Please stand by. Good day, ladies and gentlemen, welcome to today's Chipotle Mexican Grill, Inc. fourth quarter and full year 2016 earnings conference call. Today's conference is being recorded. At this time, I'd like to turn the floor over to Mark Alexee, investor relations manager for Chipotle Mexican Grill. Please go ahead, sir.
Thank you, Greg. Hello, everyone, welcome to our call today. By now you should have access to our earnings announcement released this afternoon for the fourth quarter and full year of 2016. It may also be found on our website at chipotle.com in the investor relations section. Before we begin our presentation, I will remind everyone that parts of our discussion today will include forward-looking statements as defined in the securities laws. These forward-looking statements will include statements of our management's business outlook, forecasts for comparable restaurant sales trends, estimates of food, labor, occupancy, and marketing cost trends for future periods, G&A and other cost savings for the full year 2017, descriptions of the impact of new technologies on our business, projections of effective tax rates for 2017, projections of capital investments, statements about stock purchases, as well as other statements of our expectations and plans.
These statements are based on information available to us today. We are not assuming any obligation to update them. Forward-looking statements are subject to risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements. We refer you to the risk factors in our annual report on Form 10-K as updated in our subsequent Form 10-Q for a discussion of these risks. I'd also like to remind everyone that we've adopted a self-imposed quiet period, restricting communications with investors during that period. The quiet periods for Q1 will begin on the 15th day of the last month of each fiscal quarter and continue until the next earnings conference call. For the first quarter of 2017, it will begin March 15th and continue through our first quarter earnings release planned for April 25th.
We will start today's call with prepared remarks. Then we will take 20 to 30 minutes of questions. Because we recently presented our 2017 strategy at the ICR conference, our prepared remarks today will be brief before opening the lines for Q&A. We ask that you please limit your questions to one or two per individual. On the call with us today are Steve Ells, our Chairman and Chief Executive Officer, and Jack Hartung, Chief Financial Officer. We will also have Mark Crumpacker, our Chief Marketing and Development Officer, Curt Garner, our Chief Information Officer, available for questions. With that, I'll now turn the call over to Steve.
Thanks, Mark. Good afternoon, everyone. Thanks for joining us. Today, I'm more confident than ever about Chipotle's future. I believe firmly in our mission to ensure that great food made with whole, unprocessed ingredients is accessible to everyone. I'm very encouraged by our rapid progress towards simplifying our operations and ensuring that we deliver an extraordinary dining experience for each and every one of our guests in each and every one of our restaurants. I'm also confident in the significant changes we made throughout the last year to position Chipotle for a strong performance in 2017. These efforts include the implementation of an industry-leading food safety system, investments in digital to enhance customer convenience of ordering, expanded use of consumer data and analysis, and changes to our leadership to strengthen our culture and sharpen our focus on the customer.
Our business was built on doing just a few things and doing them extremely well. As we continue to restore our economic model, I'm most optimistic about our renewed focus on simplifying our restaurant operations and delivering an excellent guest experience. Our restaurant teams and field leaders are quickly embracing this new focus with enthusiasm. As we've closed out the quarter and shifted to implementing our strategic plan for 2017, our teams are more motivated, more focused, and more energized than they've been in years. For the fourth quarter of 2016, we generated revenue of $1.03 billion, an increase of 3.7% on comparable restaurant sales decline of 4.8%, and the opening of 72 new restaurants. This produced diluted earnings of $0.55 per share for the quarter. Our comparable restaurant sales improved to a positive 14.7% in December as we lapped the softer comparison from December 2015.
Since our last update at the ICR conference in January, we've continued to make progress in ensuring that every restaurant is delivering an excellent guest experience. Next week, we will roll out a series of critical updates to our Restaurateur program, which identifies, validates, and rewards our top-performing managers. These updates will align the achievement of Restaurateur status with the measurable elements that directly result in an excellent customer experience. This was not the case in previous years when managers who achieved certain targets related to our people culture could be promoted to Restaurateur, despite the fact that their restaurants were not necessarily delivering excellent customer experience. All of our teams now know that the path to Restaurateur starts and ends with the customer experience they deliver. We've dramatically simplified the process and metrics.
Our teams know that in order to become Restaurateur, you need to not only deliver A-level customer service, but also show that you can sustain that A-level service. It's clear that this focused approach is already making a difference. Our Restaurateurs have demonstrated the ability to deliver the highest level of customer satisfaction. They are achieving this success by focusing on the critical elements of running a great restaurant, hiring great people, and training them to cook and serve delicious food quickly in a clean and inviting environment. To fully align the entire company around delivering an excellent guest experience, we are rolling out a new compensation system for our restaurant managers, Restaurateurs, and field leaders. This new program is designed to reward those leaders who are delivering the best customer experience on a sustainable basis.
We're implementing incentives that not only reward our teams for running great restaurants, but also for demonstrating continuous improvement and sustaining high performance. Beyond our efforts to strengthen the quality of customer service and restaurant operations, we're also making progress on our key digital initiatives. We have redesigned and simplified our online ordering site, enabled online payment for catering, and integrated with several well-known third-party providers for delivery. We are well into the rollout of Smarter Pickup Times, with more than 1,200 restaurants now using this system, and the remaining restaurants will roll out this technology next week. The initial results for restaurants using Smarter Pickup Times are encouraging. Not only are these restaurants seeing increases in the number of digital orders, but customers are also seeing faster service times between the time of order and time of pickup.
This improvement in speed of service reduces the average customer's wait by roughly half as compared to our legacy ordering system. With these significant improvements to our digital ordering experience, we are now in a position to promote digital ordering more aggressively. Just last month, we began promoting our new online ordering site, order.chipotle.com, in those restaurants that already have Smarter Pickup Times. By marketing these offerings, we have the potential to dramatically increase digital orders. We're also working aggressively to continue to attract and convert more new and lapsed customers. Over the second half of 2016, we attracted millions of new or lapsed customers, and we are pleased with the rate at which these new customers are converting from new or lapsed to regular customers. We're also excited about the potential to make these customers even more loyal and more frequent.
After all, frequent customers start as infrequent ones, and our data shows that customers become more frequent in restaurants that are delivering a great experience. That's why it's so crucial to elevate the quality of the customer service in all of our restaurants. To help us execute our marketing strategy, we recently hired two new agency partners, Venables Bell for advertising and MullenLowe Mediahub for media planning and buying. These new partners will support the largest advertising campaign in our history, launching in April. The campaign will focus on taste and great ingredients in a way that clearly differentiates Chipotle from the competition. We'll also continue to build greater loyalty with our existing customers through brand marketing centered around our commitment to serving delicious food made from ingredients raised responsibly.
These marketing initiatives, combined with the ongoing improvements in the customer experience and improved digital ordering channels, gives me great confidence that 2017 is teed up to be a very successful year for Chipotle. With that, I'll now turn the call over to Jack.
Thanks, Steve. Good afternoon, everyone. As we start the new year, we're optimistic about the direction we're headed, we've already seen encouraging signs of improved restaurant operations. We finished the year with three consecutive months of improvements in each of our three internal customer satisfaction scores. Our restaurant teams and field leaders are quickly responding to our recent pivot to simplify restaurant operations, they are keenly focused on delivering an excellent customer experience. These are early days with this renewed focus on the customer, we are proud of how our teams have responded, it gives us great confidence that we're on the right track.
With the change in the focus of our restaurant teams, which includes incentivizing and rewarding an elevated customer experience, combined with our strategic initiatives related to digital and marketing the Chipotle brand, we are optimistic about our ability to, one, grow our sales, two, improve our margins over time, three, allow us to invest in building long-term shareholder value. There remains a lot of hard work ahead of us, we believe in our vision, we believe in our strategy, we believe in our team's ability to continue to drive operational improvements. During December, we reported positive monthly comp of 14.7%, which includes a 60-basis-point benefit for deferred revenue related to Chiptopia. The sales comparisons ease in January as we're comparing to a down 36% versus a down 30% in December of 2015.
The dollar sales trends continued from December into January, the January preliminary comp improved to 24.6%, which included a negative trading day of over 100 basis points, slightly offset by 20 basis points positive related to Chiptopia. For the first 28 days in January, the comp was 26%, in the last three days of January, we traded a Friday and Saturday from last year, two of our highest volume days, for a Monday and Tuesday this year, two of our lowest volume days of the week. Of course, winter weather in January often results in choppy trends day to day and week to week. When we analyze the underlying comp trends, the January sales held up well, especially considering January had the lowest promotional activity of the past 12 months. We'll compare against a comp of down 26% in February and March.
Expect the comp will ease accordingly during the rest of the quarter. Our average check declined during the full year 2016, primarily due to a smaller group size. The average check began to rebound in December and January, increasing by about 2% compared to last year, which recaptured about two-thirds of our decrease in check. During the fourth quarter, we reported $1.035 billion in sales, which included $6 million of previously deferred revenue related to our Chiptopia promotion. As of the end of the fourth quarter, our trailing 12-month average unit volume was down to just under $1.9 million, that average volume will now begin to rebuild as our comps have turned positive. Looking to the P&L in Q4, we reported restaurant level margins of 13.5%.
Our food costs were 35.3%, which was impacted by elevated avocado prices during October and November, which added about 40 basis points versus Q3. Assuming no significant change in expected food inflation, we expect our full year 2017 food costs will be in the low 34% range. This includes anticipated cost savings from negotiations with our suppliers and our restaurants managing food costs by reducing waste and optimizing food ordering, food prep, and their inventory. Labor costs were 27.5% during the quarter, an increase of 140 basis points versus last year. Delevered from lower restaurant sales, along with wage inflation of about 5%, combined to negatively impact our labor costs as a percent of sales by a little over 200 basis points. We started to see better deployment of our restaurant teams, including salaried managers, which reduced labor by about 60 basis points.
During 2017, we expect labor wage inflation will likely continue at the 4% to 5% level, which would add about 100 basis points or more to labor costs versus the full year 2016. We are targeting to more than offset this inflation through continued better deployment of our salaried and hourly teams throughout the year, and from leverage on the positive comp. Through January, we've maintained progress from the fourth quarter, and we hope to continue to build on gains in effective labor deployment throughout 2017. Typically, our Q1 labor as a percent of sales is about the same as the fourth quarter labor percent. However, during Q1 2017, to be sure we will fully support the higher volume of digital orders expected from our first ever broad-based marketing of digital, we expect to invest around $2 million in additional labor or about 20 basis points.
Q1 labor as a percent of sales will be slightly higher than Q4. Once we have the cadence and better predictability of digital sales, our labor matrix should fully fund the hours needed to support our growing digital business. Occupancy as a percent of sales was higher due to sales deleverage, but with positive comps, we expect our occupancy costs in 2017 to decline to just over 7% of sales. Our other operating costs during the quarter were 16.3% of sales, including 4.7% of sales related to marketing and promotional activities. As we head into 2017, we are targeting an overall combined marketing and promo investment of around 3% of sales, although we will consider increasing that investment during the year based on the actual results of specific marketing efforts.
The path to restoring our economic model is not a complicated one. The operational efficiencies and cost savings opportunities we've outlined will require great execution by our restaurant teams, led by our field leaders. Our teams are more aligned than ever on the priorities for 2017. Our first priority is to focus on our customers and provide excellent hospitality to every customer every day. By simplifying our operation to focus on the guest, the very things that lead to a great experience, the proper training and deployment of the restaurant team at the right time throughout the day, and the proper ordering, prep, and cooking of the right amount of delicious food throughout the day, will also lead to better business results.
As an example, we often have nearly the right number of hours scheduled for the full day, but too often we are short one crew person during peak lunch, when full staffing is imperative to deliver great throughput, and we have extra crew members during non-peak parts of the day. The overall hours are nearly correct for the day, but the deployment is not yet optimal. This can contribute to a deterioration of service levels during our critical peak hours. Consistently scheduling more effectively throughout the day will result in a better guest experience and better margins. Our G&A costs in the fourth quarter were 6.3% of sales, and for the full year were 7.1% of sales, or a total of $276 million. We've worked diligently over the past year to effectively manage our overhead costs while supporting a growing business, strategically realigning resources to the highest priorities.
Our underlying G&A for 2017, excluding our support staff employee bonus program and stock compensation, is expected to be flat or even down versus last year. Including these items, we expect our G&A in 2017 will increase to around $300 million. After two years of reduced employee bonuses for our support team and no bonuses for the executive team, we expect to return to paying targeted bonuses for all employees in 2017, which will add around $20 million. We expect our stock comp will increase from around $55 million in 2016 to around $75 million-$80 million in 2017. The $55 million in 2016 was artificially low as it included a $6 million reversal of expense related to a performance share award where the shares expired unvested. We're planning to grant a retention bonus in the form of restricted shares to our non-executive support staff.
We also plan to broaden the participation in the equity plans, which combined with the one-time retention grant, will add around $15 million-$20 million to the stock comp. Offsetting these increases in staff bonuses and equity grants are G&A reductions, including a reduction for our all manager conference, which is held biannually and will not occur in 2017, along with expected reductions in legal and other G&A expenses. Our 2017 incentive equity programs have not been finalized, these are just estimates at this time. A non-recurring retention plan based on restricted shares instead of options is a great way to reward the hard work and commitment our people have put forth and makes it much more likely they will stay and grow with us.
Our effective tax rate for the quarter was higher than in recent years at 48.7%, and our effective tax rate for the full year 2016 was 40.8%, compared with 38.2% in 2015. In comparing the full year rates, our higher rate in 2016 was primarily due to higher effective state tax rates. We expect the 2017 full year effective tax rates to return to normalized levels and be in a 39%-39.5% range, excluding possible volatility in the rate due to the adoption of a new accounting standard related to the tax treatment for exercises in employee equity plans. During the quarter, we generated $68 million in cash from operations, which funded our $67 million investment in CapEx. As of December 31, we maintained $543 million in cash and liquid investments.
We also repurchased $67 million worth of stock during the quarter at a weighted average price of $392 per share. For the full year 2017, we anticipate that we will invest about $225 million in CapEx. Going forward, we anticipate we'll continue to generate cash from operations sufficient to fund new restaurants while using excess funds from operations to opportunistically repurchase shares of stock. We faced a number of challenges over the past 14 months. We've also realigned our focus and have made important investments that are now beginning to take hold. We've reevaluated and refocused our operations. We've strengthened our marketing capabilities. We've introduced important enhancements related to digital, and we've begun to capture operating efficiencies, all of which make us optimistic about what we can accomplish in 2017.
Despite the challenges, we never lost sight of our purpose, which is what has made Chipotle a compelling brand and a compelling company. It's an exciting time for all of us at Chipotle, and we look forward to what our teams can accomplish this year. Thanks for your time today. We'd now like to open up the lines for your questions.
Ladies and gentlemen, if you would like to join that queue for questions, please do so by pressing *1 on your telephone. Just make sure that your mute function is turned off to allow us to receive that signal. Once again, that's *1 for any questions at this time, and we'll pause for just a moment to allow everyone the opportunity. All right, our first question comes from David Tarantino with Baird.
Hi, good afternoon. Jack, just a question about the outlook for this year. I know you gave a lot of the pieces there in your commentary, but last quarter you outlined a goal or guidance of getting to around $10 in earnings per share, and there was no comment around that figure this time around. Could you just talk about whether that number's still in play in your mind, or whether that's changed since the last time you commented?
David, we had talked about back in the third quarter that we had a stretch goal of a $10 EPS during 2017 and a stretch margin of 20%. Those are still in play. We're still shooting for those. We didn't include those only because we've discussed those at length at ICR and other investor conferences. We've characterized those as reasonable but stretch goals. They're still in play. I'd like to think of, for example, the 20% restaurant level margin is something that we still expect to get to that sort of a run rate during the year to make sure that we leverage the P&L as our sales have turned positive now, make sure we drive operational efficiencies, make sure we do everything we can to restore our economic model.
We believe we can get to a run rate of right around that 20% restaurant level margin. Now, will we get to that run rate in time so that we can deliver the full $10 in EPS and deliver an overall 20% margin? That's where the stretch comes in. It's still a goal that's in play, David, but we're not characterizing it as formal guidance, if that makes sense.
Great. That's helpful. I guess on that last point on the run rate on the margin, can you talk about, I guess, is the idea that that would be the run rate that you would carry over into 2018? Or would you exit the year at a higher rate so that 2018, all else being equal, would be higher than 2017?
The idea behind the 20%, David, was based on what our current volumes are right now and what we put out there as a comp guidance in the high single digits is, we think that our model has the potential, if we can do everything right from an execution standpoint, that we can deliver around that run rate of around 20%. If we end the year with momentum in comp and we see ourselves continuing to drive positive comps into 2018, that margin has upward potential. I've stated a number of times that if we can get all of our sales back, so if we can return to a $2.5 million restaurant company, that we have the ability to fully regain all of our margin up to that 26%, 27% or higher. There are pieces of that that we've been absorbing, for example, inflation.
We've not had a price increase in three years. We're not planning any specific price increase right now, but at some point over time, we'll need to pass on some of the higher costs. We believe we'll be able to do that. That along with leverage from the higher sales, that along with better negotiation, that along with better management at the restaurant level, holding the line on the P&L, on individual P&L line items. We still think we have the ability to recapture the high 20% margin range. The most important factor, though, year by year, is sales, how much we can build in terms of sales.
Great. Thank you.
Moving on, we'll hear from Jeff Farmer with Wells Fargo.
Thanks. Just following up on David's questions. Can you guys provide some detail on the expected timeline for your cost control efforts on both the labor and food cost lines? I'm just curious how quickly we can see those benefits. Jack, if there's anything you can tell us about the cadence in which you'd expect to see some of those initiatives pay some dividends for you guys.
Yeah, Jeff, it's going to be hard, and I really don't want to peg specific quarters. At ICR, we talked about there's risk levels of everything we need to do to get to that kind of a 20% run rate. Some of the things like avocados have already come down, so that's going to happen. You're already going to see food costs improve during the first quarter. Other items, strategically doing a better job of managing our food costs during the year, that will happen over time. To say exactly when we will achieve the full savings that we potentially can get at the restaurant level, I don't want to commit to that. We could move really quickly on that.
What's likely to happen is that our restaurants are going to move too quickly and portion size might be reduced, holding times might increase, so that the quality of experience might be reduced. Instead, what we want to do is make sure that we're ordering correctly, we're scheduling the right prep, that we're scheduling people during the right times, and we want to make sure that we're doing that in the right way every time. I'd rather talk about it as we expect to get to a run rate during the year, Jeff, and rather than commit to it in terms of specifically which quarter. Of course, the biggest variable here is the sales building. That's been the biggest variable in the last year, the hardest to predict.
Our ability to recover our margins is highly contingent upon how we proceed in terms of the comps from here on out.
Just one quick follow-up. You were asked about this at ICR, but just in terms of some color on the performance of those TV tests, I think it was in three markets, I think it was November-ish timeframe. More specifically, where you tested TV, if those markets held on to any relative same-store sales performance in the weeks following the test. Again, any color you can provide in terms of how impactful those marketing or TV tests have been would be helpful.
Sure, Jeff, this is Mark. The tests, as I mentioned at ICR, had the results I more or less expected, but it's somewhat mixed. The results that we saw were basically an outsized level of awareness relative to the media buy, which is typical for television. It's notoriously difficult to tease apart which part of the comp is a result of which part of the marketing or whether or not it was weather or competitive pressures or whatnot. What I will say is that we saw a lift in two of the three markets where we tested. We actually saw a negative trend in one of the three markets. That's why I say it's mixed. It's very difficult to determine these things.
I can't tell you that we necessarily held or didn't hold the comp because it just wasn't big enough over that period of time for us to have been able to identify the trend clearly. Having said that, it was a relatively small test. These were three markets, and it was just over a month of run for those spots, which really isn't a lot in the world of television. The way to look at it going forward is that as we launch our new campaign in April, there will be a video component, some of which will be on television. It'll be a much more sustained run of the buy. That'll give us a much, much better sense of how television is performing.
The test, as I mentioned, did confirm for me what I more or less thought it was going to do. Certainly that test wasn't a silver bullet.
All right. Thank you.
Sure.
Moving on from RBC Capital Markets, we have David Palmer.
Thanks. Good evening. You've discussed digital ordering, the new marketing, the simplification of operations. If you end up seeing your two-year trend rebuild through the year, what do you suspect will be the biggest reason for that rebuilding?
Well, okay. I'm not sure. You might get a different answer from each of us. I think it's going to be based on the way we execute in the restaurant, delivering a great customer experience, because that includes making sure the restaurant's clean, the serving line is clean, that throughput is fast, that our crew is just providing an overall excellent experience. When we execute well in the restaurant, everything else is going to work well also. We have a better shot at executing digital, so I think the single biggest thing we can do, and the thing that we've been focused on really intently, is to simplify our operation, make sure that our teams know clearly what it takes to deliver an excellent customer experience, which they do. That's the thing they do the best. If anything, we've maybe complicated it in the past.
We've really demystified that. We've uncomplicated it. We're tying incentives to delivering an excellent experience, I think that's the single biggest thing that will drive our sales during the year.
If you see certain metrics, what metrics will you look at this year to contemplate a potential price increase? You've talked about that being something you'll contemplate at some point. What will you look at to think about doing that?
Yeah. David, we would look at our strongest markets, the markets that have recovered the best, the markets that weren't impacted in the first place. We'll look at markets where our operations are strong. Then we'll look at what competitors are doing. We don't have any plans right now, specific plans. At some point, we'll dip our toe in the water. We'll take a market where there's a very low risk and when the trends continue to build. Again, we're confident about our teams, we're confident about our pricing power. We're confident about we've got room to do this compared to our competitors. We'll at some point decide to dip our toe in the water and see how well that goes in that market. If that goes well, we'll consider what we do from there.
No specific plans right now to do anything with price.
Thank you.
Our next question comes from Sara Senatore with Bernstein.
Excuse me. Thank you very much. I just wanted to ask a little bit more about the comp recovery and the volumes that you're seeing in both existing and new stores. On the existing stores, I think again, as was referenced, a lot of us are inclined to look at the two-year trends.
To control for ease or difficulty of comparison. With that in mind, it looks like you're seeing a nice acceleration. Is that how you're thinking about the volumes that you are in fact seeing, if you control for seasonality, a pretty nice improvement versus what appeared to be no real change through last year? On the new unit volumes, could you just talk about productivity there? I know in the past you've said when you market around new unit volumes or new unit openings, you see some improvement, can you just talk a bit about if that's continued?
Yeah, I'll take the question on the comps here, and then I'll turn over to Mark on the new stores. The way I would say it is, I feel good about the comp trends. I feel like we're at least holding our own, and perhaps starting to see an inflection point. Most importantly, we're doing this with very little promo. We've weaned ourselves off of promo. Most of the improvement from December into January was we're going up against a softer comp. I feel really good about that, and January is not a great month to get a perfect read on the trends. When you look at it day by day and week by week, you do see some volatility because of weather this year, weather last year. When we look at it day by day, week by week, we feel good about what we're seeing.
We feel good about holding onto or perhaps building sales from the previous trends. We're also seeing geographically that the Northeast has made a nice move in January, they've come back to the pack. We talked about the coast being the weakest, but during January, we saw the Northeast really come back to the pack quite a bit. The West Coast has still remained to be an outlier. That was a nice move. We'll, Sara, continue to watch what happens during February and then as the weather clears, but we feel pretty good about the trend so far.
Thank you.
Mark, you want to-
Sure. Yeah, Sara, with regard to the new restaurants, they're performing right now at about 74% of our regular restaurants, which is an improvement. It got as low as 70% during the crisis. We do see that the stores that we market are performing better. Now all new restaurants receive marketing at their opening. The other change that we've made with regard to new stores is the way we're choosing real estate, particularly in developing markets. As you know, or you may know, our real estate markets are categorized into four different categories, new, proven, established, and developing. In developing markets, we've reverted to choosing only tier 1 sites, which we expect will have an ongoing effect on improving the ADS in those restaurants. All said, we're confident in where the new restaurants are headed and in the strategy around choosing those and in marketing them.
Thank you.
From Bank of America, we'll hear from Gregory Francfort.
Hey, guys. Just going back to the margin question, maybe looking back at 2010 to 2015, I think you guys held the 26%-27% restaurant margins on volumes that went from 1.8 to 2.4. Can you talk about maybe why that was? As you look forward to 2018, do you need $2.5 million volumes to get to 27% restaurant margins? How does that play together?
Yeah. Greg, if you look back to those periods, depending on what year you look at, you're going to see a much different food cost. We in the fourth quarter had a 35.3% food cost. When you look back into those periods, you're going to see a food cost somewhere in the 30%, 31% range. There's 400 basis points right there. The other piece is labor inflation. Since 2012, we've had labor inflation totaling about 20%. We've only taken about 5% of menu price increase in that time. We've eaten a couple of hundred basis points worth of labor inflation, at least, maybe even more. The food cost is higher because of things like we've had inflation in steak, we've invested in Food with Integrity, things like that.
Because we're a little bit behind right now in menu pricing, I would say our food is at an elevated level. We've been eating some of the higher food costs over time, same thing with the labor. We need a combination, frankly, of getting our volume back, getting back into the $2.5 million range, delivering on some of the efficiencies that we've talked about, and passing on some of these higher costs to our customers. If we do all that, I think we can get back into the high 20s. If we only stayed at this current volume, $2 million or so, I think it'd be a stretch to consider getting some margin in the mid 20% range or higher, unless we wanted to just jam a very high menu price increase.
That's never been part of our strategy because we want to be accessible to the mass, so we want to remain affordable.
Maybe just to follow up, to get to the 20% margins, I guess what sort of volumes do you need to do?
Well, it's within our guidance range. We talked about a guidance range for the year of in the high single digits. If we can achieve that kind of a comp, then achieve some of the negotiated savings that we've talked about, achieve the operational savings principally in food and labor, we think we can get up to that in the range of that 20% run rate.
Thanks, very helpful. Appreciate it.
Sure. Thanks, Greg.
Next question comes from Karen Holthouse with Goldman Sachs.
Hi. Thank you for taking the question. Looking at just unit by unit and the initiatives to better manage cost of sales and labor, is there any sort of difference in the success rate you're having for stores that might be seeing more versus less volatile week-to-week or day-to-day sales trends?
I'm not sure I understand the question, Karen. Unit by unit, are you trying to link our cost savings initiatives with sales building initiatives to see if there's a correlation?
No. Is there a correlation between units that. You've talked about just sort of week to week, day to day sales trends staying somewhat volatile. Are the cost management initiatives going better or a little bit easier to wrap your heads around in stores that might be seeing a more consistent or less volatile sales trend?
Yeah. The answer is yes. The volatility is not unit by unit, it's more market by market based on geography. Yes, it's a lot easier to manage food and labor especially, when you have predictability. When you have volatile weather, we have a snowstorm one day, your tendency is to probably have too many people on the staff and certainly even send people home. Generally, you're going to have de-leveraging, you're going to have excess labor, maybe excess food, although we have multiple deliveries a week. We don't usually have a problem unless we are closed because of a snowstorm for multiple days. There's no question about it. When we have predictability of the sales, we can do a better job of managing things like labor.
Great. Thank you.
Thanks, Karen.
Thanks. For Morgan Stanley, we have John Glass.
Thanks very much. First, in your plans to roll out and accelerate digital, does that include activating that second line you've talked about? Maybe I'm having a hard time imagining it, but is it the kind of thing where you'd have to set it up for peak periods, staff it, then break it down when it gets quieter? Do you not need that second line? That's not really part of the plan for the first phase of digital?
I'll start with it, then Curt may want to add on. John, the second make line is a huge part of it. It's a critical part of it. We have the second make line in most of our stores, some 90 something %. I don't have the exact number. It is underutilized in a lot of our stores. In the 1,200 stores that we've already rolled out Smarter Pickup Times, all of those stores already have a second make line specialist, a takeout specialist. We rolled out specifically to those stores first because we knew that they were staffed. We already knew that they have a skill and already the habits of using that second make line, and executing well on that second make line. The stores that are going to roll out next week are the lower volume stores. They don't necessarily have a trained takeout specialist.
The $2 million investment that I described, that is an investment in labor for those teams to open up that line. It is going to be an excess, kind of an advanced investment, because as the sales come, our labor matrix will fully fund and fully allow those hours, and we'll have normal margins. We don't want to wait for the sale, execute poorly, and then say, "Oh, we better start adding some labor." We're going to front load that a little bit, invest some extra labor in those stores, and then we'll be able to adjust. If stores stay low volume, we'll be able to adjust and make sure that we have the appropriate amount of labor.
We're optimistic that we're going to see additional digital second make line sales in all of our stores, and that will justify the labor investment that we're making in February, and it'll be fully part of the labor matrix.
If I could just follow up, can you just refresh our memory from last year, first and second quarter, when you were doing more promotional activity. Were all transactions accounted for in comps, or were the free burritos not recorded in the top line? Was all the cost associated with that, was that all in the other operating expense line, or was there anything else, for example, in food costs that related specifically to those promotions?
Yeah, John, when we have promotions, none of that would be in the sales because it would be free. You would see the entire cost of that. We would take the food cost related to the food that we're giving away. All of that would be other, and that would be in promo. For example, when we talk about 4.7% of sales in the fourth quarter being marketing and promo, the promo part of that is buy one, get ones, or free chips and guac and things like that. That's how you'd see the pieces.
To be clear, you would record a transaction if someone came in and got a free burrito?
Yes. We would record our transaction. When you saw us report last year, if we did a, say, where transactions outperformed sales, that would be because if you came in and you got a free burrito, we would count you as a transaction, yet there would be no sale.
Thank you.
Thanks, John.
Moving on, we'll hear from Sharon Zackfia with William Blair.
Hi, good afternoon. Just a quick question on the Northeast and the improvement there. I think you might have done some leadership changes in the Northeast as well. If you could maybe talk about what you think the causal elements have been in the Northeast.
Yeah. I don't know yet, Sharon, whether I can attribute it to that. I'm very confident in the team out there, and I'm very confident that they will drive not only operational savings and customer experience improvements, and that will lead to better sales. We may be seeing some of those early dividends. It may also be just a little volatility with the winter weather, but it looks pretty good to me. It looks like they closed the gap in a pretty meaningful way. I'd like to say that, yeah, the folks out there, even though they've only been out there a couple of months, that they're already making a difference. I know they've still got their work ahead of them. I'm optimistic that this is the right team.
They are some of our top proven leaders that have gone into other markets and done a really fantastic job of hiring great people, training them, and delivering a great experience. It probably is some early dividends on that, Sharon, but it's really hard to tease out how much is that versus how much is just other factors.
Moving on, we'll take our last question from John Ivankoe with JP Morgan.
Hi. Thank you very much. First, Jack, just a very basic question. I even apologize for asking it. The first quarter, for a lot of different reasons, the year-ago comparisons, the promos, the closed store, Leap Day. There's a lot of things that make the first quarter unusually difficult to predict from a comp perspective. I know you've given full year guidance, and you don't typically give a quarterly guidance, but with you having access to all the data and just seeing the overall trend in customers, is it fair for me to ask somewhat of a comp range for people to expect in the first quarter? I fear expectations might be a little bit all over the place.
Well, it's fair to ask, we're not going to give it. We're thinking about building this business over more than just a quarter at a time. We're focused on running great restaurants. We're focused on the customer, focused on digital, focused on brand marketing again, focused on restoring our economic model. To break out predictions quarter by quarter, then being defined based on those quarter-by-quarter predictions just isn't really helpful for us right now. Sorry, John, we're not going to do that, we'll continue to give you updates each quarter, we'll give you as much insight as we can about what we're doing, how we're doing, I think that's a better way to discuss how the trends are going.
Completely understand. I thought maybe we could get away with it just for this one quarter. Then secondly, if I may separate, could we talk about kind of the direction of employee turnover? I mean, maybe where that kind of peaked in 2016, what's happening with turnover now, and if you're starting to see a market change or, I suppose, improvement in turnover and how you think that may be influencing your execution at the store level.
Sure. There's no question that we saw accelerating turnover rates post-crisis for a number of reasons that we've talked about in the past. Laying on a lot of complexity to the teams. Just a lot of new food safety initiatives, things like this. It's complicated for our teams, and that was one of the reasons there was turnover. I will say, though, that since we have made it very clear how we find success in our restaurants now and how we get our restaurants to A and then on to Restaurateur, the clarity and the understanding of how to do that has really helped morale. It's palpable. We can feel it in the restaurants. I think our folks appreciate that we've simplified it. I think that in our past, the tools that we had were sometimes more complicated than actually running a good restaurant.
We've really allowed now our folks, with great training, with a clear path to Restaurateur, we've really allowed them to thrive. We're starting to see great morale. I think this is going to contribute to lower turnover throughout the year.
Thank you.
All right. Ladies and gentlemen, that does conclude the question and answer session. I'd like to turn the floor back to Mark Alexee for any additional closing remarks.
Great. Thanks, everyone. Thank you for joining us today. We look forward to speaking with you to discuss our first quarter results in late April. Thanks again.
Ladies and gentlemen, that does conclude today's conference. We appreciate your participation. You may now disconnect.