehiring and things or is it just too early to say? Yes, just it's very much too early to say. We're working obviously, like I said, with consultants and experts and certainly with the individuals at the Department of Homeland Security to make sure that we're doing everything just as well as we can. Okay, got it. And then on the quarter, the pre opening looked a little low, if I have the number right in front of me. Was there anything unusual going on there or timing wise? No, Jason. What I would do is I would look at it's more representative to look at kind of the full year, because we had so many openings during the year that some of those preopening costs might have spilled into an earlier quarter. And so it's not unusual for us to have our preopening quarter to quarter, maybe move up and move down. Overall for the year, the cost was in total about $60,000 per restaurant. I think that's a fairly good number to work with. And keep in mind of that number of the 60,000, only about 22,000 to 23,000 of that is real preopening costs, meaning some marketing expense and training expense, things like that. Most of the rest of that number is a non cash straight line rent. It's literally a journal entry. But including the non cash, non economic journal entry, it's around 60,000 per store, I think is a better measure. I think the Q4 was 40,000 and that is artificially a little bit low because of the very high number of openings during the quarter. Okay. That's really helpful. And then the last thing, just in terms of the new concept, the Asian concept, any more color in terms of where we could see that? And is it open yet? And any more color you guys can provide there would be great? Well, you could only see it if you discovered the secret Test Kitchen location, which we're not disclosing at this time. But no, seriously, it's coming along very, very nicely. I'm very happy with the development of the food. And we're starting construction very soon, and it should open mid summer. But beyond that, we're not giving you any other details. Other than to say that we really are paying close attention to what has made the Chipotle model very successful, and we're applying those things to the new concept that will make for a strong economic model that will allow us to invest in sustainably raised food and enable us to invest in top performers. So other than that though, I don't think there's anything new to report. Okay. Thanks guys. Thought I'd give it a shot. And now we'll go to Sharon Zackfia with William Blair. Hi, good afternoon. Hi Sharon. Two questions. I guess on G and A, Jack, I heard all of the things that impacted it this year. But if you could give us some sort of barometer on how much you expect G and A to grow kind of going forward? Should we expect leverage in 2011? Is a 20% rate of SG and A growth kind of the normal we should expect? And secondarily, as you've had, I want to say, close to a year in London now, but I might have lost track, I mean, what learnings do you have from London that take with you to Paris as you enter Paris later this year? Okay. I'll answer G and A and then I'll let Steve talk about London. Sharon, G and A, whether we get leverage or not depends on the comp. If we can do a comp in the low single digits, which is our guidance right now, I would expect us to be G and A as a percent of sales to be relatively flat or slightly up. If we're fortunate enough to poise past that guidance throughout the year, we can gain a little bit of leverage, but I wouldn't say very much leverage. And the things that are helping us in G and A this year is, 1, we don't have the manager conference. 2, offsetting that is we have higher non economic, non cash stock comp that will be included. But then kind of offsetting that the other way is we have we pay bonuses based on our performance. And this year, we pretty much beat every single performance measure from a comp standpoint, from a new store sales standpoint, from an off income standpoint. And so the bonuses were higher this year as well. So all those things kind of washed together that I think we can get stay pretty flat in kind of a low to mid single digit kind of comp range. And if we push above that, that's when we would start to see G and A leverage. And then in terms of European expansion, we opened London with a restauranteur who operates very autonomously. And in fact, he operates that restaurant much in the way that I operated the very first Chipotle. He does not rely on a commissary, rather cooks everything from scratch on-site and has hired a team that he believes can be part of the future leadership team that will continue to grow out Europe. And I've spent time with these folks, and I believe he's done a very, very good job. The restaurant has been really well received. It's an exciting restaurant. It has a great buzz. Customers from London and really from all over since it's such a dynamic international city are enjoying the offerings. We feel very confident that that model is appropriate for opening Paris also. So we have a second restaurant tour who will be opening Paris later in the year much in the same autonomous independent way that the first restaurant opened. He's actually been spending the Paris guy has been spending a lot of time in London, and we'll be using that as a stepping off point for additional training. So, again, just a cautious slow start in Europe realizing that most of our growth potential is here in the United States, but we're seeding Europe in a very thoughtful way and have had really good results. And now we'll go to Jeffrey Bernstein with Barclays Capital. Hi. This is Sofia Siddiqui filling in for Jeff. Just taking back off that question, it seems like the results from Canada and UK are still very encouraging. So I just wanted to get a sense of what your thoughts are on future international expansion. So specifically potential unit growth timeline and how long before international units become a meaningful contributor? Thanks. I guess the best way to answer that is it's not a growth strategy still. And so what that means is we don't have a timeline for any meaningful store opening plan. We don't have a timeline for when it will be meaningful to the business. All of our benchmarks or our milestones are based on people development, are based on relationships with suppliers built on customer response to Chipotle, did they get Chipotle to like they like Chipotle. And those are the things that we're focused on. And frankly, if we do that really well over the next 2 years, it will turn into a growth story. But right now, we're not thinking about any kind of timeline with any kind of scheduled remarks. Can you just comment a little bit more about the details on that? Remarks. Can you just comment a little bit more about the details on that? Sure, sure. Well, we're actually not going to comment on the specific details, but in a major city in the United States, an event that will be a really great venue for talking about food with integrity and actually setting up cooking demo stations where we can feature our food and even some of the farmers who are responsible for raising that food in a very interactive way. I think it's going to that we started to build around talking about why it's important to source sustainably raised food and how that not only contributes to better tasting food, but also why it's important for the environment and for animal welfare and all that. Again, it's just a way reach out more broadly and develop a stronger relationship individually with customers. Now we'll go to Bart Glynn with D. A. Davidson. Thank you. I was just curious if you have any thoughts on when we might see some of the new food innovation across the system, both the tortilla as well as the brown rice. Thank you. Sure. Well, again, as I mentioned at the last conference not too long ago, we're going to start to introduce more whole wheat into our tortillas. But rather than just flip a switch and have a brand new tortilla overnight, we're going to introduce slowly more whole wheat. We started off London operations with a brand new recipe that has a higher amount of whole wheat and we think it's a delicious tortilla. We think it's so good in fact that we ought to be serving this tortilla in the United States. So over time, we'll slowly adjust our recipe until it's the same as the London Tortilla. What's exciting about it besides that it has more whole wheat is that it has no preservatives and that's very, very exciting. It falls into the sort of food with integrity mission that we have. In terms of brown rice, we're going to be serving brown rice alongside white rice now and that will be an option. And in some of the test stores where we've done so, we noticed that brown rice is very, very popular and in fact has in many cases been more than half of the customers choosing brown rice. So we think it's an awesome opportunity to let people have a little bit more variety at Chipotle and do something that a lot a lot of people consider more helpful. Thank you. Matt DiFrisco with Oppenheimer has our next question. Thank you. You've talked I'm a little confused a little bit on the margin picture. I heard a lot about how the new A model looks very promising, good volumes and lower on the investment costs and not easier to operate longer term. However, there was a lot of sort of warning on the margin front in 1Q or in the first half of twenty eleven. And you have not only difficult comp comparisons, but you have some substantially high industry leading restaurant margins. I'm curious on how you want us to view that as far as lapping those in the environment where you might have some near term commodity pressures as well as the Minnesota labor retooling? Well, the way I think it's most appropriate to think about it, Matt, is think about it in terms of our model, because that's the way we think about it and think about it in terms of what is the potential, what is the ability for our model to sustain and even build on the margins and the returns that we have today. And our ability to sustain or even build on the margins and returns we have today is as likely or as possible as any restaurant company out there because there's nothing that's artificial, nothing that's temporary in our margins today. Having said that, there's inflation, okay? And we haven't had to raise prices in over 2 years in most of our restaurants. And inflation means at some point we're going to have to pass on those higher costs to our consumers. We're just going to be patient about doing that. And so during the Q1 and during the Q2 and maybe even for part of the Q3, I would expect that food inflation is going to creep in. It's going to creep at that mid single digit range. We're also going to see some higher costs on a temporary basis over the next couple of months due to the freeze that we talked about in Florida, Mexico. And if we stayed 100% in supply, which we're not sure if we'll be able to or want, we'll want to stay 100% in percent in supply of tomatoes, of green peppers and tomatillos, that could add for a couple of months, a couple of 100 basis points. And then we've got pressure from labor, but that's been running maybe in that 30, 20, 30 basis points in Minnesota. We expect that to level up. So, those are the things that I think are going to put pressure in. But we think about and I would encourage you to think about what's possible on more of a sustained basis once we get through all these short term pressures. And we consider ourselves to be in a position of strength to not have to rush to increase prices because of inflation and we're going to take advantage of that strength. We're going to because we have the highest margins the industry already and we don't have a franchise model where franchisees are anxious about inflation eating into their cash flow, we're going to take advantage and see how the consumer responds. And if the consumer responds well, we know we have as much pricing power as anybody out there. Okay. Thank you. Thanks, Matt. And we have time for one final question. That question will come from Joe Buckley with Bank of America Merrill Lynch. Hi, thank you. Just a couple of questions. You referenced the loyalty program and just curious if you could give us a little more details about that and the launching of that program? Sure. So well, the loyalty program starts in April. And again, it's not a typical loyalty program where a customer is rewarded by say coming in 10x and getting the 11 for free or something like that. This is a program where we're asking our managers to invite our very best customers in by inviting them to participate in learning more about food with integrity. And as they demonstrate their knowledge and share their knowledge about food with with integrity, we reward them. And we may reward them with things like free food or some of our clothing items or things like this. And it's a way to really get customers to participate in sharing the specialness of food with integrity, the importance of sustainably raised food. If you look back on the history of Chipotle and how we've really grown the brand, so much has come from word-of-mouth and customers bringing in their friends and new customers and sharing the specialness of how you order and the food and how it's and things like this. So we think that we think this is a way to really build continue to build the brand by strengthening people's knowledge about what makes the food taste so good and why sustainably raised food is important. Okay. And then just a question. How many stores in Minnesota were impacted by the labor issue? And has there been anything initiated yet in the D. C. Virginia area or are you just subject to ventures there? I'm sorry, I missed the last part. You said how many stores are affected and what? How many stores in Minnesota and then in the D. C. Virginia market? What exactly has gone on so far there? Okay. Well, in Minnesota, we have 50 restaurants and this notice of inspection that we received was not particular to any restaurant, but rather was a notice of inspection for all Chipotle restaurant level employees in the State of Minnesota. So, it had an effect on almost every restaurant, because we lost a lot of good people. And obviously, now we're mending from that and all the stores remained open and we've been able to hire great teams to replace the teams that we lost, but so we're on the mend from that. In terms of D. C. And Virginia, there are a similar amount of restaurants in that market. And we just right now what's happened is we received a notice of inspection, which means that the Department of Homeland Security and ICE asked us to give them the documents for all of our employees in those states and they're looking at those documents. So, we don't know if and they might get back to us and we certainly don't know what the results of their investigation will reveal, but we're going to work closely with them to make sure that we determine the extent of any problem that may exist in D. C. And Virginia and go from there. Okay. Thank you. Thank you, Michael. And that does conclude our question and answer session. At this time, it is my pleasure to turn the call back over to our speakers for any closing or additional remarks. Thank you so much everyone and we look forward to speaking with you next quarter.