Earnings Call: Q1 2017

Apr 25, 2017

Greetings, and welcome to the Chipotle Mexican Grill First Quarter 20 17 Earnings Conference Call. At this time, all participants are in a listen only mode. An interactive question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Mark Alecky, Investor Relations for Chipotle. Thank you. You may access to our earnings announcement released this afternoon or can 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 statements regarding the impact of management initiatives on our business, the future potential of our digital ordering programs, the impact of marketing programs forecasts of the number of restaurants we intend to open in 2017 and restaurant returns estimates of food, labor, occupancy, marketing and G and A cost trends for future periods projections of effective tax rates for 2017 statements regarding our ability to meet business goals as well as other statements of ongoing developments and our expectations and plans. These statements are based on information available to us today, and we are not assuming any obligation to update them. Forward looking statements are subject to risks and uncertainties that could cause our actual results to differ materially from the forward looking statements. We refer you to the risk factors in our Annual Report on Form 10 ks and as updated in our subsequent Form 10 Qs for a discussion of these risks. I'd like to remind everyone that we've adopted a self imposed quiet period, restricting communications with investors during that The quiet period begins on the 16th day of the last month of each fiscal quarter and continues until the next earnings conference call. For the Q2 of 2017, it will begin on June 16th and will continue through our Q2 earnings release planned for Tuesday, July 25th. We will start today's call with some prepared remarks, and we'll then take questions. On the call today are Steve Ells, our Chairman and Chief Executive Officer Mark Krumpacker, Chief Marketing and Development Officer and Jack Hartung, Chief Financial Officer. Kurt Garner, our Chief Digital Information Officer, will also join us for the Q and A session. With that, I'll now turn the call over to Steve. Thanks, Mark, and good afternoon, everyone. In December of last year, I returned to the role of Sole's CEO with a commitment to restoring the simplicity that had made Chipotle so successful. Since December, we've implemented sweeping changes throughout the organization, nearly all of which are aimed at dramatically improving the guest experience. At the core of these changes was the revamp of the restaurateur program. Restaurateur is the elite status bestowed upon our very best managers. Over the years, the restaurateur program had become overly complex and laden with a vast array of esoteric concepts and abstract measures that prevented our teams from running their restaurants well, and frankly, it didn't focus on the customer or reward great sustained performance. By refocusing the entire program on 5 understandable measures, we have been able to quickly align our entire company around running great restaurants and delivering an excellent guest experience. We still have work to do, but I'm very proud of our teams and I'm incredibly excited by the changes I've already seen, and we're beginning to see some very tangible results. Through the 1st 3 months of the year, we've seen positive sales momentum and improvements in our key operating metrics. We generated revenue of $1,070,000,000 in the Q1, an increase of 28.1% compared to the Q1 of 2016 on comparable restaurant sales growth of 17.8 percent and opening 57 new restaurants. These strengthening sales trends and improved operational execution generated diluted earnings of $1.60 a share. Our better performance for the quarter was due to a combination of factors including the continuing simplification of our operations, a relentless focus on the guest experience, thorough and ongoing crew and manager training, improved execution of digital ordering, increased marketing and improvements in customer sentiment, and a continued focus on serving safe, wholesome and delicious food. Our restaurant teams and field leaders are now focused on achieving a few straightforward and impactful goals. We eliminated dozens of needlessly complex measures and tasks freeing up more time for training, hiring, marketing and customer service, and we restructured our bonus program for restaurant managers and field leaders to focus on 5 key metrics that are easily understood and that are within the control of our managers and field leaders. We're already seeing this translate into decreased turnover, better customer service scores, better digital sales support, labor efficiencies and improvements in other key performance metrics. We anticipate that we will see continued improvements in these areas over time. Our teams are also stepping up to support the increased digital order volume in our restaurants. Through the Q1, our online sales have increased 53.5% over the prior year, and we've set all time digital ordering records. Much of this improvement is related to the implementation of our Smarter Pickup Times technology, which dynamically assigns pickup times based on transaction volumes in conjunction with our team's commitment to providing accurate and on time digital orders. As many of you are aware, we will fulfill our digital orders from a second dedicated make line in the back of each of our restaurants. These second make lines are led by crews specifically trained to prepare digital orders. Orders on the second make line do not impact throughput or our ability to provide an excellent experience on the main service line. We're excited about the incredible potential of digital ordering and confident in our team's ability to fulfill these digital orders. Even though much of our attention was dedicated to simplifying our business and strengthening the guest experience, we never lost focus of our commitment to making better food made from whole unprocessed ingredients accessible to everyone. During the quarter, we completed a multiyear journey to remove additives from our tortillas. Chipotle is now the only national restaurant brand to use no added colors, flavors or preservatives in any of the ingredients used to prepare our food. All of our food is prepared using 51 real ingredients, the recognizable high quality ingredients that you can find at grocery stores or farmers markets. While many other fast food brands have been busy upgrading their menus by replacing artificial ingredients with friendlier sounding industrial additives that serve the same purpose, we're committed to serving only real ingredients in our food. But our commitment to better ingredients goes well beyond the elimination of industrial additives, often labeled as natural flavors and colors, and it's a commitment that started 24 years ago. Chipotle has long been a pioneer in serving better quality ingredients, including the use of local and organically grown produce, dairy from cows raised on pasture, and meat from animals raised without hormones or antibiotics. Additionally, none of the ingredients used in Chipotle's food have been genetically modified. No other national restaurant brand is as fully committed to making better food made from whole unprocessed ingredients accessible to everyone. I'd also like to provide an update on the dessert we mentioned last year. We have continued to develop 2 desserts, which we'll begin testing later this month. The one that I'll tell you about today is a traditional Mexican dessert called bunuelos, which is fried tortilla strips with honey, cinnamon and sugar. The bunuelos will be served with an apple caramel butter dipping sauce. Bunuelos are simple to make using our existing equipment and require us to add just a few additional ingredients. They're delicious and complement our menu nicely. I'm as optimistic as I've ever been since starting Chipotle nearly 24 years ago. Since last fall, when I acknowledged that many of our restaurants were not meeting my expectations, we have made incredible progress. The guest experience is improving and our crews are energized and engaged. I want to thank the teams who are working hard every day in our restaurants for embracing the changes and elevating the Chipotle experience for our customers. We still have much work to do, but we have the right team, the right strategy and a commitment to seeing it through. Our teams are excited and ultimately our customers are the ones who will benefit most. I'll now turn the call over to Mark. Thanks, Steve. We have always worked hard to differentiate our brand based on our commitment to making better food made with whole unprocessed ingredients available to everyone. We carefully constructed a brand narrative about our commitment to serving better food, which resonated with our existing customers and helped draw new customers into the brand. We often relied on nontraditional forms of marketing, including entertaining films, TV shows and events like our Cultivate Food and Music Festivals to build the brand narrative. Using this type of marketing, we were often able to break through to consumers even though we generally spend less on marketing than our competitors. But our desired brand narrative was disrupted in 2015 and that required us to shift our approach. 1st, we elevated our promotional activity, which drew customers into our restaurants. Next, we applied more resources to traditional advertising so we could reach millions of new customers. Now, during the 1st months of this year, we have returned to marketing the benefits that differentiate Chipotle from the competition. While we don't normally advertise during the Q1, our strategy this year is to advertise throughout the entire year. During the Q1, we continue to run the Ingredients Rain campaign, which portrayed animated ingredients as royalty in a world where ingredients rule the land. That campaign ran in digital, social, outdoor, radio and in video and on television in some markets. We also promoted digital ordering and catering during the quarter with positive results. Ingredients Reign proved to be effective in helping to restore the image our brand by focusing on our high quality ingredients. Earlier this month, we launched our largest ever advertising campaign, as real as it gets. The campaign features outdoor, radio, digital video and online ads and social media advertising, and for the first time, national television. The ads use a playful, humorous tone to reinforce Chipotle's commitment to using only real ingredients. It's much too early to evaluate the overall success of the campaign, but initial results indicate that it's performing well, especially with consumers who are familiar with Chipotle. The campaign is scoring high marks for humor and consumers find it aligned with our brand image. Most importantly, the campaign is working to restore our desired brand narrative. It's also important to note that the campaign has only just begun. The digital and social components of the campaign will begin reaching our full levels this week. During the quarter, we also launched an unbranded television show for kids called Radlands. The show designed to educate kids about where their food comes from and how it is raised debuted through the Apple iTunes store where it reached the 5 most downloaded children's show on iTunes. Through a partnership with Discovery Education, a leading provider of digital content for K-twelve classrooms, Radland's episodes will be paired with lesson plans and activities and will extend the reach of the show to more than half of U. S. Classrooms, making it available to 4,500,000 educators and more than 50,000,000 students. The result of our marketing activities has been a steady inflow of new customers, a strong 18% conversion rate from the first visit to regular customer and ongoing improvements in customer sentiment. During the quarter, we saw increases in admiration, healthfulness, taste and ingredient quality perceptions. Some of these measures are now at or above levels from 2015. We also saw strong increases in friendly and fast service and restaurant cleanliness measures. As we look forward to the rest of the year, we will continue to use a mix of marketing programs designed to drive traffic and build loyalty with our customers. We will continue to advertise throughout the year. We will use selective promotions to drive traffic. And this summer, we will launch a nontraditional music based marketing program featuring our 51 ingredients. Additionally, a significant portion of our marketing budget is dedicated to driving digital sales and catering throughout the year. These marketing programs combined with steadily improving customer sentiment measures and continuously improving restaurant operations give us confidence that we will drive increased customer visits and loyalty throughout the year. Before I turn the call over to Jack, I'll provide an update on our development efforts. Our real estate pipeline remains robust and we are on pace to meet our restaurant opening goals of 195 to 210 for the year. More importantly, sales volumes for our new restaurants are improving with restaurants in their 1st year of operations generating sales the $1,400,000 to $1,500,000 range with the most recent new stores trending even higher. As we move through the year, will continue to open a larger percentage of restaurants in our proven and established markets where we have already built strong loyal customer bases. We are also opening more end cap restaurants that tend to have lower average investment costs. A combination of stronger new restaurant sales and lower average investment costs should contribute to improving our overall return. I'll now turn the call over to Jack. Thanks, Mark. I want to start by saying how proud I am of our restaurant managers, our crews and our field leadership for how quickly and effectively they've been able to shift their focus to simply running better restaurants and delivering an excellent guest experience. As a result of their efforts, we have seen 6 consecutive months of improving customer related scores in each of our 3 key measures. This is the best consistent month over month improvement we have seen since we started tracking these measures, and it's attributed to the hard work and commitment of our field teams. We know that our economic model can only be fully restored if our customers are treated to a compelling experience when they visit, and the results so far are an indication that we are on the right track. While elevating the guest experience is the most important and the most impactful thing we can do right now, we're also seeing our restaurant teams deliver better fundamentals in terms of running a good solid P and L. Specifically, we're seeing more efficient labor scheduling and management for the best levels we've seen in nearly 7 years. We're seeing decreased food waste and reduced inefficiency in controlling food costs, although we still have an opportunity to get even better here. We're seeing more effective management of controllable expenses such as kitchen supplies and maintenance and repairs inside the restaurants. And we're also seeing the lowest general manager turnover that we've seen in more than 8 years. Our GMs have fully embraced and are excited about our new focus and they're motivated by their ability to thrive in this new environment. It gives us great confidence that by keeping talented leadership in our restaurants, we can continue the momentum we have seen emerge in just a few short months. All of this progress in such a short period of time gives us confidence that our company is headed in the right direction, and we are all committed to continue to do all we can to improve the guest experience. And perhaps most encouraging is that when we visit our restaurant, you can see that our managers and crew are energized and excited about the direction we're headed and the improvements they are driving. And because we have redesigned all of our compensation, including merit raises, extraordinary results. During the quarter, our comparable restaurant sales grew 17.8 percent, fueling a 28.1 percent total sales growth to $1,070,000,000 comp included a small benefit of 60 basis points or $5,500,000 related to deferred revenue recognized from last year's Shiptopia promotion. The comp was primarily driven by an increase of 13% in paid traffic comps over last year. Average check also increased about 4% related to increased group size and our catering comps rebounded significantly from last year. The sales dollar trends improved nicely in February with the comps on a 2 year basis improving to around down 16% compared to January, which was down over 20% on a 2 year basis. And while March was affected by winter storms in the Northeast, the 2 year trends in March held up at around down 16% as well. April, of course, is impacted by the timing of Easter, but the underlying trends from Q1, excluding the Easter shift, are continuing into April so far. Since we closed since we are closed on Easter, we will lose one full trading day during Q2 or about 1% on the comp. Our restaurant margins improved in the quarter to 17.7%, which included a 15 basis point benefit related to Chipopia. Sales leverage contributed 5 60 basis points of the improvement in restaurant margins, and sales growth will continue to be the primary driver of improving margins in 2017. We lapped 2 60 basis points of non recurring incremental promo and marketing costs, 100 basis points of non recurring labor leverage from supporting promotions and closing our restaurants for a few hours on February 8, 2016 and 100 basis points in food safety related activities that increased food waste last year. We also benefited from better operating efficiencies resulting from simplifying our operations and better restaurant management, which added about 200 basis points of margin improvement. This was slightly offset by 140 basis points of net changes to labor and other costs, including labor inflation. Food costs during the quarter were 33.8 percent of sales, an improvement of about 150 basis points compared to last year. The decrease is related to improvements in our food handling procedures, both in our restaurants and at suppliers, as we are no longer incurring unnecessary and substantial food testing and food waste. Food cost is also 150 basis points lower than 4th quarter due to dropping avocado prices and improvements in our restaurant operations. Although avocados are relatively lower, we are still operating in a short supply environment avocados. This is still putting some pressure on our costs and will likely add about 40 basis points in Q2 and even more in Q3. As a result, we are maintaining expectation that full year 2017 food costs will be right around 34%. Labor in the quarter was 26.9 percent of sales, 400 basis points lower than last year. This 400 basis points improvement is primarily driven by sales leverage, including less labor required to support the heavy discounts and promos from last year. In addition, more effective labor scheduling and improved deployment of managers resulted in about 180 basis points of improvement. When we simplify operations, we free up labor hours that can be redeployed to improve the guest experience. This shows up as improved deployment, better attention to customer service and cleaner, more organized restaurants. The labor leverage and efficiencies were partially offset by labor inflation of around 110 basis points and continued labor inflation is expected. We also added 50 hours or 50 basis points rather of labor from returning the prep lettuce and bell peppers back into our restaurants. Labor should improve in Q3 and Q4 as sales increase seasonally, but that will be offset somewhat by incentive based bonuses for restaurant managers for continuing to elevate the customer experience and continued inflation. So labor will likely be around 26 point 5% overall for the year. Other operating costs were 14.1% during the quarter, down from 18.6% during Q1 of 2016. Our combined marketing and promo expense decreased 320 basis points compared to last year as we lapped significant promo activities from February March Total marketing and promo expense during the quarter was 3.4%. We expect our marketing and promo costs will rise further in Q2 to around 3.6% to 3.7% as we support our first ever national TV campaign before leveling off in the second half of the year for an overall marketing and promo of about 3.3% for the full year. Sales leverage contributed 200 basis points of improvement in other operating costs. G and A was 6.5 percent of sales, down from 7.4% from last year. G and A was up $7,000,000 from Q1 last year due to the reversal last year of unvested performance shares. Without this reversal, G and A dollars would have been essentially flat despite supporting an additional 225 new restaurants. We have closely managed headcount and controlled other overhead costs such as travel, while sharpening our focus on just the most important priorities. Other fees such as legal expenses are lower as a percent of sales versus 2,006. Our stock based comp during the quarter was $15,300,000 or $7,800,000 higher than last year due to the reversal in 2016 I described earlier. We anticipate that stock based comp for the full year will be approximately $65,000,000 to $70,000,000 including the special one time retention award to our employees discussed on the Q4 earnings call. For the full year, we anticipate total G and A expenses to continue to be about $300,000,000 as incentive based bonuses are expected to be restored. Our pretax income was $74,400,000 and effective tax rate during the quarter was 38%. The tax rate was impacted by nonrecurring adjustments related to state income taxes and excess tax deduction for stock compensation. Our effective tax rate for the full year is expected to be about 39% compared to 40.8% in 2016. During the Q1, we repurchased $58,000,000 of our shares at an average share price of $412 We have $144,000,000 remaining on our share repurchase authorization as of March 31. We generated cash from operations of $151,000,000 during the quarter and finished the quarter with cash and investments of $577,000,000 Earlier this month, we began to test the targeted price increase in a few markets. If you recall, mid-twenty 14 was the last time we increased prices nationally. Since that time, we have absorbed substantial labor and food inflation, and overall costs of doing business have increased dramatically. While we've been very reluctant to pass along any of these increased costs over the last year as we worked hard to fuel our recovery. Now with our business beginning to improve, we have selected a handful of markets to gauge a modest price increase. We selected markets that were considered low risk by thoughtfully considering each market's sales trends, recent and expected minimum wage increases and competitor pricing. About 4 40 restaurants were affected and the average increase was about 5%. It's too early to comment on customer reactions, potential resistance or any impact of the comp for the year, but we'll evaluate the trial over the remainder of 2017. Carefully studying the consumer response in these markets will help us evaluate and consider eventual increases in other markets. But we will be very patient and we will not be in a hurry to expand the increase to other markets. We know that the best way to fully restore our economic model is to deliver an excellent guest experience in every restaurant every time. And the last thing we want to do is risk interrupting the current momentum of customer visit increases we have worked so hard to earn. Finally, we want to make our customers and investors aware that we recently detected unauthorized activity on a network that supports payment processing for purchases made in our restaurants. We immediately began an investigation with the help of leading cybersecurity firms, law enforcement and our payment processor. We believe actions we have taken have stopped the unauthorized activity, and we have implemented additional security enhancements. Our investigation is focused on card transactions in our restaurants that occurred from March 24, 2017 through April 18, 2017. Because our investigation is continuing, complete findings are not available. It's too early to provide further details on the investigation. So we will refrain from providing additional commentary now or in the Q and A. We anticipate notifying any affected customers as we get further clarity about the specific time frames and the restaurant locations that might have been affected. We continue to work towards our stretch goals for 2017 as we previously highlighted, and we think these solid first quarter results are strong initial installment toward those goals. We still consider achievement of the goals for the full year as a stretch accomplishment, but we are more confident now that we are on our way to achieving the run rate of those stretch goals over the next few quarters. Continued sales growth momentum is the most important component on this journey to fully restore our economic model, and that begins with great execution and an excellent guest experience in each and every restaurant. Our teams are more aligned and more committed than ever on the priorities for 2017, and we're confident that they will continue to elevate the restaurant experience. We're encouraged by our improving financial and operating performance in the quarter, but we are fully aware that we still have much work to do. We want to thank all of our restaurant teams and our support teams in the field and corporate offices for their tremendous effort and their commitment to our vision. Together, we will remain focused on restoring the Chipotle brand and business to its full potential. Thank you for your time today, and we'll be happy to open the line for any questions you may have. Thank you. And our first question comes from Nicole Moore from Piper Jaffray. Please go ahead. Good afternoon. So I've caught your TV campaign a bunch of times and I hesitate to share it has been on the Bravo channel. But I just wanted to understand which channels you pick and why? How many weeks would you be running this campaign? How are you splitting out impressions? And then, kind of finishing out and rounding up the question, how are you measuring the returns? And do you want us to understand this as a short term initiative or a longer term strategy? Thank you. Thanks, Nicole. I'm glad you're seeing the spots. I mean, we're running them at a high level of frequency. In fact, just across the 1st 2 weeks, it's about 160,000,000 impressions. In terms of how we're choosing where we run them, they're running against what was primarily considered appointment TV or TV shows that people tend to watch live. So like Desperate Housewives, I'm not going to suggest that's what you were watching. But that or sports center or any sort of game, The Voice we run on. So those types of shows that people are less likely to DVR and then skip the commercials on. And with regard to how the campaign is structured, it runs in 2 flights. The first one runs now through really through the beginning of July. And then in July August, we actually run a different type of promotion, which I alluded to in my prepared statements. And then we run another flight of the TV in September October. But throughout the entire year, there are certain types certain aspects of the campaign that run continuously. With regard to your question about whether or not this is a long term strategy, I mean, this is part of the overall effort to rebuild the brand narrative. And so the type of advertising that you're seeing now really is brand advertising. This is obviously not advertising that's promotionally driven. It's instead brand building advertising. Having said that, the campaign is multifaceted. So the digital components and social components are much more food focused. In fact, all of the online advertising drives to our online ordering site. So it is it has a lot of different components to it. But we're this is part of the long term strategy to reengage our customers in the aspects of our brand, which make them more loyal, while at the same time layering on aspects of the campaign that drive transactions and that drive digital ordering. So hopefully that answers your questions. And just in terms of measuring the return and then I'll hop off. Thank you so much. Sure. Well, the return, we're going to measure this several ways. So the most traditional way we do it is with pre, mid and post wave campaign research, which we haven't come to the midpoint of the campaign. So we've only got our pre wave benchmark on that. So that's one form of research. The other is we do user acceptance research and we've already fielded that and I alluded to some of the results of that in terms of how people are engaging with or liking the ads. Then of course, we look at the sales impact. It's a little bit difficult, of course, as you know, with these sorts of things to tease apart the part of a comp that's directly the result of the campaign and not weather or other seasonality effects. But we'll do our best in terms of studying that. And then a great deal of this campaign is actually using 1st and third party data to target our customers directly. And so in those types of in those parts of the campaign, we're reaching people who we know on a one to one basis. So we can actually see them transact as a result of the campaign. So as this unfolds, we'll be able to provide much more data on exactly how effective digital components that were targeted 1 to 1 were able to were actually performing. Thank you. Our next question is from John Glass from Morgan Stanley. Please go ahead. Thanks very much. If I could just ask a little bit about a little sales. First of all, in the past, you'd sort of provided a cadence on a 1 year basis for comps for the quarter. So if you could maybe talk about fairway of margin. I think, Jack, you talked about it on a 2 year trend, but maybe just to be very explicit on a 1 year basis where sales exiting the quarter, what were you referring to in April? And since I know it's early days in the advertising campaign, have you seen since it is the first time you're on TV and I would expect you'd see some immediate impact. Can you quantify what that impact you're seeing early days on the advertising campaign is on sales? Yes, John, I'll take the for sales question. February, we had a nice step up in February. We already reported January comps were in the 24% range. February March were going against lower negative comps from the prior year, but both came in at around 14%. Now keep in mind, we lost a day in February because of leap day and we picked up a day in Easter. But both months were going up against about a down 26%. And so the most important metric John that we looked at is on a 2 year basis, how far down are we. And we for the first time in really many months, we had a significant move from a down about 20% in January and we were down a little worse than 20% in the 4th quarter to a down on a 2 year basis, just 16% in February. We helped that in March. And then we're seeing a similar trend into April so far where when you when we do our best to factor out the Easter noise into April, looks like we're still trending at about a down 16 percent range. So hopefully that helps on the sales and then Mark What is that on a 1 year basis though, Jack? Just to be clear, what's the 1 year comp in April then? So April is running John. If you set aside the Easter compare, it's in the low double digits during April. And with regard to the TV, we don't have a direct correlation to sales right now. And it's primarily for the reason I mentioned earlier, which is it's very difficult to tease apart, which part of the sales comp we're seeing is a result of the television or not. And because this is national, we don't have our normal control markets that we would normally have in order to compare the advertising against markets where we didn't advertise. Having said that, the initial research is showing that we do have increases in consideration and increases in a number of other metrics that would suggest that we're having an impact. But it's just too it's only been running for 15 days. So we'll have a much better idea about this after 30 days or more. Okay. Thank you. Our next question is from Karen Holthouse from Goldman Sachs. Please go ahead. Hi. Question on the increase in digital orders, which it's great to hear, success with the new platform. Is there any noticeable difference in comp trends at stores where you're seeing sort of bigger year over year increases or just bigger usage to begin with? And against that really impressive growth, sort of going from here, what are the areas you're focused on in terms of continuing to refine, and improve either at the store level or on the sort of digital platform itself? Yes. I'll take the confidence, Kurt. I don't know if you want to talk about the digital specifically. Karen, it's too hard to separate how much of the comp number we're comparing to significantly negative numbers and we're seeing an inflection point that I described during February. We're not seeing anything that we can specifically point to to say, okay, of the comp, of the improvement that we're seeing in the sales trend, X amount is digital. We know digital is growing at a very fast rate. We know that's taking people off the front line. And so that's helping theoretically should be helping our throughput because we should be having shorter lines. And so we feel like it's a contributor, but to put a specific number on it, we're not able to do that right now. And Karen, I can add a little bit of color around the road map for digital for the rest of the year. We recently made some improvements on both the web and the mobile site to allow customers to customize their meals much like they do in the front line of our restaurants and have seen a really positive reaction to that. We continue to expand the network of delivery providers that we have and have seen great growth in that channel. And we'll be introducing catering delivery to more of our restaurants throughout the Q2. The other big initiative that we still have for this year is a wholesale rewrite of our mobile application to match some of the improvements that we've made on our online site. Great. Thank you. Our next question is from Brian Bittner from Oppenheimer and Company. Please go ahead. Hey, guys. Thanks for taking the question. I just got a question and then a follow-up. In your recent proxy filing, you guys revealed some new compensation goals for the executive team. And I think part of the weighting of this is based on same store sales going forward. I think the target for the payout is a compounded annual growth rate of 7% over the next 3 years. Can you talk a little bit about how this target was constructed? Was it kind of back of the envelope math where that's kind of what you need to get to kind of your goals? Or was it bottoms up driven? Anything you guys can say about the target and the proxy would be helpful. And I have a follow-up. Yes, Brian. Our comp committee put that together and they had a lot of advice from some outside comp experts. I will tell you there are 2 components to it. 1 was the stock price and that is a significant increase in the stock price where the target equity would only be earned if the stock price achieved a weighted average over a period of time of at least $6.50 There's a lower payout, if you hit below that, but to get the target you have to hit 6.50 And then I think it was a third of it was the comp. And there were 3 different targets, a 5.7% and a 9% and a 7% would return the company to a very respectable sales level, which would have the potential to enable a very respectable and significantly higher margin for the company. And so it would put the company back on track to have some significant EPS growth. And of course, there are higher awards that are available to be earned. If we had a 9% and 9% compounded over a 3 year period would be a significant increase in that. That 9% would get us all the way back to somewhere in the $2,400,000 $2,500,000 average range. But keep in mind, by the time we get there, we'd have somewhere in the neighborhood of 600 to 800 additional restaurants at that kind of a volume. So our comp committee put it together, but there was some modeling that would suggest that that would put the company in a very strong earnings situation. Okay. That makes a lot of sense. And just to follow-up is you kind of talked about getting hopefully to the run rate guidance some point this year and I'm assuming what you're referring to is kind of the $10 EPS run rate. Question I have is what then becomes the big opportunity to build earnings power from there? At that point, does the model upside in the earnings power side kind of come from what we just talked about just continuing to get sales back and the leverage that comes with that? Or is there any significant opportunities outside of restoring sales once you get to the $10 run rate? Yes. The most significant thing, Brian, is for us to recover our sales, fully restore our sales. And we've saved money. We're doing a better job at labor. We've seen some improvements in some of the miscellaneous line items on the P and L. And to give you a perspective, if you look at the margin that we achieved during this Q1 of 17.8%, and if you said, for example, well, what based on the current way we're managing the business, what if our volume over time does return to a $2,400,000 number. If you just take into account the same kind of management, take into account the expected kind of leverage, our margin should improve to about a 23.5% to 24% range. Keep in mind, we've absorbed inflation over the last 3 years. And so if you, for example, added on a 5% price increase and you saw little or no resistance that 23% or 24% margin gets to a 27% or 27.5% margin. So that gives you an idea that sales alone with the current efficient way we're managing the business would get us back into a kind of a 27%, 27.5% margin for the Q1. And keep in mind, Q1 is not our best margin quarter. So we feel like in terms of running the business, in terms of managing efficiencies and still staffing for things like to support the higher volume per second make line, We think our teams are doing a fantastic job. So now what we've got to do is continue to welcome people into the restaurant, continue to deliver an excellent guest experience. And if we continue to step forward and fully recover our volumes, our economic model will be in full force. And keep in mind, these margins that I'm talking about, we have 100 basis points of additional incremental food safety related costs that we've got in there. And so we would have fully absorbed that and still have margins equal to or perhaps even better than our historic high margins in the past. Great. Thanks, Jack. Thanks, Brian. Our next question is from Sara Senatore from Bernstein. Please go ahead. Yes. Hi. A couple of questions. One is a follow-up on the sort of stretch targets that you've talked about and the 20% margin. I know that we're 4 months into the year. Could you give a little color on where versus expectations the chart you laid out with the build from kind of 2013, 2014 up to 2020. I would guess maybe food costs are not quite as good, maybe pricing is an offset. But I'm just curious where you might have seen more or better than expected contribution versus what may have disappointed a little bit? And then I had a question on a related question. As you see digital mix increase, is there any are there any kind of additional investments you have to make? I know you've talked to think a little bit about maybe kitchen display back of the house, just to ensure the throughput is there in the second make line, but, anything that might need to be done on that side as well to increase capacity? Thank you. Yes, Sarah, in terms of the stretch target, the 20% margin, the $10 EPS, in terms of surprises on the positive side, this isn't a direct margin or EPS impact. But I think the thing that we're the most delighted about is how fast we've been able to pivot and focus on the customer and how fast we're seeing every single measure, every way we measure customer satisfaction, we're doing a better job and it's month after month after month. And so we thought we could do this fairly quickly, but we thought it would take many more months and our teams are moving very, very fast. And this goes to show that when we simplify operations, when we define success in a clear way with what Steve described as these 5 key measures of success. Our teams, while they're not easy to get there, they're easy to understand and our teams have mobilized very quickly. And so that's, I think the biggest surprise overall. I think in terms of from a margin contribution, we're really surprised and delighted the fact that we're doing a way better job scheduling and deploying our people such that we're ready at peak hour, we're ready to support the increasing second make line sales. And yet we're in terms of deploying the right number of hours and deploying the right number of managers throughout the day and managing that part of the business. We're the best we've been in 7 years. And that happened in a matter of a few months. And so that happened much, much quicker than we thought. We're seeing progress in things like food costs. We picked up a couple of basis points just in terms of doing a better job of ordering, scheduling the prep, cooking the right amount of food and managing food throughout the day. We picked up maybe 20 basis points on that. We think there's still another 30 to 40 or 50 basis points left there. And so I wouldn't say that we're displeased with that, but we still got work there. But I think we've made some nice progress. Probably the only thing that nobody's asked about yet and that we should be further ahead and we're not is throughput. Throughput is the one thing it is an important focus of ours and we're doing okay not great. And so it's something that we're going to have to continue to focus on. We haven't really it hasn't been an important focus in the last year and a half. And because we've had high turnover, we have to retrain and really regain this skill and that's something we're very active in doing right now as we speak to make sure it's the right focus that we're doing the right training and that our folks in the field are executing at a high level. Thank you. Thanks, Sarah. Our next question is from Jeffrey Bernstein from Barclays. Please go ahead. Great. Thank you very much. I had two questions. Just one on the follow-up on the pricing color you gave. I think we had heard it was 5% increase in maybe 20% of stores. I'm just wondering as you read those results, like what would be a good response? So how much maybe how much traffic pushback would you say is acceptable? I'm just wondering kind of what you're looking for when you read that. I know you said you did it in kind of low risk markets, but I wasn't sure if that was defined as stores that had much better traffic in those markets or whether those markets just had tremendously high labor costs and therefore everybody was raging. I guess I'm just trying to gauge the likelihood that you ultimately deem it a success and at what point we would see another significant increase to the rest of the system. Yes, Jeff. Historically, when we've raised prices, we haven't raised prices that often. And when we track resistance, we track it into different areas. 1, we look at transaction resistance and 2, we look at average check resistance. So and we monitor both of those. And in most cases, in most markets historically, we've seen little or no resistance. We plan for around a 25% resistance and that would be a combination of resistance on the average check or resistance on the transaction. So if we raise prices by 5%, which we did and we saw a resistance of 25% of that, so onefour of that, so about 1.25%. So if we saw that we were only seeing a pass through of 3.75% or 4%, we would still consider that to be within the range of normal. Historically, we've seen even a better result, in other words, less resistance than that. But if we saw something like that, we'd be okay with that. We did take low risk markets just because we wanted to start with low risk markets. And when we decide that we want to take the next step, I think we'll take the next layer of markets and say, okay, this is the next layer from a risk standpoint. And risk does mean, what are the current competitive prices? What are the current sales trends? How strong are the trends right now? And what is the cost of doing business in those areas. And those are the consider what we consider to pick the first 4 40 restaurants. And as we go to the next wave, we would consider those same things. So hopefully that helps in terms of what we're looking for in terms of whether it's going well. And how long of a read do you think that takes? I mean is it possible that later in the back half of this year you've picked the next 400 stores for a 5% increase? Or do you really want to get comfortable and therefore we're talking about 2018 or beyond? It just depends on what we see Jeff. I was careful to in my prepared comments to say we're going to be patient because I know as soon as work got out that we did some target increases, there was a lot of excitement about, oh my god, they're going to raise prices across the system. And that's not a knee jerk reaction that that's not how we're thinking about it. If we saw that we went through the next few months, the next 3, 4 months or so and we saw really muted or virtually none at all, we'd consider, okay, which would be the next market. And so there is a chance that you might see some markets roll in 2018. I just don't want people to think that it's a predetermined. We've done the $440,000,000 and then next we're going to immediately follow it up with another $400,000,000 and another $400,000,000 We're going to be a little bit more patient. There's going to be a lot more patient than that actually. Got it. Thank you. Thanks, Jeff. Thank you. And our last question comes from Sharon Zackfia from William Blair. Please go ahead. Hi, good afternoon. Two quick questions, I guess. In December, I think you gave some grades for the stores and I think half of them were kind of below par on customer experience. I'm just wondering if you could maybe quantify what percent now are A or B or if you're actively grading them? And then any update on West Coast trends, Jack, I know that was something that had been lagging. Have you seen any narrowing of that gap? First on the grading, Sharon, I thought and so did the team, I think that it was going to take quite a while to get our field leaders and managers refocused on a new brand of restaurant tour programs that focuses on very measurable metrics that are customer facing, the things that affect the customer experience. We expected it to probably take a year to change that culture. It happened much, much faster. The managers and field leaders did an extraordinary job rallying the teams and the restaurants to embrace these new customer facing measures and the results have been great. We've dramatically improved the customer experience. And while we don't disclose, I mean these are internal measures that don't necessarily mean much to the outside world. The result though is that our customers are noticing a difference and it's a big difference. And so we're really pleased with the momentum and that's going to continue because these measures are based on things that will be sustainable. And so, it's very, very good news. Sharon, on the West Coast, West Coast is still lagging. And if you think about when we look at overall the company on a 2 year basis, we're down about 16%. The Midwest and Rocky Mountain continue to outperform that. So they're better than a down 16% on a 2 year basis. The South and the Southeast are doing pretty well. They're not quite at 16%, but they're in the teens. The Northeast, we mentioned this at the last call, the Northeast had been a laggard and they have closed the gap. And so they're more in kind of the teens, maybe the high teens range. They've made a move. But the West Coast still is in overall, call it, that low 20% range. And so we still have some work to do out in the West Coast, but most of the rest of the country is coming along nicely. Great. Thank you. Thanks, Sharon. Thank you. This does conclude the question and answer session. I'd like to turn the floor back over to Mr. Lexi for any closing comments. Thanks, everyone, for joining our call today. Just a quick note, our Annual Shareholder Meeting will be held next month on Thursday, May 25. After that, we look forward to sharing our Q2 results with you on July 25. Thank you. Thank you. This does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time.