Chipotle 2Q16 Earnings Call Notes

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Chipotle Mexican Grill (CMG) Steve Ells on Q2 2016 Results

Comps still in negative 20 range

“During the second quarter, we generated total revenue of $998 million. Our sales comp improved by 6% from the first quarter to a negative 23.6% for the quarter. As a result of promotional activities, we are seeing slightly better improvements in comparable traffic with customer traffic down 20% for the quarter. ”

Invested more heavily than ever in marketing

“In the first half of the year, we have invested more heavily than ever in marketing and promotional activity and those investments are beginning to pay off.”

Bell peppers are an example of one ingredient where taste suffered from safety protocols, but we’ve since altered processes so that taste isn’t sacrificed

“Take bell peppers, for instance. One of our experts said that it would be helpful if we could test the bell peppers before we bring them into the restaurant. Well the way to test them though is to slice them up in a central kitchen and then wash them, test them and then package them. That turned out to degrade the flavor. It does not taste as good as when our crews would expertly chop using a cutting board and a knife right there in front of the customer and then sautéing. But in order to make sure that we had the highest food safety, we went right to the central kitchen. And we did this with a couple of other items also. And I fear that we probably did negatively impact the flavor and I think maybe some customers noticed that also. We have reversed that though with bell peppers and other items because we have developed with our in-house food safety expert, Jim Marsden, a number of interventions that we put in place from the farm all the way through the distribution system and into the restaurants. And so, with peppers, for instance, we now have our crews blanche the peppers in boiling water which would completely eliminate any pathogen that might be on the surface because blanching doesn’t actually cook the pepper because it’s for such a short period of time, but it’s plenty of time to kill any pathogen that may be on the surface. Our crew then goes with the old process of with a knife and a cutting board chopping right in front of the customer and then sautéing as usual.”

Montgomery F. Moran – Co-Chief Executive Officer, Secretary & Director

Still on track for restaurant openings

” our openings continue to be on pace with our guidance for 2016. We have opened 116 restaurant so far this year, which is about half of our total planned openings of 220 to 235. We are pleased that we have a strong pipeline of real estate locations under consideration.”

Turnover has snuck higher for a number of reasons

“Yeah. Our turnover is going various directions for different positions. The crew turnover right now is fairly high. It’s in the 130%-plus range and our kitchen manager turnover ha”

Mark Shambura – Director of Brand Marketing, Chipotle Mexican Grill, Inc.

Consumer perception of Chipotle turned positive

“In a June 2 survey by YouGov, for example, consumer perception for Chipotle turned positive for the first time since November. While sentiment is not back to where it was prior to these issues, it shows movement in the right direction. This improving sentiment is also supported by our own ongoing brand health tracking study which shows consistent upward trends since mid-January’s all-time lows. ”

John R. Hartung – Chief Financial Officer

Seeing good traction is loyalty program

“We’ve seen a very regular ramp-up of people that are participating in the program. We have significant – every single day, we have over 100,000 people that are added to the program. The majority of them are registered in the program. And we’ve seen significant repeat visits. We’ve seen like 28% of the people that are enrolled, they’re engaged in Chiptopia, have come back a second time”

“There’s never been a case like this”

“Jeff, success to us is getting all the sales back. The timeframe, we can’t predict what that is. We’re frustrated that we’re further along but there’s never been a case like this. Any of the case studies that we looked at in the past just didn’t have the amount of publicity and didn’t have things like what happened in March where nothing happened and yet there was a news story about somebody – or that some of our crew that didn’t work because they were ill, didn’t show up to work, no customers got sick, and yet that turned into a news story. So it’s been frustrating that there have been things beyond our control where things had worked perfectly well and we followed all our protocols, and yet that still caused our recovery to see a setback. So it’s been challenging and frustrating but our objective is to fully win all of our customers back. How long it will take, we just don’t know.”

Labor inflation has been pretty significant in the last year

“The labor inflation especially in the last year has been significant. We had intended to pass on the wage rates that we were seeing because of local pressures, because of raises in minimum wages, some of them very significant at $10, $12, $13, and we haven’t really raised prices. We haven’t passed on the cost of those higher wages. Probably a couple hundred basis points there.”

Of 1100bps hit to comp recurring food safety costs are only 100-150 bps

“We do have recurring food safety costs that you heard me talk about. We talked about that being in the maybe 200 basis point range. I think it’s going to be better than that. I would say that’s probably going to end up in the 100 to 150 basis point. Right now we’ve got about 150 in there. And so that’s the only thing that’s really what I said is an absolute permanent. So if you add these things up together, you’re probably in that 1,000, 1,100 basis points or. So those are the items.”