Chipotle Mexican Grill, Inc. (CMG) Q4 2014 Earnings Report, Transcript and Summary

Good day everyone and welcome to the Chipotle Mexican Grill’s Fourth Quarter 2014 Earnings Conference Call. All participants are now in a listen-only mode. After the speakers’ remarks, there will be a question-and-answer session [Operator Instructions]. As a reminder, this conference is being recorded. Thank you. I would now like introduce Chipotle’s Director of Investor Relations, Mark Alexee. You may begin your conference.

Good afternoon everyone and welcome to our call today. By now you should have access to our earnings announcement released this afternoon for the fourth quarter and year end 2014. It may also be found on our website at 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 as defined in the securities laws. These forward-looking statements will include projections of a number of restaurants we intend to open, new restaurants that [indiscernible] and new restaurant volumes. Statements about potential shareholders or projections of comparable restaurant sales increases or comps, trends in food, labor and G&A costs, our expected effective tax rates, statements about stock repurchases as well as other statements of our expectations and plans. These 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 on our subsequent Form 10-Qs for a discussion of these risks. Our discussion today will also include non-GAAP financial measures, a reconciliation of which will be found on the presentation page of the Investor Relations section of our Web site. I would like to remind everyone that we have adopted a self-imposed quiet period, restricting communications with investors during that period. The quiet period begins on the first day of the last month of each fiscal quarter and continues over the next earnings conference call. For the first quarter, it will begin March 1st and will continue through our Q1 earnings release on April 21, 2015. On the call with us today are Steve Ells, our Chairman and Co-Chief Executive Officer; Monty Moran, Co-Chief Executive Officer; and Jack Hartung, Chief Financial Officer; and Mark Crumpacker, Chief Marketing and Development Officer. With that, I will now turn the call over to Steve.

Thanks Mark. I am extremely pleased with our performance during the fourth quarter and throughout 2014. During the quarter we generated revenue of $1.1 billion, an increase of 26.7% on comparable restaurant sales growth of 16.1% and the opening of 16 new restaurants. This produced diluted earnings per share of $3.84, an increase of 51.8%. For the full year we generated revenue of $4.1 billion on comparable restaurant sales growth of 16.8% and the opening of 192 new restaurants. While those results would be strong for a Company of any size I think they’re particularly impressive considering how we now have nearly 1,800 restaurants averaging nearly $2.5 million each. 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. Recently we’ve seen strong evidence that our commitment to sourcing sustainably raised ingredients is resonating with many consumers. In January we decided to spend one of our pork suppliers after a routine audit reveal that they were not following all of our animal welfare protocols. Choosing to suspend the supplier meant that we would not be able to supply carnitas to about one third of our restaurants. While we could have chosen to replace this supply with pork from conventionally raised pigs, we decided not to because most conventionally raised pigs are subjected to conditions that we find unacceptable. Conventionally raised pigs are typically raised indoors with no outdoor or access to [indiscernible] and are typically given antibiotics non-therapeutically to simulate growth and to prevent illness from spreading due to harsh crowded living conditions. These conventional practices are unacceptable to us and we refuse to serve pork from animals raised in that manner. Since we made this decision the majority of sentiment from our customers has been very supportive in the email and web comments along with social media posts, customers are applauding our commitment to our vision, thanking us for standing on principal, commending us for taking action against the inhumane treatment of animals and congratulating us for standing by our business values. We certainly appreciate what we are hearing from our customers and are great full for their continued loyalty. We’re also pleased to see this response that shows that our vision and our commitment to sourcing responsibly raise ingredients including respecting animal welfare are resonating with people in a very real and powerful way. People care about where their food comes from and how it is raised. And we are proud of the tremendous progress we have made over the years. Last year we served more than 165 million pounds of responsibly raised meat more than a 20% increase from 2013. All of our responsibly raised meat comes from animals that are raised in more humane ways and without the use antibiotics or added hormones. Meat from animal raised to these higher welfare standards still accounts for a small percentage of the total meat production in this country. Yet we continue find ways to increase our supply year-after-year. Because meat raised in this way is such a small portion of the overall supply system we will see disruptions from time-to-time. But these disruptions just reinforced and strengthen our commitment to continue to look for ways to increase the supply that is available to us whether from existing suppliers who can grow with us, exploring additional cuts to add to our supply well, enhancing the quality of flavor or finding new suppliers that meet our high standards. Our commitment to sourcing food that is raised responsibly is not limited to pork, chicken and beef. During the year we continued our use of [indiscernible] an organically grown beans and we eclipsed our 2014 goal of serving 20 million pounds of locally grown. In a food system that is so heavily dominated by relatively few large producers its extraordinary progress and our teams has encountered and overcome numerous hurdles to reach each of these milestones. I’m certain that we will continue to face challenges in this area, that our commitment rate remains the strong as ever and we will find ways to keep making progress simply because we believe that serving food from these great ingredients is the right thing to do. While the customer response to how we handle our pork situation is encouraging it’s not the only sign that more and more people are becoming more curious and more discerning about where their food comes from. For example our vision is really resonating with teens, millennials and generation x. According to industry research Chipotle is one of the most popular restaurant chains among teens and has been growing in popularity among this demographic. This report from 2014 ranks Chipotle as the third most popular brand among teens up from number eight 2013. Gen x consumers were 33% more likely than average to use Chipotle, with millennials Chipotle was even more popular with customers in this group 75% more likely been average to choose Chipotle over other restaurants. 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. Based on our ongoing tracking research 87% of fast casual diners say they prefer to eat foods that are grown locally up from 70% in 2011. 86% ingredients raised or grown in a more responsible way taste better, that’s up from 76% in 2011. 73% feels it's important to buy organic for certain food items up from 61% in 2011. And 69% try to eat meat that has been raised responsibly and that’s up 53% in 2011. 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. We believe this is the new fast foot model. But this model is not limited to just burritos and tacos and as you know we are in the early stages of developing two new concepts ShopHouse Southeast Asian Kitchen and Pizzeria Locale that embrace the principals that have made Chipotle successful over the years. We believe operating these cuisines following the Chipotle model is a great way to offer variety to our customers elevating the dining experience for pizza and Asian Cuisine just as we have done with Chipotle and we believe this is a much better way to create additional compelling shareholder value as compared to the traditional restaurant model of flooding the menu with so many items that is impossible to serve anything that is extraordinary. During the quarter we opened the newest shop house in Washington DC's Union Station, the ninth ShopHouse so far. And in January we finalized the deal to open the first Pizzeria Locale outside of Denver this one in Kansas City’s Waldo neighborhood. While we are pursuing additional sites for each of these concepts I will remind you that most of our growth for the foreseeable future will continue to be driven by opening Chipotle Restaurants in the United States. Chipotle has created the new fast food model and it’s the underlying principles of that model that continue to drive our financial success. Increasingly our vision of changing the way people think about any fast food is resonating with consumers many of whom want a better, more responsible alternative to traditional fast food. I’ll now turn the call over to Monty.

Thanks Steve. Our ongoing ability to deliver impressive financial results arises from a special culture that we’ve built at Chipotle that has led to the development of strong leaders. These leaders are able to attract very talented people to our company and to develop those people to be at their best. Because of this we’re able do things most of our competitors can’t do. For instance other restaurants rely heavily on automated systems to reduce the amount of training and skill that is necessary to do their work in an effort to simplify training and make operations full proof. On the other hand at Chipotle we hire energetic and ambitious people who have a desire to learn classic cooking skills, how to be a successful leader in the business acumen necessary to run a highly successful business. But we ask even more of our people we ask them to elevate the people around them and we judge all of our leaders based on how positively they do that. By rewarding this behavior we elevate the dining experience our customers enjoy each time they visit which leads to excellent operations. One of the rewards of this kind of enlightened leadership is the rapid promotion of our talented leaders into positions within the restaurants where they can have a greater effect on more of our crew people. Over 90% of our general managers come from crew positions so people are really starting to understand the kind of opportunity that awaits them at Chipotle. The extraordinary culture that we have created with the restaurateur program as a cornerstone is one of the areas where we are unique within the restaurant industry. That’s one of the key drivers of our business and this culture is growing stronger. We’ve made important investments over the past year or so to further strengthen this culture and our ability to develop restaurant tourists at a faster rate and across more restaurants. First 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. Secondly, we created the restaurateur diagnostic and plan tool which helps our field leaders properly diagnose inadequacies and weaknesses in the culture of each restaurant they supervise. Also this tool generates a clear and actionable plan which helps the GM address the underlying causes that are preventing that restaurant team from becoming a restaurateur. The combination of these two investments is just now beginning to pay off. While we promoted a similar number of restaurateurs during the past two year we’re currently approaching the largest backlog of GMs ready to be interviewed to become restaurateurs that we’ve ever had at one time. This gives me great confidence that 2015 will be a breakout year for us in terms of restaurateur development which means that even more of our restaurants will be better than they are today, with better throughput, better food and a better overall customer experience. I am confident about this because our restaurateur shows us time and time again that the special cultures they create lead to better restaurants in every way. Better field leadership ratios alone might not accelerate restaurateur development but with the development and plan tool in place and better ratios that allow our field leaders to dive deep into and better understand each restaurant’s culture we feel that we’re in a position to accelerate the proliferation of this powerful culture quickly into more restaurants. So I am excited to see the dividends from this combined investment payoff this year and in the coming years. One of the benefits of having great teams and great cultures is the ability to deliver superior throughput. When done well throughput isn’t simply about moving people to the restaurant as quickly as possible instead it’s about outstanding customer service with clear, authentic communication with customers as they efficiently move down our serving line. During the quarter we continued to make progress in terms of throughput on top of the outstanding throughput we drove in the fourth quarter of 2013. We increased our average peak lunch hour transactions by three and out of that average of five more transactions during the peak dinner hour. We attributed this to our continued emphasis on the four pillars and the effectiveness of our auditing of and reporting to our field teams who get frequency back on how well they’re executing these four pillars. Since beginning of the four pillars reporting effort we’ve seen significant improvement and we recently expanded our reporting to include peak dinner hours in addition to peak lunch hours. With this standard reporting we continue to better execute the four pillars of both and dinner which we expect will pay-off as we head into our busiest season in just a few months. Finally I’d like to provide an update on development. During the quarter we opened 60 new restaurants bringing our total to 192 restaurants opened during the year coming in at the higher end of our guided range of 180 to 195. Nearly 80% of these new restaurants opened and proven for established markets while the remainder opened and developing are new markets. This makes allowed us to expand our footprint in markets where we have strong presence and strong teams while also introducing our unique dining experience to customers in new markets. For 2015 we expect to open 190 to 205 new restaurants with a similar distribution between proven, established, developing and new markets. And a small number of [indiscernible] restaurants as well. Overall we’re seeing more competition per site given the relative health of the economy but Chipotle remains a very desirable tenant and so we continue to have success in obtaining great real estate locations. In 2014 our total average development cost including international, ShopHouse and Pizzeria Locale locations was about $849,000 net of land reimbursements. The increase in our development cost this year was driven by opening more free standing restaurants along with higher cost locations in the northeast. And improving commercial real estate and construction market has also contributed to an increase in development cost. In 2015 we expect our average restaurant development cost to decrease based on opening more traditional in-cap and in-line restaurants which are generally easier to build and cost less in the free standing restaurants. I’m more confident now that we have the right pieces in place, a strong food culture, a strong and empowering people culture and an industry leading unit economic model to continue on our path to change the way people think about and eat fast food. I know that our success in doing that will allow us to generate outstanding returns for our shareholders. I will now turn the call over to John.

Thanks, Monty. We’re proud of results we achieved during the fourth quarter and for the entire year of 2014 as our empowered restaurant teams continue to delight our customers with great service, while preparing and serving a delicious meal made from responsibly raised ingredients to each and every customer. In the fourth quarter we compared against 2013's highest quarterly comp at 9.3% and we’re delighted to be able to serve many more customers and delivery fourth quarter comp of 16.1% on top of that 9.3% comp in 2013. This 16.1% comp help to drive our total quarterly revenue to $1.1 billion, an increase of 26.7% and our full year revenue totaled $4.1 billion and increase of 27.8% on a full year comp of 16.8%. These increased sales are driven primarily by increase customer visits along with an average check increase of 8.3%, increase in average check was primarily driven by the menu price increase we took mid-year of 6.3% and to a lesser extent by continued growth in catering and in group size. We’re maintaining our full year 2015 same-store sales guidance in the low to mid-single digit range, while we’re bullish about the sales trends and the growing consumer awareness and appreciation for our sustainably raised ingredients, in 2015 we will compare against the toughest comps we’ve ever had as a public company. We expect our comps will be the highest in the first quarter and then become more difficult as we begin to [indiscernible] the menu increase starting in the second quarter and then begin to flatten out as we compared to the 19.8% comp in Q3 and the 16.1% in the fourth quarter. As a result of this strong comp 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. This average volume along with our industry leading restaurant level margins help us deliver among the highest restaurant level returns in the industry and nearly double the very attractive returns we earned when we first became a public company. Our new restaurants also continue to perform exceptionally opening above our communicated sales range of $1.7 million to $1.8 million and in fact we now expect our new restaurants to open in the range of 1.8 million to 1.9 million and grow from this initial opening level. We opened 16 new restaurants in the quarter bringing our year-to-date openings to 192 which is at the high-end of our guidance range for 2014 and we ended the year with 1,783,000 restaurants including 17 Chipotle restaurants outside the U.S., nine ShopHouse and two Pizzeria Locales. As Monty mentioned earlier we plan to open between 190 to 205 new restaurants in 2015 which we expect will be reasonably level loaded throughout the year. Diluted earnings per share for the quarter was $3.84, an increase of 51.8%, restaurant level margins increased in the quarter by 100 basis points to 26.6%. Margins were impacted by strong transaction trends and the menu price increase from the middle of last year. Diluted EPS was $14.13 for the full year 2014 an increase of 35% over 2013. EPS growth outpaced our sales growth as the higher comps in food and menu increase allowed us to leverage labor and occupancy lines at the restaurant level. Margins for the year increased 60 basis points to 27.2% in 2014. The full year margin impact included underlying food inflation of about 7.5% and because we increased prices around mid-year our effective price increase for the full year was only about 3.8% which did not fully cover all of this food inflation. Food cost were 35% in the quarter up 110 basis points from 2013 and sequentially higher by 70 basis points from the third quarter. While avocado cost decline in the quarter as we shifted away from buying California avocados that benefit was more than offset by higher beef, and dairy cost during the quarter. 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. We also expect about a $2 million charge in the first quarter on our food line related to the suspension of one of our pork suppliers. As Steve mentioned decision to stop serving this pork was driven by commitment to principals underlying food with integrity including animal welfare protocols and the response from our loyal customers has been very supportive. So all things considered we expect our food cost in 2015 to remain at about the 35% level we saw in the fourth quarter as the continued pressure in the prices of beef and avocado will be roughly offset by lower prices for dairy with full year food cost remain in that 35% range. We don’t have any plans for an across the board menu price increase in 2015 since we just increased prices and because we’re currently earning at or near record margins and returns. In addition it's important to us that we remain accessible or affordable to our customers as this is the core to our ability to change the way people think about any fast food. But had we known earlier last year that beef prices would continue to rise we may have increased the prices for our Steak and Barbacoa more than we did. We did increase the price of these two items much higher than any other entrée in an effort to charge the fair going price for our Steak and Barbacoa. And we expected to see some trade off from Steak and Barbacoa as a result of the higher relative price. But we saw virtually no trade down. The continued rise in beef prices has resulted in the up charge for these entrées not covering the higher ingredient cost. So we’re open to considering a targeted price increase later in 2015 on our Steak and perhaps Barbacoa to help cover the rising cost of beef. Because Steak and Barbacoa account for less than one third of the entrées we sell we expect any increase we might consider to have a relatively modest impact on our overall results. But our Food With Integrity mission depends on our ability to charge a fair price for the ingredients we serve and we’re not quite doing that with our beef right now, so while we’re open at a possibility we’ve not made a decision to raise beef prices at this time and we’ll keep you updated if and when we decide to so. Labor costs were 22.2% of sales in the quarter a decrease of 80 basis points from 2013. And for the full year labor cost were down 100 basis points from 2013. These decreases were mainly due to leverage from the higher full year comp including the menu price increase partially offset by increased wage inflation and hire manager and crew staffing. While Chipotle has always offered a simple streamline health insurance option to all of our hourly employees on January 1, 2015 we began to offer medical coverage that qualifies under the Affordable Care Act to full time hourly employees, that is those employees working 30 or more hours per week and with at least 12 months of service. Over 10,000 hourly employees were eligible for this plan based on service length and actual hours work and more than 1,000 employees have enrolled so far. The enrollment number is likely to increase going forward as additional employees will qualify each month as they hit the full time status and as they hit their one year anniversary. And based on the over 1,000 enrolled so far our estimate of expected number and the estimate of expected additional enrollees going forward we expect the additional cost of this health insurance in 2015 to be in the $4 million to $8 million range and all of that will hit our labor line. Other operating costs were 10.5% for the quarter which is down 80 basis points from 2013 due to leverage from the higher comp in the quarter and slightly lower marketing cost. For the full year other operating costs were 10.6% or down 20 basis points from 2013. Marketing was 1% of sales for the quarter compared to 1.2% in the fourth quarter of 2013. Our marketing expenses dropped sequentially by 30 basis points as our skillfully made advertising campaign ended for most markets in October. For the full year marketing was 1.4% of sales in 2014 in line with 2013 and we expect it to increase slightly to around 1.5% to 1.6% in 2015. G&A was 5.7% at quarter or 90 basis points lower than 2013 due primarily to the timing of the accrual for our annual bonus program and the increased acceleration of stock compensation expense in the first three quarters of the year as another one of our officers achieved retiree status. For the full year G&A was 6.7% or 40 basis points higher than 2013 primarily driven by higher non-cash non-economic stock comp and from our biennial All Managers’ conference held in September where nearly 3,000 Chipotle employee and suppliers were in attendance. The non-cash non-economic stock comp expense was $15 million in the quarter and $98 million for the full year which is about $33 million higher than in 2013 due to options granted in 2014 being issued at a much higher share price and as a result of more of the senior management team qualifying for retirement which accelerates the non-cash charges. These items accounted for about 50 basis points of the increase in G&A so without these items underlying G&A would have been lower for the full year 2014. In 2015, we will hold a biennial Field Leadership conference in the third quarter and we expect that will cost around $2 million. The compensation committee of our Board is actively evaluating our executive comp for 2015 and until that is finalized and approved we’re unable to project and communicate the stock comp expense expected for 2015. Our comp committee expects to finalize the plan in the next week or so and we’ll communicate the impact when we’re able to. Our 2014 effective tax rate was 37.6% and this is lower than the rate projected at Q3 because of adjustment and our state tax rate due to a change in estimate of usable employer credits and the renewal of the work opportunity and R&D credits in the fourth quarter. Unfortunately the renewal was only approved for 2014 so without the state tax adjustment and without the work opportunity in R&D credit we expect our 2015 tax rate to return to about 39%. These federal credits are renewed the effective tax rate would benefit by about 40 basis points in 2015. During the quarter we purchased about $25 million worth of our stock for over 37,500 shares at an average share price of $650. For the year we purchased about $88 million worth of stock and over 153,000 shares at an average share price of $572. At the end of 2014, we still had about $102 million remaining and a previously announced share buyback program and we're announcing today that the board is authorizing additional share repurchase program of another $100 million. Overall since 2008 we've invested more than $700 million to purchase more than 4.2 million shares at an average price of $166 per share. Capital expenditures net of landlord reimbursements totaled about $240 million in 2014 primarily related to new restaurants along with continued reinvestment existing restaurant and other company initiatives including a significant upgrade of our restaurant network infrastructure. For 2015 we anticipate CapEx will be around 220 million, the majority of which relates to new restaurant construction. In 2014 we increased our total cash and investments by $362 million to $1.250 billion even after funding the opening of 192 restaurants and repurchasing $88 million of stock through our share buyback agreements and we still have no debt on our balance sheet. We continue to believe that investing in a high returning new restaurants remains the best use of our cash and we're confident that the growth options we're developing today including ShopHouse, Chipotle and International markets and Pizzeria Locale will provide value enhancing growth opportunities in the future and in the meantime we'll continue to invest in our high returning domestic restaurants and we'll optimistically repurchase our stock to enhance shareholder value. Thanks for your time today and at this time we'd be happy to answer any questions you may have. Operator, please open the lines.

Thank you very much. [Operator Instructions] We'll take our first question from John Glass from Morgan Stanley.

Thanks. First John, could you just clarify your comment around food cost particularly that you're not going to take pricing but you might take some pricing and that pricing is against targeted, when would you make that decision if not now, because it sounds like beef is going to stay elevated and maybe you can just frame if you did cover that cost increase what the implications for overall cost inflation might be in that scenario?

Yes John, I know that I can be that precise because we haven't made a decision but when we raised our prices in the middle of last year, we double the increase or the difference between our chicken burrito for example and our steak and Barbacoa burrito, historically we've had about $0.30 or $0.35 up-charge for that and we doubled that to about $0.70 and that at the time came closer or is in the ballpark of covering our additional ingredient cost for serving a steak burrito for example. We'll now get cost as an extra dollar or so to serve steak versus chicken and so, we're actually not covering that up-charge and so it's that situation that causes us to think that we're subsidizing steak and Barbacoa with other items on the menu and that doesn't make sense to us so recognizing that kind of shortfall, we're at least considering raising prices on right now our steak and our Barbacoa. We don't expect to do anything before midyear John, we don't want to have a second increase even though it would be just on a few menu items. We'd rather not do that within a 12 month period, we don't want to double up on price increases. We think in order for us to remain accessible, we want to hold off as long as we can so we'll look and see watch what happens to these prices throughout the next quarter or two and then around the middle of the year we'll decide whether it makes sense to go ahead and do some kind of a targeted price increase as I just described. In terms of the impact John, we did a $0.30 or $0.40 impact or increase that would be a roughly a 5% or so increase as the order of magnitude steak and Barbacoa and say they account for less than a third of our menu, that would be somewhere between maybe 100 to 150 basis point menu price increase across all of our menu. So, it's not a huge impact to our overall menu, not a huge impact to our margins but just kind of gets our individual margins for the entrées that we serve a little bit more in line.

And just a follow up on the food question, you remove pork from about a third of your restaurants and you said the customers received it well, does that have an impact therefore on sales or no impact on sales and is that also in any way feeding into your view on food cost for '15.

John, at this point it seems to have mostly just -- people are just trading off for chicken or beef or in a few cases our other offerings and it doesn't seem to hit sales at all but certainly yet we'll have more time to analyze that.

Thank you.

We'll take our next question from David Tarantino from Robert W. Baird.

Hi, good afternoon and congratulations on a great 2014. Jack, I was wondering if you could comment on how that comp trended throughout the quarter and while there are very strong in an absolute basis they did slow a little bit from Q3 on a one and two year basis so, just wondering what your thoughts are on that sort of modest slowdown that you saw there and then secondly if you could comment on what you're seeing so far in the first quarter that would be helpful. Thanks.

Okay, David, during the quarter sales were lower, accounts were lower in November than they were in the other two months and as we can look back at the quarter and as we look back, our sales trends during November, whether was cold through much of number and I think a lot of restaurant companies all saw the same thing and so we think there might have been a temporary weather impact during November. Now we typically don’t ever say that our comp was negatively affected by the weather because usually when the weather improves or returns to more normal weather our customers come back and it kind of makes up for it. So I don’t know that there was a net impact of weather during the quarter but we did see that our comps did dip November and then rebounded back in December. And then into January so far we’re seeing similar sales and transaction trends not necessarily the same comp, in fact not the same comp because as moved in the first quarter we’re now comparing against 13.3 or 13.4. So obviously that comparison is a tougher comparison but in terms of just absolute transaction at dollar levels in January we’re seeing similar trends to what we saw in the fourth quarter.

(We'll go to) [ph] John Ivankoe from JPMorgan.

Hi, great, thank you. Also a question on pricing and how you think about COGS. 35% in the history of Chipotle is the high number so I just wanted to get a sense of why you don’t consider taking at price increase across the menu as opposed to just isolating that as B to I guess acknowledge the A, you could do in a six or nine months ago and didn’t affect customer traffic at all and secondly just to expect what might be a new economic reality that pricing in general is going up across the economy weather because of commodities, because of labor what have you, and if you can just touch on the point that Steve made in his prepared remarks I think there was a comment about the number of Chipotle imitators that were coming into the market place. You’re seeing any kind of competitive impact what so ever on a local basis I mean we certainly can’t see it on a national basis in your comps that are giving you at least somewhat of a hesitation of the amount of pricing that the concept can handle.

John, I’ll take the menu price concept first. First of all in terms of raising menu prices, we just don’t put a very high importance on our food cost percent as a percent of sales what we’ve always focused more on is what is our overall margin and when we apply that margin to our sales what is our unit economic return which at these sales and these margins and with the investment that we’ve got we’re talking about a 70% or so return on investment which is roughly double what other successful chains are delivering. And so we don’t feel this urge with these margins and these returns to increase price just because our food cost happen to be higher. [indiscernible] our food cost were going to be 40% but we generated 80% return. So our margins will be higher and our returns will be higher, will that be something that investors would expect, I think the answer would be yes. And so our focus is less on individual line items and more on our margins and our returns. 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. And so we would rather err on the side of being more patient and not rushing to raise prices every time some of our ingredient costs move up so that as many people as possible can enjoy Chipotle and I think overtime that strategy has worked well for us. And then some of the other one was on competitor impact. We generally don’t see any sustained impact, when we have a competitor open up right next to us we might see a week, one week, maybe 10 days or something where we see sales will drop a little bit, there might be just curiosity where some of our customers may pick in and may grab meal at another fast casual competitor but those sales come right back, so we’ve not ever seen any restaurant open at near us where they’ve taken sales away from us on any kind of sustained basis.

We’ll take our next question from Jeff Bernstein from Barclays.

Great, thank you very much. Two questions, one just Monty on the development side just kind of connecting the dots around what you said on the people side it seems like find the right people of what’s the inhibitor and they talked about a large backlog and what not. So from a development standpoint is it really it would seem like real estate or like you said maybe increased competition to get those sites that’s kind of the biggest constraint. Is that fair to say or should we assume similar to this year some of the ‘14 that you’re able to upside on the unit growth or at what point maybe would we see an acceleration as the people side is well equipped. And then I had a follow up.

I guess I wouldn’t say that real estate or people, I wouldn’t really pick one of them as being the greater obstacle right now to continue growth. Our people, we feel very good about our people culture like I mentioned in my prepared remarks the ratio of the number of restaurants per field leader is much lower than its tenant in the last several years and we think that gives us a great opportunity to develop more restaurant tours and even where we’re not developing restaurant tours we’re developing a lot of our GMs to get much, much closer to that level. So we feel like there are (very strong) [ph] restaurants if you want to call them that are much, much better and they were getting a lot more they’re getting close to that restaurant tour level. So we feel really good about that. But likewise in talking to our real estate gains they feel really good about what’s out there in the real estate world granted some of the prices are going up because a lot of other concepts are also expanding and growing more quickly due to a better economy but also by the same token Chipotle is a really-really well-known name and landlords are excited to get us on their centers because they believe that we provided real boost to the excitement of their center. And so we find that we’re able to get more than our fair share of deals. But in both the people side and on the real estate side we have very high standards and we want to make sure that we have loads of restaurants tours and excellent general managers and really good field leaders to open up new restaurants. And so we’re always watching that carefully and not wanting to overstress the cultural side of what we do. But likewise on the real estate side we want to open aggressively but also in a measured way where we’re being careful to make sure that we’re selecting great-great real estate. And while we are able to go into more secondary sorts of locations than we were say 10, 11, 12, 13 years ago with much more success we still want to do that in a balanced way. So yes we agree we can over time grow faster but we don’t find it super important to rush anything in that regard. What’s most important to us is to continue to do a great job with our real estate and a great job with our managers and run terrific restaurants such that the demand for what we’re doing continues to outstrip the supply such that when we open new restaurants we have this really great success with our new restaurant openings which I think you heard in Jack’s remarks but now we’re looking at sort of the 1.8 million to 1.9 million for those new restaurant openings and a great return pretty much out of the box which very quickly catches up over the next few years with these very high average unit volumes that we now have which are somewhere in the $2.47 million range per restaurant. So, by continuing to create demand we continue to have a huge opportunity out in front of us and that allows us to feel really good about our future and our growth.

And then just to follow up on that as you mentioned kind of the increase in volumes you often talk about I guess around throughput you talk about maybe a second line that you sometimes are catering and online. Just wondering whether there is any potential or maybe in any markets you might offer two lines just some more traditional foot traffic that would seem like that would increase throughput meaningful during peak periods. I don’t know whether that’s ever an option kind of like a (double enjoy) [ph] to for a drive through concept but the ability to just have a second line at least during certain hours of the day to really help the throughput? Is that a (brand) [ph] option?

Yes, Jeff I think the answer is it is an option and it’s an idea that has occurred to us and we even experimented with it. But really what’s most important for us is to continue to implement the four pillars of throughput because right now our average restaurant in the country does something about one third of the transactions during lunch as our fastest restaurant in the country does and so the number one opportunity for us along the main service line is that we can go much-much-much faster and we continue to -- and like I said in my remarks we have gotten quicker even though fourth quarter we’re at a pace that while it’s not as quick as our busiest season is close to and faster than our busiest season used to be at throughput. But we continue to make these throughput gains but we think that there is so much low hanging fruit still in terms of speeding up our restaurants in order to accommodate additional folks that adding a second line would be more disruptive to our operation and to the design of our restaurants than it would be helpful to the economic model at this point. That being said we do have to keep in mind in almost all of our restaurants a secondary client that we’ve historically referred to as the fax line where we can serve catering orders out of store orders, iPhone orders and such that keeps those orders many of which are larger orders off our main service line. Early in my comments just now I mentioned that we had tried the two line method. We have a restaurant in France at [indiscernible] which is a business center in [indiscernible] Paris where we do have -- its one really long line but people tend to go in two directions so it is two service lines with two separate areas, two separate cash registers and so forth. It works and it works just fine, like I said it’s just not a strategy we need to implement right now and in that location we had a situation where we had a lot of additional square feet where we could put that in to place without losing other aspects of the operation. So, at this point we’re going to continue to focus on the main service line implementing the four pillars of throughput and driving great throughput so that we can have a nice tiny efficient unit economic model.

We’ll go next to Nicole Miller from Piper Jaffray.

Thanks. Good afternoon. Entrée from a company or concept perspective why don’t you just dictate something more structural and then you price practice that kind of systematically takes 1%, 2%, 3% a year and there is certainly patented statistical ways to do that that protects the value proposition? Also thinking about the stock perspective it seems to create a lot of volatility in the share price just from not always fully understanding or appreciating when you are or when you’re not going to take price. So could you comment on it from both perspectives please?

First of all, Nicole, 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. People more than ever care about where their food comes from. Recognize that Chipotle is offering something that many other restaurant companies don't or are unable to offer and so we've always been guided more by our vision than the stock price knowing that the stock price will take care of itself if we're successful. Then back to why not choose to kind of an every year thing. It's not linear, food inflation is not linear and so we don't think our price increases should be linear and in addition to that even if you did have regular inflationary pressure, we're constantly investing in our food and so we might have significant investments that we want to make one year and in the early days when we were first introducing that for the rates needs to our market that would dictate the timing of when we will go ahead and raise prices. And so we don't think that the way our cost either because of food integrity or because of inflation is ever going to be kind of a linear one to 2% or 3% per year and so we don't think the pricing should be linear as well so that would be the way I would describe it.

Thank you.

We'll go next to Joe Buckley with Bank of America Merrill Lynch.

Hi, thank you. Jack, did you mention a $2 million first quarter charge in connection to the pork issue and if so, could you explain?

Yes, we had supplies of pork that were in various -- some of the supplies were in our restaurants, some was in our distribution centers and so the cost of removing all of that pork and disposing of it we were able to donate a lot of it, we're able to sell some of it but in that we've to take a loss Joe and so that loss will total about $2 million, we don't think it will be more than 2 million but we think it will cost about 2 million and that will here our food line during this the first quarter.

Okay, is there any breach of contract this year that you should pursue?

Possibly, we haven't done that yet, our first concern was what are we going to do? How are we going to make sure we don't serve this pork and we're now working with our supplier [indiscernible] what the next step is, so there is a possibility but as of right now Joe, we're going to take the hit and if there is any kind of -- the other thing is rather than go and make this a legal issue we'd like to do is we'd like to find a way to get this supplier to rise up to our protocol on a more consistent basis and so rather than this being a legal issue we'd rather look at this as how can we make sure that we can assured supply going forward and that would be more important.

Okay, then maybe just one on development side Mark, I think you said you opened some lower -- the cost you decided to be a little bit lower in 2015 as you should shift away from free standing, away from the Northeast in '14 but the new store volumes are still expected to be higher. Does that again is that the message and could you just explain a little?

Yes, I mean we didn't make a specific comment on where we think the new store opening levels are going to be but we're very confident in the pipeline of real estate that we have in front of us and our real estate people feel very good about it, so we have no reason to believe that we won't continue to open restaurants in that 1.8 million, 1.9 million sort of range. The reason that we believe development costs are going to come down is people, one thing is that just in 2014 we had an unusually high number of free standards. Sometimes we sort of take what we can get that's not necessarily the result of a strategic objective to open more of them we just happen to find more of them in 2014 that met our screens and look like exciting pieces of real estate that we should build Chipotle restaurants in. In 2015 it's looking like a lot more of our mix is going to end [indiscernible] locations which tend to do wonderfully well but also tend to cost less to build, more of our bread and butter you might say. So, also we think we can get development cost down because we're working very hard from a design standpoint to implement some of our new better design methodologies but to do it in a more efficient way and to gain some economies of scale on what we're doing so we're approaching the development cost puzzle from a number of different directions but strategically we're not trying to eliminate free standards, we just understand that the [indiscernible] locations that we do very, very well with them and during 2015 it looks like more the pipeline is comprised of them than it was in 2014.

We'll take our next question from Karen Houlthouse from Goldman Sachs.

Hi, so the commentary on sequential trends and the quarter and end of January, are we to take that basically as if sales per week seasonally adjusted were flat and if so if there is still incremental opportunities on the throughput side why isn't that continuing to grow and I'm also curious it relates to sequential trends as well if you thought you were seeing any sort of benefit from the stronger low income consumer that's kind of become a buzz word across the restaurant industry given what I think is very legitimate possibility and value even to lower consumer compared to what you typically think of as a fast casual company.

First of all on the sequential trends I think the answer is yes, but let me clarify that we’re talking in the same language yes, for the first -- end of January for the first -- the next four and half weeks or so end of the quarter similar sales in more transactions seasonally adjusted that we saw in the fourth quarter, that would be at higher level than last year. So when you say flat yes flat sequentially but not flat compared to last year. In terms of higher throughput, higher throughput really comes in to play more or so as we move into the spring month. This is seasonally our lower average daily sales period and so throughput's important throughout the year but it becomes even more important as the weather gets nicer as more and more people are out and about and our lines tend to get a little bit longer and if our throughput is excellent at that time the lines actually won’t get longer and so people will walk in a Chipotle, we serve quickly and so at that point we expect to see a benefit. In that sense Karen for us to change that trend line we’re going to have to invite more customers in have faster throughput as I mentioned as we hit more of our seasonally higher sales month and hopefully we will see a trend change, very often we do see a trend change or two or three during a year was just happen to see one as we’ve moved just a few weeks of the fourth quarter and into January so far. And then in terms of the impact on the customer Chipotle has never really seen a lot of sensitivity in terms of when customers -- when the recession first hit. We weren’t the first in fact we were one of the last ones to see any impact on our sales and when the recession was ending and we were coming out of recession we were one of the first ones to see a sales increase and we returned to double digit comps pretty quickly as the recession was ending. And so generally our customers come to Chipotle sure they say its great value when we do research our customers give us very, very high scores on the great value. But we have very loyal customers such that they don’t stop coming to Chipotle when they have few less dollars in their pocket and then all of a sudden say, boy I’m going to start going to Chipotle more often because I've got a few more bucks. I think the good news here is that people find ways to visit Chipotle and it’s not necessarily affected by whether they’ve got an extra bucks in their pocket. Our customer loyalty kind of overcomes these what I will call relatively minor changes in our customers' spending ability.

And as a quick follow up, you really haven't seen sequentially trends sort of stabilized, what’s the thought process around if not more explicitly addressing that with you on their spend of marketing versus the peer group, you are more explicitly addressing it in some of the -- nuts and bolts ways to get more people in the door.

Well, geez, the comp was 16.1% so are you saying spend more money to get a higher than 16.1% comp? I’m not sure I understand the question.

Well sequentially things have stabilized week over week or month over month, there aren't more people coming in the door, you basically are just staring down or perpetually decelerating comp, why not be more proactive about putting things in place that will -- prevent that.

Well, for about -- I don't -- for over 20 years we’ve been working very hard to improve every aspect of the customer experience. So for instance we've got roughly speaking the same menu we had 20 years ago. During all of those 20 years and particularly during the years since we’ve been public we’ve been hearing a crescendo of people wondering why we don’t add additional menu items and change other aspects of what we do and yet we’ve had the highest comps I think in the history of the restaurant business during that time and likewise we keep trying to improve the quality of our cultures so we have better people serving you. We’ve been increasing -- improving the quality of our average raw ingredient, every ingredient we have has been under our scrutiny, in order to make sure the food test as good as it can take. Then we work on throughput to make sure that that aspect of the customer experience also improves and what we find is that by focusing on those things that we do really, really well but yet getting even better at them we’ve been able to sustain a much stronger comp than any other restaurant company has done. So it may look like we’re staring down the pike at sort of flattening sales and no increase in comps, it looks that way 10 years ago and nine years ago and eight years ago and seven, six, five, four three, two, one years ago I think even a year ago if you looked at what our guidance was for the year I believe at the very beginning of 2014 we said that there will be a low single digit comp I think are flat to low single digit comp and that looked like what it was going to be at the time. How did we get to a mid-to-high-teen comp doing that which we do even better and so it is possible of course that our comp will flatten out and there won’t be sequential trend changes to the positive but we hope that our continued focus on trying to do everything we do better will work out just super.

We’ll go to next question from Jeff Farmer from Wells Fargo.

Jack you touched on it but you increased your labor staffing ratios in early ‘14. I think you addressed largely the double digit transaction growth and some other things but as we’re modeling the labor line in ‘15 how should we be thinking about staffing levels relative to what we saw last year, meaning you think there is another little bump in staffing levels? Are you going to hold tight with what you saw in ‘14?

Jeff I wouldn’t expect another bump, now we’ll add people as we see more transactions so as our comps continue to be in the high single or low double digit we’ll add people at kind of a normal level, I would expect that it would not be as much as we saw in the last year or so. We talk on other calls that we have some labor inefficiencies and so we have more staffing at restaurant level and I think we have just more approved that we can schedule. We have more managers, hourly or salary managers and hourly managers on our teams than ever before. And so the hours that were to appoint are higher than we think they normally should be even at these very high comps that we’ve been delivering. But we’ve also said we’re not going to be in hurry to go shape those inefficiencies out of the restaurant. It’s been an extraordinary year in terms of throughput, in terms of transaction, we’ve moved to a whole another sales level here. And so the fact that we’ve had some what I call relatively modest labor inefficiencies somewhere in the maybe 50, 60, 70 basis points kind of range. We’re not going to be in a hurry to shape that loose. We’re aware of it, our teams are aware it and so I wouldn’t see additional inefficiencies creep in and at some point in the future I just wouldn’t want to pinpoint when, we believe we will get this efficiency back but I wouldn’t see a similar kind of step up for the reasons I just mentioned. I think you will see another layer of inefficiency creep in like you’ve seen in the last year and half.

Just one quick follow up, so excluding stock-based comp, which means that clearly that we still need to figure out what that number potentially could be, so again excluding stock-based comp how should we be thinking about G&A dollar growth in ‘15 or even absolute sort of G&A dollars in ‘15?

Yes, I would expect at this level Jeff, that our G&A excluding non-cash comp and excluding any kind of one-time things that might happen will be at a similar but hopefully slightly lower as a percentage of sales. There is not a ton of leverage but I would say there is slight leverage that hopefully we will get as I would expect the G&A as a percentage of sales anything stock comp should drift slightly lower over the coming years.

And this does conclude the question-and-answer session of today’s call. I’d like to turn the call back over to Mark Alexee for any additional or closing remarks.

Thank you for joining us. We really appreciate it. We look forward to speaking with you next quarter for our first quarter financial results. Thanks.