Chipotle 4Q16 Earnings Call Notes

Steve Ells

John Hartung

Haven’t had a price increase in 3 years but at some point will need to do that

“Now there are pieces of that, that we’ve been absorbing; for example, inflation. We’ve not had a price increase in three years. We’re not planning any specific price increase right now. But at some point over time, we’ll need to pass on some of the higher costs. But we believe we’ll be able to do that. And then that along with leverage from the higher sales, that along with better negotiation, that along with better management at the restaurant level and holding the line on the P&L, on individual P&L line item. We still think we have the ability to recapture the high 20% margin range. The most important factor, though, year-by-year, is sales, how much we can build in terms of sales.”

Food and labor inflation without price increases

“Since 2012, we’ve had labor inflation totaling about 20%. We have only taken about 5% of a menu price increase in that time, and so we’ve eaten a couple hundred basis points worth of labor inflation, at least, maybe even more. And so the food cost is higher because of things like, we’ve had inflation at steak, we’ve invested in Food With Integrity, things like that, And because we are a little bit behind right now menu pricing, I would say our food is at an elevated level, we’ve been eating some of the higher food costs over time, same thing with the labor.”

Mark Crumpacker

Changed real estate strategy in new locations

“with regard to the new restaurants, they’re performing right now at about 74% of our regular restaurants, which is an improvement, it got as low as 70% during the crisis, and we do see that the stores that we market are performing better. So now all new restaurants receive marketing at their opening. The other change that we’ve made with regard to new stores is the way we’re choosing real estate, particularly in developing markets. As you know, we have our, or you may know, our real estate markets are categorized into four different categories, knew, proven, established, and developing. And in developing markets, we’ve reverted to choosing only Tier 1 sites, which we expect will have an ongoing effect on improving the ADS (33:21) in those restaurants.”

Chipotle 3Q16 Earnings Call Notes

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.”

Chipotle 2Q16 Earnings Call Notes

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.”

Chipotle 1Q16 Earnings Call Notes

Steve Ells – Chairman & Co-Chief Executive Officer

Never more important to delight customers

“Never has it been more important for us to delight our customers on each and every visit and we have great confidence in our managers and crews to remain focused and to provide the extraordinary customer experience our customers expect from us. ”

Seen an improvement in comps since beginning of Feb

“We begin to see sales recover in the second half of the first quarter as our transaction trends reversed course from the lows we saw in January. Since the beginning of February, we have seen an 18-point improvement in comp transactions compared to the full month of January.”

It will take some time to rebuild trust

“We recognize that it will take us some time to rebuild trust with our customers and to fully recover from the issues we faced late last year. And while we are encouraged that the recovery is underway, we know that there’s still a lot more work to be done.”

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

Survey data has come back a bit

“when we give people a list of restaurants including our brand, and ask them how likely they are to visit, before the food safety issues that hovered around 50%, right now that’s recovered to 43%. So we’re down 7% on that one, but it’s picking up at a consistent rate. Admiration before these incidents was 70%, now it’s at 61%. So again, recovering from down into the 50% area. So a lot of the stuff has come back up nicely.”

Lettuce is one example of quality decline for food safety

“Yeah. I think, generally, the changes have gone very, very well. I won’t say all of them have been met with immediate approval. And an example of that is we went over to a lettuce that was pre-shredded at a central kitchen in order to be able to be absolutely certain of the – that all the interventions were in place to make sure that that was food safe. And that lettuce, I think, people found to be a degradation in quality of the stuff that was cut in the restaurants by our teams who – when our restaurant teams do it, they’re able to cut it to the exact size they want, they’re able to really make sure that the presentation is exactly what they want and that they can assure the quality of the lettuce. This was a product which is really just completely prepared in a central kitchen.”

Steak quality has actually gotten better

“The rest of the changes have been met very positively. The sous viding of the steak is delicious. We’ve actually had a reduction in the number of customer complaints. With steak, there’s always been over time some complaints because steak contains naturally some chewy bits and whatnot because we use real steak. And with the sous vide, the technique has allowed us to break down some of those aspects of the steak through kind of a long breathing process in the sous vide process which makes the steak juicier and more tender and more delicious. So actually we’re very, very pleased with how that’s going and our customers seemed to be very pleased as well.”

Mark Crumpacker – Chief Creative & Development Officer

Buckets of customers in terms of loyalty

“We call our most frequent customers top loyal, they come 25 times or more a year. The next group are heavy customers, they come 13 times to 24 times, then medium which is 6 times to 12 times, light is 2 times to 5 times and a new or lapsed customer is one-time. And you’re correct in that we saw larger declines in both new in the two – the top and bottom categories. So these are single-digit drops, but in new and lapsed, and in top loyal”

Integrated back of house with postmates

“We have completed the integration between Postmates, our largest delivery partner and our back-of-house ordering system. This allows Postmates to send orders directly to our back-of-house make line instead of standing in line to order.”

Chipotle 4Q15 Earnings Call Notes

Chipotle Mexican Grill (CMG) Steve Ells on Q4 2015 Results

Without question the most challenging quarter in our history

“The fourth quarter was without question the most challenging in our history, but we have responded and have implemented an industry-leading food safety program that reduces our food safety risk to as low to zero as possible.”

Objective for 2016 will be making food as safe as possible

“as we emerge from this difficult time, we can focus on what will be our primary objective for 2016: making sure our food is as safe as possible and welcoming customers back to our restaurants as our teams deliver an extraordinary dining experience.”

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

Not an increase in employee turnover

“Just reviewed those numbers recently, and there’s not increased turnover in any significant way. So in fact most of our turnover numbers, especially for our hourly managers and salaried managers, have been declining over the last few months and they seem to continue to. And just having spent a lot of time in the restaurants with our teams and having spoken with our executive team directors and restaurant support officers, all of us are seeing the same thing, which is that our employees are really, really enthusiastic, they’re excited to be implementing these new food safety procedures, they’re proud of what they’re doing, they understand that these things make sense and they’re doing a fantastic job. And they’re keeping their heads very, very high.”

Mark Crumpacker – Chief Creative & Development Officer

60% of customers who are aware of the issues say that it would cause them to visit less

“Starting November 1, we have been running both daily and weekly research studies in order to keep close track of customer awareness and perception. Not surprisingly, consumer awareness of the issues we have been dealing with for the last few months is high. Our most current research indicates that 63% of Chipotle customers and 60% of fast casual diners in general are aware of the food-borne illness issues at Chipotle. Of those who are our customers and who are also aware of the issues, right around 60% have indicated that it would cause them to visit less.”

Customers are showing an increased willingness to return to restaurants

“While this research data’s obviously not good news, our weekly data for the last two weeks is encouraging as it indicates a leveling off of what was a downward trend that started in late October. We have seen a leveling off and in some cases a slight increase in consideration, admiration, first-time visits and date last visited. This is good news as our customers are indicating willingness to return to the restaurants.”

John R. Hartung – Chief Financial Officer

Comps got worse in January

“For the month of January, sales comps were down about 36%, worse than the December run rate due to tougher January comparisons, weather in the Northeast, and continued negative publicity. Comparisons become easier in February, but more importantly, we’re anxious to begin the process of welcoming our customers back, which will begin in February with the marketing and PR that Mark talked about.”

Year of significant investment

“Overall, 2016 will be a year of significant investment to ensure our food is safe and to encourage our customers to return to Chipotle. Margins and earnings will be significantly affected as we make these important investments. But I’m still confident that as we recover sales, over time, we can also fully recover our margins and our earnings capabilities.”

When we looked at other companies it typically takes 4-5 quarters to recover

“When we looked at other events, other companies that have gone through something like this, the recovery typically takes four or five quarters or so. We know that there are things that are different than what happened in previous cases. For one, we’ve had a couple instances here, so that kept us in the news a lot longer. Secondly, the news travels faster. There’s a lot more chatter on social media, and so the word really traveled fast. Sometimes accurately, sometimes inaccurately.”

A lot of the food safety procedures are happening outside of the restaurant

“A lot of the procedures are not happening in the restaurant, meaning the testing is happening outside the restaurant. So a lot of this food safety program is designed to prevent anything unwanted from ever getting into the restaurant”

Chipotle 3Q15 Earnings Call Notes

2.6% Comps growth

“we generated revenue of $1.2 billion, an increase of 12%, on comparable restaurant sales growth of 2.6% and the opening of 53 new restaurants.”

Opened 7th London restaurant

“during the third quarter, we opened our seventh restaurant in London and I recently visited the fantastic team there and was pleased to be able to sign them off as Restaurateur. Our European operations team, which is led by Jacob Sumner, a team leader and Restaurateur, has been building outstanding teams to ensure the customer experience we are providing in these new markets meets our high standards and he continues to develop Restaurateur cultures in these restaurants quickly.”

Chipotle remains a preferred tenant

“Chipotle remains a preferred tenant for many landlords, and that places us in a strong position to negotiate favorable lease and tenant improvement terms. It also helps us get into properties even where demand is very high”

Raised wages proactively

“just because of general competition for employees, just the expectation that we want to hire top performers and we want to be the employer of choice, we’ve been very proactive in making sure that not only our starting wages are competitive, but we also took a look at a number of our hourly managers during the summer to make sure that we’re paying fair rates to them as well. So that was proactive.”\

2/3 of our business eaten outside but only 7% ordered outside

“about two-thirds of our business is eaten outside of a restaurant, but only 7% of our business is ordered outside of a restaurant. And so, there’s a big gap between our customers who choose to or end up eating somewhere else other than a restaurant. So kind of makes sense for us to provide the convenience to order outside of a restaurant. And we do have – we have iPhone, we do have Android, but we can make that whole process more efficient.”

Deliberately under-marketed our mobile ordering

“Well, we’ve deliberately under-marketed our mobile ordering, and the reason for that is fairly simple. We just have not quite optimized the experience in the restaurants to the point where we feel comfortable driving a large number of people in there. I mean, we’re working on all of those improvements. So we don’t want somebody to go in, make a mobile order and go in and have a degraded experience.”

We’ve had these waves of comps, our goal is to ignite another one

“what we’re hoping will happen is, we’ll be able to ignite another trend, another three-year trend. When that will happen with the order of magnitude of that happening is very difficult to predict, but over the last 10 years-15 years, Chipotle has these kind of waves of comps, and most of it is around creating awareness and appreciation for what we do at Chipotle.”

Still opportunities to educate people around Chipotle

“there is still this opportunity to educate people, one, that we exist, which that is changing over time because as we are in more markets, more and more people know about Chipotle but they don’t necessarily know that we are using classic (46:14) cooking techniques.”

Shophouse and Pizzeria Locale behave a lot like Chipotle 12-15 years ago

“We are accelerating to a certain degree, but I assume what you mean is to really ramp it up aggressively. They’re still in the nurturing phase, it’s still in the brand building phase. When we open up a new restaurant, it behaves a lot like Chipotle 12 years, 15 years ago, when we went into a new market where it’s an unfamiliar brand, it takes a while for customers to figure out what ShopHouse is. Pizzeria Locale, while it’s pizza, it’s pizza that may be unfamiliar to customers that are used to traditional pizza. ”

Television really tailored to call to action, not brand building

“The problem with television beyond the expense, is that it’s really, really tailored toward 30-second spots which really only deliver if you have some sort of promotional or call-to-action message in them, which is a very slippery slope. So we’re going to stay the course on telling this brand story”

Chipotle 2Q15 Earnings Call Notes

4.3% comps

“During the quarter, we generated revenue of $1.2 billion, an increase of 14.1% on comparable restaurant sales growth of 4.3% and the opening of 48 new restaurants. This produced diluted earnings of $4.45 per share, an increase of 27.1%.”

The only national chain that’s gone non-GMO

“Chipotle is the only national chain where consumers can eat anything on the menu without worry about eating GMOs. This direction is not new for us, and the decision is very consistent with our overall culture of serving food with integrity.”

Set our sights on new tortillas

“With our food now made entirely from non-GMO ingredients, we have set our sights on making better tortillas. These artisanal tortillas are made using only five ingredients: flour, water, starter, vegetable oil, and salt. And when you consider that the starter, which is the leavening agent, is made from flour and water, it’s really just four ingredients. While this might sound like a relatively simple undertaking, it’s actually quite a challenge because one has to account for a number of variables: moisture in the flour, temperature and humidity in the bakery, strength of the starter, et cetera. And many of the chemical additives in commercial tortillas are designed to mitigate these variabilities.”

We have to reinvent the way tortillas are made at scale

“Returning to this fresher, simpler tortilla essentially requires that we reinvent the way tortillas are made on a large scale, and that’s exactly what we’re doing.”

Some local markets have minimum wage boosts that will lead to price increases

“We typically pay above minimum wage in all of our markets, so a normal increase in local wages usually has little effect on us. But in some local markets the minimum wage has been or soon will be pushed well above our national average rate.’

“In the San Francisco Bay Area for example, the minimum wage was recently increased to over $12 an hour. This increase coupled with higher occupancy and other operating costs excluding food costs contribute to an overall cost of doing business of 30% or more compared to 30% or more higher than our average Chipotle. But our menu prices in the San Francisco area were until recently only about 4% above the typical Chipotle and were lower than most competitors in the area. So as a result of looking at all of these factors, we decided we were underpriced in San Francisco and we recently increased prices by 10% in the 10 restaurants within San Francisco and by 7% for the 74 restaurants outside San Francisco in the Bay Area.”

We’re still evaluating implementing Apple Pay

“We’re still in the process of evaluating the level of effort that’s going to be required to implement Apple Pay in particular. And we certainly see that as being a significant benefit to us once we can get that enabled, especially if it in any way speeds throughput at our restaurants. But we’re also on a continuing basis updating our mobile ordering app to be more efficient.”

Slight negative traffic

“the comp was 4.3%, menu pricing was 4%. Of the 0.3%, it was a very slight negative traffic, 0.3% negative traffic, and that was offset by 60 basis points or 70 basis points of mix.”

We used to pay a lot more attention to first mover advantage, but then we realized that we could out compete

“we used to pay a lot of attention to the first mover advantage theory. When we were partnered with McDonald’s, they were telling us how important it was in their development. Although, if you look at our history and our sales trends when we come into markets and we’re not the first mover, we definitely pass them, I mean, California is the best example where we had two big competitors, and we severely lagged behind them. Over time though, through great execution and through a great people culture and sharing with our customers what makes Chipotle food special, we quickly took the lead.”

Still opportunities

“The other thing with marketing is we still believe that – or we still know that there’s lots of people that have never been to Chipotle, something like 35% or 40% of people have never been to Chipotle. We know that when we study our existing customers, that there is like 55% of our customers only come a couple times a year”

Chipotle 1Q15 Earnings Call Notes

47% EPS growth on 20% revenue growth

“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%”

Encountered supply issues around pork because suppliers not meeting their standards

“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.”

People climbing the ladder is evidence of our success

“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.’

We thought that good ingredients would be the best marketing

“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.”

Less reliance on traditional advertising than many competitors

“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.”

Other QSR relies on limited time offers to drive sales

“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. ”

Working to eliminate preservatives in tortillas

” Only our tortillas contain any preservatives or other additives and we are diligently working to eliminate those.”

Going to make an ordering app for Apple Watch

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. ”

Comps in April are being affected by carnitas

“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. ”

Going to raise prices on steak

“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.”

We undershot price increases last year

“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.”

Our growth seems to have come in waves

“we seem to have these wavess 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 surge and then we have a leveling off and then a surge and leveling off.”

Hardware requirement for ApplePay is minimal. Software is more of a challenge

“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.”

Chipotle 4Q14 Earnings Call Notes

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

Could not deliver these result without the broader vision

“Quite simply, I do not think that we would be able to deliver these results without such a compelling and broader vision we have made it our mission to change the way people think about any fast food and we have created an extraordinary food and people culture, and a very strong unit economic model that is allowing us to do that. ”

Success with young people is about the mission

“We believe that our popularity among these younger consumers is tied to our vision and the growing interest in issues related to food and how it is raised. Our own research shows that these issues are clearly becoming more relevant and important when customers choose where they will dine.”

Do things your way

“From the very first Chipotle restaurant nearly 22 years ago we have chartered our own path for how a restaurant company should be run in every single way. We have shown that you can own and operate all of your restaurants rather than franchise and still grow at a rapid rate, that you can spend more on ingredients not less, still serve high quality food at reasonable prices and have industry leading margins and returns, that you can build teams of top performers and power them to deliver high standards while still maintaining an efficient labor model and that you can remain focused on doing just a few things extremely well rather than trying to be all things to all people or engaging in a kind of marketing gimmicks that it become the hallmarks of traditional fast food and still continue to attract new customers and profitably grow the business over the long-term.”

8 restaurants per field leader

” we have reduced the field leadership ratios from a high of around 15 restaurants for a field leader just a few years ago to about eight restaurants per field leader today.”

2.4m sales per restaurant

“our average sales volume for restaurant that have been opened for at least 12 months is now $2,472,000 the highest we’ve ever achieved. ”

Beef/Avocado prices higher, Dairy prices should come down

“Beef prices are expected to remain elevated throughout the year and into 2016 due to continued supply constraints and avocado prices are expected to be slightly higher in 2015 as increased demand is projected to exceed the higher yields we expect from California and Mexico during the year.”

“We expect dairy price to come down during Q1 from record highs for our cheese and sour cream from late 2014 and remain at normalized levels throughout the remainder of 2015.”

Accessibility is an important part of our mission

“The second reason why we’re not in a hurry and never been in hurry to raise prices is part of our vision is to remain accessible. So it’s important that we’ve got to source these high end premium ingredients, sustainably raise ingredient. But we want to be affordable. We want people to feel like they can come to Chipotle as often as they want once a week multiple times a week.”

We’re not thinking about the stock price when we make business decisions

” none of our discussions about price and what we should charge and ingredients to source and what the going rates of that — how should price additional food integrity initiatives what kind of price we should charge, none of that ever involves a discussion of the stock price. And so our belief has always been that we have the vision to change food culture the past food culture in this country and if we’re successful at that we just believe that we can have lots and lots of value and we’ve done. We’ve done that I think even maybe more than a lot of people including ourselves thought were possible 8 years ago when we first went public and so we think that our vision is working or is becoming a reality.”

Chipotle 3Q14 Earnings Call Notes

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.’