Chipotle Mexican Grill, Inc.
Q1 2015 Earnings Call Transcript

Published: 22 Apr 2015

[Operator:]

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. [Operator Instructions] As a reminder this conference is being recorded. Thank you. I would now like to introduce Investor Relations Manager for Chipotle Mexican Grill, Mr. Mark Alexee. You may begin your conference.

[Mark Alexee:]

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 tend to open, and trends of development cost, estimates 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 and 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-K as updated in our subsequent Form 10-Q for a discussion of these risks. I’d like to remind everyone that we have adopted a self-imposed quiet period, restricting communications with investors during that period. The quiet period begins on the first day of the last month of each fiscal quarter and continues until the next earnings conference call. For the second quarter it will begin June 1st 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 Crumpacker, Chief Creative and Development Officer and Jack Hartung, Chief Financial Officer. With that, I will now turn the call over to Steve.

[Steve Ells:]

Thank you, Mark. I am pleased with our performance during the first quarter. 2014 was an extraordinary year for our business and we are off to a strong start in 2015. During the quarter we generated revenue of nearly $1.1 billion, an increase of 20% on comparable restaurant sales growth of 10.4% and the opening of 49 new restaurants. This produce diluted earnings of $3.88 per share, an increase of 47%. These results are particularly strong considering that we were up against 13.4% same store sales growth in Q1 last year and faced with harsh winter conditions in much of the country, including many important Chipotle markets. 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 begin 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 this change in these areas is unprecedented and we believe these higher quality ingredients taste better. In January we suspended one 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 raise. In many cases they spend their whole lives indoors on hard flooded 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 one 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 this supply. There is very little cushion today in the supply for some - for pork that meet 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 the protocols. Our long-term suppliers have partnered with us to increase their output and responsibly raise pork. However this alone will not be enough to remedy the situation and our shortage will remain at more than one 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 third quarter and back in full supply during the fourth quarter. While the commitments we make and the way we run our business can be difficult they're 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 firms 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 mentioned as the number two company on the list. Another study shows that millennials, key customers for Chipotle are eating out at fast casual restaurants, more than generation X’s or boomers and that their dissatisfaction with traditional fast food is higher than other generations. We believe that the loyalty we believe that we are building with key customer groups is very much 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 that 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.

[Montgomery Moran:]

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 unique economic model. During the quarter we continued to strengthen our restaurant teams, adding 42 new restaurateurs, and promoting 11 in the field leadership roles, either apprentice 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 the very best, we're able to do things at our restaurants that other restaurant company simply can't do. Not only our team’s running extraordinary restaurants, preparing delicious food using classic cooking techniques and providing exceptional customer service we'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 to deliver such strong unique economics. To 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 in to management positions. More than 78% of our restaurateurs started with us as crew, many having never even worked in a restaurant before. During the quarter one particular leader really captured our attention. Montell Millage [ph] who demonstrated his ability to assemble a team of all top performers and then empower them to achieve high standards in these restaurant become our youngest restaurateur ever at only 19 years old. Montell came to Chipotle two 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 interview and was hired on the spot. He had a group of very strong leaders, such as Gabby Forteo [ph] who is now a restaurateur and Patricia Agila [ph] a restaurateur who's been promoted to field leader and is now actually a team leader at Chipotle. This team immediately recognized that despite not having significant experience, Montell embodied the 13 characteristics of a top performer in the drive to empower others around them. A year later he was a service manager working to develop his replacement so he can move to the apprentice role and at 19 years promoted to general manager at a new Chipotle restaurant when we open in Maryland City. From the beginning Montell set his sights on developing a team of all top performers. He then shared his restaurateur vision with all of them and connected with each person on his team by getting to know them, sharing his own dreams and desires and demonstrating to them how he could help them become leaders in their own right. Montell’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 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 a restaurant before our customers arrive so we're prepared for service, particularly in 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 a product of our outstanding restaurant teams and their ongoing attention to providing better service. But also our continued emphasis on the four pillars of throughput, which are using a line-backer and dedicated expediter at peak times, proper mise en plus 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 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 one new ShopHouse, bringing our total number of restaurants to 1,831 including 10 ShopHouses in two 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 [indiscernible] 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 third market, Cincinnati later this year. We are 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 in economics, we are well position to people think about any fast food and to deliver outstanding results for our shareholders. I will now turn the call over to Mark.

[Mark Crumpacker:]

Thanks, Monty. The 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 will be the most powerful marketing of all. In fact we were serving better ingredients, including pasteurized 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 confidence that this is the case. Chipotle has become quite buzz worthy with awareness coming from social media, public relations, advertising and our local and event market programs, but with less reliance on traditional advertising than many of our competitors. Many of [ph] our programs in areas other advertising generates considerable attention on awareness and does, as does the breakthrough nature of our content programs, which have reached well beyond what we will 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 our customer, about 60% are willing to pay more for better food; food that is made with [indiscernible] 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 spike in sales during the 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 crew 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 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, including our use of local produce pasteurized dairy and meats without antibiotics and added hormones. But more recently we have begun to expand our marketing messages, 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 tortillas 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 and other fast food contains literally hundreds of them will further differentiate Chipotle from the competition. That is 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 two flights; one is spring and another this fall. During the summer break between advertising flights we will be launching a large online initiative for collective beauty. Beyond this expansion of our marketing strategy strengthening our eCommerce program is a top priority for us this year. Over the last year we worked on a project to incorporate mobile payment into Chipotle ordering apps. We had hoped that this capability would have been available in the updated app release 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 has 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 April 24th and the exploration of new systems for mobile payment, including the use of ApplePay 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 we’ll keep you apprised as these programs evolve. Last, we also relaunched our chipotle.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 in 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 will turn it over to Jack.

[John Hartung:]

Thanks Mark. We are very proud of our results for the quarter as we grew our revenue to nearly $1.1 billion, or 20% increase as compared to last year and EPS was up 47% in the quarter. Our average restaurant volumes have surpassed the $2.5 million mark for the first time. And it was just a little more than three years ago that our average volumes passed $2 million for the first time, meaning that we have been able to increase our average volumes by more than $500,000 per restaurant while adding more than 600 new restaurants during the past three years. This obviously has had a significant positive effect on the unit economics and it means we are serving more Chipotle to more and more people in new and existing restaurants as we pursue our vision to change the way people about any fast food. As you know this year we have faced the most difficult comp comparisons we have ever had as a public company, including lapping the menu price increase from Q2 of last year. We are 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 mid-Atlantic and 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 have been 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 happened 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 snow storm, 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 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 and 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 first quarter. 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 had 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 again in their market. Now this is not surprising as the vast majority of our customers tend to find their favorite burrito or favorable combination and then they order that favorite meal every single time they visit. We had hoped that the shortage would encourage our carnitas customer to try another menu option and some did, but many have decided to hold out until carnitas returns to their market. And as a reminder we rotated markets without pork about every six weeks, and so everyone 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 previous product mix levels, as a result of our carnitas loving customers not realizing we were back in supply of carnitas and so they visited less often. In other words this rolling blackout has caused confusion among our customers about where and when we are out of carnitas and this has worsened the sales impact. Because of this phenomenon we are going to stop the rolling blackout and continuously serve carnitas in our markets where the carnitas product mix tends to be the highest, starting later this month. Based on actual April trends and factoring the tougher comparisons in May and 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 from the pork shortage. As Steve mentioned we expect additional pork to be returning to our restaurants, beginning in the third quarter with the full return of carnitas during the fourth quarter. 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 our 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're as confident as ever that we made the right decision to suspend the 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 costs declining from 35% in the fourth quarter to 33.9% in Q1. The main contributors to the decrease were from relief in dairy cost and favorable pricing for Avocados. Dairy pricing has largely been expected to realize as the broader commodity market increased supply during the fourth quarter 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 the third quarter. And while we're still carefully reviewing our options we anticipate an average increase of around 4% to 6%, which would have a net effect of about 150 basis points based on the current product mix of our Steak and Barbacoa. And as you will 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 well 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 Steak and Barbacoa last year when we increased prices for these entrees more than other menu items. One final note related to food cost in the quarter, we included a one-time write off to the cost of sales associated with the carnitas inventory of $1.7 million. 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 cost during the quarter. Labor costs for the first quarter were 22.4% of sales, a decrease of 50 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 slightly offset by wage inflation. Occupancy [ph] costs were 5.8% 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% benefiting from strong revenue growth compared to last year. G&A was 5.8% of sales and 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 million which is down $18 million from last year. Executive comp was restructured, resulting in an estimated $33 million reduction in exec comp for the full year while additional grants to restaurant management and staff are expected to offset the non-cash stock comp by about $15 million. Total stock comp in the first quarter was about $15.6 million compared to about $27.6 million 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 incur a loss on disposal of assets of about $2.8 million associated with some of the prior development work. Our effective tax rate in the quarter was 38.4% and for the full year we estimate our effective tax rate will be 38.7% compared to 37.6% for the full year in 2014. 2014 benefited from our estimated usable federal and state credits and from the work opportunity and R&D federal tax credit which have not been renewed for 2015. If those federal credits are extended to 2015 we estimate our tax rate would benefit by about 30 basis points. We finished the quarter with 1,831 restaurants and our average unit volumes have helped push our return on investment up to nearly 80%, an economic return that we are very proud to achieve. As at March 31 we held cash and investments of about $1.4 billion 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 million of our stock at an average share price of $675 and we currently have $179 million 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 will continue to opportunistically repurchase our stock to enhance shareholder value. Thanks for your time today and we would happy to answer any questions you may have. Operator, please open the lines.

[Operator:]

Thank you. [Operator Instructions]. And at this time we will take a question from Brian Bittner with Oppenheimer & Company. Please go ahead.

[Brian Bittner:]

Thank you, appreciate it. So, a question on comps and I am just trying to understand the way you are thinking about it. Over the next two quarters you are facing very similar traffic comparisons that you faced in the first quarter. So are you assuming that over the next couple of quarters that you see very similar traffic growth that you saw in this first quarter, which I am assuming is in the low singles and then you are just rolling in the loss of the pricing as it falls off. Is that kind of how you are thinking about comps going forward?

[John Hartung:]

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 first quarter. The way I would think about it is in April so far we are 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 are going to see transactions that are going to be moving down into the low single-digits and that would continue to compare to tougher comparisons as the year rolls out. So I would not except to see the same transaction growth as you saw in the first quarter continue as we move through the rest of the year.

[Brian Bittner:]

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 your business?

[John Hartung:]

Yes, the total - what I include as kind of all online and catering and burritos by the box, they are all kind of non-traditional orders. That was about 6.6% 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 are approaching our peak catering season and so I would expect that catering would move up in Q2. But 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 talked 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 are in a high single-digits, low double-digits that gives us optimism that we can move that number up from the 6.6% today.

[Mark Crumpacker:]

And just to add on to that, with regard to catering keep in mind that catering currently does not have online ordering, or delivery for online payment. So I said it’s 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 are using. We are seeing a 30% month-over-month growth on those orders and we have not publicized this. So there is 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.

[Brian Bittner:]

Okay, thanks.

[Operator:]

At this time we will take a question from Joseph Buckley with Bank of America.

[Joe Buckley:]

Thank you. Just to clarify the last discussion, so the 6.6% is the percent of online orders. If I understand correctly that does not include catering, is that correct?

[Steve Ells:]

Joe, that does include catering. So catering is a little over 1%. So about 6.6% catering is about 1.1 or so. But we think catering in the second quarter could increase by much as 50%, so could be 1.5, 1.6 range or so, but the 6.6 does include catering.

[Joe Buckley:]

Okay, and then just a question on the food cost, which you came in remarkably good for the question given the recent run rate. There is something - or there is some unusual let up of the pressure from beef during the first quarter or was that simply dairy and avocados and another some other things becoming more favorable then you expected?

[Steve Ells:]

Joe, it was all diary and avocados. Beef just kind of held constant. We picked up about two-thirds of the benefit from diary and about a third of the benefit from avocados and then we just had no other surprises. We have been kind of [indiscernible] in the last several quarters despite 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 get from avocados and dairy. So nothing else out of the ordinary.

[Joe Buckley:]

Okay, was there any unusual spread between advertising expenses for the balance of the year, I know it was down as a percent of sales in the first quarter?

[John Hartung:]

Yeah, so I would expect Q2 and Q3 to probably be at the peak. You know this quarter was closer to 1%, just under 1% , Q2 and Q3 will be closer to 2% and then overall for the year fourth quarter will drop down you know to something maybe closer to 1%. Overall for the year we will probably be in the 1.6% range or so.

[Joe Buckley:]

Okay, thank you.

[Steve Ells:]

Thanks, Joe.

[Operator:]

At this time we will go to Jason West with Credit Suisse.

[Jason West:]

Yes, thanks guys. Just want to get back on the delivery roll out, you said that is going to be delivery to individuals. Is that something you guys have offered? I mean I am guessing you can do it on like seamless in places like that but is that sort of a new initiative and how wide spread would that delivery be, is that a nationwide opportunity?

[Steve Ells:]

Yeah, that’s - it is relatively new. Let me put up this way, there has been a lot of people that have been delivering Chipotle through various services over the year and we have try to - in lot of cases shuffle down because we weren’t sure whether the quality was going to sufficient or whether they were following our rules. This is different because we have made an official deal with Postmates and I they have been delivering Chipotle for quite a while too and so we have them as our official partner and they will be delivering Chipotle - they are Chipotle in all of their markets all of their markets it is 64 cities and about 24 big metropolitan areas so, it is nationwide.

[Jason West:]

Okay, got it. And I guess going back to the comp question, the underlying, I guess trends do you guys assume the two 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 are seeing you know outside of the weather and the pork issues that suggest being a reason for deceleration in the underlying trend in the business?

[Steve Ells:]

Well I don’t know that I will look at a two year trend. I think when you combine years you have to combine years that make up the full trend that we are seeing. And in our case I go back to the current trend we are in - we are in the third year of the 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 every 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 to 9 and look at double-digit and now we are comparing against those strong double-digit. And I think as you combine those three years together you will see a three year trend that for the first quarter with 2015 gains the third year the comp about 24.8% now we know that was effected by weather and pork and so it was depressed a bit but if you make adjustment for weather and pork, I think for the rest of the year you can think in terms of a three year combined sales comp and that would put you in kind of a 26%-26% range or so and I think that is 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 taking into account. The replenishment of supply with the fork that Steve talked about later in the year.

[Jason West:]

Okay. I think I got you. Thank you.

[Steve Ells:]

Okay.

[Operator:]

At this time we'll hear from David Tarantino with Robert W. Baird.

[David Tarantino:]

Hi good afternoon. Just maybe a follow up on that question Jack. I guess if you think about the trends on a multi-year basis and apply that logic, would you expect this year's traffic or the one year traffic number to turn negative at any point during the year I guess does that imply sort a flattening out of the traffic or a turning of the traffic to negative territory.

[Steve Ells:]

I don't think David it will turn negative. But when we compare against the third quarter 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, just met one over the weekend. I just can't believe it that somebody has never been at Chipotle. And so the third quarter will be the toughest test but I would say right now I don't expect it turn negative.

[David Tarantino:]

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, at Chipotle time and time again has found the way to drive more traffic into the business through, whether it's marketing or just issues 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 at the wrong way but what are your raw thoughts on the ability to continue to driving this up and kind a hurdle over the great trends you had last year with positive momentum?

[Steve Ells:]

Yeah, David it's very hard to predict quarter-by-quarter. I look at this as a very substantial three year end. Where we now have 1800 restaurants are now $2.5 million. The fact that we've added $500,000 in volume while adding the 600 restaurants I talked about over the last three year, I think is pretty substantial. If you go back to three years before that, that was a three year trend as well that had a start and a stop and it was pretty clean, 2010, '11 and '12 during that three year period 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 ways and if you go back even as we are private company, these waves where people figure out that's Chipotle exists. They like it, they come back more often. And so we have this kind of search and then we have a leveling off and then a surge and leveling off. Very tough to predict where we have another surge, when where we have it what will the magnitude of that search be but we continue to believe that there is a great appreciation and a growing appreciation for what we do at Chipotle. We do think millennials in particular are very appreciative of what we do. We think this campaign that's designed to reinforce the idea that not only do we source sustainably raise ingredients but we do real cooking with real whole ingredient zone and we largely don't use things like preservatives and stabilizers and things like that. And so we believe that that is not something that is short lived, that's over that we think that will probably benefit from that. But in terms of that breaking that down into exactly what that's going to do for the next two or three quarters. It's tougher to predict and the comparisons are tough, but over the longer term we're optimistic about what we can go from here.

[David Tarantino:]

Great, thank you.

[Steve Ells:]

Thanks David.

[Operator:]

At this time we'll take a question from John Glass with Morgan Stanley.

[John Glass:]

Thanks very much. Jack, just first on the food cost outlook for the full year just to be clear. Is the 33.9, I know there is lots of pushes and pulls, but is that a good number. Doesn't that also include the right off for the forks that was and even better or is that just a slot of this asset or something.

[John Hartung:]

Well the right off for the fork is offset by a reclass. And so I would look at those as largely awash. So I would think if John is we're going to see pressure in the next two quarters from avocados. And so I think that will be enough pressure. Hopefully that pressure will be relieved in the fourth quarter. so I would say generally we will probably be up a little bit from this first quarter but hopefully not too significant.

[John Glass:]

Okay, and also it's still below say that 35 that you're running at the end of last year… is that a fair way to…

[Steve Ells:]

We it to be below the 35 yes.

[John Glass:]

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?

[Steve Ells:]

The restaurants certainly are not setup to accept mobile pay although with ApplePay 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 ApplePay. So we are working on that and 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 are also of course pursuing putting ApplePay 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 as if the POS hardware has to change, there’s just an additional piece of equipment.

[John Glass:]

And do you envision that being available this year?

[Steve Ells:]

That’s our hope to have that implemented by the end of the year, yeah.

[John Glass:]

Thank you.

[Steve Ells:]

Thanks John.

[Operator:]

At this time we will move to Andrew Charles with Cowen and Company.

[Andrew Charles:]

Great thanks. Monty with the combined power of increased field leadership oversight and diagnostic tools, do you see that 21 transaction gain sustainable for the remainder of 2015?

[Montgomery Moran:]

Do we see the - what transaction?

[Andrew Charles:]

The 21 transactions you gained from the throughput initiatives, do you see that sustainable with the tools you are putting in place?

[Montgomery Moran:]

Yes in fact I would like to see actually improve on that over the next two quarters that’s a nice result specially during the first quarter which from a transaction standpoint is one of our slowest two 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 make sure to emphasize with all of our teams the importance of having those four pillars in place and in fact at this time we have 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 for those who are doing the best with it just like we did with the reported at nationwide from team director to team director but this way we are actually having a little bit of a contest for bragging rights. And we will see if we can keep pushing the needle but I think it’s going to get stronger over the next two quarters in terms of throughput. Now of course our ability to put through more people depends on having more come to our doors as well. So throughput will not in and of itself drive transactions, it’s just that when you have transactions commence, if you don’t have good throughput you are stifling your ability to allow additional transactions to come in the door. So but yeah we are excited about hopefully continuing to improve on our execution of the four pillars and our execution of the throughput.

[Andrew Charles:]

Got you. And Mark on the new digital initiatives what can we expect from one to one marketing efforts and how can Chipotle build efforts to strengthen this form of marketing?

[Mark Crumpacker:]

I missed the second part of the question?

[Andrew Charles:]

Yeah, sure just kind of curious about how Chipotle can build efforts to strengthen the one to one marketing?

[Mark Crumpacker:]

Well I mean we have been doing that actually for a couple of years. We have significantly improved our one to one marketing through mobile, what we are 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 are also as Jack mentioned on our 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 what we are spending anyway. So I think we are already underway in that regard.

[Andrew Charles:]

But it seems like the digital initiative will give you more fire power behind that?

[Mark Crumpacker:]

Well anything that we do that’s digital has the potential for people to share it by themselves, so it adds a viral element and Chipotle we are very judicious with our offers and when we combined a mobile initiative with an offer of some time we see a tremendous amount of viral pickup of that. And so yeah these digital initiatives have - give us more leverage for our dollars than traditional advertising will do or does, we use them always in conjunction with one another but you are right digit gives us more leverage because of the potential for it to be shared.

[Andrew Charles:]

Got it, thank you.

[Operator:]

At this time we will take a question from Sharon Zackfia with William Blair.

[Sharon Zackfia:]

Hi, good afternoon. I had a question about the supply chain and obviously with carnitas it took 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 of the partner with larger entities to ensure the supply chain going forward. It just seems like you'll be a very attractive partner and maybe you already are doing that and that's just not obvious just on the outside is to try to ensure the consistency of the supply.

[John Hartung:]

Yeah 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 bigger suppliers. With the bigger suppliers we've encourage them to adopt our protocols and some of them have. And some have chosen not to do so. So but we know in order to continue to ensure supply of our top quality ingredients that are more steadily raise. We're going to have to use all different sizes of farmers and ranches out there and we have been doing that for years.

[Sharon Zackfia:]

Okay, thanks.

[Operator:]

At this time we'll hear from David Palmer with RBC.

[David Palmer:]

Thanks, a 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 the 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?

[John Hartung:]

Well trends don't change. We are likely going to increase prices. If something happened in economy or something happened with our trends we might defer it. I mentioned that we’ll probably get it done by the end of the third quarter. 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 steak 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 little concerned about we might decide to fix that a quarter or two later, but right now unless things change, I think we're going to get this done by the third quarter.

[David Palmer:]

And then just, just a follow-up to your previous comments about the cycle, this three year ebb and flow that you seem to see looking back the last quarter [ph], we came to see or at least we did that there is perhaps some throughput constraint and then the throughput focus and also that the marketing efforts that we're breakthrough 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 this throughput metrics are perhaps not improving the way that they were? Thanks.

[John Hartung:]

No, I think the throughput is improving very 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 three years now sort of in a row we've consistently set a new high watermark on throughput, during our second 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 is long - lot of a 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. We end up with a lot of people come to 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 than is the 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 to our doors, those opportunities on throughput in some stores we are not going fast enough you are not going to see as much of an ability to ramp up throughput. So great throughput overtime 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 is more of a convenient experience, but great throughput doesn't sort of - it will not add any comp in the vacuum during any given quarter. You have to have the transactions come to your door.

[Steve Ells:]

And with regard to your question regarding marketing, we had, had a series of successful advertising campaigns but I wouldn’t look at it as if those campaigns - I would look at it in the way that suggested this current campaign can’t achieve those same goals. If you look at what we are doing now, and in the past we have touted what we call our zero ingredients, we talk a lot about naturally raised or responsibly raised meat, local produce, pasture raised dairy, that kind of thing. But there are number of other competitors who are trying to say similar things. The approach we are taking now is to expand our platform to include essentially what’s not in our food, you know 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 had you know 65 ingredients in our entire or 67 ingredients in 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 understand that and you can’t take all this junk out of these other processed menu items in other fast food companies. They just can’t do it. While they can limit some of our past marketing, I think it will be very difficult for them to do this. So I expect this new approach to have potentially even greater impact than the ones previously.

[David Palmer:]

Thank you.

[Operator:]

At this time we move to Sara Senatore with Bernstein.

[Sara Senatore:]

Hi, yes, thank you very much. I just have a follow-up question if I may I guess one is I am try to believe that it’s a comp issue but you track I guess the two year trend, actually or the three year trend you are talking about and you are adjusting for kind of the 1Q comp in 2013, but the implication would be in fact negative comp, certainly traffic. So I guess I am just trying to reconcile some of the commentary and the other think I had about marketing, so I think in the first-half of last year you had a pretty big increase in marketing dollars and the impact how along with the throughput initiative that saw the lines shorten through 2013, that sounds that you think about in terms of marketing spend is down between brand building and traffic jargon.

[Steve Ells:]

Yeah, so, I will take the comp piece first. When I look at the first quarter, you are right that in 2013 there was - we lost a day. So that 1% comp is really like a 2% comp. So you can make that adjustment. There is also an adjustment to be made and I am suggesting it is 100 basis points, 200 basis points in the first quarter and that’s an estimate their best estimate right now and so the three year comp, if you make those adjustments you are talking about something in the - you know 26%-27% or so range. And if you do that and if you look out at the rest of the year and unless we do things like we adjust for trading day and things like that, I think the third quarter and the fourth quarter will be tough comparisons. I don’t think the graph will turn negative but it will get close. So the margin for error is very, very small. But right now I wouldn’t expect it to be a negative comp. So but it is going to be close so we are hoping for the best.

[Montgomery Moran:]

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 is sort of thing in the spring and the fall. That’s what we did last year. We are doing it at the same time this year. We are 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 budget in ways that make it look as if we are spending more than when we are not. So I don’t think there is a meaningful correlation between the spend of marketing and what we are seeing right now. It’s what we are doing with marketing is pretty much exactly we did last year.

[Sara Senatore:]

Okay, great and sorry, one last thing, did I miss - did you give some mix this quarter, in contribution?

[John Hartung:]

Yeah, it was like 6.1% was menu price. But most of the rest was transaction. There was a small piece Sara, that wasn’t transaction but even that was quite a good size in catering, which even those are like transaction, because you are serving more people. There wasn’t anything in terms of people buying different items on the menu, that causes that to go up. So it was menu price was the biggest piece, 6.1 most of the rest was transaction and a small piece related to group size and catering.

[Sara Senatore:]

Okay, thank you.

[John Hartung:]

Okay, thanks Sara.

[Operator:]

That is all the time we have for questions. At this time I will turn the things back to Mark Alexee for closing remarks.

[Mark Alexee:]

Thank you all for joining the call. We will look forward to speaking to you next quarter.

[Operator:]

And again this does conclude today’s conference call. Thank you all for your participation.