Earnings Call: Q1 2015

Apr 21, 2015

Please standby. We're about to begin. Good day, and welcome to the Chipotle Mexican Grill First Quarter 2015 Earnings Conference Call. All participants are now in listen only mode. After the speakers' remarks, there will be a question and answer session. Call. As a reminder, this conference is being I would now like to introduce Investor Relations Manager for Chipotle Mexican Grill, Mr. Mark Alexei. You may begin your conference. Thank you. Hello, everyone, and welcome to our call today. By now, you should have access to our earnings announcement released this afternoon for the first quarter 2015. 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 about our potential business results, growth and shareholder returns, projections of the number of restaurants we intend to open and trends and development costs. Essence of future comparable restaurant sales increases or comps and supply chain and other trends affecting future comps projections regarding trends in food, labor and general administrative costs our expected effective tax rate statements about stock repurchases as well as other statements of our expectations and plans. These statements are based on information available to us today, and we are not assuming any obligation to update them. Forward looking statements are subject to risks and uncertainties that could cause our actual results to differ materially from the forward looking statements. We refer you to the risk factors in our annual report on Form 10 ks as updated in our subsequent Form 10 Qs for discussion of these risks. I'd like to remind everyone that we have adopted a self imposed quiet period, restricted communications with investors during that period. The quiet period begins on the 1st day of the last month of each fiscal quarter and continues until the next earnings conference call. For the Q2, it will begin June 1 and continue through our Q2 earnings release in July 2015. On the call with us today are Steve Ells, our Chairman and Co Chief Executive Officer Monty Moran, Co Chief Executive Officer Mark Krumpacker, Chief Creative and Development Officer and John Cartung, Chief Financial Officer. With that, I'll now turn the call over to Steve. Thank you, Mark. I'm pleased with our performance during the Q1. 2014 was an extraordinary year for our business and we're off to a strong start in 2015. During the quarter, we generated revenue of nearly $1,100,000,000 an increase of 20% on comparable restaurant sales growth of 10.4% and the opening of 49 new restaurants. This produced diluted earnings of $3.88 per share, an increase of 47%. These results are particularly strong considering that we were up We also saw some challenges related to our decision to stop serving carnitas in some of our restaurants. However, the strength of our business has weathered these challenges and emerged to set us up for a great year in 2015. Our performance is the direct result of our continued focus on the things that really drive our business, our unique food culture and our unique people culture. We have a strong history of establishing very high standards for food we serve, standards that are very often hard to meet given our requirements for the ingredients we use. We've encountered challenges from time to time since we began our journey to find the very best ingredients we can, and we do not anticipate our recent pork supply issue to be our last one. But our track record of driving positive change in these areas is unprecedented and we believe these higher quality ingredients taste better. In January, we suspended 1 of our pork suppliers after a supply chain audit found that they were not fully compliant with all of our standards. Our protocol requires that pigs are raised with access to the outdoors or deep bedding in barns and without the use of antibiotics. These differences are in stark contrast to the way conventional pigs are raised. In many cases, they spend their whole lives indoors hard slatted floors with no bedding, which we think is inhumane. When we found that one of our suppliers was falling short on some of our requirements, we knew that removing this pork from our supply was the right thing to do. But our decision left us without enough pork and the resulting outages affected more than 1 third of our restaurants. While many of our customers were incredibly proud that we took a stand to do what was right, we also knew that there was risks involved and that we would encounter challenges in replacing the supply. There is very little cushion today in the supply system for pork that meets our standards. And ultimately, the solution requires increasing the number of pigs that are available. This does not happen quickly. Recognizing this near term supply constraint, we have been looking hard to find more pork that meets our protocols. Our long term suppliers have partnered with us to increase output of responsibly raised pork. However, this alone will not be enough to remedy the situation and our shortage will remain at more than 1 third of our restaurants as we enter the peak spring and summer periods. We have also looked at the possibility of adding new suppliers and have explored options to use other cuts of pork as a way to get more supply. Each of these potential solutions has their own unique complications. That said, we now believe that we have found a solution with a new supplier to help us fill our gap. Our team is conducting on-site visits to inspect all facets of the operation and we're encouraged by what we have seen so far. At this point, we plan to begin introducing this new pork in some of our restaurants in the coming months. If all goes as planned, we believe that we will be steadily increasing our supply throughout the 3rd quarter and back in full supply during the Q4. While the commitments we make and the way we run our business can be difficult, they are also helping to differentiate Chipotle and enabling us to build stronger relationships with our customers, particularly younger customers. New research out during the quarter from investment firm shows that the fast casual sector has surpassed casual dining in terms of frequency of visits, with 45% of consumers saying that they spend more money eating out in 2014, up from 37% in 2013, and pointing to gains in popularity among fast casual restaurants. In this study, Chipotle was named as the favorite restaurant more than any other, with twice as many mentions as the number 2 company on the list. Another study shows that millennials, key customers for Chipotle are eating out at fast casual restaurants more than Generation Xers or Boomers and that their dissatisfaction with traditional fast food is higher than other generations. We believe that the loyalty we are believed that we're building with key customer groups is very much a result of a result of our commitment to doing what is right in addition to the excellent customer service that we provide. As we move closer to resolving the supply issues that have left us short of Carnitas, we believe the pieces are in place for us to deliver strong performance throughout the year and to help us continue to change the way people think about any fast food. I'll now turn the call over to Monty. Thank you, Steve. Our ability to continue to deliver excellent results depends on the continued success of the special people culture that we have created at Chipotle. This culture continues to provide an extraordinary restaurant experience, while simultaneously allowing us to develop the excellent leaders we will need to accommodate our future growth and help us to maintain our strong unit economic model. During the quarter, we continued to strengthen our restaurant teams, adding 42 new restaurant tours and promoting 11 in the field leadership roles, either apprentice team leaders, team leaders or area managers. These leaders are able to attract very talented people to our company and develop them to reach their full potential. By hiring only top performing employees and developing them to be at the very best, we're able to do things in our restaurants that other restaurant companies simply can't do. Not only are our teams running extraordinary restaurants, preparing delicious food using classic cooking techniques and providing exceptional customer service, they're also elevating the people around them. This approach to running our restaurants is what enables us to create such an extraordinary dining experience and deliver such strong unit economics. The strength of our culture is evident in many ways, including through a growing number of individual success stories as more and more of our people are climbing the ladder from crew to management and to field leadership positions as well. In fact, last year alone, we promoted more than 10,500 people who started as crew into management positions. More than 78% of our restauranteurs started with us as crew, many having never even worked in a restaurant before. During the quarter, one particular leader really captured our attention, Montel Millage, who demonstrated his ability to assemble a team of all top performers and then empower them to achieve high standards in his restaurant, became our youngest restaurant tour ever at only 19 years old. Montel came to Chipotle 2 years ago, discouraged by his first job in a fast food restaurant. He wanted to work in an environment where the circumstances were encouraging and where he saw opportunities to advance, learn and grow. He came to our College Park restaurant in Maryland for an interview and was hired on the spot. He had a group of very strong leaders such as Gabby Portillo, who is now a restauranteur and Patricio Aguila, a restauranteur who has been promoted to field leader and is now actually a team leader at Chipotle. This team immediately recognized that despite not having significant experience, Montel embodied the 13 characteristics of a top performer and the drive to empower others around him. A year later, he was a service manager working to develop his replacement so he can move to the apprentice role. And in 2019, he was promoted to General Manager at a new Chipotle restaurant when we opened in Maryland City. From the beginning, Montel set his sights on developing a team of all top performers. He then shared his restaurant tour vision with all of them connected with each person on his team by getting to know them, sharing his own dreams and desires and demonstrating to them how he can help them become leaders in their own right. Montel's story is just one of a number of truly inspiring stories of people who come to Chipotle motivated by our food culture and our people culture and who share our vision and work hard to achieve it. These stories really illustrate the opportunities we're offering at Chipotle to top performers who are able to deliver a fantastic customer experience and elevate the people around them to help them reach their potential. These opportunities are not only very rewarding to those who take advantage of them, they also help provide the people that we will need to lead our continued growth at Chipotle. One of the greatest benefits of having such strong cultures in our restaurants is that it enables us to deliver excellent customer service, which among other things generates great throughput. Our teams understand that the qualities that make for great throughput are exactly the same qualities that provide the very best customer service. Having everything ready in the restaurant before our customers arrive, so we're prepared for service, particularly at our busiest times and clear authentic communication with customers to keep our lines moving quickly without making people feel rushed. We continue to increase our average transactions throughout the day, including our peak lunch and peak dinner hours. During the quarter, we increased average transactions by 21 across the entire day, a tremendous accomplishment. This continued improvement is the product of our outstanding restaurant teams and their ongoing attention to providing better service, but also our continued emphasis on the 4 pillars of throughput, which are using a linebacker and dedicated expo at peak times, proper mise en place and having the very best person in each position on the line during our busiest time. Since we started reporting on the progress our restaurants are making in implementing these four pillars, we've seen continued improvement in throughput, which we believe will become increasingly important now as we head into our busiest months of the year. Finally, on the development front, we are well on track to meet our initial guidance to open 190 to 205 new restaurants during this year. During the quarter, we opened 49 new restaurants, including 1 new shophouse, bringing our total number of restaurants to 1831, including 10 shophouses and 2 pizzeria Locales. We continue to have a very strong real estate pipeline and are increasing our mix of new construction deals. Building restaurants in newly constructed centers is less costly for us, so this increase in new development should help offset some of the higher development costs that we saw in 2014. We're continuing to evaluate new market opportunities for our grow proceeds and anticipate entering new markets for both Shophouse and Pizzeria Locale this year. We previously announced our plans to introduce Pizzeria Locale in Kansas City and also expect to open in a 3rd market, Cincinnati, later this year. We're pleased with our results for the quarter and our start to 2015. With a strong food culture, unique and empowering people culture and industry leading unit economics, we're well positioned to change the way people think about and eat fast food and to deliver outstanding results for our shareholders. I'll now turn the call over to Mark. Thanks, Monty. Marketing we do at Chipotle is unlike that of any other fast food brand. The reason for this is simple. Very early on, we decided to spend more on our ingredients and less on our marketing. It's always been our belief that better quality food prepared by hand and served by excellent teams would be the most powerful marketing of all. In fact, we were serving better ingredients, including pasture raised dairy, local produce and meats without antibiotics or hormones long before there was even significant customer demand for such things. Over time, this has created powerful differentiation between Chipotle and other fast food brands. This approach has served us well and our ongoing marketing research makes us confident that this is the case. Chipotle has become quite buzzworthy with awareness coming from social media, public relations, advertising and our local and event marketing programs, but with less reliance on traditional advertising than many of our competitors. Strength of our programs in areas other than advertising generates considerable attention and awareness and as does the breakthrough nature of our content programs, which have reached well beyond what we would get through traditional advertising. We are also seeing greater interest among customers who are looking to eat healthier and defining healthy around such characteristics as natural and minimally processed ingredients, exactly the same kind of ingredients we use to make our food. And we are also seeing that a majority of customers, about 60% are willing to pay more for better food, food that is made without artificial ingredients. All of these findings really support the way we run our business and our marketing, and all the traits that are reflected in various aspects of our marketing. The vast majority of fast food brands use limited time offers, new menu items and price promotions as their core marketing strategy. These new menu items and offers rarely build long term loyal customers instead only provide a spike in sales during their advertising window. In order to maintain traffic, most fast food brands need to add a steady stream of new menu items throughout the year, resulting in bloated menus filled with hundreds of menu items. Not only is this marketing approach incredibly expensive, the cluttered menus can be confusing to customers and difficult for the restaurant crews to execute. But the most significant downside of this approach is that these new menu items are often made from cheap artificial ingredients and are highly processed. These menus of highly processed items are proving problematic as customers are increasingly concerned with a long list of artificial ingredients found in foods today. There are more than 800 artificial ingredients, preservatives and processing aids used in processed foods. In fact, there are over there are 85 ingredients in a single fast food burrito served by one of our competitors. For years, our marketing has touted the superiority of our ingredients, ingredients, including our use of local produce, pasture raised dairy and meats without antibiotics and added hormones. But more recently, we have begun to expand our messages to highlight the small number of whole unprocessed ingredients used in our food. In fact, there are only 68 ingredients used to prepare all of the food we serve at Chipotle, the vast majority of which are simple ingredients you could buy at the local market. Only our contain any preservatives or other additives, and we are diligently working to eliminate those. The fact that Chipotle uses better quality ingredients is well known, but the fact that our food contains virtually none of these artificial ingredients that other fast food contains literally 100 of them will further differentiate Chipotle from the competition. That's why we have developed a new marketing platform called Collective Beauty, which is our internal designation for the program that highlights the simple beauty of the minimal number of whole unprocessed ingredients in our food. The campaign includes several phases and will be rolled out over the coming years. Currently, the campaign is running in print, outdoor and radio across 30 of our top markets. Additionally, we are running more national advertising than ever before, leveraging print, streaming radio, search and social. The campaign runs in 2 flights, one this spring and another this fall. During the summer break between advertising flights, we'll be launching a large online initiative for Collective Beauty. Beyond this expansion of our marketing strategy, strengthening our e commerce programs is a top priority for us this year. Over the last year, we've worked on a project to incorporate mobile payment the Chipotle ordering apps. We had hoped that this capability would have been available in the updated app we released in December 2014, but we were not happy with how it was working, particularly in light of the continually evolving landscape of mobile payment. Our commitment to support mobile payments not changed, but our approach has. We are broadening our view of mobile payment to include more than simply paying for in restaurant transactions using our app. Our near term priorities with regard to mobile include the launch of an ordering app for Apple Watch, which will be available Apple 24th and the exploration of new systems for mobile payment, including the use of Apple Pay in our restaurants and our iOS app and potentially Google Wallet capability within our Android app. We are making progress with all of these initiatives and will keep you apprised as these programs evolve. Last, we also relaunched archfolley.com website with better accessibility and functionality for mobile users. Additionally, we have begun delivery of online and mobile orders for individual and small groups in 67 cities using the Postmates delivery app. We selected Postmates as our official delivery partner in March, and now they are currently delivering Chipotle orders at all of the markets where they operate. Finally, with regard to our catering programs, we will begin advertising catering in a number of markets as we get close to graduation season, historically a busy season for catering packages and expect to see continued momentum in this area during that peak time. With that, I'll turn it over to Jack. Thanks, Mark. We're very proud of our results for the quarter as we grew our revenue to nearly $1,100,000,000 or 20% increase as compared to last year, and EPS was up 47% in the quarter. Our average restaurant volumes have surpassed the $2,500,000 mark for the first time. And it was just a little more than 3 years ago that our average volumes passed $2,000,000 for the first time, meaning that we've been able to increase our average volumes by more than $500,000 per restaurant, while adding more than 600 new restaurants during the past 3 years. This obviously has had a significant positive effect on our unit economics and it means we're serving more Chipotle to more and more people in new and existing restaurants as we pursue our vision to change the way people think about and eat fast food. As you know, this year, we faced the most difficult comp comparisons we've ever had as a public company, including lapping the menu price increase from Q2 of last year. We're pleased with the 10.4% comp in the quarter on top of the 13.4% comp from last year. And we believe the comp was affected by weather, especially in parts of the Mid Atlantic, the Northeast and regions in the South and by the pork shortage, which Steve talked about. It's difficult to put a precise impact on the combined effect of weather and the pork shortage during the quarter, but we believe the comp could have been as much as 100 to 200 basis points higher with normalized weather and had we been able to serve carnitas in all of our restaurants. And it's not possible to separate the weather impact from the effect of the pork shortage since they happen at roughly the same time. We normally talk about weather not having a net impact on our sales as our sales typically come roaring back after a big snowstorm, offsetting the lower sales caused by the storm. But the weather impact this year lasted for many weeks in most markets, so any sales bounce back could not affect not offset the full effect of the bad weather. Our comps were highest in January and lowest in March, similar to some macro retail trends and consistent with the premise that the weather was likely a factor in February March. And sales so far in April are trending slightly higher than March, which tells us that weather was at least partially a factor in the Q1. So what does all that mean for our sales trends going forward? Well, comps in April so far appear on track to be in the high single digits, and we think our pork shortage is currently impacting our sales by as much as 200 basis points. We have not seen immediate impact on sales when markets first ran out of pork, But our research and our sales analysis suggest that our Carnitas customers really love our pork and they appear to be visiting less often or not at all until they know we have Carnitas skin their market. Now this is not surprising as the vast majority of our customers tend to find their favorite burrito or favorite bowl combination, and then they order meal every single time they visit. We had hoped that the shortage would encourage our Carditas customers to try another menu option, and some did, but many have decided to hold out until Cardenas returns to their market. And as a reminder, we rotated markets without pork about every 6 weeks, and so every one of our markets has been affected at some time or another. We found that when we rotated supply back to a particular market, it can take weeks before our Carnitas product mix returns to the previous product mix levels, as a result of our Cardenas loving customers not realizing we were back in supply of Cardenas until they visited less often. In other words, this rolling blackout has caused confusion among our customers about where and when we were out of Carnitas and this has worsened the sales impact. Because of this phenomenon, we're going to stop the rolling blackout and continuously serve Cardenas in our markets where the Cardenas product mix tends to be the highest starting later this month. Based on actual April trends and factoring in the tougher comparisons in May June, including the lapping of last year's menu price increase, Q2 comps overall are likely to be in the low to mid single digits. So that comp assumes that we continue to see as much as a 200 basis points negative impact on the pork shortage. As Steve mentioned, we expect additional pork to be returning to our restaurants beginning in Q3 with a full return of Carnitas during the Q4. It also assumes no incremental menu price increase in Q2 related to the elevated beef prices, which I'll talk about in a few minutes. It also is before any potential sales lift we might get from our marketing campaign that Mark talked about or from other impacts such as faster throughput. By the way, of the 10.4% comp in the quarter, about 6.1% relates to the price increase from last year and most of the rest is due to higher traffic with a small increase in average check due to positive mix including greater group size and catering. Of course, we're as disappointed as carnitas loving customers that we have not been able to satisfy their craving, and we don't love the fact that our sales have been impacted by the shortage. But we remain committed to our food integrity mission, and we are as confident as ever that we made the right decision to suspend a pork supplier based on our animal welfare protocols. And we're optimistic that the new pork supplier Steve talked about will help us at least reduce the impact of the shortage on our customers and on our sales soon. Overall for the year, we continue to expect comps in the low to mid single digits, which is consistent with the outlook we initially provided for the year. And again, this does not factor in any menu price increases related to beef or any sales recovery from eliminating the pork shortage. We're pleased to finally see some relief on our food cost line with food cost declining from 35% in the 4th quarter to 33.9% in Q1. The main contributors to the decrease were from relief in dairy costs and favorable pricing for avocados. Dairy pricing had largely been expected to be realized as the broader commodity market increased supply during the Q4 of 2014 and the trend was relatively stable throughout the quarter. With avocado pricing, we have observed a slight increase in supply, and that has temporarily helped to keep the prices reasonable through the early months of 2015. However, we anticipate that normal seasonal shifts will pressure the avocado market in Q2 and Q3 as we buy more avocados from California growers. Beef prices remain at historically high levels, although beef inflation was largely contained during the quarter. We currently believe that the pricing for beef will remain at these elevated levels well into 2016 and perhaps even into 2017. As a result of this increased inflation, we expect to raise prices on steak and barbacoa this year, most likely by the end of Q3. And while we're still carefully reviewing our options, we anticipate an average increase of around 4% to And as you'll recall, our And as you'll recall, our intent last year was to cover the inflationary cost pressures of beef, but we undershot this level in hindsight as beef costs continue to rise. And while it's important to our vision that we remain accessible or affordable to our customers, we also want to charge our customers the going rate for the ingredients that we use. And as a reminder, we saw virtually no trade down from SAKA Barbaco last year when we increased prices for these entrees more than other menu items. One final note related to food costs in the quarter. We included a one time write off to the cost of sales associated with the Carnitas inventory of $1,700,000 We chose to donate rather than serve the pork which did not meet our protocols. This write off was offset by a small change in the classification of miscellaneous kitchen supplies, which shifted from the food cost line to the other operating costs during the quarter. Labor costs for the Q1 were 22.4 percent of sales, a decrease of 60 basis points from last year. Leverage for the quarter was largely driven by higher sales volumes, which include the benefit of the higher menu prices and that was slightly offset by wage inflation. Occupies costs were 5.8 percent of sales, a decrease of 30 basis points from last year and other operating costs were 10.4% of sales or 10 basis points lower than last year. Marketing expenses during the quarter were 0.9% of sales compared to 1.3% in the prior year, and that's in line with expectations and lower than our full year outlook as we will ramp up additional marketing costs during Q2 and Q3 related to the campaign that Mark discussed. Restaurant level margins increased 160 basis points to 27.5 percent benefiting from strong revenue growth compared to last year. G and A was 5.8% of sales in the quarter, down from 7.4% last year, and that was driven by the lower non cash stock comp. For the full year 2015, we expect non cash stock comp expense to be about $80,000,000 which is down $18,000,000 from last year. Executive comp was restructured, resulting in an estimated $33,000,000 reduction in exec comp for the full year, while additional branch to restaurant management and staff are expected to offset the non cash stock comp by about $15,000,000 Total stock comp in the Q1 was about $16,600,000 compared to about $27,600,000 last year. As Mark mentioned earlier, we are refocusing our e commerce program to build a mobile platform that moves beyond simply incorporating mobile payment into our ordering app. We incurred a loss on the disposal of assets of about $2,800,000 associated with some of the prior development work. Our effective tax rate during the quarter was 38.4 percent and for the full year, we estimate our effective tax rate will be 38.7% compared to 37.6 percent for the full year in 2014. 2014 benefited from our estimated usable federal and state credits and from the work opportunity in R and D federal tax credits, which have not been renewed for 2015. If those federal credits are extended to 20 15, we estimate our tax rate would benefit by about 30 basis points. We finished the quarter with 1831 restaurants and our average unit volumes helped push our return on investment up to nearly 80%, an economic return that we're very proud to achieve. As of March 31, we held cash and investments of about $1,400,000,000 including short and long term interest bearing investments, and we continue to have no debt on our balance sheet. During the quarter, we repurchased $23,000,000 of our stock at an average share price of $6.75 and we currently have $179,000,000 remaining on our share buyback program, which was previously approved by our Board. We continue to believe that reinvesting into the growth of our business remains the best use of our cash, although we'll continue to opportunistically repurchase our stock to enhance shareholder value. Thanks for your time today and we'd be happy to answer any questions you may have. Operator, please open the line. Thank And at this time, we'll take a question from Brian Bittner with Oppenheimer and Company. So a question on comps and I'm just trying to understand the way you're thinking about it. Over the next two Q1. So are you assuming that over the next couple of quarters you see very similar traffic growth that you saw in this Q1, which I'm assuming is in the low singles and then you're just rolling in the loss of the pricing as it falls off. Is that kind of how you're thinking about comps going toward? No. I think that the comparisons get tougher. And so I would expect that the transaction comps are not going to hold up at the same level as the Q1. The way I would think about it is, in April so far, we're seeing comps in the high single digit range and that includes menu pricing of about 6.1%. That menu pricing will fall off over the next few quarters. And so as that 6.1% falls off, you're going to see transactions that are going to be moving down into the low single digits. And then we continue to compare to tougher comparisons as the year rolls out. So I would not expect to see the same transaction growth as you saw in the Q1 continue as we move through the rest of the year. Okay. And then second and last question, how much is your online orders as a percent of your sales mix today? And as you focus on it, what really are the benefits and where could it go in your mind as a percent of the business? Yes, the total what I include as kind of all online and catering and burritos by the box there, they're all kind of non traditional orders. That was about 6.6 percent during the quarter. That's at or near an all time peak. That number will vary quarter by quarter because catering has seasonality. Mark mentioned in his comments that we're approaching our peak catering season. And so I would expect that catering would move up in Q2. I would expect that 6.6% to increase along with the higher catering expected in the next quarter. We don't know where it can go, but we do know some competitors talk about their total catering in the 8%, 9%, 10% range. And so we think we've got a lot of room to grow. Catering is very young. We still think that our mobile ordering, as Mark talked about, we could do a lot more with the ordering, with the payment, with the way that we accommodate those orders in restaurants. So we think we have a lot of room to do a better job with all that. In terms of where it can go, we don't know. We just know others when they're in the high single digits, low double digits. That gives us optimism that we can move that number up from the 6.6% today. And just to add on to that, with regard to catering, keep in mind that catering does currently does not have online ordering or delivery or online payment. So it's in its very early stages. So as we add those things, we expect to see catering become more popular. With regard to online orders, I can't give you one statistic with regard to the Postmates delivery service that we're using. We're seeing a 30% month over month growth on those orders, and we have not publicized this. So there's a tremendous amount of potential for individual orders, but it's a little bit too early for us to predict what long term impact that will have. Okay. Thanks. At this time, we'll take a question from Joseph Buckley with Bank of America. Thank you. Can I just ask you to clarify the last discussion? So the 6.6% is the percent of online orders. But if I understand correctly, that does not include catering. Is that correct, Cindy? Joe, that does include catering. So catering is a little over 1%. So of that 6.6%, catering is about 1.1 percent or so. But we think catering in the 2nd quarter could increase by as much as 50%. So it could be in the 1.5%, 1.6 range or so. But the 6.6% does include catering. Okay. Okay. And then just a question on the food costs, which came in remarkably good for the quarter given the recent run rate. Is there something was there some unusual let up with the pressure from beef during the Q1? Or was that simply dairy and avocados and some other things coming in more favorable than you expected? Joe, it was all dairy and avocados. Beef just kind of held constant. We picked up about 2 thirds of the benefit from dairy and about a third of the benefit from avocados. And we just had no other surprises. We've been kind of snake bit in the last several quarters just by surprising continued increase, whether it was beef or some other ingredients. And this quarter, everything remained calm and we got the benefit that we hoped we would get from avocados and dairy. So nothing else out of the ordinary. Okay. Is there any unusual split between advertising expense for the balance of the year? I know you said it was down as a percent of sales in the Q1. Yes, Joe. I would expect Q2 and Q3 to probably be at the peaks. This quarter was closer to 1%, just under 1%. Q2 and Q3 will be closer to 2%. And then overall for the year, the 4th quarter will drop down to something maybe closer to 1%. Overall for the year, we'll probably be in the 1.6% range or so. Okay. Thank you. Thanks, Joe. At this time, we'll move to Jason West with Credit Suisse. Yes. Thanks, guys. Just one I guess going back on the delivery rollout, you said that's going to be delivery to individuals as well. Is that something you guys have offered? I mean, I'm guessing you can do it on like Seamless and places like that. But is that sort of a new initiative? And how widespread will that delivery be? Is that a nationwide opportunity? Yes. That's it is relatively new. Let me put it this way. There have been a lot of people that have been delivering Chipotle through various services over the years and we've tried to, in a lot of cases, shut them down because we weren't sure whether the quality was going to be sufficient or whether they were following our rules. This is different because we've made an official deal with Postmates and they have been delivering Chipotle for quite a while too. And so we have them as our official partner and they'll be delivering Chipotle. They are delivering Chipotle in all of their markets, which are it's 64 cities and about 24 big metropolitan areas. So it is nationwide. Okay. Got it. And I guess going back to the comp question, the underlying I guess trends, do you guys assume the 2 year is going to deteriorate for any reason, particularly looking at maybe the traffic specifically on that? And I guess around that question, is there anything you're seeing outside of the weather and the pork issues that suggests there to be a reason for deceleration in the underlying trend in the business? Well, I don't know that I would look at a 2 year trend. I think when you combine years, you have to combine years that make up the full trend that we're seeing. And in our case, I go back to the current trend we're in. We're in the 3rd year of a trend that started in early 2013. If you remember, our comp in 2013 was 1%. And the year before that, we were on a kind of deceleration as we were finishing up a 3 year trend that started in 2010. And so if you go back to 2013 and you look, we grew comps from 1% then 5% then 6% then 9% and went with the double digits. And now we're comparing against those strong double digits. And I think if you combine those 3 years together, you'll see a 3 year trend that for the Q1 with 2015 being the 3rd year, the comp was about 24.8%. Now we know that was affected by weather and pork, and so it was depressed a little bit. But if you make an adjustment for weather and pork, I think for the rest of the year, you can think in terms of a 3 year combined sales comp, and that would put you in kind of the 25%, 26% range or so, and I think that's a better way to think about it. So in those terms, I think that we should stay in that same kind of ballpark. And again, that doesn't take into account anything we do with menu prices on beef, and it doesn't take any into account the replenishment of supply with the pork that Steve talked about later in the year. Okay. I think I got you. Thank you. Okay. At this time, we'll hear from Dave Tarantino with Robert W. Baird. Hi, good afternoon. Just maybe a follow-up on that question, Jack. I guess if you think about the trends on a multiyear basis and apply that logic, would you expect this year's traffic or the 1 year traffic number to turn negative at any point during the year? I guess, does that imply sort of a flattening out of the traffic or a turning of the traffic to negative territory? I don't think, David, it will turn negative. But when we compare against the Q3, that's going to be our toughest comparison. And it's going to be low single digits. So I don't think it will turn negative. I hope that we see a balance like from things like creating greater awareness with the campaign that Mark talked about and just general increase in awareness that we from time to time get with Chipotle. We're just it's amazing to me that some people still have never visited Chipotle. I just met one over the weekend. I just can't believe that somebody has never been to Chipotle. And so the Q3 will be the toughest test, but I would say right now, I don't expect it to turn negative. Got it. And then I guess getting back to your point there that you just made. In the past, I think this is pretty similar to how you've given guidance yet in the past. Chipotle time and time again has found a way to drive more traffic into the business through whether it's marketing or just initiatives around food or throughput. So I guess this year it sounds like maybe you're less optimistic about your ability to drive more traffic or maybe I'm reading it the wrong way, but what are your overall thoughts on the ability to continue driving this up and kind of hurdle over the great trends you had last year with positive momentum? Yes. David, it's very hard to predict quarter by quarter. I look at this as a very substantial 3 year trend where we now have 1800 restaurants, we're now at $2,500,000 The fact that we've added $500,000 in volume adding the 600 restaurants I talked about over the last 3 years, I think is pretty substantial. If you go back to the 3 years before that, that was a 3 year trend as well that had a start and a stop and it was pretty clean, 2010, 2011, 2012 during that 3 year period and you can see where it started, you can see where it ended and that was about a 27% or 28% or 29% increase. And so we seem to have these waves. And if you go back, even as we were a private company, these waves where people figure out that you fully exist, they like it, they come back more often. And so we have this kind of surge and then we have a leveling off and then a surge and a leveling Very tough to predict. Will we have another surge? When will we have it? What would the magnitude of that surge be? But we continue to believe that there's a great appreciation and a growing appreciation for what we do at Chipotle. We do think millennials in particular very appreciative of what we do. We think this campaign that's designed to reinforce the idea that not only do we source sustainably raised ingredients, but we do real cooking with real whole ingredients and we largely don't use things like preservatives and stabilizers and things like that. So we believe that that is not something that is short lived, that's over. We think that we'll probably benefit from that. But in terms of them breaking that down into exactly what that's going to do for the next 2 or 3 quarters, tougher to predict and the comparisons are tough. But over the longer term, we're optimistic about where we can go from here. Great. Thank you. Thanks, David. At this time, we'll take a question from John Glass with Morgan Stanley. Thanks very much. Jack, just first on the food cost outlook for the full year, just to be clear, is the $33,900,000 I know there's light to pushes and pulls, but is that a good number? Doesn't that also include the write off of the pork, so wasn't it even better? Or is that a loss of this asset or something? Well, the write off of the pork is offset by a reclass. And so I would look at those as largely a wash. So I would think of it, John, as we're going to see pressure in the next two quarters from avocados. And so I think that will be not pressure. Hopefully, that pressure will be relieved in the Q4. So I would say, generally, we will probably be up a little bit from this Q1, but hopefully not too significant. Okay. So still below say the 35 that you're running at the end of last year? Is that a fair way to estimate? We would expect it to be below the 35, yes. Okay. And then are your restaurants set up now to take mobile payments? Do you have to invest more in the POS systems or different POS systems? How do you envision this new mobile payment system working with your existing systems? The restaurants currently are not set up to accept mobile pay although with Apple Pay in particular the investment on the hardware side is relatively minimal. So that's not a significant barrier. The main challenge there is making the POS software compliant with Apple Pay. So we're working on that and that's of most that's the type of payment that's of most interest to us as people being able to pay at the POS with their phone. We're also, of course, pursuing putting Apple Pay in our mobile app as well as Google Wallet in our Android app, but the priority is going to be mobile payment at the POS. But it's not a it's not as if the POS hardware has to change. There's just an additional piece of equipment. And do you envision that being available this year? That's our hope to have that implemented by the end of the year, yes. Thank you. Thanks, John. And just then we'll move to Andrew Charles with Cowen and Company. Great. Thanks. Monty, with the combined power of increased field leadership oversight and diagnostic tool, do you see the 21 transaction gain sustainable for the remainder of 2015? Do I see the what transaction? The 21 transactions you gained from the throughput initiatives. Do you see that sustainable with the tools you're putting in place? Yes. In fact, I would like see us actually improve on that over the next two quarters. That's a nice result, especially during the Q1, which from a transaction standpoint is one of our slowest 2 quarters. And over the second and third quarter, we see usually see a significant pickup in our business seasonally. And it's during those seasons that we really, really make sure to emphasize with all of our teams the importance of having those 4 pillars in place. And in fact, at this time, we've just started a national sort of throughput contest just to sort of make it top of mind with our restaurant teams, have some fun with it and bring awareness to those who are doing the best job with it just like we did with the reporting at Nationwide from team director to team director. But this way we're actually having a little bit of a contest for bragging rights. And we'll see if we can keep pushing the needle. But I think it's going to get stronger over the next 2 quarters in terms of throughput. Now of course, our ability to put through more people depends on having more people come through our doors as well. So throughput will not in and of itself drive transactions. It's just that when you have transactions come in, if you don't have good throughput, you are stifling your ability to allow those additional transactions to come in the door. So, but yes, we're excited about hopefully continuing to improve on our execution of the 4 pillars and our execution of throughput. Got you. And Mark with the new digital initiatives, what can we expect from 1 to 1 marketing efforts? And how can Chipotle build efforts to strengthen this form of marketing? I missed the second part of the question? Yes, sure. Just kind of curious about how Chipotle can build efforts to strengthen the 1 to 1 marketing? Well, I mean, we've been doing that actually for a couple of years. We've significantly improved our 1 to 1 marketing through mobile. We've what we're doing now is doing more marketing campaigns that enable people to participate by opting in either through email or via text. As I mentioned in my comments earlier, we just relaunched chipotle.com yesterday, which makes it mobile friendly and much easier for people to opt in to our emails and follow us on our social media accounts. We're also, as Jack mentioned, I think on the last earnings call, doing a large data project at Chipotle, which will give us even more capability in terms of reaching out to these folks. But we have seen a shift in our marketing toward more one to one marketing in terms of we're spending anyway. So I think we're already underway in that regard. But it seems like the digital initiative will give you more firepower behind that? Well, anything that we do that's digital has the potential for people to share it by themselves, so it becomes it adds a viral element. And Chipotle, we're very judicious with our offers. And when we combine a mobile initiative with an offer of some kind, we see a tremendous amount of viral pickup of that. And so, yes, these digital initiatives have give us more leverage for our dollars than traditional advertising do or does. We use them always in conjunction with one another. But you're right, digital gives us more leverage because of the potential for it to be shared. Got it. Thank you. At this time, we'll take a question from Sharon Hazaccio with William Blair. Hi, good afternoon. I had a question about the supply chain and obviously with Carnitas, it's had a little bit of a bump more recently. But given the size of the company and the growth path, can you talk about maybe the potential to partner with larger entities to ensure the supply chain going Yes. Well, our suppliers are some of the Yes. Well, our suppliers are some of the largest suppliers in the country. Our suppliers are also very small independent family farms that are sometimes part of larger cooperatives. But we buy from some of the very, very biggest suppliers. With the bigger suppliers, we've encouraged them to adopt our protocols and some of them have and some have chose not to do so. So but we know in order to continue to ensure supply of our top quality ingredients that are more sustainably raised, we're going to have to use all different sizes of farmers and ranches out there and we have been doing that for years. Okay. Thanks. At this time, we'll hear from David Palmer with RBC. Thanks. Quick follow-up and then another question. With regards to pricing, Jack, you mentioned that you think the traffic will remain positive. If pricing if traffic were approaching negative territory, does that change your resolve to raise pricing? Or do you think of this independent of what your traffic is doing? Well, if trends don't change, we're likely going to increase prices. If something happened in the economy or something happened with our trends, we might defer it. I mentioned that we'd probably get it done by the end of Q3. So if we saw something unusual happen, we might defer it just so that we don't exasperate the challenge. But if the trends stay as they are, we're underpriced on stake right now. We're just not charging the going rate. We actually lose money anytime somebody comes in thinking about getting chicken and instead gets steak, for example. And so we'd like to fix that. But if we decided if there were some trends that we were a little concerned about, we might decide to fix that a quarter or 2 later. But right now, unless things change, I think we're going to get this done by the Q3. And then just a follow-up to your previous comments about the cycle, this 3 year ebb and flow that you seem to see. Looking back at the last slowdown, we came to see or at least we did that there was perhaps some throughput constraints and then the throughput focus and also that the marketing efforts that were break through perhaps made a better case for this acceleration than you might have had otherwise. You're talking about a new campaign, but is there a little bit of an introspection where you're seeing perhaps that old campaign has perhaps lost its energy and that's going to be a big part of your hope going forward. And then you're talking about this competition with throughput. Is there a sense that perhaps some of the throughput metrics are perhaps not improving the way that they were? Thanks. No, I think the throughput is improving nicely and we're really proud of what our teams are doing. Like I said, we think we can continue to go faster as the pressure of a busy second and third quarter comes to us. Over the last couple of years, even 3 years now sort of in a row, we've consistently set a new high watermark on throughput during our 2nd and third quarters, particularly each year. So we're getting faster and faster and we think that we're not sort of close to being at the point where we can't get faster. That is to say there's a long sort of a lot of runway on our ability to get faster. But I just want to sort of caution on the throughput thing that throughput is something that's very important when a lot of people come through our doors. It's always important because it's part of good customer service and it's always important because when our throughput is fast, our food tastes better because our burritos are rolled and assembled and served to customers while they're still hot. But throughput doesn't happen in a vacuum. When we have more pressure on our teams, longer lines, more customers, then it is a time when you're going to see our throughput numbers get better. That being said, throughput doesn't if we don't have people come through our doors, there's opportunities on throughput in some stores where we're not going fast enough, but you're not going to see as much of an ability to ramp up throughput. So great throughput over time will cause I think more customers to enjoy Chipotle because they're going to trust that we can get them through more quickly and that it's more of a convenient experience. But great throughput doesn't sort of it will not add a comp in a vacuum during any given quarter. You have to have the transactions come to your door. And with regard to your question regarding marketing, we have had a series of successful advertising campaigns, but I wouldn't look at it as if those campaigns or for example, I wouldn't look at it in the way that to suggest that this current campaign can't achieve those same goals. If you look at what we're doing now, in the past we've touted what we call our hero ingredients. We talk a lot about naturally raised or responsibly raised meats, local produce, pasture raised dairy, that kind of thing. But there are a number of other competitors who are trying to say similar things. The approach we're taking now is to expand that platform to include essentially what's not in our food. These 800 or so chemical additives, which are used to make processed food that is sold at most fast food. And the fact that Chipotle only has 65 ingredients in our entire or 67 ingredients in our entire company is really remarkable. So the new campaign is designed to prove that to people, to show that to them in a very interesting, compelling way. That will further differentiate Chipotle in a way that frankly the competitors can mimic. I mean, you can't take all of this junk out of these other processed menu items in other fast food companies. They just can't do it. While they can mimic some of our past marketing, I think it'd be very difficult for them to do this. So I expect this new approach to have potentially even greater impact than the ones previously. Thank you. At this time, we'll move to Sara Sartore with Bernstein. Hi. Yes. Thank you very much. I just have a couple of follow-up questions, if I may. I guess one is, I'm trying to belabor the comp issue, but Jack, I guess the 2 year trend actually or the 3 year trend you're talking about, I don't know if you're adjusting for kind of the 1Q calendar shift in 2013, but the implication would be in fact negative costs and certainly traffic. So I guess I'm just trying to reconcile some of the commentary. And the other piece I had about marketing is, I think in the first half of last year, you had a pretty big increase in marketing dollars and that seems to have helped along with the through initiative that saw the lines really shortened through 2013. Is that something that you think about in terms of marketing spend, the balance between brand building and traffic driving? Yes, sir. I'll take the comp piece first. When I look at the Q1, you're right that in 2013, there was we lost today. So that 1% comp is really like a 2% comp, so you can make that adjustment. There's also an adjustment to be made, and I'm suggesting it's 100 basis points, 200 basis points in the Q1, and that's an estimate. It's our best estimate right now. And so the 3 year comp, if you make those adjustments, you're talking about something in the 26%, 27% or so range. And if you do that and if you look out at the rest the year and listen, we do things like we adjust for trading day and things like that, I think the Q3 and the Q4 will be tough comparisons. I don't think the traffic will turn negative, but it will get close. So the margin for Air is very, very small. But right now, I wouldn't expect it to be a negative comp. So but it's going to be close. So we're hoping for the best. And with regard to the marketing spend, you need to be careful when looking at when the dollars are spent. We typically do the same type of marketing each year. That is to say, we do traditional advertising, outdoor print radio, that sort of thing in the spring and the fall. That's what we did last year. We're doing it at the same time this year. We're actually spending more than ever this year. You can see lumps in the spend because of how we develop the brand building content, like the short films or the television series. You can see that impact the marketing budgets in ways that make it look as if we're spending more at that moment when we're not. So I don't think there's a meaningful correlation between the spend of marketing and what we're seeing right now. It's what we're doing with marketing is pretty much exactly what we did last year. Okay, great. And sorry one last thing. Did I miss did you give the mix for this quarter, mix contribution? Yeah, it was like 6.1% was menu price. Most of the rest was transaction. There was a small piece that wasn't transaction, but even that was greater group size and catering, which even those are like transactions, because you're serving more people. There wasn't anything in terms of people buying different items on a menu that caused the check to go up. So it was menu price was the biggest piece, 6.1. Most of the rest of the transaction and a small piece related to group size and catering. Okay. Thanks, Sarah. That's all the time we have for questions. At this time, I'll turn things back over to Mark Alexei for closing remarks. Thank you, everyone, for clarifying our call today with 4th 6th next quarter. And again, this does conclude today's conference call. Thank you all for your participation.