Chipotle 3Q16 Earnings Call Notes

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Chipotle Mexican Grill (CMG) Q3 2016 Results

Steve Ells

Impairing assets related to ShopHouse

“Finally, we fully impaired the assets related to ShopHouse, which totaled approximately $14.5 million on a pre-taxes basis. We opened the first ShopHouse in 2011. And currently operate 15 ShopHouse restaurants in three separate markets. ShopHouse is managed by a small independent team, which was tasked with creating a compelling brand, which could develop into a compelling growth strategy and enhance long-term shareholder value. We’re proud of the ShopHouse team, the delicious food they’ve created and the excellent customer service they’ve delivered. But after operating in three distinct markets, and opening in a variety of trade areas, ShopHouse simply has not demonstrated the ability to support an attractive unit economic model. As a result, we have decided not to invest further in developing or growing the ShopHouse brand and will pursue strategic alternatives.”

We still believe in the approach despite ShopHouse

“Although the exotic ShopHouse cuisine was not able to attract sufficient customer loyalty and visit frequency to make it a viable growth strategy for us, we continue to believe that our approach to food, people and unit economics with the right cuisine, with the right concept, can lead to a compelling growth strategy. And we are optimistic that our other growth seeds, serving pizza and soon burgers, both of which have broad customer appeal can become further growth strategies for us. While this was not an easy decision, we trust in our overall growth seed approach where we can innovate and develop new concepts, with a relatively small capital investment and little or no distraction to the Chipotle business. ”

Montgomery F. Moran – Chipotle Mexican Grill, Inc.

We are keenly aware that safe food alone will not bring people to restaurants

“At the same time, we are keenly aware that safe food alone will not bring people into our restaurants. Instead, they come for delicious food and an excellent guest experience.”

Economic model has been weakened due to lower sales volumes

“Prior to last year’s issues, Chipotle had the strongest economic model in the industry. Of course, this model has been weakened due to lower sales volumes that we’ve seen this year. While it’s critical to fully restore sales volumes and keep improving them from there, we also know that we need to improve our economic model now so that we can provide healthy returns even at lower volumes.”

Mark Crumpacker

Introducing new restaurant design

“Finally, I’d like to report on the successful launch of a new restaurant design that has been in development for more than a year. The new design is an evolution of the current design, with improvements in lighting, acoustics, seating, customer flow and the presentation of our kitchen. Additionally, the new design is more cost-effective with an average cost of $760,000, which is about $40,000 less expensive than our current restaurant design. We also anticipate a reduction in maintenance and repair as a result of this new design. ”

Adding second make line in restaurants

“the second make line that Steve referred to, we’ve had one in our restaurants for many, many, many years but the classic version. This new version is much more efficient. Whether or not you have the tech component added to it or not, it’s just a better layout. It’s got bigger bins. It’s set up to be more efficient, and that new line actually is slightly cheaper than our existing second make line. And so that line that is about all the technology component on it is actually a little bit cheaper than our existing line. And so we’re going to move quickly to have all of our restaurants outfitted with that new line starting in March 2017”

John Hartung

Aiming for high single digit comps in 2017

” we believe we can deliver comps in the high single-digit range for the full year in 2017. Of course, we hope these strategies will deliver an even greater sales increase.”

We are confident that we can fully recover our restaurant margins

” We continue to believe we can, over time, fully recover our restaurant margins as sales recover. From the unit economic standpoint, these projected results would lead to an average restaurant volume of around $2 million and restaurant ROI of around 50%. And the return potential for new stores is even greater as we expect the average new store investment to decline to around $760,000 in 2017.”

Tight Avocado supply

“Avocado supply declined during the summer. We began to experience higher pricing. Although we had hoped that this would be a temporary spike, in recent weeks though, supply has become even tighter and pricing has become much more volatile than expected. In fact, we’ve seen that some competitors recently have posted signs on their doors saying they are out of avocados altogether.”