Chipotle Mexican Grill, Inc. (CMG) Q2 2010 Earnings Report, Transcript and Summary

Thank you for standing by, everyone. Welcome to the Chipotle Mexican Grill Second Quarter 2010 Conference Call. [Operator Instructions] Now at this time, I'd like to introduce Chipotle's Director of Investor Relations, Ms. Kate Giha. Please go ahead, ma'am.

Thanks, Micah. Hello, everyone, and welcome to our call today. By now, you should have access to our earnings announcement release this afternoon for our second quarter 2010. It may also be found on our website at www.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 within the meaning of the Securities laws. These forward-looking statements will include discussion of our A Model restaurant strategy as well as projections of comparable restaurant sales and trends, the number of restaurants we intend to open, expected trends in various costs in our business, statements about our stock repurchase program and other statements of expectations and plans. These forward-looking 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 10-Qs for discussion of these risks. I want to remind everyone that we have adopted a self-imposed quiet period restricting communications with investors during sensitive periods. This 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 third quarter, it will begin September 1 and continue until our third quarter release in October. On the call with us today are Steve Ells, Founder, Chairman and Co-Chief Executive Officer; Monty Moran, Co-Chief Executive Officer; and Jack Hartung, Chief Financial Officer. With that, I'll now turn the call over to Steve.

Thank you, Kate. I’m joining you today from France, where we plan to open our first restaurant sometime in the middle of next year. Like London, we believe the prospects are excellent for Chipotle in France, given the exceptional food culture and the abundance of great quality, sustainably raised ingredients here. We're also excited about the potential for Chipotle in such a remarkable international food culture. During the second quarter, Chipotle reached a couple of milestones that we're all very proud of. First, we opened our 1,000th restaurant in June. With more than 1,000 restaurants now, Chipotle is having more of an impact on the way people eat than I ever would have imagined when I started the first restaurant 17 years ago. Our commitment to building a unique food culture based on making better food for more sustainably raised ingredients available and affordable for everybody, and our commitment to a unique people culture that empowers and rewards our best performers and allows us to provide better customer service in all of our restaurants, is resonating with all of our customers. And as we continue to grow, our impact will only be greater. The other major milestone was opening our first restaurant in Europe. That restaurant has the same philosophy as our U.S. restaurants, and we are using premium-quality ingredients from local sources, including chicken that is grown to a higher welfare of standard, pork that comes from pigs raised on farms that offer large one-acre paddocks where pigs can roam freely and display natural behaviors, and beef from farm-assured British farms, where cattle are raised in a humane and compassionate condition. We’re also using vegetables and herbs from local farms as well. Before arriving in France this week, I spent a full week working in our London restaurant with our managers and crew. Our plan with this first London restaurant is to introduce the Chipotle brand, establish relationships with suppliers that meet our standards and will be able to help us grow, and to develop a culture of empowerment among our crew so that we can ensure that we properly develop the future leaders of our European business. Well, just two months after opening, I'm very pleased with how this restaurant is operating. The food is exceptional. The crew is empowered and already performing very, very well, which gives me great confidence that we're now well on our way to developing the future leaders we will need to expand in London and elsewhere in Europe. This focused approach to expansion in Europe is off to a great start, and we remain encouraged about our opportunities. During the quarter, we continued to make progress on our vision to provide Food With Integrity. As of now, all of the beef we use to make our barbacoa, the spicy shredded beef, is naturally raised. With this change, 85% of all of our beef is now naturally raised. That brings our naturally raised meat total to more than 75 million pounds for 2010, including all of the pork, 85% of our beef and about 80% of our chicken. You may recall that we had been at about 100% -- or we had been at 100% -- of our chicken as well as pork, but we cannot currently get enough naturally raised chicken to keep pace with demand. We're working hard to find additional suppliers and also helping existing suppliers grow, and we're going to hope to return to 100% naturally raised chicken soon. We have also been working with milk suppliers, cheese makers and creameries in Ohio, Wisconsin and California to increase the supply of pasture-raised milk in our cheese and sour cream. Currently, more than 50% of the cheese we serve is made from cream meeting these standards and is in a few of our restaurants. We are in the process of growing the supply and expect to serve more cheese from sour cream made with pastured milk in the near future. Beyond our use of naturally raised meat and pastured dairy, we have also made progress on our commitment to serve locally raised ingredients when in season. Chipotle recently started serving naturally raised pigs to our entire Colorado Springs market. We also remain the only national restaurant company with the significant commitment to serving locally grown produce. We are just entering our growing season now in most of the country and have purchased roughly 2.6 million pounds of local produce to date. We have to date already approved 45 local farmers to provide Romaine lettuce, green bell peppers, jalapeno peppers, red onions, fresh cilantro, avocados, lemon, cilantros and tomatoes to restaurant locations across the country, and we will continue to add local growers to our program throughout the rest of the year. By year end, we expect to serve about 5 million pounds of locally grown produce during the calendar year. We're also making progress on our effort to provide more certified organic ingredients. This year, we expect roughly 40% of our beans and half of our cilantro to be organic. Additionally, we'll start to purchase some organic avocados. In total, this will equate to Chipotle purchasing roughly 8 million pounds of certified organic produce this year. And lastly, I'd like to talk about our new marketing programs. Earlier this year, we redesigned our marketing to specifically and to speak directly about our commitment to serving food from more sustainable sources. In fact, nearly all of our marketing programs now work together to help communicate our Food With Integrity philosophy. Our new ad campaign, running in print, outdoor, radio and online, delivers memorable message about Food With Integrity by using media in unexpected ways like billboards with long headlines and radio ads that don't sound like ads. In order to measure the effectiveness of the campaign, we conducted research prior to the start and then again, after the first eight weeks of the campaign. While it's still preliminary, the results of the research are encouraging. We have seen meaningful increases in awareness of Chipotle's commitment to serving ingredients from more sustainable sources and markets where our advertising is running. How that corresponds to sales remains to be seen, though it's not uncommon for these kinds of changes in awareness to precede changes in behavior. An additional wave of research will be conducted at the conclusion of the campaign later this year. Beyond the new campaign, we have also recently introduced a new website and a new packaging system. Our new packaging consists of 24 different bags and cups, each with a different story about Chipotle. Some of these stories talk about Food With Integrity and others don't, but they all communicate something special about Chipotle, and they do so in a lighthearted and approachable way. And all of the packaging invites our customers to submit their own stories that we might use on future packaging. In June, we launched a new website that integrates Food With Integrity into almost every aspect of the site. It's been completely redesigned to be more informative, more fun and easier to use than the old site. The new site features something that we call, "under the foil," which enables users to peek underneath many of the pages, and they uncover entertaining content that explains Food With Integrity in engaging ways. So taken together, our packaging and website reach nearly 800,000 people every day. And as such, they are powerful tools to help educate our customers about the brand. Combined with our advertising campaign, we are now reaching more people than ever before with engaging messages about Food With Integrity and the Chipotle story. Beyond our marketing programs, we're also working to redefine the design of our restaurants. The new design has been incorporated in several new restaurants across the country, and initial feedback from our customers is good. Apart from the aesthetic improvements to these faces, the new design is also more durable, making it easier and more efficient to maintain over time. It makes use of more energy-efficient systems and environmentally friendly materials and lowers investment costs, particularly with the A Model restaurants. With our continued focus on developing our extraordinary food and people cultures and the renewed commitment to bringing our marketing in line with the progress we have made in the other critical areas, we believe Chipotle remains well positioned for long-term growth and will continue to provide value to our shareholders. I'll now turn the call over to Monty. Monty?

Thanks, Steve. We're all very proud to have reached the 1,000-restaurant milestone, but we're even more proud of the way we got there. By focusing our efforts on building a unique food culture with great-tasting food from more sustainable sources and a people culture that appeals to and rewards high performers, we're changing the way people think about and eat fast food. As we look ahead to our future, we continue to be incredibly focused on the two things that we believe will allow us to grow in the most sustainable way possible. The first is developing people who can both provide exceptional customer service and who can develop into our future leaders. The second is finding great real estate. The cornerstone of our effort to develop people is our restauranteur program and our culture of high performers. Chipotle's employees are the driving force behind our growth to 1,000 restaurants, and as we develop even stronger and more effective leaders from our store-level employees, they will be an even stronger force in the future. This culture is touching the lives of tens of thousands of Chipotle employees, but it's also improving customer service in our restaurants. Today, more than 90% of all the restaurant managers are promoted from crew, creating excellent opportunities for our people. And our 167 restauranteurs continue to set the example of how to best empower these top-performing crew to become leaders. But because many restauranteurs oversee more than one restaurant, this group is now directly overseeing 1/3 of our restaurants and setting an example to all of our 25,000 employees. This culture of high performance is essential in providing a great restaurant experience for our customers, and we are seeing the results in better customer service. On our website, we now receive more comments about great service than we do about anything else, and the number of positive service comments continues to significantly outpace negative service comments. As you have heard me say many times, one area where Chipotle's customer service really excels is our throughput, and we are continuing to place renewed emphasis on this important objective. As I discussed on our last earnings call, during the last couple years, our throughput slowed, which made sense during a time where we had fewer transactions in our restaurants. But as we look more closely, we concluded that it slowed more than it should have. So while customers continue to give us credit for providing fast and friendly customer service, the fact is, we are still not as fast as we can be. Just a few months ago, we launched a renewed focus on providing better throughput to coincide with the increase in the number of customers who are visiting our restaurants. And I'm pleased to report that we've already seen our throughput results improve to the point where we are faster than we were during the last two years and approaching our peak throughput numbers from 2007. But still, I know we can do even better. During our restaurant visits, we see many instances where we are not consistently applying our proven approaches to improve our throughput. We need to ensure that all of our prep is completed before peak hours so that we can have all hands on deck to serve customers during our busy lunch and dinner rushes. We need to make sure that we always have an expeditor during peak times, which significantly speeds up the cashier. We need to make sure we're deploying the right labor at the right times throughout the day so that we have the very best people at each station to provide the very best customer service. So again, I'm pleased with the progress we’ve made so far, but I'm also confident that we can do better. Next month, we will hold our second biannual all-managers conference in Las Vegas. This conference pulls together all of our managers, operations leadership and support departments. Together, we will discuss how we can continue to build upon and improve this special people culture. We will discuss how we are advancing our food culture and how our business model allows us to do the extraordinary things Chipotle is doing as a company. We will work to help all of our general managers create a path, by which they can become restauranteurs. We think the conference is extremely beneficial to our managers, but it's also very inspirational to me, Steve and our executive team as we see firsthand the talent and passion that exists among our employees, who are going to be the ones leading this company in the future. While our culture and ability to develop managers is a key driver for continued growth, so is our ability to find great sites and develop successful restaurants. Our A Model strategy is one way that we have modified our real estate strategy to allow for strong growth in the years to come. Since last quarter, we’ve opened five more A Model restaurants, bringing our total number of A Models to 10. As of now, we have A Model locations in Dayton, Columbus, Cleveland, Sacramento, Los Angeles, Phoenix, Houston, Dallas, Chicago and Minneapolis. While we are still early on in the development of this strategy, we are very encouraged by what we’re seeing so far. Opening sales volumes in our 10 A Model locations have been in line with traditional restaurants. But couple that with lower occupancy costs, lower development costs -- less than $700,000 for an A Model as opposed to $850,000 for a traditional restaurant -- and a couple of years of modest comp sales increases, and our A Model strategy has the potential to generate cash-on-cash returns of more than 50%. While reaching 1,000 restaurants is certainly an important milestone for us, there is still considerable growth and opportunity ahead. With the deep commitment to serving food from sustainable sources, a culture that rewards and empowers people and provides us with future leadership, and a real estate strategy that will allow us to continue opening restaurants at a healthy pace, we are well positioned for continued success. I'll now turn the call over to Jack.

Thanks, Monty. Now celebrating milestones such as the opening of our 1,000th restaurant and opening our first restaurant in London certainly makes us all proud of what we've accomplished so far. But the celebrations, while satisfying, are short because we know we have so much more to accomplish. These milestones are behind us already, and we're looking ahead to an even brighter future as we continue to advance our strong and unique food and people cultures and as we continue to strengthen our business model. Customers visited Chipotle in greater numbers during the second quarter as the hard work of our restaurant managers and crew over the past few years to ensure every visit is a special dining experience continued to pay off. Our comps held up well throughout the quarter and into July so far. But we do remain concerned about recent reports of softening consumer confidence and the outlook for the economy. While we feel good about the strong customer loyalty our managers and crew have built over the years, we saw over the past two years that economic concerns will affect how often our customers will visit Chipotle. Sales for the second quarter increased 20.1% to $466.8 million, which is driven by opening new restaurants along with a comp increase of 8.7%. The comp was driven by increased traffic as only about 1/10 of 1% of the comp was attributed to a small price increase related to additional rollouts of naturally raised barbacoa and steak. Sales for the first six months increased 17.9% to $876.5 million, which is driven by new restaurants along with a comp increase of 6.6%, and the comp was driven by increased traffic. Based on the comp trends so far this year, we’re increasing our comp guidance from a mid-single-digit comp to an expected comp in the mid- to high-single-digit range for the full year, though we do remain concerned about uncertainty with macroeconomics and recent consumer confidence trends, which might affect our comps for the rest of the year. Diluted EPS for the quarter was $1.46, an increase of 32.7% from last year. And we're especially pleased with this increase, considering we're comparing to a very strong 49% increase in EPS in the second quarter of last year. Year-to-date, diluted EPS was $2.65, an increase of 41%. And restaurant margins were 26.9% for the quarter, an increase of 90 basis points over last year. The margin leverage was driven by the higher comps, along with lower food costs. For the year, restaurant margins were 26.5%, an increase of 170 basis points from last year. Food costs for the quarter were 30.4%, a decrease of 50 basis points from last year, and this decrease was driven by small decreases in a number of items including rice, cheese, corn, avocados and chicken. We encountered supply issues with our nationally raised chicken during the quarter, resulting in a decrease of naturally raised chicken served to around 80%. And while we're disappointed we were forced to take a step backward after reaching 100% naturally raised chicken a few years ago, we're optimistic that we can return to 100%. Our food cost was lower by about 20 basis points because of this shift, and we will be more than happy to reinvest that additional 20 basis points back into our food cost as soon as we can secure more naturally raised chicken. We continue to expect modest upward pressure on food costs for the remainder of the year. And our food costs were 20 basis points higher in Q2 compared to the first quarter as the lower cost of chicken was more than offset by the higher cost of avocados and beef. Labor costs in the quarter were 24.6%, up 10 basis points from the prior year. As we mentioned on our last call, we fully lapped the implementation of our new labor matrix in the second quarter. And as we renewed our focus on throughput with our comps increasing, we gave back some of the labor efficiencies we achieved last year. And while we’d certainly like to get those efficiencies back, our bigger priority right now will be to continue to provide great customer service, including faster throughput to the increased number of customers visiting Chipotle. So we anticipate no leverage for 2010 as we continue to lap efficiencies from the fully implemented labor matrix and due to wage inflation. For the year, labor is 25%, down 40 basis points compared to last year. Occupancy costs for the quarter were 6.8%, down 40 basis points from last year, and year-to-date occupancy costs were down 20 basis points to 7.2%, and the decrease both for the year and quarter were driven by the higher comp. Other operating costs were 11.3% for the quarter, which is flat compared to last year. Marketing was up 20 basis points to 2.1% for the quarter. And for the year, other operating costs were 11%, down 40 basis points compared to the prior year. Year-to-date, we've invested about 1.6% in marketing, up 10 basis points from last year, and we still anticipate spending about 1.75% of sales in marketing for the full year, and that's a 35-basis-point increase over 2009. And we anticipate no overall leverage on the other operating cost line. G&A was 6.5% for the quarter, down 10 basis points and was 6.4% year-to-date, down 30 basis points. The decrease for both the quarter and the year is the result of the higher comp, partially offset by a higher non-cash stock comp and increased travel. As a reminder, we anticipate no G&A leverage for the full year as we will host our second biannual all-manager conference in the third quarter, which will add over $3 million to our G&A. And we expect non-cash stock comp around $22 million for the year or around $7 million higher than last year. We opened 25 new restaurants in the quarter and 45 new restaurants for the year so far, bringing our total restaurant count to 1,001 restaurants at the end of the quarter. We continue to expect our new restaurants to open at volumes in the $1.350 million to the $1.4 million [ph] (34:57) range, though recent openings have trended at or above the high end of that range so far this year. Five A Model restaurants opened in the quarter and 10 have opened so far this year, and the A Models continue to open with sales volumes in line with traditional restaurants and with investment costs well under $700,000. We continue to anticipate opening 120 to 130 new restaurants in 2010 with about 25% of those openings being A Models. And about 2/3 of the remaining openings for the year will occur in the fourth quarter, which was similar to last year. And we still anticipate overall development costs of around $800,000 on average for 2010. So a quick update on our share of repurchased as of yesterday. We have repurchased about $85 million of our stock at an average price of around $1.20, and our board recently authorized another $100 million stock repurchase plan. Of course, any buybacks are subject to market conditions and may be terminated at any time. While we prefer to invest all of our free cash into our high-returning restaurants, we will optimistically reinvest some of our excess free cash flow to repurchase our stock to enhance shareholder value. Longer term, we hope that strategies such as the A Model and our entry into Europe will create growth options for us, allowing us to create even greater shareholder value by investing more of our free cash flow into growing the Chipotle brand. Thanks for your time today. At this time, we'd be happy to answer any questions you might have. So operator, please open the line.

[Operator Instructions] And we'll take the first question from John Glass of Morgan Stanley.

Two questions. First is just on the labor ratios check that you're running this quarter. Do you think this is enough labor to put back in the store to maximize that throughput, or is this still a fluid event where you might come back in a quarter or two and say you can reinvest even more and delever labor in the process as you work through this? Or do you feel like this is where you need to be in terms of staffing right now?

John, we don't see that we need more staffing right now. And in fact, we think we're actually a little bit inefficient right now. We think we ought to be able to advance throughput -- not only hold onto the throughput that we've been able to advance so far this year. We think we ought to be able to continue to increase throughput with actually a little bit less labor. The key point is we're going to be very patient on the labor. We're not really going to be aggressively going after -- taking labor out of the model -- because right now, throughput is the most important. We've got lots of restaurants, especially restauranteur restaurants that are operating with less overall labor. So they're more efficient, and they're driving even better throughput than we’re seeing on average. And they're continuing to just run an overall great restaurant, provide great customer service and develop great people in the restaurants. So we know the possibility is there to become more efficient. So I think we will probably see our labor hold at this kind of level for a while, continue to advance throughput. And then hopefully sometime in the future, we'll get some of those efficiencies back.

And then, just on the store openings, I know you said back-end weighted. But I think, year-to-date, you are behind where you had been the last couple years in terms of absolute number of store openings -- not by a lot, but by enough, I guess. How comfortable do you feel about getting -- why is that? And then how comfortable do you feel about hitting your targets based on that?

Let me answer that second question first. We feel good about the 120 to 130. There's always timing risk, John. We've got the deals to open in that range for sure. When we're back-loaded, where 2/3 of the remaining openings are going to be in the fourth quarter, there is some timing risk. So there is the possibility that some may slip, and we may threaten the low end of that range. But right now, the 120 to 130 feels good. And in terms of why are they back-loaded, frankly, we're more still going into mostly somebody else's space, either a new development or we're going into an existing space, where we're waiting for the existing tenant to leave or we're waiting for permitting, et cetera. And it's just -- the timelines have just happened this year and last year to push our openings to the back half of the year. Certainly, to the extent that we have the ability to get the sites earlier, and so we can spread these out evenly throughout the year. We certainly try to do that, but it hasn't really worked out in the last, well, this year and last year so far.

We'll move next to Matthew DiFrisco of Oppenheimer. Matthew DiFrisco - Oppenheimer & Co. Inc.: That last comment, Jack, I think you made regarding the stock compensation, incrementally up $7 million for the full year, $22 million total. Have you been accruing that evenly in the first couple of quarters, or is that going to hit a little bit more in the back half, given the better-than-expected or the improving trend in your guidance?

It's relatively evenly. It's not perfect because the stock-option expense for this year actually starts hitting in February. So we're a little light in the first quarter. We're probably a little heavy in the second quarter because we have some folks -- the expenses accelerate if they happen to qualify for retirement, and then it levels off a bit. But I don't think you'll see anything too noticeable. It'll dip a little bit in the third and fourth quarter but not a tremendous amount. Matthew DiFrisco - Oppenheimer & Co. Inc.: So just to look at it with half the year left or half the quarter still to be reported, roughly 3.5 of that incremental is going to fall into the second half. You balanced it out 2Q being more than 1Q, but we're entering with half left to do?

Yeah. That's going to get you close. Matthew DiFrisco - Oppenheimer & Co. Inc.: Just to be precise on that $3 million that you're talking about of the incremental for the conference expense, that all comes into 3Q? You didn't incur any of that into Q2?

No, that should all hit in the third quarter. And there's a few people that have booked their airline tickets in the second quarter, but most of it's going to hit in the third quarter. Matthew DiFrisco - Oppenheimer & Co. Inc.: And then also, I think you've spoken in the past about potentially taking some price in the back half of the year. Where do you stand as far as your philosophy towards that? Are you just going to hold pricing basically flat or no pricing and just ride the traffic here, or do you think there's an opportunity to take some price in the back half here?

We don't have any plans to increase our menu prices at all. It certainly, of course, depends on food inflation, which we think there's going to be some modest food inflation, but not enough to justify an increase. Frankly, we're delighted with the fact that our loyal customers are coming back to Chipotle more often. We'd hate to interrupt that trend with a price increase. Our margins are already very, very, very healthy, and so we're going to be patient. Right now, we don't have any plans to increase prices for the rest of this year.

We'll next take a question from Jeff Omohundro with Wells Fargo Securities.

We'll next take a question from Jeff Omohundro from Wells Fargo Securities.

Just a question on Europe. I wonder if you could talk through how you're thinking about the longer-term European growth strategy. In particular, the hurdles and timing of additional European unit growth and how you're thinking about your European real estate strategy?

Well, first of all, I think I'd like to start by saying our major opportunities are, of course, in the United States, especially considering the success of the Restaurateur program, Food With Integrity progress and our ability to expand real estate through the A Model. But it's time we think to seed Europe in a very thoughtful way that's going to set us up for great success. And so I think we've got a great restaurant in our first London store. And we're very close to signing a lease in Paris and we'll be opening there probably mid-next year. What we're really looking to do is establish great crews, great suppliers, great locations and a great trade drift [ph], a great architecture. And we're really focused on all of those things and I'm so impressed with the way we've opened the first restaurant. And so I think we've established a team that will be our future leaders, and I see great opportunity. But really, I would focus on the opportunity in the U.S. right now.

We'll move on to David Tarantino of Robert W. Baird. David Tarantino - Robert W. Baird & Co. Incorporated: Jack, you mentioned that July trends in your comps have held up well, but you also tied that with cautionary remarks about the consumer. Just wanted to ask if you've seen any sort of slow-down or any signs that the consumers starting to slow or if that was more of a forward-looking statement.

Yes, David. We’ve not seen the slow, so that’s why I wanted to make sure that while we're cautious, we're seeing a lot more of a macro comments. We see consumer confidence trends. There was a dip this summer. We're feeling fortunate that our customers -- they're loyal and so we have not seen a fallout so far in the July, so that's why we did increase our guidance. But we know that when the economy softened the first time, we held onto our comp trends for at least a few quarters after other restaurant companies and other retailers have seen a softness. So we do know that we are affected by the impact of the economy and soft consumer demand. So we’re wary of that. We wanted to point out that possible concern. But so far, trends are holding up really well through yesterday, so far. David Tarantino - Robert W. Baird & Co. Incorporated: And then just a question on the A Model sites. The initial commentary there has been very positive, and I'm wondering if you have an update on how the pipeline might be building for using that strategy, especially in new markets for next year?

Well, yes. We expect, as I mentioned during the last call, that A Model will be an expanding part of what we're able to do probably in 2011 because it allows us to bolster the portfolio sites that we’d otherwise have access to with the fewer new developments coming out of the ground than we used have. So it is a significant part of the way we're going to continue to build restaurants, not just throughout this year, but in coming years as well. You had a second part of your question, David, though, that I didn't -- there was a second part of your question, what was it? David Tarantino - Robert W. Baird & Co. Incorporated: Like new markets?

In new markets, that’s something that we, given the success so far of our 10 A Model restaurants, we are still bullish that the A Model strategy will be something that we can expand beyond proven markets and into a new and developing markets in the coming years. So we do expect that we’ll be layering in some A Model growth in new markets and see how they perform there as well, in next year and beyond. David Tarantino - Robert W. Baird & Co. Incorporated: It might be too early to be talking about, but do you think that would allow you to accelerate the pace of growth in 2011 or is it still too early to call?

Well, I mean, it’s possible that – I mean obviously this strategy is something that gives us the ability to look at a lot of real estate that we would’ve passed upon earlier. So the question becomes, David, is that some something whereby we're accelerating the amount of growth or is it something that's allowing us to supplement in place of that growth that would've happened had the economy still been rolling forward with a lot of new developments coming out of the ground. So it's kind of tricky to answer that. But again, it will be a very significant percentage of our growth in proven markets for sure and also being able to layer in, in new and developing markets in 2011 and beyond. So I think it will enable us to build more restaurants than we could have without it. It's still a little bit too early to tell you exactly what that's going to look like for next year, but we'll give you an update at the close of next quarter during our remarks about where we think that’ll fall out in our 2011 unit growth plans.

We'll next take a question from Stifel, Nicolaus, Steve West. Steve West - Stifel, Nicolaus & Co., Inc.: I was wondering if you could maybe give some commentary on very strong trend towards sales comps [ph] obviously. Have you seen any significant difference in some markets that were weaker before, maybe some of the markets are picking up, such as Florida or Southern California, something like that, any color you can give would be thankful.

Well, the comp trends have been, Steve, very broad, and so we're seeing improved comps throughout the entire country. Keep in mind, we never really saw those areas that other restaurant companies that were really suffering as the recession deepened. California, Arizona and Florida I think were the three that were most often named. And we had commented that we did see some softness in Arizona. We really didn't see the extreme softness in California and Florida that others had seen. Having said that, all of those markets are doing quite well now. There's really not an area of the country that's not doing well right now. I'd say if there’s one area that maybe is lagging, maybe a bit behind some of the others, is Texas. Texas entered the recession later than others, and so it seems like it's coming out of little bit later than others as well. But even in Texas, we’re having nice comp trends.

We'll take a question from Sharon Zackfia from William Blair. Sharon Zackfia - William Blair & Company L.L.C.: I may have missed this, Monty, but you were talking about the throughput initiatives that helped the quarter and, I guess I'm just curious specifically if you could detail what you're doing at the stores to help enhance throughput?

It’s really quite basic. Three or four years ago, or I guess four years ago now, when we really started to place an emphasis on this important aspect of our customer service, we identified a whole number of things that really enhanced throughput and the customer experience. One was making sure that all of our people had finished their prep work prior to the time of the lunch rush and the dinner rush, so that all hands could be on-deck to deal directly with customers during the rush periods. So that's one key factor. And as we traveled to restaurants recently, we’ve noticed over the last year or two that some of the emphasis had fallen off of that and we have people prepping food during a time when their help was needed on the line. And when we didn't have their help in the line, obviously, it slows us down, but it also decreases the quality of the customer service and there's just no need for that. If we staff correctly and if we deploy our labor correctly, which most of our managers are excellent at doing, what happens is the business model just works wonderfully, that we can do all the prep work in advance of the rush periods and the only prep work that's actually being done is cooking during the peak lunch and dinner hours. And all of the people who could be front-facing, looking at customers, helping customers are doing so during those peak hours. Other things are, there's someone called an expediter who's the person who basically assists the customer in deciding whether it's for here to-go and putting the food in a bag and getting them a drink and maybe getting them a side order or some chips and guac, that person, when in place, enables the cashier, which is historically the slowest part of our service line, to operate much more efficiently and much more quickly, and give their full attention to the customer rather than being occupied with reaching around and grabbing things. So having an expediter in place at all peak periods without that person moving away from the station is very important. And again, we’ve seen that, that's not been as consistently followed as we’d been doing in 2007 when we we're hitting these tremendous throughput numbers. Also just being aware of throughput and being aware of when the rush is coming and scheduling your labor properly so that we’ve got the right people in the right positions at the right times of day so that we’re very, very efficient and give great customer service. So the bottom line is, we know exactly what we need to do. Some of our restaurants are executing this beautifully. And in fact, they're executing it beautifully and doing so while complying with our labor matrix, so it isn't necessarily a labor cost. But other restaurants are now refocusing their energy on throughput, and some of these are newer managers and newer crews who weren’t part of Chipotle in 2007 when we were achieving these very high throughput numbers and so are sort of learning it for the first time. We’re very confident that as they learn this, they’ll learn when they execute properly on these techniques I mentioned, the labor line falls right into place and we can do it in a very efficient way.

Next we'll hear from Bryan Elliott of Raymond James. Bryan Elliott - Raymond James & Associates: Actually, a couple of clarifications, Jack. I missed a couple of things. One clarification on the food cost guidance you gave, you said I think expect to be up balance of the year, second half of the year. Just wondered if you meant up sequentially or up year-on-year with that comment?

Good question, Brian. I meant sequentially. So we were at 30.4% for the second quarter and we think there's going to be modest inflation, so we think we’ll be up sequentially. We know for example, we’re already paying a higher price for avocados in the third quarter because the domestic in-season has ended. So just the avocados alone will probably add about 20, 25 basis points or so in the third quarter. And then we think there's going to continue to be slight inflation, probably mostly with the [indiscernible]. So sequentially, we see pressure in the third and then probably a little bit in the fourth quarter as well. Bryan Elliott - Raymond James & Associates: When you talked about G&A, you talked about the $3 million incremental for the meeting and then you said something else and I was writing the $3 million, sorry.

It might have been about stock options. Okay. Our stock options expense is going to be $22 million for the year. I compared it to about $15 million last year, so it's up $7 million. And then the other question was how was it spread throughout the year. It was a little light in the first quarter. A little heavier in the second quarter. So far, year-to-date, we're just a little bit more than halfway through the $22 million. Halfway through it would be about $11 million; we’re at about $12 million year-to-date. So basically, the second half of the year will be roughly equal to the first half, though the first half was a little choppy, light in the first quarter, heavy in the second quarter. So I hope that helps in terms of the G&A or the stock options and how that spread. Bryan Elliott - Raymond James & Associates: I have a bigger picture question, I guess maybe for Steve, but I'll just throw it out. As you sort of think longer term about growth rate, you mentioned the people and the real estate are the real constraints. Are you looking at or initiating anything to try and work through those constraints? I'm thinking about materially higher than 120-ish kind of 130-ish store a year capacity for the organization looking out at longer term several years down the road?

Well, certainly in terms of number of units – I mean Model A certainly provides an opportunity to build more restaurants because we can go into areas where we wouldn't have previously considered. And of course, sort of mid-term to longer-term, we're planting the seeds for European expansion. And so I see a very, very, bright future there. But also in terms of people, we've made extraordinary progress in terms of building the team that's going to be able to manage these restaurants in a way that's really superior to the way they were managing these just a few years ago, which enables us to cook better food, to provide better quality experience and these restaurants with these top-performing people also have better P&L. So we see a very, very bright future indeed. Bryan Elliott - Raymond James & Associates: We can sort of see that clearly in the numbers at all, but just thinking about how do you sort of order of magnitude the growth capacity organization, I guess that’s really my question. You said your constrained. How we get through those constraints over a…

To be clear, we don't have a particular constraint from a corporate standpoint. In other words, our teams, our real estate teams, our brokerage teams, our design teams are not now considered with our numbers, and we can certainly achieve higher numbers. And in fact, in 2008, our number would've been quite a lot higher had the recession not hit that year, and in 2009, it would've been higher had the recession not hit. Because again, it affected dramatically the amount of new developments that were being built. And keep in mind that three years ago, 70% of our restaurants were going in to new developments. Now that number’s in the mid-high 30% range and that really hit us. Those were our bread and butter, those locations. The A Model strategy has allowed us to look at things differently and dramatically expand the number of sites that we can look at with a degree of confidence of achieving high returns, with still producing great restaurants with great Chipotle restaurant experiences. So we're very excited about that. As I mentioned earlier in response to David Tarantino's question, it becomes a question of, are we going to be able to expand the number of restaurants we otherwise could have built or are we simply going to supplement the ones that went missing when the real estate mix changed. I guess it's sort of a rhetorical difference and doesn't really matter. But the two big constraints that we see in building additional locations in 2011, 2012 and beyond, are people and real estate. And right now, our pipeline of very confident managers who are eager to open new restaurants is greater than it ever has ever been with the Restaurateur Program being where it is. So we feel very strongly, and in fact, there are markets where I would tell you we’re excited to open new stores just to give the opportunities to some of these very, very high-performing people who are really looking forward to having their own restaurant. So we feel great on the people side. I would say the limiting factor in our ability to grow in absolute unit terms is, right now, still in real estate. We think that we have given ourselves a significant advantage with A Model strategy. And I'm just like to hesitate to tell you numbers until we sit down together and sit with our Chief Development Officer and put things together for the third quarter. And at that time, we'll give you a good idea of where we think it can go specifically in 2011. But we do think that there is certainly upside in the future.

We'll next take a question from Bart Glenn of D.A. Davidson. Bart Glenn - D.A. Davidson & Co.: I was just wondering if you had anything to share on the potential that loyalty program might plan out?

We've been looking at what loyalty programs for years, mostly because our customers have been asking for them. And the last thing we really wanted to do was be like everybody else and have a typical sort of “buy 10, get one free” kind of thing. And so what we've been talking about for the past few quarters is something that's very, very different that will look different in the eyes of our customers. And so we are going to be starting this fall rolling out our invite-only program, where we'll be asking our managers to select our very best customers to come into the program. And these customers will have an opportunity to learn more about the company, Food With Integrity and the things that make us special, and we're hoping that they will become our evangelists. I mean, because ultimately, that's how Chipotle really started to get rolling in the early days, were a very select few customers who really appreciated Chipotle and they spread the word by bringing in customers. So we know that this evangelical, super-passionate regular customer is the one to go after. So the program is going to be based on that notion.

Joe Buckley of Bank of America Merrill Lynch has our next question.

Jack, want to go back to the comment about consumer confidence. And curious if during the quarter, when the consumer confidence numbers seemed to dip towards the end of the quarter or the stock market volatilities seem to pick up in May and again, at different points in June, if you would see any impact on the business? Or was the monthly pattern of comps still even through the quarter?

Yes, Joe. The comps, I mean, it's not perfectly even. It never is. But I would say it was largely even throughout the quarter, when we saw the impact on the stock market, when we saw consumer confidence reports come in. And of course, we watch this daily, weekly. We watch it across markets. And our sales held up and we're delighted by that. And so our comments about consumer confidence, we're more just cautionary that the economy seems to be still a bit fragile. It's not perfectly clear which direction it's going to take, and so that may affect us in the future. But so far, we're really pleased with the way our sales picked up at the end of the first quarter, continued through the second quarter and it have continued into July so far.

Monty, I think you made the comment about the 50% cash-on-cash return potential for the A Models. But I think that was contingent upon, I'm not sure how you phrased it, maybe a couple of years of same-store sales growth. Could you just kind of run through that again and maybe talk about how that compares with the cash-on-cash returns of your more typical units historically?

Well, I mean, when I talked about the strategy being capable of yielding consistent 50% cash-on-cash returns, I mean, yes, I talked about continued lower development costs, continued lower occupancy cost and a couple of years of comps. I mean, right now, keep in mind that the A Model strategy is focused on proven markets and we've been more than happily surprised by, or I should say pleasantly surprised, by the volumes that we've achieved in this A Model restaurants. Now so far, the A Model of restaurants, like I said, the sales have kept pace with our traditional openings. That means that despite the fact that these are sites that we would've anticipated would've yielded smaller unit openings, more in $1.1 million, $1.2 million range. Instead, they've opened that parity with our traditional locations. Obviously, with a lower investment costs, lower occupancy cost and lower operating costs, restaurants that are doing the sales that we’ve historically done are going to give us wonderful cash-on-cash returns. When we talk about the future and how we can continue to produce those kind of returns, we're talking about being able to continue to open those restaurants in new and developing markets, as well where perhaps the unit opening volumes might be sort of in that $1.1 million, $1.2 million range. But comping from there so that the sales volumes come back up to parity with our new openings.

We'll next question from Greg Ruedy of Stephens.

You mentioned that 1/3 of the units are sharing Restaurateur supervision. How should we expect those numbers to evolve? How much benefit-to-labor are you realizing from that in isolation? And at what point do you reach -- where do you reach an inflection point with that leverage?

First of all, I would focus less on the leverage that we looked to gain on sort of the labor line, and I would say the much greater benefit is the leadership that we're going to gain over more restaurants by people who are simply excellent at building great cultures in the restaurants, identifying top-performing crew in the restaurants and developing those people to be our future leaders. So that's really where almost all the money is in this prospect, so to speak. If you look at how it's going to improve, how we're going to leverage that from a strictly financial basis, I mean it's true that as we’ve gained more restaurateurs and more what we call R-pluses, which is restaurateurs overseeing more than one restaurant, it’s allowed us to stretch our area manager ratios from the five that they used to be six, seven years ago to 13 ½ restaurants per area manager or team leader today. So there's been, of course, a significant G&A benefit from that. But again, that's not something we’re pushing for, that's not something we're asking for. That has instead been a manifestation of having much, much better leaders in place at the restaurant level and overseeing a few restaurants, which allows the mid-management folks to get a heck of a lot more done when they’re not chasing fires and chasing other trivial things that don’t happen when you have great people running your restaurants.

Question on Jack on the second quarter comp. How much benefit do you realize from the Father's Day, graduation gift card bounce back and an implementation of Burritos by the Box?

Tough to quantify. Certainly, both of those were successful. I think the gift card program for graduation was very successful, very well received. But we know how much of gift cards we’ve sold. Hard to tell how much of that is incremental, but certainly when we look at hour our comps held up through the quarter, those things certainly help contribute to the very high comp that we saw through the quarter. But too difficult and not something we’d want to publicly talk about specifically what those might have contributed.

We'll move next to Deutsche Bank's Jason West.

Jack, I believe you said sales were good through yesterday, but I was wondering how they’re looking today?

Well,, last hour, they were really up a lot, so I don't know if means anything.

Now seriously, just a question on margins. I was a little surprised that we didn't see a little more margin leverage in the quarter. I know you talked about marketing was up a bit and labor, you put some labor behind the throughput initiatives. But were there any other heavy expenses that hit this quarter that maybe we would cycle off in the back half or anything from a timing standpoint that maybe with this kind of comp in the back half we would see better margin leverage?

It was really mostly labor. If you look, for example, at what our margin was for the quarter and compare it, let's say, to the first quarter just sequentially. The first quarter was about a 26.1. We are like at 26.9 for this quarter. Seasonally, going from first to second quarter, you might expect about100-basis point improvement and then from the comping, you might expect overall about 100 basis points improvement. So that would put you in the 28% range or so. But then you’ve got to make a few adjustments because in marketing, we spent 2.1% in the second quarter. We only spent 1.5% in the first quarter. So that's a 60-basis point detriment Q2 versus Q1. Food cost is up 20 basis points as well. So now you're up to 80-basis point detriment. So now you're down to maybe 27.2% or so. And so we think we probably should've gotten may be 30, 40 basis points of leverage on labor, and we actually lost 10. And so that's kind of the difference between maybe a 28% margin if you roll it from first quarter to second quarter, and then 26.9. So really, the only thing, Jason, that we saw that we felt like we could have done better is on labor leverage. We know we've done better in the past. We're just not going to get too aggressive and risk losing the momentum that we are building on throughput to go after that labor leverage. It's out there. I'm confident we'll get it eventually. But we're going to be patient so that we have throughput first, then we'll get efficiency second.

Just on the rent side. Are you guys starting to see rent inflation moderate a bit where we would see some better leverage there as well, or is that still pretty inflationary?

Well, it's inflationary to the extent that we're adding new restaurants, because keep in mind, the straight- line rent accounting that we're required to do that. That means all the existing restaurants, their rents are pretty -- they're even once we open them up. So it's the new restaurants coming in the mix. Then we've got a couple of things offsetting each other. We're adding some more urban restaurants, restaurants in markets like Boston and like Philadelphia. We continue to open in markets like New York and the occupancy costs are quite high. And helping that a little bit offset that a little bit is the A Model. A Model occupancy costs are quite low. So we were frankly pretty pleased with the fact that we got 40 basis points of leverage on occupancy cost. But I would say that was more driven from a net standpoint by the comp. And then the two offsetting forces kind of held our occupancy cost at a reasonable level so that the comp would allow some leverage to happen. So I would expect if we can keep at this kind of comp level, you should see some leverage on that line. If we dip back in kind of low-single digits again, I think that's where we start to see de-leverage at the occupancy cost line.

That does conclude our question-and-answer session today and also does conclude the conference for today. We thank you all for joining us. Have a wonderful day.