Chipotle 3Q14 Earnings Call Notes

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This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. Full transcripts can be found at Seeking Alpha

56% earnings growth

“We have continued the momentum we build 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 of $4.15 for the quarter, an increase of 56%.”

We’re 21 years old. These results are extraordinary.

“These results would be remarkable for any restaurant company but for Chipotle where we are now more than 21 years old with more than 1700 restaurants and average unit volumes of more than $2.4 million, we think they are extraordinary.”

What’s wrong with traditional fast food and why we’re different

“The traditional fast food sector has traded food quality and taste for low cost and ease of preparation. It has aggressively marketed low prices to entice customers to visit more often which has resulted in the need to reduce cost by cheapening ingredients and by compromising the overall dining experience. We have not made these compromises because our fundamental belief is that in order to provide an extraordinary customer experience you cannot take shortcuts.”

We have proven that we can do things that are against conventional wisdom

“We have shown that we can spend more 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 techniques in each and every one of our more than 1700 restaurants and have consistency. That we can provide great service and still be fast.”

Millenials are particularly willing to seek out better quality

“Food industry research indicates that millennial are turning away from traditional fast food in favor of better food and a 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 recognize as better, better tasting, better for the environment and better for their wellbeing.”

Traditional fast food’s approach is filled with gimmicks

” traditional fast food companies are struggling to produce positive same-store sales growth at all. The gimmicks that have driven the fast food sectors for years, dollar menus, limited time offers, and merchandizing partnership are not producing results like they used to as consumers simply want better tasty nutritious food at a more compelling experience not gimmicks.”

Other companies are just revamping their branding not their culture

“these other companies are looking to revamp their branding efforts to change their customer’s perception but not the food. Fundamentally these are short sighted reactions that seem out of touch with what customers want, better food and a more compelling dining experience. This is exactly what we offer at Chipotle and we think its replicable with other kinds of cuisines.”

We have totally changed the culture of the restaurant

“We have totally changed the traditional fast food formula which depends on constantly lowering costs and simplifying the tasks in the restaurant to the point where they are essentially fool proof. Instead we are creating rewarding environments with skilled teams who do work that they are proud of.”

We do anticipate lower dairy costs

“we do anticipate dairy price will come down in 2015 from these 2014 highs.”

It costs $10 m to put on a big company conference. Moves the needle on SG&A for CMG

“G&A 6.6% in the quarter, 20 basis points higher than last year and the increase was primarily driven by our Biannual Managers Conference held in September. The conference cost just over $10 million with nearly 3000 Chipotle employees and suppliers in attendance including all of our GMs and restaurateurs. In 2015 we will hold our Biannual Field Leadership Conference in the third quarter, which we expect will cost around $1 million.”

We’re not trying to maximize our growth we’re trying to open stores without compromising quality

“we don’t really think in terms of maximums, 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 performed well, plus the speed with which we can create or develop managers to really run those restaurants really effectively.’

New ACA-compliant health insurance could add up to 1% cost of sales maybe less though

“it would be an incremental cost 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 more — way more people than 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 is likely to be less than that. We just won’t know until our people begin to enroll and that will happen here between now and the end of the year.’

Going to start hitting against tougher comps

“a 300 basis point tougher comparison so I would expect for that you will see our comps decline by that tougher comparison…the tougher comparison is going to have an impact for sure.”

Thoughts on the commodity environment

” we are seeing pressure from three main areas from beef, from dairy, and from avocados. Avocados we think is more cyclical. It is caused by weather…Beef is going to take a couple of years to grow out for to replenish the herd is going to take a couple of years. So we think that beef is probably going to remain at this elevated level, probably have additional pressure, hopefully not too severe a pressure going forward. Dairy we think will come back. We think that dairy has hit peaks and in fact just in last couple of weeks we have seen butter costs come down pretty dramatically”

We don’t have imminent plans to roll out Apple Pay. It’s not so easy

“Right now, we don’t have imminent plants to roll out Apple Pay support. It’s something that we are considering for 2015. There are considerable technological constraints implementing it, just based on the way payments are processed with our system.”

We don’t really have a way to target comps. All we do is try to continually improve customer experience

“we really don’t have a magic approach or a 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 our ingredients”

We’re the only ones doing what we’re doing

“Chipotle is the only one that’s doing what we are doing with food, with the people culture, where you feel like you are being treated to an authentic dining experience although it’s affordable and it doesn’t take that much time.’

Drought is really whats affecting commodity prices

“Right now the pressure that is affecting beef is that there were these droughts and the drought affected all these naturally raised and commodity beef as well. So that is 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.’