Greetings, welcome to the Chipotle Mexican Grill first quarter 2017 earnings conference call. At this time, all participants are in a listen-only mode. An interactive question and answer session will follow formal presentation. If anyone for your assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I'd like to turn the conference over to your host, Mr. Mark Alexee, investor relations for Chipotle. Thank you. You may begin.
Good afternoon, everyone, thanks for joining Chipotle's first quarter 2017 earnings call. By now, you should have access to our earnings announcement released this afternoon, or it 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&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 in our expectations and plans. These statements are based on information available to us today, and we are not assuming any obligation to update them. Forward-looking statements are subject to risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements.
We refer you to the risk factors in our annual report on Form 10-K and is updated in our subsequent Form 10-Q for a discussion of these risks. I'd like to remind everyone that we've adopted a self-imposed quiet period restricting communications with investors during that period. The quiet period begins on the 16th day of the last month of each fiscal quarter and continues until the next earnings conference call. For the second quarter of 2017, it will begin on June 16th and will continue through our second quarter earnings release planned for Tuesday, July 25th. We will start today's call with some prepared remarks and will then take questions. On the call today are Steve Ells, our Chairman and Chief Executive Officer, Mark Crumpacker, Chief Marketing and Development Officer, and Jack Hartung, Chief Financial Officer.
Curt Garner, our Chief Digital Information Officer, will also join us for the Q&A session. We ask that you please limit your questions during Q&A to one per individual. With that, I'll now turn the call over to Steve.
Thanks, Mark, good afternoon, everyone. In December of last year, I returned to the role of sole 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 five 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. We're beginning to see some very tangible results. Through the first three months of the year, we've seen positive sales momentum and improvements in our key operating metrics. We generated revenue of $1.07 billion in the first quarter, an increase of 28.1% compared to the first quarter of 2016 on comparable restaurant sales growth of 17.8% 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. We restructured our bonus program for restaurant managers and field leaders to focus on five 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 first quarter, 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 multi-year 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. 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 two desserts, which we'll begin testing later this month. The one that I'll tell you about today is a traditional Mexican dessert called buñuelos, which is fried tortilla strips with honey, cinnamon, and sugar. The buñuelos will be served with an apple caramel butter dipping sauce. The buñuelos 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. Our desired brand narrative was disrupted in 2015, and that required us to shift our approach. First, 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 first 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 first quarter, our strategy this year is to advertise throughout the entire year. During the first quarter, we continued to run the Ingredients Reign 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 of 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. 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 their full levels this week. During the quarter, we also launched an unbranded television show for kids called Rad Lands.
The show, designed to educate kids about where their food comes from and how it is raised, debuted through the iTunes Store, where it reached the top five most downloaded children's show on iTunes. Through a partnership with Discovery Education, a leading provider of digital content for K-12 classrooms, Rad Lands 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 4.5 million educators and more than 50 million 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 195-210 for the year. More importantly, sales volumes for our new restaurants are improving, with restaurants in their first year of operations generating sales in the $1.4 million-$1.5 million range, with the most recent new stores trending even higher. As we move through the year, we 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 have 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 six consecutive months of improving customer-related scores in each of our three key measures. This is the best consistent month-over-month improvement we have seen since we started tracking these measures, and it's a tribute 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're 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&L. Specifically, we're seeing more efficient labor scheduling and management to the best levels we've seen in nearly seven 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. We're also seeing the lowest general manager turnover that we've seen in more than eight 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. Perhaps most encouraging is that when we visit our restaurants, you can see that our managers and crew are energized and excited about the direction we're headed and the improvements they are driving. Because we have redesigned all of our compensation, including merit raises, promotions, bonuses, and equity around this new direction, they know they will be rewarded when they achieve extraordinary results.
During the quarter, our comparable restaurant sales grew 17.8%, fueling a 28.1% total sales growth to $1.07 billion. The comp included a small benefit of 60 basis points or $5.5 million related to deferred revenue recognized from last year's Chiptopia 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 two-year basis improving to around down 16%, compared to January, which was down over 20% on a two-year basis. While March was affected by winter storms in the Northeast, the two-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 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 Chiptopia. Sales leverage contributed 560 basis points of the improvement in restaurant margins. Sales growth will continue to be the primary driver of improving margins in 2017. We lapped 260 basis points of non-recurring incremental promo and marketing costs, 100 basis points of non-recurring lost labor leverage from supporting promotions and closing our restaurants for a few hours on February 8th, 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% 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 was also 150 basis points lower than fourth 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 for 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% 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 of 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. Labor will likely be around 26.5% 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 and March 2016. 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%-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&A was 6.5% of sales, down from 7.4% from last year. G&A was up $7 million from Q1 last year due to the reversal last year of unvested performance shares. Without this reversal, G&A dollars would've 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 2016.
Our stock-based comp during the quarter was $15.3 million, or $7.8 million 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 million-$70 million, including the special one-time retention award to our employees discussed on the Q4 earnings call. For the full year, we anticipate total G&A expenses to continue to be about $300 million, as incentive-based bonuses are expected to be restored. Our pre-tax income was $74.4 million, and our effective tax rate during the quarter was 38%. The tax rate was impacted by non-recurring adjustments related to state income taxes and excess tax deductions 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 first quarter, we repurchased $58 million of our shares at an average share price of $412. We have $144 million remaining on our share repurchase authorization as of March 31. We generated cash from operations of $151 million during the quarter and finished the quarter with cash and investments of $577 million. Earlier this month, we began to test a targeted price increase in a few markets. If you recall, mid-2014 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 440 restaurants were affected, and the average increase was about 5%. It's too early to comment on customer reactions, potential resistance, or any impact to 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 the 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 24th, 2017, through April 18th, 2017.
Because our investigation is continuing, complete findings are not available, and it's too early to provide further details on the investigation. We will refrain from providing additional commentary now or in the Q&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. We think these solid first quarter results are a strong initial installment toward those goals. We still consider achievement of the goals for the full year as a stretch accomplishment, 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, 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, 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, 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, we'll be happy to open the lines for any questions you may have.
Thank you. At this time, we will be conducting a question-and-answer session. If you'd like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to move your question from the queue. In the interest of time, please limit to one question and one follow-up question. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. One moment, please, while we poll for questions. Our first question comes from Nicole Moore from Piper Jaffray. Please go ahead.
Good afternoon. I've caught your TV campaign a bunch of times, and I hesitate to share it has been on the Bravo channel. I just wanted to understand which channels you picked and why. How many weeks will you be running this campaign? How are you splitting out impressions? Then finishing out and rounding out the question, how are you measuring the returns? 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. We're running them at a high level of frequency. In fact, just across the first 2 weeks, it's about 160 million impressions. In terms of how we're choosing where we run them, they're running against what is primarily considered appointment TV or TV shows that people tend to watch live. Like "Desperate Housewives," I'm not going to suggest that's what you are watching. But that or "SportsCenter" or any sort of game, "The Voice" we run on. Those types of shows that people are less likely to DVR and then skip the commercials on. With regard to how the campaign is structured, it runs in two flights. The first one runs now through the beginning of July. Then in July and August, we actually run a different type of promotion, which I alluded to in my prepared statements.
Then we run another flight of the TV in September and October. Throughout the entire year, there are certain aspects of the campaign that run continuously. With regard to your question about whether or not this is a long-term strategy, this is part of the overall effort to rebuild the brand narrative. 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. It has a lot of different components to it.
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. Hopefully that answers your questions.
Just in terms of measuring the return, I'll hop off. Thank you so much.
Sure. The return, we're going to measure this in several ways. 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, we've only got our pre-wave benchmark on that. 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. 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. We'll do our best in terms of studying that.
A great deal of this campaign is actually using first and third-party data to target our customers directly. In those parts of the campaign we're reaching people who we know on a one-to-one basis, we can actually see them transact as a result of the campaign. As this unfolds, we'll be able to provide much more data on exactly how effective digital components that were targeted one-to-one 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 one-year basis for comps for the quarter. If you could maybe talk about February and March, and I think Jack, you talked about it on a two-year trend, but maybe just be very explicit on a one-year basis where sales exiting the quarter, what were you referring to?
In April. 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?
Yeah, John, I'll take the per sales question. February, we got a nice step up in February. We already reported January comps were in the 24% range. February and March were going against lower negative comps from the prior year, 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. Both months were going up against about a down 26%. The most important metric, John, that we looked at is on a two-year basis, how far down are 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 fourth quarter to a down on a two-year basis, just 16% in February.
We held that in March. We're seeing a similar trend into April so far where when we do our best to factor out the Easter noise into April, looks like we're still trending at about a down 16% range. Hopefully that helps on the sales. Mark, I don't know if you want to-
What is that on a one-year basis, though, Jack, just to be clear, what's the one-year comp in April then?
April is running, John, if you set aside the Easter compare, it's in the low double digits during April.
Okay, thank you.
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. 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. 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? 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?
I'll take the comp. Curt, 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. Remember, we're comparing the significantly negative numbers, we're seeing an inflection point that I described during February. We're not seeing anything that we can specifically point to say, "Okay, of the comp, of the improvement that we're seeing in the sales trend, X amount is digital." We know digital's growing at a very fast rate. We know that's taking people off the front line. That's helping, theoretically, should be helping our throughput because we should be having shorter lines. We feel like it's a contributor, but to put a specific number on it, we're not able to do that right now.
Karen, I can add a little bit of color around the roadmap 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 frontline 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, we'll be introducing catering delivery to more of our restaurants throughout the second quarter. 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 & Co.. Please go ahead.
Hey, guys. Thanks for taking the question. Just got a question, then a follow-up. In your recent proxy filing, you guys revealed some new compensation goals for the executive team. 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 three 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.
Yeah. Brian, our comp committee put that together, and they had a lot of advice from some outside comp experts. I will tell you, there were two components to it. One 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 $650. There was a lower payout if you hit below that, but to get the target, you have to hit $650. I think it was a third of it was the comp. There were three different targets, a five, seven, and a nine. A seven would return the company to a very respectable sales level, which would have the potential to enable a very respectful and significantly higher margin for the company.
It would put the company back on track to have some significant EPS growth. Of course, there are higher awards that are available to be earned if we had a 9%. A 9% compounded over a three-year period would be a significant increase. That 9% would get us all the way back to somewhere in the $2.4 million-$2.5 million average range. 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. 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. 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 and 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? Is there any significant opportunities outside of restoring sales once you get to the $10 run rate?
Yeah, the most significant thing, Brian, is for us to recover our sales, fully restore our sales. 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&L. To give you a perspective, if you look at the margin that we achieved during this first quarter of 17.8%, and if you said, for example, based on the current way we're managing the business, what if our volume over time does return to a $2.4 million 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%-24% range. Keep in mind, we've absorbed inflation over the last 3 years.
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. 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 first quarter. Keep in mind, first quarter is not our best margin quarter. 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 for second make line, we think our teams are doing a fantastic job. Now what we've got to do is continue to welcome people into the restaurant, continue to deliver an excellent guest experience.
If we continue to step forward and fully recover our volumes, our economic model will be in full force. 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. 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 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 four 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 13, 14 up to 20? I would guess maybe food costs are not quite as good, maybe pricing is an offset. I'm just curious where you might have seen more or better than expected contribution versus what may have disappointed a little bit. I had a related question. As you see digital mix increase, are there any kind of additional investments you have to make?
I know you've talked, I think, a little bit about maybe kitchen display, back of the house, just to ensure the throughput's there in the second make line, but anything that might need to be done on that side as well to increase capacity? Okay. Thank you.
Yeah, Sara, 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. We thought we could do this fairly quickly, but we thought it would take many more months, and our teams are moving very fast.
Just goes to show that when we simplified operations, when we define success in a clear way with what Steve described as these five 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. That's, I think, the biggest surprise overall. I think in terms of from a margin contribution, we're really surprised and delighted at 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 increase in second make line sales. 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 seven years.
That happened in a matter of a few months. That happened much quicker than we thought. We're seeing progress in things like food cost. We picked up a couple 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. I wouldn't say that we're displeased with that, but we still got work there. 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 that is an important focus of ours, and we're doing okay, not great.
It's something that we're going to have to continue to focus on. It hasn't been an important focus in the last year and a half. Because we've had high turnover, we have to retrain and really regain this skill. 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, Sara.
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 your stores. I'm just wondering, as you read those results, what would be a good response? Or maybe how much traffic pushback would you say is acceptable? I'm just wondering what you're looking for when you read that. I know you said you did it in 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.
Yeah
to the rest of the system.
Yeah, Jeff, historically, when we've raised prices, we haven't raised prices that often. When we track resistance, we track that in two different areas. One, we look at transaction resistance, and two, we look at average check resistance. We monitor both of those. 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. If we raise prices by 5%, which we did, and we saw a resistance of 25% of that, one fourth of that, about one and a quarter. 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. If we saw something like that, we'd be okay with that. We did pick low-risk markets just because we wanted to start with low-risk markets. 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." Risk does mean, what are the current competitive prices? What are the current sales trends? How strong are the trends right now? What is the cost of doing business in those areas? Those are what we considered to pick the first 440 restaurants. As we go to the next wave, we would consider those same things.
Hopefully that helps in terms of what we're looking for in terms of whether it's going well.
How long of a read do you think that takes? Is it possible that later in the back half of this year, you'll pick the next 400 stores for a 5% increase? 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 word 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." That's not the knee-jerk reaction. That's not how we're thinking about it. If we saw that we went through the next few months, the next three, four months or so, and we saw really muted or virtually none at all, we'd consider, okay, which would be the next markets? 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, and then next, we're going to immediately follow that up with another 400, then another 400. We're going to be a little bit more patient. We're going to be a lot more patient than that, actually.
Got it. Thank you.
Thanks, Jeff.
Thank you. 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 below par on customer experience. I'm just wondering if you could maybe quantify what % now are A or B, or if you're actively grading them. 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, think that it was going to take quite a while to get our field leaders and managers refocused on a new brand of Restaurateur program 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 in the restaurants to embrace these new customer-facing measures, and the results have been great. We've dramatically improved the customer experience. While we don't disclose, 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.
We're really pleased with the momentum, that's going to continue because these measures are based on things that will be sustainable. It's very, very good news.
Sharon, on the West Coast, West Coast is still lagging. If you think about when we look at overall the company on a two-year basis, we're down about 16%. The Midwest and Rocky Mountain continues to outperform that, so they're better than a down 16% on a two-year basis. The South and the Southeast are doing pretty well. They're not quite at 16%, but they're in the teens. We mentioned this at the last call. The Northeast had been a laggard, they have closed the gap, they're more in the teens, maybe the high teens range. They've made a move. The West Coast still is in overall, call it that low 20% range. We still have some work to do out in the West Coast, but most of the rest of the country is coming along nicely.
Yes. 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. Wesby for any closing comments.
Great. Thanks, everyone, for joining our call today. Just a quick note, our annual shareholder meeting will be held next month on Thursday, May 25th. After that, we look forward to sharing our second quarter results with you on July 25th. Thank you.
Thank you. This does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time.