Chipotle Mexican Grill, Inc.
Q3 2014 Earnings Call Transcript

Published: 21 Oct 2014

[Operator:]

Good day, and welcome to the Chipotle Mexican Grill Third Quarter 2014 Earnings Conference Call. All participants are now in a listen-only mode. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded. Thank you. I would now like introduce Chipotle's Director of Communications, Chris Arnold. You may begin your conference.

[Chris Arnold:]

Hello, everyone and welcome to our call today. By now you should have access to our earnings announcement released this afternoon for the third quarter 2014. It may also be found on our website at www.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 businesses model and consumer trends and how those may influence our results in the future as well as projections of comp restaurant sales, the number of restaurants we intend to open, the impact of menu price increases, trends in food, labor and G&A costs, effective tax rates, stock repurchases and shareholder returns, 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-K as updated in our subsequent Form 10-Q for a discussion of these risks. I like to remind everyone that we have adopted a self- imposed quite period restricting communications with investors during that period. The quite period begins on the first day of the last month of each fiscal quarter and continues until the next earnings conference call. For the fourth quarter, it will begin December 1st and continue through our yearend release. On the call with us today are Steve Ells, our Chairman and Co-Chief Executive Officer; Monty Moran, Co-Chief Executive Officer; Jack Hartung, Chief Financial Officer and Mark Crumpacker, Chief Marketing and Development Officer. With that, I will now turn the call over to Steve.

[Steve Ells:]

Thanks, Chris. Well, I am extremely pleased with our performance during the third quarter. We've continued the momentum we built through the first half of the year, growing revenue to $1.08 billion for the quarter, an increase of 31.1% on same store sales growth of 19.8% and the opening of 43 new restaurants. This produced diluted earnings per share $4.15 for the quarter, an increase of 56%. These results would be remarkable for any restaurant company. But for Chipotle where we are now more than 21 years old with more than 1,700 restaurants and averaging volumes of more than $2.4 million, we think they are extraordinary. While our performance has been particularly strong this year, our results have been solid throughout our history as a public company. Even through the depths of the recession and I am often asked how we continue to perform so well. The fact is there is no great mystery to it. Our ability to generate such strong sales growth is the result of our commitment to serving the best tasting food we can. Food that is made with ingredients from more sustainable sources and prepared using classic cooking technique. And our commitment to having teams of top performers in our restaurants who are empowered to provide an extraordinary customer experience. It is our focus on these two key areas that will allow us to achieve our vision to change the way people think about and eat fast food. This formula is unique in the world of traditional fast food in some very important ways. The traditional fast food sector has traded food quality in taste for low cost and ease of preparation. It has aggressively market at low prices to entice customers to visit more often which has resulted in the need to reduce costs by cheapening ingredients and by compromising the overall dining experience. We have not made these compromises because our fundamental believe is that in order to provide an extraordinary customer experience, you cannot take shortcut. We've shown that we can spend on ingredients not less and charge a fair price. And at the same time generate outstanding business results that we can prepare food using classic cooking technique in each and everyone of our more than 1,700 restaurants, and have consistency. That we can provide great service and still be fast. That we can have teams of top performing managers and crews cooking in the restaurants and still maintain an efficient labor model. Rather than compromise any of the important variables involved in running restaurant, our decision is to deliver all of them and it allows creating an extraordinary experience that is unique to Chipotle. This formula has worked extremely well for us since the very beginning. And others have starting to notice. A July of fast food customers asked more than 32,000 participants who reportedly ate more than 96,000 fast food meals at 65 chains to rank restaurants based on the quality of the food and the experience. Chipotle top the list, while traditional fast food restaurants were ranked near the bottom with customers citing uninspiring food as the primary reason. Despite offering dollar menus and frequent discounts, many of these chains also score poorly in terms of value. The bottom line, customers want delicious food, served quickly in interactive format and they are increasingly unwilling to compromise. Perhaps not surprisingly this survey found that younger consumers to millennials were more inclined to skip traditional fast food in favor of restaurants like Chipotle. Food industry research indicate that millennials are turned it away from traditional fast food in favor of better food and more enjoyable experience overall. They are more concerned with how food is raised and prepared than previous generations. And are willing to seek out and pay a little more for something they recognized as better. Better tasting, better for the environment and better for their wellbeing. Investment Analyst research also shows similar results. Over the last decade, there has been a noticeable shift among consumers away from traditional fast food and casual dining chain to fast casual restaurants, as customers are looking for better quality food served in a convenient format. The company that have lost the most customers over the last decade are traditional fast food chains. While the biggest gains go to fast casual restaurants. Chipotle tops the list of restaurant companies gaining customers during this time period. These trends are validated looking at the performance of Chipotle and other restaurant companies. Our business is thriving posting a same store sales increase of 19.8% for the quarter and 17% year-to-date. At the same time, traditional fast food companies are struggling to produce positive same store sales growth at all. The gimmicks that have driven the fast food sector for years, dollar menus, limited time offers and merchandizing partnerships, are not producing results like they used to as consumers simply want better tasting, nutritious food and a more compelling experience not gimmicks. In some cases, these other companies are looking to revamp their branding efforts to change their customers' perception but not the food. Fundamentally, these are short sighted reactions that seem out of touch with what customers want better food and more compelling dining experience. This is exactly what we offer at Chipotle, and we think it's replicable with other kinds of cuisines. We are in the early stages of developing two new fantastic restaurants what we call our growth feed concepts. ShopHouse Southeast Asian Kitchen and Pizzeria Locale, using the exact same model that is driven Chipotle's success. Each of these concepts shares our commitment to using only the very best ingredients, the classical cooking technique and to building cultures of top performers who empowered to achieve high standards. During the quarter, we opened another ShopHouse eighth one in the Washington DC area. ShopHouse very much reminds me of Chipotle when I open the first one-- one of the restaurants. It is food that is new to many of our customers, but they love it are thrilled to enjoy meal that is flavorful, skillfully prepared and served in a way that is accessible and affordable. At the beginning of this month, we also opened a second Pizzeria Locale in Denver. Pizzeria Locale was developed by two extraordinary restaurant tourists. Executive chef Lachlan Patterson and master sommelier Bobby Stuckey, and we are partner with them to bring the Pizzeria Locale experience to more customers using the same format that is worked so well for Chipotle. More than ever, I believe this is the new fast food model. Increasingly, consumers want what Chipotle is doing. And they seemed to be turned it away from traditional fast food in favor of better food and more compelling experience. That is what drives our business and continues to provide outstanding results for our shareholders. And we will continue to be our primary focus. I'll now turn the call over to Monty.

[Monty Moran:]

Thanks, Steve. Now that our vision is changing the way people think about and eat fast food, nor would the results we are producing be possible without our teams of top performers who are empowered to achieve high standards. We have totally changed the traditional fast food formula which depends on constantly lowering cost and simplifying the tasks in a restaurant to the point where they are essentially fool proof. Instead, we are creating rewarding environment with skilled teams who do work that they are proud of. We ask more of our people not less and reward them with greater opportunities when they step up to meet the challenge. This is one of the many areas where Chipotle is unique within the industry. And we are performing well because we have so many shop performers who are committed to achieving our vision. And to provide an extraordinary restaurant experience. At the end of the quarter, we had our All Managers' conference in Las Vegas. This conference which we hold every two years is a powerful way for us to teach and inspire our restaurant managers and the team that they are building to raise the bar and to share more about our vision, changing the way people think about and eat fast food. The conference also allows us to introduce new tool that help set our managers up to success. This year's conference focused on our vision and the importance of our food culture, people culture and unique economic model. Presentation to our managers highlighted many of our accomplishments. We discussed the importance of ingredients that are raised with respect to the environment, animals and the farmers who produce them. We emphasize the importance of developing extraordinary leaders and how that is critical for our business. And we explained our strong, unique, economic model and why they are so important for our managers to remain focused and disciplined in protecting it and how they run their restaurants. We also used the conference to introduce new tools to help better set our managers up for success. One promising development in this area is the new tablet based training system that we are just starting to rollout in our restaurants. This new tool will allow us to compile all of our training materials including text and video in a single place that can be quickly and easily updated. And accessed immediately anywhere restaurants or offices. We introduced this new system at our managers' conference and are just beginning to rollout to restaurants now, but are optimistic that this new system will improve upon our already successful training program. Ultimately, better training program helped us improve how we develop people and teach specific skill. In turn, this will help us deliver a more consistent restaurant experience. Finally, we also use the conference as an opportunity to introduce our new concepts, ShopHouse and Pizzeria Locale to our employees. Each of the new concepts had exhibited to the conference; they were designed to resemble the actual restaurants. The people running each concept first provide a thorough overview of each restaurant to all of our managers and guests and then serve food allowing everyone to see and taste themselves just how delicious these restaurants are. This was the first time most of our employees had tried either of these restaurants, and they were very excited. While most of our growth will continue to be driven by opening and improving our Chipotle restaurants, we felt it was a great time to introduce the opportunities that these concepts will provide to our teams, as our operations team will ultimately play the most important role and help them expand. While we believe the conference is an enormously valuable to our managers, it's also incredibly inspiring and powerful to us. The conference provides the clear and strong picture of the movement we are creating. There were nearly 3,000 inspired top performing employees as well as value suppliers for the conference, each committed to helping us achieve our vision. Being part of that is a powerful experience for all of us. During the quarter, our efforts to build and strengthen our culture continue with the addition of 41 new restaurateurs. We also promoted 27 of our existing restaurateurs into our plus position and 15 restaurateurs into more senior field leadership position including four new team directors. Because of the success that these extraordinary leaders have developing the people around them, we paid out nearly $700,000 in the quarter in people development bonuses and nearly $2 million year-to-date. These bonuses are paid specifically when restaurateurs develop crew in the management positions. As the rank of restaurateurs continues to grow, so does the reach. These extraordinary leaders now oversee more than 70% of all our restaurants. This is important and that restaurant serves and their crew delivers a compelling dining experience to keep their customers coming back. Our unique people culture is an area which Chipotle excels, and that is contributing significantly to our overall performance. One area in particularly where we have seen tangible benefits from this special culture is in the area of our throughput. Our teams are continuing to increase the speed and service we provide and by doing so are providing a better customer experience. During the quarter, throughput remains strong. And actually get stronger with an increase of six transactions during the peak lunch hour and six transactions during the peak dinner hour compared to the same time last year. We would not be able to achieve such extraordinary same store sales increases without these continued improvements and throughput during our busiest hour. The improvements we are seeing in our throughput are a result of having more top performing managers and teams that make sure that we have the four pillars of throughput in place. Using a linebacker during our peak hours, having proper meson floss, ensuring there are only aces in their places and using a dedicated expediter during peak hours. We approved that when we focus on these four pillars, we can serve more customers and provide a better experience. And traditionally now we measure of effectiveness in this key area as well as provide bonus to entire field team in part based upon their ability execute these four pillars. Finally, I would like to provide an update on development. While we expect to end this year with total new restaurant opening at the high end of our guidance of 180 to 295 new restaurants. For the year about 70% of these locations will be in proven market with 15% new markets and 15% in established or developing market. Going forward, we believe that we are well positioned to continue to find excellent real estate. While the market overall is become more competitive for the kind of sites we are looking for, Chipotle remains a very desirable tenant with strong financial. Given the strength of our position, we expect to open between 190 and 205 new restaurants in 2015 which will include a small number of [grow seed] restaurants. We expect to see some pressure on rents in major market, but think we can offset some of that with a strong supplier of new, smaller, retail strip centers. In many cases, we are able to find developers who are willing to build two or three tenant strip for our use, and believe that they are continue to be great opportunities ahead in some of the smaller, more remote market that are bit underserved. Places such as Corpus Christi, Texas, or Greenville, North Carolina where we recently opened restaurants. We have the right pieces in place. The right food culture, people culture and unique economic model to continue on our path to change food culture, and we are pleased that our success in doing that will allow us to generate outstanding returns for our shareholders. I'll now turn the call over to Jack Hartung.

[Jack Hartung:]

Thanks, Monty. Our teams top performers continue provide incredible dining experience to our customers, and our ongoing commitment to using the very best ingredients for our food is continue to bring more customers to our door. We are happy to announce another great quarter with strong financial results. Last quarter, we reported our second strongest sales comp as a public company. In this quarter after 21 years in business, we are delighted to report an even higher third quarter sales comp of 19.8%, making it the strongest sales comp since becoming a public company in 2006. It's really quite an achievement and we are proud of this result -- proud of our results and which are driven by unique food, a unique people and our strong business culture. Our third quarter same store sales comp of 19.8% has helped to drive average sales volumes for the restaurants that have been open for these 12 months an all time higher of $2.4 million. Overall sales for the quarter increased 31.1% to $1.08 billion driven by the comp of 19.8% which includes the full impact of the menu price increase along with new restaurant opening. Year-to-date sales were just over $3 billion, an increase of 28.2%. The quarter new to date comp sales increase is driven by increase customer visit along with the higher average check. Our average check in quarter is up about 8.5%, driven primarily by an effective price increase of about 6.3% as well as from catering and a slightly larger group size. Although our menu prices increased, we continue to see very strong transaction growth. And we are experiencing very little price resistance just under 1% so far with very little menu trade down. We are delighted to see that the price increase we had to take after three years of absorbing food inflation have little or no effect on a strong customer loyalty we've worked so hard to build. It confirmed our belief that our customers understand and appreciate our focus on sourcing high quality ingredients. And that they see tremendous value in the dining experience they enjoy at Chipotle. We will continue our focus on developing teams of top performers who are empowered to achieve high standards as we know these strong comps are not possible without them. Our teams freshly inspired by the themes presented at all our Managers' Conference will help continue our success and achieve our mission, a change in a way people think about and eat fast food. That we will finish this year comparing to a higher comp of 9.3% in the fourth quarter of last year, we continue to expect comps for the full year 2014 will be in the mid teen. Of course 2015 will bring even tougher comparison especially in the second half of the year. We expect full year comps in 2015 will be in the low to mid single digit range and will decline beginning in the second quarter as the menu price increase begins to cycle off. Our new restaurants continue to perform very well and we still expect strong opening sales volume in the $1.7 million to $1.8 million range or higher. What we are most pleased with regarding our new restaurants is that we continue to staff them with terrific leaders and teams have empowered top performers delivering the same and incredible dining experience that customers have come to expect. This allows us to continue to grow while delivering industry leading unit economics and returns for both our existing and new restaurant. Diluted earnings per share for the quarter were $4.15, an increase of 56% from last year. We were able to grow EPS at nearly double sales growth rate despite higher food cost as we delivered sales leverage on the labor and occupancy lines. Our operating margins were up 250 basis points to 19.1%, our restaurant level margins were up 200 basis points compared to last year to 28.8% due to our strong transaction trends and the benefits of the recent menu price increase. Year-to-date diluted earnings per share were $10.29, an increase of 29.8% over last year. Restaurant level margin year-to-date was 27.4%, an increase of 50 basis points due to higher comps offsets by higher food cost. Food costs were 34.3% in a quarter, down only 30 basis point sequentially from Q2 and food costs were up 70 basis points over last year despite having the full benefit of the price increase in the quarter. Without the menu price impact, our food costs would have been around 200 basis points higher. And this means underlying food inflation was around 8% over last year, so a 6.3% price increase did not fully cover all of this inflation. While we expected food costs to stabilize in the second half of the year. We saw costs for beef and avocados continue to rise in the quarter. Having breeding cost primarily for beef and avocados, stabilize as expected at a level we saw in Q2, our food costs would have been around 80 to 90 basis points lower and our restaurant level margins would have been approaching 30%. We expect these elevated food costs as a percentage of revenue to continue and even increase slightly in Q4 as continued inflation in beef and dairy is expected, and will be offset by lower expected avocados cost. As we look to 2015, we hope our costs will stabilize but we expect food costs inflation will be in the low single digit from where food costs were in Q3. Beef prices are expected to remain elevated through 2015 due to strong demand and the tight supply of live stock producer continue to rebuild their herds after two years of drought condition. Avocados cost increased significantly this year due to late California crop, though anticipated avocados costs will decline in Q4 as we source from Chile and Mexico. We don't expect much of any benefit from avocados prices next year due to rising demand and supply shortages caused by drought conditions in California and Chile. We saw price of cheese and sour cream increase to record highs in the quarter and we expect that dairy cost will remain higher through the end of this year. But we do anticipate dairy price will come down at 2015 from this 2014 highs. Labor costs were 21.2% of sales in the quarter, decrease of 160 basis points from last year and year-to-date labor costs were down 100 basis point. Labor leverage driven by higher sales volume, partially offset by higher management and crew staffing ratios which contributed to slightly higher labor costs to store and by normal wage inflation. We expect labor costs as a percentage of sales to move higher in the fourth quarter due to seasonally lower sales. While we've always offered a basic low cost health insurance plan to all of our hourly employees in the past, effective January 1, 2015, we will be offering coverage that qualifies under Affordable Care Act to eligible hourly employee. Currently, we estimate over 10,000 of our hourly employees will have the opportunity to signed up for health insurance. And while we can't predict how many will choose and enroll in this new plan, we estimate that total cost will not exceed 1% of sales. We also will see minimal wage increases in a number of states and cities which we expect to have only a modest inflationary impact on labor because we pay above minimum wage. Occupancy costs declined 70 basis point from last year for the quarter due to favorable sales leverage. Other operating costs were 10.2% in the quarter, decrease of 60 basis points versus last year, and year-to-date they were 10.6% unchanged from last year. In the quarter, other operating costs move lower due to lower marketing and utility cost. Marketing was 1.3% in the quarter, down 20 basis points from last year and is expected to increase to around 1.5% in the fourth quarter. G&A was 6.6% in the quarter, 20 basis points higher than last year, and increase was primarily driven by our biennial our Managers' conference held in September. The conference cost just over $10 million with nearly 3,000 full employees and suppliers in attended including all of our GMs and restaurateurs. In 2015, we will hold our biennial field leadership conference in the third quarter which we expect will cost around $1 million. Non-cash stock comp was about $20 million in the quarter, and year-to-date non-cash stock comp was about $83 million with a small portion of that in a labor volume. We continue to expect non-cash stock comp for the full year will be around $98 million which is about $33 million higher than in 2013, due to this year's option being issued at a much higher share price and as a result of much of the senior management team qualifying for retirement which accelerates the non-cash charges. As a perspective, G&A without the non-cash stock comp expense and without the cost on All Managers' conference, G&A would have been down about 60 basis points compared to last year. G&A fourth quarter will be lower as a result of reduced stock comp charge and not having the cost of the All Managers' conference which will be offset somewhat by $1 million donation related to our annual burrito promotion and fund raising event benefiting the Chipotle Cultivate Foundation, along with normal G&A additions to support our growth. In 2015, we expect underlying G&A as a percentage of sales before non-cash stock comp charges will grow at lesser rate than our sales growth. Our effective tax rate for the third quarter was 37.2% which include the adjustments related to filing in 2013 tax return. We now expect our effective tax rate for 2014 to be around 38.5%, and 2015 we expect the effective tax rate will be around 39.1%. The work opportunity tax credit and R&D tax rate have been renewed by Congress for 2014 or for 2015. If these credits are renewed, the state tax rate would benefit by about 50 basis points for each year. During the quarter, we repurchased about $13 million of our stocks or 20,000 at an average share price of about $654. At the end of the third quarter we had about $127 million left under our share buyback program previously approved by our Board. Overall, we've invested $673 million to purchase nearly 4.2 million shares at an average price of $161 per share. We finished the third quarter with over $1.2 billion in cash and cash equivalents, and short and long-term interest bearing investments and no debt on our balance sheet. Although, we continue to believe that the best use of our cash is to invest in our high returning domestic restaurants, we plan to carefully nurture our growth seeds, ShopHouse, Pizzeria Locale and Chipotle outside of the U.S. as we expect they will provide attractive value enhancing growth investments in the future. In the meantime we'll opportunistically repurchase our stock to enhance shareholder value. Thanks for your time today and at this time we'll be happy to answer any questions you have. Operator, please open the lines.

[Operator:]

(Operator Instructions) And the first question comes form John Glass with Morgan Stanley.

[John Glass:]

Hi, thanks very much. First, Monty, I just wanted to ask about your thoughts on unit growth. Are you beginning to hit a maximum number of stores you can open in the year given either real estate availability or own ability human capital? Is this 200 plus or minus about where things level off or how do you see it over the next I guess two to three years as you think about that?

[Monty Moran:]

Yes, John, thanks. Well, we don't really think in terms of maximum. In terms of maximizing our growth. What we do is we continue to try to strike a balance and open restaurants when we -- at the speed with which we can find great real estate that we think will be perform well plus the speed with which we can create or develop managers to really run these restaurants really effectively. So this month we said we open 190 to 205 for next year. We talked to our real estate team that is where we struck the balance. That we believe we got really strong people development throughout the country and certain markets teams stronger than others. And our teams in the field feel very optimistic about this type of real estate defining and prospects for those sites to be well. So it's just a balancing act and we do think that this 190 to 205 is a really sensible growth rate. We are not talking yet about what we are going to do in 2016 and 2017, but we suspect that we will continue to strike that balance based on people and how well our real estate performs. But if you look at our opening line so far, like Jack said our new stores opening about $1.7 million to $1.8 million on average and others a time not too far back where those volumes that we hoped we would reach as a system. And now there is a brand new stores opening at those volumes despite the fact that we are opening fewer tier one locations. So really opening a lot more locations that in the past we might have walked by. Also our operations are the strongest they have ever been. Our throughput the fast it's ever been and there are a lot of reasons to believe that we can feel good about asking our field teams to pick up and run new restaurants and to be able to do it tremendously effectively.

[John Glass:]

That's helpful. And Jack, just a clarification. The ACA cost you're talking about for 2015, you said not to exceed 1% of sales. What does that mean? Is that an incremental 100 basis points of pressure versus 2014 or what do you mean by that 1%?

[Jack Hartung:]

Yes. It will be an incremental cost, John, but we think it will not even reach 1%. We just don't know how to estimate it and so we just put kind of an upper range on it that we don't expect, no matter how many-- even if way more people now we think or that we estimate will elect for the new insurance that we are offering that it will still not be more than 1%. We think it's likely to be less than that. We just don't know until our people begin to enroll and that will happen here between now and the end of the year.

[Operator:]

And next question comes from David Tarantino with Robert W. Baird.

[David Tarantino:]

Hi. Good afternoon, and congratulations on great results. Jack, I wanted to ask a question about the comps momentum that you are having. And could you talk specifically about potentially the trends exiting the quarter and entering Q4? And then maybe how would you frame up the outlook for Q4 given that the comparison does look maybe 300 basis points more difficult?

[Jack Hartung:]

Yes, David. I would say that the trends through September and then in October so far have been very consistent. We are now comparing to a top recorder, so last year we -- in the fourth quarter, our comp was about 9.3% and it was like 6.1% or six point something percent in the third quarter. So 300 basis points tougher comparison, so I would expect that you will see our comps decline by that tougher comparison. So from a dollar and transaction standpoint, the trends are holding well as we move from September to October. Yes, but the tougher comparison going to have an impact for sure.

[David Tarantino:]

Great. Very helpful. And then maybe one on the cost side. The commodity environment seems to be getting worse and worse. So I was just wondering kind of what your thoughts were on if we can see continued pressure there, what your thoughts were on sort of another round of price increases. Maybe not right away but as you move through 2015.

[Jack Hartung:]

Yes, David, probably too early for us to consider a price increase. The way we think about the commodities right now, we are seeing pressure from three main areas. From beef, from dairy and from avocados. Avocados we think are from cyclical. It is caused by weather, it was caused by -- this year there was a shortage relative to the demand. While we think that's going to continue somewhat next year and so we won't get the break. At one time we thought we get a break next year. We don't think we will get the break. We do expect that avocados costs will be relatively stable next year and we are hoping that this is going to be more of kind of upper limit for avocados, but time will tell. Beef is going to take a couple of years to grow out for to replenish their herds is going to take a couple year so we think that beef is probably going to remain its elevated level, probably have additional pressure, hopefully not too severe pressure going forward. Dairy, we think will come back. We think that dairy has hit peak. In fact, just last couple of weeks we've seen butter costs are come down pretty dramatically just in the last two weeks. That affects our -- the cost of our sour cream. And so that holds we think that dairy is already starting to come back where maybe a normal kind of a normal sustained price could be so we netted altogether it doesn't feel like extreme pressure. David, so it's too early for us to be even thinking about another price increase. So hopefully things will stay stable and we won't have to think about it until sometime after 2015.

[Operator:]

Our next question comes from Nicole Miller with Piper Jaffray.

[Nicole Miller:]

Thank you, good afternoon. Great comps. I'm wondering if you have some of your latest survey work talking about usage patterns. So is this more frequent -- more frequency from your most loyal guests or are there some new users in the mix for a change at the core? Is there anything you can share on that front?

[Mark Crumpacker:]

Well, Nicole, this is Mark Crumpacker, the chief marketing officer. We don't right now have data that shows which -- whether it's increased frequency from customers or new customers. It's our belief that it's a combination of both. We do have some feedbacks, research back on the advertising campaign we've done and we've seen increased awareness and increased purchase intent with all of our existing customer so that leading us to believe that that's certainly a major factor, but given the level of the comps we suspect there is got to be a large number of new customers in there as well.

[Nicole Miller:]

Okay. And if you do, well, I don't know, if you do have your core guests, how many times they come and you're most loyal, do you have anything on that as of late? How often they use you on a weekly basis or monthly or anything of that nature quarterly?

[Mark Crumpacker:]

Well, that's actually not something that we track on quarterly basis. We do that research regularly. We are doing it now. So we will have some feedback on that in the future. But right now we don't -- I can't tell you the increased frequency of the existing customers.

[Nicole Miller:]

Okay, great. And then just back on the comps, I think, Jack, last quarter you said there's 2.5 price because it was only partial price. 2.5 mixes and the rest was traffic. When you said 100 basis points of resistance, I'm not clear, is that trade down in mix like the beef to chicken conversation, or is that meant to be a traffic-resistant comment?

[Jack Hartung:]

Nicole, it looks like it's mostly traffic. We started to see some trade down from state to chicken like when we reported earnings in July. And we thought that may be that would increase but it really didn't. And so the trade down effect, there is some from state down to chicken, it was very modest. It didn't really continue to get worse, in fact it leveled up quite a bit. So from what we can tell it looks like maybe our comp, if there is no resistant, should have been just a little over 20%. Maybe 20.5% something like that. So we are looking at something less than 1%, and it looks like it's driven on the transaction.

[Operator:]

And our next question comes from John Ivankoe with JPMorgan.

[Imod Galvin:]

Hi, thanks. It's [Imod] Galvin filling in. The first question is based on our estimates; it appears you've had a pretty extraordinary increase in year-over-year and new-unit volumes. And I know there were some concerns back in 2012 when you might have been laughing over some very strong unit results in 2011. So can you just help us maybe with where you're opening units next year in terms of proving risks emerging in new markets and how that compares to this year? If it's materially different anyway?

[Monty Moran:]

Yes, it's not materially different. Next year -- I mean this year we open about 70% of our restaurants in proven market and 15% in development market and 15% in new markets and next year will not be substantially different. It is a very similar strategy and just to carry over what we've done this year.

[Imod Galvin:]

Okay. And then with the recent announcement of some restaurant partnerships with ApplePay, can you just tell us maybe where you stand on mobile payment and whether your infrastructure is in place to roll that out now? Or do you have to maybe make some additional technology investments behind POS or something else at the restaurant level?

[Mark Crumpacker:]

Well, right now we don't have eminent plans to rollout ApplyPay support; it's something that we are considering for 2015. There are considerable technological constrains to implementing it, just based on the way payments are processed with our system. We are in the process of readying the launch of our new ordering app in November. And when we do a rev of that in the middle of next year is our anticipated time, we might include ApplePay. It's just a little bit too early for us to tell, just given that we haven't sorted out all of the backend issues.

[Operator:]

And next will be Jeffery Bernstein with Barclays.

[Jeffery Bernstein:]

Great, thank you very much. Just two questions. One on the comps side. As you now lap or as you look to 2015, and it looks like you are lapping what will be mid-teens comp growth in 2014, I mean wondering how you even think about what the right number should be. It looks like you guide low single-digit to mid single-digit. Just lapping such strong results, how do you even arrive at something like that? What kind of history do you use or how do you even come up with that on such a heroic lap that you have? And then I had a follow-up.

[Jack Hartung:]

Well, Jeff, it's a great question. And so we don't spend lot of time trying to predict how we are going to over -- to leap over that number. What we do is we take our current sales trends and we literally just push them out over the next 14 months, for the rest of this year and then for all of 2015 and if we don't increase our sales trends or we don't decrease our sales trends, we think we will be in this lower to mid single digit comp rate. This way we've always predict a comp. As you know, we had 10 years of double digit comp before the recession. That was interrupted during the recession that we had almost two four years of double digit comps again after that. And so we really don't have a magic approach or crystal ball to predict how you are going to exceed like a 19% comp for example. We are constantly working on improving our customer experience. We are constantly working on improving our people culture, we are constantly looking to upgrade the quality of ingredients, throughput, we are constantly working on throughput. So we are constantly working on the things that will enhance the dining experience and over the years it is paid off that when we do have a job, when we have great teams, and when they do a job of providing great dining experience, customers want to come back to probably more often and hopefully that will happen again -- hopefully will -- comp guys we have today will come back and say, boy, it looked conservative at the time but there is no other way for us to predict it other than to take our current sales trend and then assume they don't change and then we back into a number of which falls into that low to mid single digit range.

[Jeffery Bernstein:]

Understood. And then just a follow-up on the food inflation side. Jack, I think in your remarks you said in 2015, that we should expect a low single-digit basket increase but I know oftentimes -- I think you said you were talking about relative to 3Q. So I'm just wondering if you are taking the 34.3% in the third quarter and we should assume low single digit off of that prior to pricing. Or maybe if you could just tell us what the outlook is for 2015 either for the line item or what the overall basket is versus the full year 2014. Or is there any other way to look at it just so we make sure we understand it correctly? The comparison you are using against.

[Jack Hartung:]

What I would -- the way I would think about it, Jeff, is we just finished the quarter with food costs in 34.3% range. Based on what we see today we see hopefully relative stability without avocados. We don't get a break but hopefully it will be relatively stable. Dairy just hit a peak, just hit a high. Hopefully that will stabilize many even come back. But beef -- there is going to be more pressure there. And so when you net those three together and we assume everything else and what we buy is going to relatively stable. We think there will be slight pressure to next year from the 34.3%. We don't exactly what the pressure is going to be. We think it looks like it will be relatively modest barring unusual things like weather or supply shortages or things that we can't predict today. And so we think there is likely to be some modest pressure on the 34.3% that we are seeing in the third quarter today.

[Jeffery Bernstein:]

And that's even with the 6% plus pricing at least for the first part of next year. But then assuming, John, for the rest of next year?

[Jack Hartung:]

That's right. I mean -- in my assumption about food costs pressure, I am assuming no price increase.

[Operator:]

And next will be Brian Bittner with Oppenheimer & Company.

[Brian Bittner:]

Great, thank you. Another question on the 2015 comp guidance. It seems like its just par for the course as far as historically how you initially project your comps going into the next year. But the mathematics behind it that you just explained, obviously, it seems like you are giving a lot of respect to the tougher compares and justifiably so. But it does seem like you built this comp particularly this year via throughput in a sustainable way and you really raised the base of the business. And so when I think about 2015, can you talk through it a little bit more about what is left to do on the throughput side of the world that has helped your comps so much this year? And why maybe this time next year we could be surprised sitting here saying, wow, that low to mid single-digit comp projection was conservative.

[Monty Moran:]

Yes. This is kind of two pieces to it, throughput piece and then I'll let Jack answer the balance of it. But when we look at throughput I mean it just you can kind of look at two different directions. I mean it's very hard to raise throughput without additional people wanting to use it fully, but we can even if it is most of people don't want to work-- we get the same level of traffic, there are still opportunities to increase throughput just by moving a line quicker specially at the peak lunch and peak dinner hours which we were able to do once again this quarter. By the same token when you have a lot more people coming to us as has been the case recently then throughput becomes even more important especially because if there is peak lunch and peak dinner hour bottleneck, and our teams in the field are very focused on this and has been working really, really hard to drill the four pillars and to be have everything going that they needed. They have going to increase our throughput and we've been measuring at the field leader level and all of our field leaders are aware of it. And they know where they stand versus their colleagues throughout the country in terms of their group of restaurants and their ability to deliver execution on the four pillars of throughput. So we have an opportunity we think to get much, much faster because still our very fastest restaurants from the country at peak lunch hour are doing sort of 350 transactions an hour and sometimes even more than that, on a very regular basis. So we know it's possible to go very, very fast. Our average restaurant there is something about one third of that speed at peak lunch hour. So our ability to achieve higher throughput is enormous, but it depends on a few things. I mean obviously it depends on having a plenty of customers coming through our door. And it will also depends on the type of customers and also depends on whether it's lunch or dinner because dinner people, they are kind be more children and more group orders which take longer to put through. And larger size transactions as well which take longer to bring in. So we have a huge amount of ability to increase throughput particularly if we keep seeing this increases in traffic. And so that increase in the throughput will help to drive a comp but also an increased comp can also help to drive throughput. So it's kind of go both directions and now we feel really very good about throughput because of having six more transactions coming through at lunch, six more transactions coming through at dinner than happened third quarter a year ago. Plus we put through an additional five transactions -- approximately five transactions for every single hour of business during the day. So there is not one kind of day where we haven't managed to speed up and deliver better on these four pillars of throughput. So that gives us plenty of confidence that we can answer the call of any additional transactions that come through the door. But that being said, I'll let Jack answer the part about how he measures the comp.

[Jack Hartung:]

Yes. I think watching about what else can happen such that a year from now we looked back and say, boy that comp was conservative, is that the essence of the question?

[Brian Bittner:]

I mean I'm just trying to think about how much respect you are giving the comparisons, and really it's like they just build a bigger base. I guess more of the question for Monte, is there a percentage of the store base for instance that doesn't have all four pillars in there? I'm just trying to think about the runway for comp growth from throughput even as you base the tougher comparisons they felt this year.

[Jack Hartung:]

So maybe the way to answer that I think maybe the causing effect and this is what I think the point Monty was making is, the causing effect maybe different than what you think. You are thinking that if we have back to great throughput that subscribe in a comp, well, we are getting a comp throughout every hour today. And we need to be as fast as we possibly can during lunch and dinner because we are already have a heavy concentration of customers coming through those times. We need to get faster because as more customers want to come to Chipotle, if we don't get faster, we are going to be repelling that, we are not -- they are going to walking off to back of our line, so the demand is happening and then throughput is necessary, absolutely necessary to allow the demand for their coming to our door, go through the line and be satisfied customers. So in terms of what's driving a comp, I think you have to go back to Steve's comment that there is something going on in the industry. People are rejecting the traditional fast food model. The Chipotle approach is resonating. I think marketing team have been doing, is causing great curiosity especially with millennials where things like the scarecrow and back to the start and farm in dangerous and these are resonating with people that care about where their food comes from, how it is raised, what's the impact on the environment and their health, things like that. And so there is a movement going on that is resonating. Chipotle is the only one that's doing what we are doing with food, with people culture where you feel like you are being treated to an authentic dining experience although it is affordable and it doesn't take that much time and so it's likely that these trends will continue. It's not likely that all of sudden people are going to stop worrying about where their food comes from and stop appreciating the wonderful experience that they get by joint Chipotle, so it's likely that they will continue. It is incumbent upon us and our teams then to make sure throughput they are ready for the customers as they come in so that we can accept them into our line.

[Brian Bittner:]

Okay, that makes sense. And as far as the GMO-free menu, are we any closer to an announcement date on that?

[Mark Crumpacker:]

Well, we don't have a specific announcement date but what we can tell you that we are largely serving only ingredients that are free of GMO. And so we made some progress on that. We've recently rolled out, our tea is being GMO free and it's just no announcement day yet.

[Operator:]

And next will Jeff Farmer with Wells Fargo.

[Jeff Farmer:]

Thanks. Jack, can you share with us where chicken, beef, dairy, avocado, and whatever else matters, where they stand as a percent of COGs? And how should we think about the relationship between spot prices and what you are paying for a lot of those higher-quality inputs?

[Jack Hartung:]

Yes, Jeff, we don't talk about the individual ingredients and the percentage because there are changes over time like expect this year would be higher than last year. But if you take beef, chicken, avocado, cheese and beans, those are our top item ingredients, and those account for right around half of everything that we buy. Okay, so any of those, when you have a significant impact on quality or up or down, it's going to have a meaningful impact on our costs to good sales.

[Jeff Farmer:]

And then in terms of looking at spot as a proxy for any of those, is that still a directional sort of proxy?

[Jack Hartung:]

It's directional. You just have to be careful of the source like for example if the source is the same beef that we would be using, there is going to be an impact. Right now, the pressure that's affecting beef is that, there were these drought and the drought affected all these naturally raised and commodity pieces well. So that's something that -- when you look at the source of why there is a shortage, something like weather is likely to affect both naturally raised as well as commodity. Years ago there were world factor that were affecting chicken, they were affecting like bird flu and things like that, they didn't affect us at all. So, Jeff, you got to look at the source, generally when it is drought conditions, when it is general supply and demand, generally those things are at least directionally can impact commodity and naturally raised ingredients as well. And may not be on the exact same timing. May not be the exact same magnitude but everything that I am talking about dairy, about beef, as well as with avocado, you are seeing similar trends in the commodity markets as well.

[Jeff Farmer:]

Okay. And you touched on it but as your brand awareness and unit volumes continue to grow, what's been the resulting impact on the restaurants in the comparable store base? So are they entering sort of neutral talent headwind? And where does it sort of stand relative to where you were a few years ago?

[Jack Hartung:]

No, the new stores still out comp existing stores. The five years old existing stores still comp like into double digit, well in double digits. So when we do -- when we see these kind of comps, it is very broad based in terms of the layer store opening, it is broad based in terms of market and when our new store, even though our new restaurants are opening up at way higher volumes than they ever have before, they still out comp the stores that are two years old or three years old, really every other stores. So they still -- so they come in stronger and then they can't make comp stronger than every other layer as well.

[Operator:]

And moving on Bryan Elliott with Raymond James.

[Bryan Elliott:]

Good afternoon, gentlemen. And first, couple of things. One, maybe a little nit to pick, could we have done something to push the comp over 20% for the quarter?

[Mark Crumpacker:]

It's still would be nice.

[Bryan Elliott:]

Work on that for next quarter. Now seriously my question I guess the clarification question, Jack, just clarifying again this 1% traffic pressure or response to pricing that you mentioned. So you are -- as I heard you, you said you are kind of looking at the traffic growth rate prior to the price increase and then subsequent to the price increase there was a 1% decline or a point decline in the rate of traffic growth, is that what you were saying?

[Jack Hartung:]

That's right, Bryan. With that in mind, when you have 1% or something less than 1%, there is a lot of noise and there too and so we are going to continue watch this.

[Bryan Elliott:]

Sure, sure. I just wanted to make sure I understood exactly the message was. My question, I would like to if I could dwell down little more into the ACA commentary and understand I guess you give sort of some of the details, so you talked about after an ACA compliance plan to all the eligible hourly, those maybe 10,000 of them and can you help us with what exactly ACA compliant mean with respect to the income limit, so I think for the ACA compliant if I recall correctly it is kind of dropped out as the news and all but the pushing of the premium that you can ask the employee to cover, it has to be I believe it's something like 9% or less of their total income and so, a; is that right? And, b; I guess I am thinking about that there is going to be -- it's going to be possible or not after the fact and how many people of certain pay grades are going to be buying into the insurance and how much your portion is going to be versus their portion? Then you could flesh out a little about --

[Jack Hartung:]

Bryan, what you are talking about is to comply; you need to have a plan that's credible. Okay, so it meets the requirements. So it's got to be real insurance and their guidelines for that. And our plan does meet that. And it's got to be affordable. And affordable, you are roughly right. That it's got to be -- what's tough about it is got to be based on household income, okay? So we don't know whether there are other income earners in the family. So we have to use an estimate. We feel pretty good though about the fact that everyone will be able to afford this plan. We've gone through a lot of different assumptions, lot of different calculation, we know what our folks are making, what we don't know is how much other wage earners in the house are making. So we think that our plan is going to be affordable by most if not all the employees that are going to be offered insurance. If more than 10,000 people buying, we don't have an exact number but I said a number more than 10,000, so it is for sure more than that, that are going to be eligible. And eligible means that you worked here for a year and during this time you had averaged 30 hours or more. And what we are going to be doing throughout the year is each month as people hit their anniversary date, we are going to identify whether they qualifying so, it is an estimate because each month we are going to be recalculating and kind of having reenrollment throughout the year to see if people, see if our employees are eligible. And if they choose to go ahead and enter the insurance rolls.

[Bryan Elliott:]

And are we talking just about hourly? I assume that the management staff is already on a corporate type insurance program?

[Jack Hartung:]

Right. Salaried management and we have typically at least two salaried managers, a GM and restaurateur and then apprentice in each restaurant. They already qualify for health insurance today. So you are talking about our hourly crew, and hourly managers in the restaurant they will not qualify.

[Bryan Elliott:]

And of the total premium costs, roughly what's the split between the employee and the employer?

[Jack Hartung:]

We are paying the majority of it. And you have to make it affordable.

[Bryan Elliott:]

Sure. I am wondering is it like -- you are going to pay 75% or 80%, that is more like a little more than 50%?

[Jack Hartung:]

No. It's -- it depends on whether family or not but it's for example it will cost an average employee a couple hundred bucks or so a month in terms of the premium. That doesn't count deductible and things like that. And the company on average we think it's going to cost us around $3,000 a year, so we are paying more than half of it for sure. We are doing everything we can to make it affordable, as affordable as possible. I've also read about some very, very deductible. These high deductible plans are reasonable deduction, deductible plan kind of which is considered to be normal. I was reading the other day about deductible plan that have like $5,000 and $6,000 deductible. So it's as what you would consider to be a normal deductible, kind of a normal monthly premium, couple hundred bucks per employee and then Chipotle paying what we estimate to be over $3,000 per employee per year.

[Operator:]

And next will be Joe Buckley with BofA Merrill Lynch

[Joe Buckley:]

Thank you. You mentioned catering contributing to the check. Could you just give us an update on what percent of sales is catering? And how big a portion are you making this holiday season on that business?

[Jack Hartung:]

Joe, the catering, we've mentioned catering was like 1.6% in the second quarter. But seasonally with graduation we saw that as being seasonally our highest quarter. This quarter we are run around 1% in catering, so we did pull back a bit and I don't know if we do have anything special plan, Mark and Monty.

[Mark Crumpacker:]

Yes. We will be doing holiday promotions. It is turned out that one of the things we've learned about fully catering is -- it actually is slightly more appealing to folks that are doing parties at home than it is people that are doing things in the office. So we trying to make, put our marketing around events that happen at home like graduations, super bowl that sort of thing or on site just like we call it, it is update game. Keep in mind we are catering, right now we are just rolling out catering and we don't yet have online ordering for it. It's really just in its infancy. So it has a long way to go as we roll this up.

[Joe Buckley:]

Okay. Thank you. Maybe one quick one because you mentioned online ordering. How -- is that becoming a more significant part of your store business? Away from catering.

[Jack Hartung:]

Joe, if you take all of the online like iPhone, fax, online ordering and catering together, it's somewhere 5.5% to 6%. It was like 6% last quarter, so it's call between 5.5% and 6%. So it's bigger I mean three -four years ago, five years ago it was 3.5% to 4%, so certainly moved up, but we know that there are companies out there that they are doing 7%, 8%, 9%, 10% of their sales. So we think there is still a lot of room to move.

[Operator:]

And that does conclude the question-and-answer session. I will now turn the conference back over to you for any additional or closing remarks.

[Steve Ells:]

Thank you, all for joining us this afternoon. And we will look forward to speaking again next quarter.

[Operator:]

Thank you. That does conclude today's conference. We do thank you for your participation today.