Chipotle Mexican Grill (CMG) — Q1 2015 Earnings Call Transcript

Thank you. Hello, everyone, and welcome to our call today. By now you should have access to our earnings announcement released this afternoon for the first quarter 2015. 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 statements about our potential business results, growth in shareholder returns, projections of a number of restaurants we intend to open and trends and development costs, estimates of future and comparable restaurant sales increases or comps, and supply chain and other trends affecting future comps, projections regarding trends in food, labor and general and administrative costs, our expected effective tax rate, 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. I'd 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 until the next earnings conference call. For the second quarter, it will begin June 1 and continue through our Q2 earnings release in July 2015. On the call with us today are Steve Ells, our Chairman and Co-Chief Executive Officer; Monty Moran, Co-Chief Executive Officer; Mark Crumpacker, Chief Creative and Development Officer; and Jack Hartung, Chief Financial Officer. With that, I'll now turn the call over to Steve.

Thank you, Mark. I'm pleased with our performance during the first quarter. 2014 was an extraordinary year for our business and we're off to a strong start in 2015. During the quarter, we generated revenue of nearly $1.1 billion, an increase of 20% on comparable restaurant sales growth of 10.4% and the opening of 49 new restaurants. This produced diluted earnings of $2.88 per share, an increase of 47%. These results are particularly strong considering that we were up against 13.4% same-store sales growth in Q1 last year and faced with harsh winter conditions in much of the country, including many important Chipotle markets. We also saw some challenges related to our decision to stop serving carnitas in some of our restaurants. However, the strength of our business has weathered these challenges and emerged to set us up for a great year in 2015. Our performance is the direct result of our continued focus on the things that really drive our business, our unique food culture and our unique people culture. We have a strong history of establishing very high standards for food we serve. Standards that are very often hard to meet, given our requirements for the ingredients we use. We have encountered challenges from time to time since we began our journey to find the very best ingredients we can, and we do not anticipate our recent pork supply issue to be our last one. But our track record of driving positive change in these areas is unprecedented, and we believe these higher quality ingredients taste better. In January, we suspended one of our pork suppliers after a supply chain audit found that they were not fully compliant with all of our standards. Our protocol requires that pigs are raised with access to the outdoors or deep bedding in barns and without the use of antibiotics. These differences are in stark contrast to the way conventional pigs are raised. In many cases, they spend their whole lives indoors, on hard slatted floors with no bedding, which we think is inhumane. When we found that one of our suppliers was falling short on some of our requirements, we knew that removing this pork from our supply was the right thing to do. But our decision left us without enough pork, and the resulting outages affected more than one-third of our restaurants. While many of our customers were incredibly proud that we took a stand to do what was right, we also knew that there were risks involved, and that we would encounter challenges in replacing this supply. There is very little cushion today in the supply system for pork that meets our standards, and ultimately the solution requires increasing the number of pigs that are available. This does not happen quickly. Recognizing this near-term supply constraint, we have been looking hard to find more pork that meets our protocols. Our long-term suppliers have partnered with us to increase their output of responsibly raised pork. However, this alone will not be enough to remedy the situation, and our shortage will remain at more than one-third of our restaurants, as we enter the peak spring and summer periods. We have also looked at the possibility of adding new suppliers and have explored options to use other types of pork as a way to get more supply. Each of these potential solutions has their own unique complications. That said, we now believe that we have found a solution with a new supplier to help us fill our gap. Our team is conducting on-site visits to inspect all facets of the operation, and we're encouraged by what we have seen so far. At this point, we plan to begin introducing this new pork in some of our restaurants in the coming months. If all goes as planned, we believe that we will be steadily increasing our supply throughout the third quarter and back in full supply during the fourth quarter. While the commitments we make and the way we run our business can be difficult, they are also helping to differentiate Chipotle and enabling us to build stronger relationships with our customers, particularly younger customers. New research out during the quarter from an investment firm shows that the fast-casual sector has surpassed casual dining in terms of frequency of visits, with 45% of consumers saying that they spend more money eating out in 2014, up from 37% in 2013, and pointing to gains in popularity amongst fast-casual restaurants. In this study, Chipotle was named as the favorite restaurant more than any other, with twice as many mentions as the number two company on the list. Another study shows that millennials, key customers for Chipotle, are eating out at fast-casual restaurants more than Generation X-ers or boomers, and that their dissatisfaction with traditional fast food is higher than that of other generations. We believe that the loyalty that we're building with key customer groups is very much a result of our commitment to doing what is right, in addition to the excellent customer service that we provide. As we move closer to resolving the supply issues that have left us short of carnitas, we believe the pieces are in place for us to deliver strong performance throughout the year, and to help us continue to change the way people think about fast food.

Thank you, Steve. Our ability to continue to deliver excellent results depends on the continued success of the special people culture that we have created at Chipotle. This culture continues to provide an extraordinary restaurant experience while simultaneously allowing us to develop the excellent leaders we will need to accommodate our future growth and help us to maintain our strong unit economic model. During the quarter, we continued to strengthen our restaurant teams, adding 42 new restaurateurs and promoting 11 in the field leadership roles, either Apprentice Team Leaders or Area Managers. These leaders are able to attract very talented people to our company and develop them to reach their full potential. By hiring only top-performing employees and developing them to be at their very best, we're able to do things in our restaurants that other restaurant companies simply can't do. Not only is our team running extraordinary restaurants, preparing delicious food using classic cooking techniques and providing exceptional customer service, we're also elevating the people around them. This approach to running our restaurants is what enables us to create such an extraordinary dining experience and to deliver such strong unit economics. The strength of our culture is evident in many ways, including through a growing number of individual success stories, as more and more of our people are climbing the ladder from crew to management and field leadership positions as well. In fact, last year alone, we promoted more than 10,500 people who started as crew into management positions. More than 78% of our restaurateurs started with us as crew, many having never even worked in a restaurant before. During the quarter, one particular leader really captured our attention, Montel Milleage, who demonstrated his ability to assemble a team of all top performers, and then empower them to achieve high standards in his restaurant, became our youngest restaurateur ever at only 19 years old. Montel came to Chipotle two years ago, discouraged by his first job in a fast food restaurant. He wanted to work in an environment where the circumstances were encouraging and where he saw opportunities to advance, learn and grow. He came to our College Park restaurant in Maryland for an interview and was hired on the spot. He had a group of very strong leaders such as Gabby Fertio, who is now a restaurateur, and Patricia Aguila, a restaurateur who has been promoted to field leader and is now actually a team leader at Chipotle. His team immediately recognized that despite not having significant experience, Montel embodied the 13 characteristics of a top performer and the drive to empower others around him. A year later, he was a Service Manager working to develop his replacement so he can move to the apprentice role. By 19, he was promoted to General Manager at a new Chipotle restaurant when we opened in Maryland City. From the beginning, Montel set his sights on developing a team of all top performers. He then shared his restaurateur vision with all of them and connected with each person on his team by getting to know them, sharing his own dreams and desires, and demonstrating to them how he could help them become leaders in their own right. Montel's story is just one of a number of truly inspiring stories of people who come to Chipotle, are motivated by our food culture and our people culture, and who share our vision and work hard to achieve it. These stories really illustrate the opportunities we're offering at Chipotle to top performers who are able to deliver a fantastic customer experience and elevate the people around them to help them reach their potential. These opportunities are not only very rewarding to those who take advantage of them, they also provide the people that we will need to lead our continued growth at Chipotle. One of the greatest benefits of having such strong cultures in our restaurants is that it enables us to deliver excellent customer service, which among other things generates great throughput. Our teams understand that the qualities that make for great throughput are exactly the same qualities that provide the very best customer service. Having everything ready in a restaurant before customers arrive, so we're prepared for service, particularly in our busiest times, and clear authentic communication with customers to keep our lines moving quickly without making people feel rushed. We continue to increase our average transactions throughout the day, including during our peak lunch and peak dinner hours. During the quarter, we increased average transactions by 21 across the entire day, a tremendous accomplishment. This continued improvement is the product of our outstanding restaurant teams and their ongoing attention to providing better service, but also our continued emphasis on the four pillars of throughput, which are using a linebacker and dedicated expo at peak times, proper mise en place, and having the very best person in each position on the line during our busiest times. Since we started reporting on the progress our restaurants are making and implementing these four pillars, we've seen continued improvement in throughput, which we believe will become increasingly important now as we head into our busiest months of the year. Finally, on the development front, we are well on track to meet our initial guidance to open 190 to 205 new restaurants during this year. During the quarter, we opened 49 new restaurants, including one new ShopHouse, bringing our total number of restaurants to 1,831, including 10 ShopHouses and two Pizzeria Locales. We continue to have a very strong real estate pipeline and are increasing our mix of new construction deals. Building restaurants in newly constructed centers is less costly for us. So this increase in new development should help offset some of the higher development costs that we saw in 2014. We're continuing to evaluate new market opportunities and anticipate entering new markets for both ShopHouse and Pizzeria Locale this year. We previously announced our plans to introduce Pizzeria Locale in Kansas City and also expect to open in Cincinnati later this year. We're pleased with our results for the quarter and our start to 2015. With a strong food culture, unique and empowering people culture, and industry-leading unit economics, we're well-positioned to change the way people think about and eat fast food and to deliver outstanding results for our shareholders.

Thanks, Monty. The marketing we do at Chipotle is unlike that of any other fast food brand. The reason for this is simple; very early on we decided to spend more on our ingredients and less on our marketing. It's always been our belief that better quality food prepared by hand and served by excellent teams would be the most powerful marketing of all. In fact, we were serving better ingredients, including pasteurized dairy, local produce, and meats without antibiotics or hormones, long before there was even significant customer demand for such things. Over time, this has created powerful differentiation between Chipotle and other fast food brands. This approach has served us well and our ongoing marketing research makes us confident that this is the case. Chipotle has become quite buzz-worthy with awareness coming from social media, public relations, advertising, and our local and event marketing programs. But with less reliance on traditional advertising than many of our competitors, the strength of our programs in areas other than advertising generates considerable attention and awareness, as does the breakthrough nature of our content programs, which have reached well beyond what we would get through traditional advertising. We are also seeing greater interest among customers who are looking to eat healthier and defining healthy around such characteristics as natural and minimally processed ingredients, exactly the same kind of ingredients we use to make our food. And we are also seeing that a majority of customers, about 60%, are willing to pay more for better food, food that is made without artificial ingredients. All of these findings really support the way we run our business and our marketing, and all traits that are reflected in various aspects of our marketing. The vast majority of fast food brands use limited-time offers, new menu items, and price promotions as their core marketing strategy. These new menu items and offers rarely build long-term loyal customers; instead, they only provide a spike in sales during their advertising window. In order to maintain traffic, most fast food brands need to add a steady stream of new menu items throughout the year, resulting in bloated menus filled with hundreds of items. Not only is this marketing approach incredibly expensive, the cluttered menus can be confusing to customers and difficult for the restaurant crews to execute. But the most significant downside to this approach is that these new menu items are often made from cheap artificial ingredients and are highly processed. These menus of highly processed items are proving problematic, as customers are increasingly concerned with a long list of artificial ingredients found in foods today. There are more than 800 artificial ingredients, preservatives, and processing aids used in processed foods. In fact, there are 85 ingredients in a single fast food burrito served by one of our competitors. For years, our marketing has touted the superiority of our ingredients, including our use of local produce, pasteurized dairy, and meats without antibiotics and added hormones. But more recently, we have begun to expand our marketing messages to highlight the small number of whole unprocessed ingredients used in our food. In fact, there are only 68 ingredients used to prepare all of the food we serve at Chipotle, the vast majority of which are simple ingredients you could buy at the local market. Only our tortillas contain any preservatives or other additives, and we are diligently working to eliminate those. The fact that Chipotle uses better quality ingredients is well-known, but the fact that our food contains virtually none of these artificial ingredients and other fast food contains literally hundreds of them, will further differentiate Chipotle from the competition. That's why we have developed a new marketing platform called 'Collective Beauty,' which is our internal designation for the program that highlights the simple beauty of the minimal number of whole unprocessed ingredients in our food. The campaign includes several phases and will be rolled out over the coming years. Currently, the campaign is running in print, outdoor, and radio across 30 of our top markets. Additionally, we are running more national advertising than ever before, leveraging print, streaming radio, search, and social. The campaign runs in two flights, one this spring and another this fall. During the summer break between advertising flights, we'll be launching a large online initiative for Collective Beauty. Beyond this expansion of our marketing strategy, strengthening our e-commerce program is a top priority for us this year. Over the last year, we worked on a project to incorporate mobile payment into Chipotle ordering apps. We had hoped that this capability would have been available in the updated app released in December 2014, but we were not happy with how it was working, particularly in light of the continually evolving landscape of mobile payment. Our commitment to support mobile payments has not changed, but our approach has. We are broadening our view of mobile payment to include more than simply paying for in-restaurant transactions using our app. Our near-term priorities with regard to mobile include the launch of an ordering app for Apple Watch, which will be available April 24, and the exploration of new systems for mobile payment, including the use of Apple Pay in our restaurants and our iOS app, and potentially Google Wallet capability within our Android app. We are making progress with all of these initiatives and we'll keep you apprised as these programs evolve. Last, we also relaunched our chipotle.com website with better accessibility and functionality for mobile users. Additionally, we have begun delivery of online and mobile orders for individuals and small groups in 67 cities using the Postmates delivery app. We selected Postmates as our official delivery partner in March, and now they are currently delivering Chipotle orders in all of the markets where they operate. Finally, with regard to our catering programs, we will begin advertising catering in a number of markets, as we get close to graduation season, historically a busy season for catering packages. And expect to see continued momentum in this area during that peak time.

Thanks Mark. We're very proud of our results for the quarter, as we grew our revenue to nearly $1.1 billion, a 20% increase compared to last year and EPS was up 47% in the quarter. Our average restaurant volumes have surpassed the $2.5 million mark for the first time, and we sit just a little more than three years ago that our average volumes passed $2 million for the first time, meaning that we've been able to increase our average volumes by more than $500,000 per restaurant while adding more than 600 new restaurants during the past three years. This obviously has had a significant positive effect on our unit economics, and it means we're serving more Chipotle to more and more people in new and existing restaurants as we pursue our vision to change the way people think about fast food. As you know, this year we faced the most difficult comp comparisons we've ever had as a public company, including lapping the menu price increase from Q2 of last year. We're pleased with the 10.4% comp in the quarter, on top of the 13.4% comp from last year. And we believe the comp was affected by weather, especially in parts of the Mid-Atlantic, the Northeast, and regions in the south, and by the pork shortage, which Steve talked about. It's difficult to put a precise impact on the combined effect of weather and the pork shortage during the quarter, but we believe the comp could have been as much as 100 basis points to 200 basis points higher with normalized weather, and if we'd been able to serve carnitas in all of our restaurants. Once again, it is not possible to separate the weather impact from the effect of the pork shortage, since they happened at roughly the same time. We normally talk about weather not having a net impact on our sales, because our sales typically come roaring back after big snowstorms, offsetting the lower sales caused by the storm. But the weather impact this year lasted for many weeks in most markets, so any sales bounce back could not offset the full effect of the bad weather. Our comps were highest in January and lowest in March, similar to some macro retail trends, and consistent with the premise that the weather was likely a factor in February and March. Thus far in April, we are trending slightly higher than in March, which tells us that weather was at least partially a factor in the first quarter. So what does all that mean for our sales trend going forward? Well, comps in April so far appear on track to be in the high single digits, and we think our pork shortage is currently impacting our sales by as much as 200 basis points. We have not seen an immediate impact on sales when the market initially ran out of pork, but research in our sales analysis suggests that our carnitas customers really love our pork and they appear to be visiting less often, or not at all, until they know we have carnitas back in their market. Now, this is not surprising, as the vast majority of our customers tend to find their favorite burrito or favorite bowl combination and then they order that favorite meal every single time they visit. We had hoped that the shortage would encourage our carnitas customers to try another menu option, and some did, but many have decided to hold out until carnitas returns to their market. As a reminder, we rotated markets without pork about every six weeks, and so every one of our markets has been affected at some time or another. We found that when we rotate supply back to a particular market, it can take weeks before our carnitas product mix returns to previous product mix levels. As a result of our carnitas-loving customers not realizing we were back in supply of carnitas until they visited less often, this rolling blackout has caused confusion among our customers about where and when we were out of carnitas, and this has worsened the sales impact. Because of this phenomenon, we're going to stop the rolling blackout and continuously serve carnitas in our markets where the carnitas product mix tends to be the highest, starting later this month. Based on actual April trends and factoring in tougher comparisons in May and June, including the lapping of last year's menu price increase, Q2 comps overall are likely to be in the low-to-mid single digits. So that comp assumes that we continue to see as much as 200 basis points negative impact from the pork shortage. As Steve mentioned, we expect additional pork to be returning to our restaurants beginning in the third quarter, with a full return of carnitas during the fourth quarter. It also assumes no incremental menu price increase in Q2 related to the elevated beef prices, which I'll talk about in a few minutes. And also, as before, any potential sales lift we might get from our marketing campaign that Mark talked about or from other impact such as faster throughput. By the way, of the 10.4% comp in the quarter, about 6.1% relates to the price increase from last year, and most of the rest is due to higher traffic with a small increase in average check due to positive mix, including greater group size and catering. Of course, we're as disappointed as our carnitas-loving customers that we have not been able to satisfy their craving, and we don't like the fact that our sales have been impacted by the shortage. But we remain committed to our food integrity mission, and we are as confident as ever that we made the right decision to suspend a pork supplier based on our animal welfare protocols. And we're optimistic that the new pork supplier Steve talked about will help us at least reduce the impact of this shortage on our customers and on our sales soon. Overall, for the year, we continue to expect comps in the low-to-mid single digits, which is consistent with the outlook we initially provided for the year. And again, this does not factor in any menu price increases related to beef or any sales recovery from eliminating the pork shortage. We're pleased to finally see some relief on our food cost line, with food costs declining from 35% in the fourth quarter to 33.9% in Q1. The main contributors to the decrease were from relief in dairy cost and favorable pricing for avocados. Dairy pricing had largely been expected to be realized with a broader commodity market increased supply during the fourth quarter of 2014, and the trend was relatively stable throughout the quarter. With avocado pricing, we have observed a slight increase in supply, which has temporarily helped to keep the prices reasonable through the early months of 2015. However, we anticipate that normal seasonal shifts will pressure the avocado market in Q2 and Q3, as we buy more avocados from California growers. Beef prices remain at historically high levels, although beef inflation was largely contained during the quarter. We currently believe that the pricing for beef will remain at these elevated levels well into 2016 and perhaps even into 2017. As a result of this increased inflation, we expect to raise prices on steak and barbacoa this year, most likely by the end of the third quarter. And while we're still carefully reviewing our options, we anticipate an average increase of around 4% to 6%, which would have a net effect of about 150 basis points based on the current product mix of our steak and barbacoa. As you'll recall, our intent last year was to cover the inflationary cost pressures of beef, but we undershot this level in hindsight, as beef costs continued to rise. And while it's important to our vision that we remain accessible or affordable to our customers, we also want to charge our customers the going rate for the ingredients that we use. And as a reminder, we saw virtually no trade down from steak and barbacoa last year when we increased prices for these entrees more than other menu items. One final note related to food costs in the quarter. We included a one-time write-off to the cost of sales associated with the carnitas inventory of $1.7 million. We chose to donate rather than serve the pork that did not meet our protocols. This write-off was offset by a small change in the classification of miscellaneous kitchen supplies, which shifted from the food cost line to other operating costs during the quarter. Labor costs for the first quarter were 22.4% of sales, a decrease of 60 basis points from last year. Leverage for the quarter was largely driven by higher sales volumes, which included the benefit of the higher menu prices and that was slightly offset by wage inflation. Occupancy costs were 5.8% of sales, a decrease of 30 basis points from last year. Other operating costs were 10.4% of sales, or 10 basis points lower than last year. Marketing expenses during the quarter were 0.9% of sales compared to 1.3% in the prior year, and that's in line with expectations and lower than our full-year outlook, as we will ramp up additional marketing costs during Q2 and Q3 related to the campaign that Mark discussed. Restaurant level margins increased 160 basis points to 27.5%, benefiting from strong revenue growth compared to last year. G&A was 5.8% of sales in the quarter, down from 7.4% last year and was driven by the lower non-cash stock compensation. For the full year 2015, we expect non-cash stock comp expense to be about $80 million, which is down $18 million from last year. Executive compensation was restructured resulting in an estimated $33 million reduction, and exec comp for the full year, while additional grants to restaurant management and staff are expected to offset the non-cash stock comp by about $15 million. Total stock comp in the first quarter was about $16.6 million compared to about $27.6 million last year. As Mark mentioned earlier, we are refocusing our e-commerce program to build a mobile platform that moves beyond simply incorporating mobile payment into our ordering app. We incurred a loss on disposal of assets of about $2.8 million associated with some of the prior development work. The effective tax rate during the quarter was 38.4%, and for the full year, we estimate our effective tax rate will be 38.7% compared to 37.6% for the full year in 2014. Last year benefited from our estimated usable federal and state credits and from the work opportunity and R&D federal tax credit, which have not been renewed for 2015. If those federal credits are extended to 2015, we estimate our tax rate would benefit by about 30 basis points. We finished the quarter with 1,831 restaurants, and our average unit volumes have helped push our return on investment up to nearly 80%, an economic return that we're very proud to achieve. As of March 31, we held cash and investments of about $1.4 billion including short and long-term interest-bearing investments, and we continue to have no debt on our balance sheet. During the quarter, we repurchased $23 million of our stock at an average share price of $675 and we currently have $179 million remaining on our share buyback program, which was previously approved by our Board. We continue to believe that reinvesting into the growth of our business remains the best use of our cash, although we'll continue to opportunistically repurchase our stock to enhance shareholder value.

So a question on comps, and I'm just trying to understand the way you are thinking about it. Over the next two quarters, you're facing very similar traffic comparisons that you faced in the first quarter. So are you assuming that over the next couple of quarters, you see very similar traffic growth that you saw in this first quarter, which I'm assuming is in the low single digits, and then you're just rolling in the loss of the pricing as it falls off? Is that kind of how you're thinking about comps going forward?

No, I think the comparisons get tougher, and so I would expect that the transaction comps are not going to hold up at the same level as the first quarter. The way I would think about it is, in April so far we're seeing comps in the high single-digit range, and that includes menu pricing of about 6.1%. That menu pricing will fall off over the next few quarters. And so as that 6.1% falls off, you're going to see transactions that are going to be moving down into the low single digits. And then we continue to compare it to tougher comparisons as the year rolls out. So I would not expect to see the same transaction growth as you saw in the first quarter continue as we move to the rest of the year.

And then, second and last question. How much is your online orders as a percent of your sales mix today? And as you focus on it, what really are the benefits and where could it go in your mind as a percent of the business?

What I include as kind of all online and catering and burritos by the box, they're all kind of non-traditional orders. That was about 6.6% during the quarter. That's at or near an all-time peak. That number will vary quarter by quarter because catering has seasonality. Mark mentioned in his comments that we're approaching our peak catering season. And so I would expect that catering would move up in Q2, and I would expect that 6.6% to increase along with the higher catering expected in the next quarter. We don't know where it can go, but we do know some competitors talk about their total catering in the 8%, 9%, 10% range. And so we think we've got a lot of room to grow. Catering is very young. We still think that our mobile ordering, as Mark talked about, we could do a lot more with the ordering, with the payment, with the way that we accommodate those orders in restaurants. So we think we have a lot of room to do a better job with all that. In terms of where it can go, we don't know. We just know others when they're in high single digits, low double digits, that gives us optimism that we can move that number up from the 6.6% today.

And just to add on to that, with regard to catering, keep in mind that catering currently does not have online ordering or delivery or online payment. So it's in its very early stages. If we add those things, we expect to see catering become more popular. With regard to online orders, I can't give you one statistic with regard to the Postmates delivery service that we're using. We're seeing a 30% month-over-month growth on those orders, and we have not publicized this. So there is a tremendous amount of potential for individual orders, but it's a little bit too early for us to predict what long-term impact that will have.

Can I just ask you to clarify the last discussion? So the 6.6% is the percent of online orders, but if I understand correctly, that does not include catering? Is that correct?

Joe, that does include catering. So catering is a little over 1%, so of that 6.6% catering is about 1.1% or so. But we didn't cater in the second quarter, it could increase by as much as 50%, so it could be in a 1.5% or 1.6% range or so, but the 6.6% does include catering.

And then just a question on the food costs, which you are commenting remarkably good for the quarter, given the recent run rate. Was there some unusual letup on the pressure from beef during the first quarter, or was that simply dairy and avocado and some other things coming in more favorable than you expected?

Joe, it was all dairy and avocados. Beef just kind of held constant. We picked up about two-thirds of the benefit from dairy and about a third of the benefit from avocados, and then we just had no other surprises. We've been kind of snake-bit in the last several quarters just by surprising continued increases, whether it was beef or some other ingredients. And this quarter everything remained calm, and we got the benefit that we hoped we would get from avocados and dairy, so nothing else out of the ordinary.

Is there any unusual split between advertising expense for the balance of the year? I know you said it was down as a percent of sales in the first quarter?

Yes, Joe, I would expect Q2 and Q3 to probably be at the peak. This quarter was closer to 1%, just under 1%. Q2 and Q3 will be closer to 2%. Overall for the year, the fourth quarter will drop down to something maybe closer to 1%. Overall for the year, we'll probably be in the 1.6% range or so.

Just one, I guess, going back on the delivery rollout. You said that's going to be delivery to individuals as well. Is that something you guys have offered? I mean I'm guessing you can do it on like seamless and places like that, but is that sort of a new initiative and how widespread will that delivery be? Is this a nationwide opportunity?

Yes, it is relatively new. Let me put it this way. There have been a lot of people that have been delivering Chipotle through various services over the years. And we've tried to in a lot of cases shut them down, because we weren't sure whether the quality was going to be sufficient or whether they were following our rules. This is different because we've made an official deal with Postmates, and they have been delivering Chipotle for quite a while too. We have them as our official partner, and they will be delivering Chipotle; they are delivering Chipotle in all of their markets, which are 64 cities and about 24 big metropolitan areas. So it is nationwide.

And I guess going back to the comp question. The underlying, I guess, trends, do you guys assume the two-year is going to deteriorate for any reason, particularly looking at maybe the traffic specifically on that? And I guess, around that question, is there anything you're seeing outside of the weather and the pork issues that suggest there to be any reason for a deceleration in the underlying trend of the business?

Well, I don't know that I will look at a two-year trend. I think when you combine years you have to combine years that make up the full trend that we're seeing. In our case, I go back to the current trend we're in. We're in a third year of a trend that started in early 2013. If you remember our comp in 2013 was 1%, and the year before that we were on a kind of deceleration as we were finishing up a three-year trend that started in 2010. And so if you go back to 2013 and you look, we grew comps from 1% and 5% and 6% and 9% and we went to double digits and now we're comparing against those strong double digits. And I think if you combine those three years together, you will see a three-year trend that for the first quarter with 2015 being the third year, the comp was about 24.8%. Now, we know that was affected by weather and pork, and so it was depressed a little bit. But if you make an adjustment for weather and pork, I think for the rest of the year, you can think in terms of a three-year combined sales comp, and that would put you in kind of 25%, 26% range or so. I think that's the better way to think about it. And again, that doesn't take into account anything we do with menu prices on beef and it doesn't take into account the replenishment of supply with the pork that Steve talked about later in the year.

Just maybe a follow-up on that question, Jack. I guess if you think about the trends on a multi-year basis and apply that logic, would you expect this year's traffic or the one-year traffic number to turn negative at any point during the year? I guess, does that imply sort of a flattening out of the traffic or a turning of the traffic to negative territory?

I don't think, David, it will turn negative, but when we compare against the third quarter that's going to be our toughest comparison. And it's going to be low single digits. So I don't think it will turn negative. I hope that we see a balance from things like creating greater awareness with the campaign that Mark talked about and just general increases in awareness that we from time to time get with Chipotle. It's amazing to me that some people still have never visited Chipotle, I just met one over the weekend. I just can't believe it that somebody has never been to Chipotle. And so the third quarter will be the toughest test, but I would say right now I don't expect it to turn negative.

And then, I guess, getting back to your point there that you just made, in the past I think this is pretty similar to how you've given guidance. Chipotle, time and time again has found a way to drive more traffic into the business through, whether it's marketing or just initiatives around food or throughput. So I guess this year, it sounds like maybe you're less optimistic about your ability to drive more traffic or maybe I'm reading it the wrong way, but what are your overall thoughts on the ability to continue driving this up and kind of hurdle over the great trends you had last year with positive momentum?

David, it's very hard to predict quarter by quarter. I look at this as a very substantial three-year trend where we now have 1,800 restaurants; we're now at $2.5 million. In fact, we've had a $500,000 increase in volume while adding 600 restaurants I talked about over the last three years. I think that's pretty substantial. If you go back to the three years before that, that was a three-year trend as well that had a start and a stop. And it was pretty clean. 2010, 2011, and 2012, during that three-year period, and you see where it started, you can see where it ended and that was about a 27% or 28% or 29% increase. And so we seem to have these waves. And if you go back even as we were a private company, these waves where people figure out that Chipotle exists, they like it, and they come back more often. And so we have this kind of surge and then we have a leveling off, then a surge and a leveling off, very tough to predict. Will we have another surge? When will we have it? What will the magnitude of that surge be? But we continue to believe that there's great appreciation and a growing appreciation for what we do at Chipotle. We do think millennials in particular are very appreciative of what we do. We think this campaign that's designed to reinforce the idea that we not only source sustainably raised ingredients, but we do really cook with real whole ingredients. We largely don't use things like preservatives and stabilizers and things like that. So we believe that that is not something that is short-lived, that's over. We think that we'll probably benefit from that, but in terms of then breaking that down into exactly what that's going to do for the next two or three quarters, it's tougher to predict and the comparisons are tough, but over the long term, we're optimistic about where we can go from here.

Jack, regarding the food cost outlook for the full year, is the $33.9 million a solid figure? I understand there are various factors at play, but does this amount account for the write-off of the pork? If so, does that make the number better, or are we looking at a loss on this asset?

Well, the write-off of the pork is offset by re-class. And so I would look at those as largely a loss. So I would think of it, John, as we're going to see pressure in the next two quarters from avocados, and so I think they will be under that pressure. Hopefully that pressure will be relieved in the fourth quarter. So I would say generally, we will probably be up a little bit from this first quarter, but hopefully not too significant.

So still below, say, the 35% that you're running at the end of last year, is that a fair way to think about?

We expect to see below the 35%, yes.

And then are your restaurants set up now that take mobile payments? Do you have to invest more in the POS systems or different POS systems? How do you envision this new mobile payment system working with your existing systems?

The restaurants currently are not set up to accept mobile pay, although with Apple Pay, in particular, the investment on the hardware side is relatively minimal. So that's not a significant barrier. The main challenge there is making the POS software compliant with Apple Pay. So we're working on that. And that's the type of payment that's of most interest to us, so people being able to pay at the POS with their phone. We're also, of course, pursuing putting Apple Pay in our mobile app as well as Google Wallet in our Android app. But the priority is going to be mobile payment at the POS. But it's not as if the POS hardware has to change; there's just an additional piece of equipment.

And do you envision that being available this year?

That's our hope to have that implemented by the end of the year.

Monty, with the combined power of increased field leadership oversight in diagnostic tool, do you see the 21 transaction gain sustainable for the remainder of 2015?

Yes, in fact, I would like to see us actually improve on that over the next two quarters. That's a nice result especially during the first quarter, which from a transaction standpoint is one of our slowest two quarters. Over the second and third quarter, we usually see a significant pick up in our business seasonally. It's during those seasons that we really make sure to emphasize with all of our teams the importance of having those four pillars in place. In fact, at this time we've just started a national sort of throughput contest just to sort of make it top of mind with our restaurant teams, have some fun with it, and bring awareness to those who are doing the best job just like we did with the reporting nationwide from team director to team director, but this way we're actually having a little bit of a contest for bragging rights. We'll see if we can keep pushing the needle, but I think it's going to get stronger over the next two quarters in terms of throughput. Of course, our ability to put through more people depends on having more people come to our doors as well. So throughput will not in and of itself drive transactions; it's just that when you have transactions come in, if you don't have the throughput, you are stifling your ability to allow those additional transactions to come in the door. But yes, we're excited about hopefully continuing to improve on our execution of the four pillars and our execution of throughput.

And Mark, with the new digital initiatives what can we expect from one-to-one marketing efforts? And how can Chipotle build efforts to strengthen this form of marketing?

Well, I mean, we've been doing that actually for a couple of years. We've significantly improved our one-to-one marketing through mobile. What we're doing now is doing more marketing campaigns that enable people to participate by opting in either through email or via text. As I mentioned in my comments earlier, we just relaunched chipotle.com yesterday, which makes it mobile-friendly, much easier for people to opt into our emails and follow us on our social media accounts. We're also, as Jeff mentioned, I think on the last earnings call, doing a large data project at Chipotle, which will give us even more capability in terms of reaching out to these folks, but we have seen a shift in our marketing toward more one-to-one marketing in terms of what we're spending anyway. So I think we're already underway in that regard.

But it seems like the digital initiative will give you more firepower behind that.

Well, anything that we do that's digital has the potential for people to share them by themselves, so it adds a viral element. At Chipotle, we're very judicious with our offers. When we combine our mobile initiative with an offer of some kind, we see a tremendous amount of viral pickup of that. And so, yes, these digital initiatives have given us more leverage for our dollars than traditional advertising does. We use them always in conjunction with one another, but you're right digital gives us more leverage because of the potential for it to be shared.

I had a question about the supply chain and obviously with carnitas, it's had a little bit about a bump more recently. But given the size of the company and the growth path, can you talk about maybe the potential or the partner with larger entities to ensure the supply chain going forward? It just seems like you'll be a very attractive partner and maybe you already are doing that, and it's just not obvious to us on the outside is try to ensure the consistency of the supply.

Well, our suppliers are some of the larger suppliers in the country. Our suppliers are also very small independent family farms that are sometimes part of larger cooperatives. But we buy from some of the very, very larger suppliers. With the bigger suppliers, we've encouraged them to adopt our protocols, and some of them have, and some have chosen not to do so. But we know in order to continue to ensure a supply of our top-quality ingredients that are more sustainably raised, we're going to have to use all different sizes of farmers and ranches out there, and we have been doing that for years.

A quick follow-up and then another question. With regard to pricing, Jack, you mentioned that you think the traffic will remain positive. If traffic were approaching negative territory, does that change your resolve to raise pricing or do you think of this independent of what your traffic is doing?

Well, trends don't change. We're likely going to increase prices, if something happened in the economy, or something happened with our trends, we might defer it. I mentioned that we'd probably get it done by the end of the third quarter. So if we saw something unusual happen, we might defer it just so that we don't exacerbate the challenge. But if the trends stay as they are, we're underpriced on steak right now. We're just not charging the going rate. We actually lose money anytime somebody comes in thinking about getting chicken and instead gets steak for example. So we'd like to fix that. But if we decided if there were some trends that we were concerned about, we might decide to fix that a quarter or two later. But right now, unless things change, I think we're going to get this done by the third quarter.

And then just a follow-up to your previous comments about the cycle, this three-year ebb and flow that you seem to see. Looking back at the last slowdown, we came to see or at least we did, that there was perhaps some throughput constraints, and then the throughput focus, and also that the marketing efforts that were breakthrough perhaps made a better case for this acceleration than you might have had otherwise. You're talking about a new campaign, but is there a little bit of introspection, where you're seeing perhaps that whole campaign has perhaps lost its energy, and that's going to be a big part of your hope going forward. And then you're talking about this competition with throughput; is there a sense that perhaps some of the throughput metrics are perhaps not improving the way that they were?

I believe our throughput is showing significant improvement, and we are very proud of the efforts from our teams. As I mentioned, we feel we can maintain this momentum, especially as we approach a busy second and third quarter. Over the past few years, we have consistently set new records for throughput during these periods each year. We are getting quicker, and we believe there is still a lot of potential for further improvement. However, I want to emphasize that while throughput is crucial when many customers visit us, it also needs to be viewed in context. Improved throughput not only enhances customer service but also ensures our food tastes better because our burritos are prepared while they are hot. That said, throughput doesn’t function in isolation. When our teams experience more demand, longer lines, and a greater number of customers, we often see our throughput metrics improve. However, if there isn’t enough customer traffic, some locations may struggle to optimize their throughput. If we fail to operate efficiently, we won’t be able to significantly enhance our throughput. Over time, excellent throughput can lead to more customers enjoying Chipotle as they come to trust our ability to serve them quickly, creating a more convenient experience. But exceptional throughput alone will not drive comparable sales growth in any given quarter without sufficient customer transactions.

In response to your question about marketing, we've had several successful advertising campaigns, but I don’t want to imply that our current campaign can't achieve similar success. What we are doing now builds on our previous emphasis on what we call our hero ingredients, which include naturally raised meats, local produce, and pasteurized dairy. However, many competitors are making similar claims. Our current approach is to broaden that focus to highlight what isn't in our food—specifically the 800 or so chemical additives commonly used in processed foods at most fast-food restaurants. Chipotle, with only 65 or 67 ingredients across our entire menu, stands out as remarkable. The new campaign aims to demonstrate this in an engaging way, effectively differentiating Chipotle in a manner that competitors cannot replicate. While they may emulate some aspects of our past marketing, I believe they will find it challenging to adopt this new strategy. Therefore, I expect this fresh approach to potentially have an even greater impact than previous ones.

I just have a couple of follow-up questions if I may. I guess one is, I don't believe with the comp issue, but Jack, I guess the two-year trend actually or the three-year trend you're talking about, I don't know if you're adjusting for kind of the 1Q calendar shift in 2013, but the implication would be in fact negative. The process is certainly traffic. So I guess I'm just trying to reconcile some of the commentary. And the other piece I had about marketing is, so I think in the first half of last year, you had a pretty big increase in marketing dollars and it seems to have helped, along with your good initiatives that saw the lines really shorten through 2013. Is that something that you think about in terms of marketing spend as down between brand building and traffic driving?

Sara, I'll take the comp issues first. When I look at the first quarter, you're right that in 2013, there was a lost day. So that 1% comp is really like a 2% comp, so you can make that adjustment. There is also an adjustment to be made, and I'm suggesting it's 100 or 200 basis points in the first quarter and that's an estimate. It's our best estimate right now. And so the three-year comp if you make those adjustments you're talking about something in the 26%, 27% or so range. And if you do that, and if you look out at the rest of the year, and listen, we do things like we adjust for trading days and things like that, I think the third and fourth quarter will be tough comparisons. I don't think the traffic will turn negative, but it will get close. So the margin for error is very, very small, but right now I wouldn't expect it to be a negative comp, but it's going to be close.

You need to be careful when looking at when the dollars are spent. We typically do the same type of marketing each year. That is to say, we do traditional advertising, outdoor print radio that sort of thing in the spring and the fall. That's what we did last year. And we're doing it at the same time this year. We're actually spending more than ever this year. You can see lumps in the spend because of how we developed the brand building content, like the short films or the television series, you can see that impact on marketing budgets in ways that make it look as if we're spending more at that moment when we're not. So I don't think there is a meaningful correlation between the spent of marketing and what we're seeing right now. What we're doing with marketing is pretty exactly what we did last year.

And with regard to the marketing spend, you need to be careful when looking at how the dollars are spent. We typically do the same type of marketing each year. That is to say, we do traditional advertising, outdoor print radio that sort of thing in the spring and the fall. That's what we did last year, and we're doing it at the same time this year. We're actually spending more than ever this year. You can see lumps in the spend because of how we developed the brand-building content, like the short films or the television series; you can see that impact to marketing budgets in ways that make it look as if we're spending more at that moment when we're not. So I don't think there is a meaningful correlation between the spend of marketing and what we're seeing right now. What we're doing with marketing is pretty exactly what we did last year.

Thank you again for joining our call today. We look forward to speaking with you next quarter. Thanks.