Background on CMG 2007Q2 earnings

Last quarter saw profit growth of 56% with an 8.3% growth of same store sales. That's not half bad.

Analysts expect income of 45 cents per share and sales of $262.9million. And, in logic that only high paid investment bankers can understand, most folks expect chipotle to beat those expectations and raise guidance for Q3. Indeed.

The call starts in a half hour and can be listened to via the interweb at this investor relations page. You have to share some details about who you are. I'll be adding more as the call passes.

Press Release Before the call

From there's some juicy details. EPS smashed the expectation at 60 cents per share, sales beat expectations at $274.3million, and same store sales grew at 11.6%. Wow.

One interesting thought I have here is that they just mentioned "market concerns about rising labor and raw materials costs". Chipotle's slow adoption of higher end raw materials may buffer them against these rising prices. Until they go "100%" in any one category they can reduce the mix of organic/natural/RGBH free items. Also, as their suppliers increase the supply of these higher end raw materials it reduces the premium which chipotle has to pay for them.

Discussing Innovation

Just mentioned the "hotter more evenly heated tortillas more quickly with less effort" which must be the one I photographed at 1600 california street.

Redesigning the "second make line". Is that for to go orders?

Managers

Top hits -

• now have 60 restaurateurs (I'm not really sure what that role does)
• 24% vs. 34% turnover
• Promote from within

Increasing monitoring of the stores in a variety of ways that helps improve management skills. Also, believe this improves throughput and service (they did get a customer service award).

Growth of Stores and Capital Investment in Old Stores

Continuing on the track to build as many stores as predicted this year (~110-120 new stores). Currently at 640 restaurants - including the 4 former franchise stores that they acquired in April. Doubled new restaurant openings - 32 this quarter vs. 14 this quarter last year. New security systems in 150 stores. Expect to install about that many more.

New stores are $90,000 in development.

Questions

Now it's question time...

Jeffrey Bernstein - Lehman - pricing expectations based on rollout of natural meats? Would you expect restaurant level margins to grow and by what amount? Are any markets outperforming others?
No expectation on pricing. In the 2nd quarter - 2% increase with a run rate of 2.5%-2.6% on menu pricing.

2nd quarter is traditionally the best quarter for margins over the last few years. This could be a seasonal high with a falloff in Q3/Q4.

Jason West - Deutsche Bank - Any numbers on growth at new stores? 2008 store growth rates?
New stores open at 85% of existing - so, only a "couple of years" to reach "old store" profitability. New stores will "comp" at a higher rate, so that is a source of the reduction.

2008 will probably be 20% store growth rates again. Possibly then they will

Brian Elliot - Raymond James - Sales throughput? Any shifts in lunch/dinner?
In 2005 they saw 90 transactions/hour during the peak hour. In 2006 they saw ~100. In 2007 they expect another 10 transactions per hour.

Lunch/dinner split is 48% lunch ~remainder dinner which is about the same as last year.

Nicole Miller - Piper Jaffray - Pricing growth rates?
2.5-2.6% growth for the year.

Pre-opening of about $73,000.

Lots of talk about demographics and Chipotle is claiming that they feel that the whole nation is basically the same (which seems odd).

Adding a drive through would not increase the volume and would change the feeling of the place. Increasing throughput of current sales means is the key to actually increasing throughput.

Other folks
Throughput - change machines - "expediter". Training and talented folks is the key to speed. Other possible improvements: tortilla machine, POS. Cash handling is slowest part of line, but credit cards help speed them up. They don't wait for verification of credit cards (interesting!).

Now doing 15 minute monitoring periods which they feel is quite important.

Scott Shapiro - Morgan Stanley - commodities? Any contractual protection on those commodities? Pipeline for target locations?
In order: avocados, chicken, beef. No contracts on those items. Goal is to move towards the natural raised meats and the suppliers have no ability to get contracts on naturally raised meats.

Cheese prices are contracted for all of 2007. Expect an increase in contracts when they are renegotiated.

Pipeline for new store locations in 2008 is just being started...nothing to report yet really.

blah blah blah

3% CPI excluding premium from naturally raised beef... Menu prices have fallen behind CPI.

Larry from RBC - cannibalization? Splits?
If a store does $3million - don't say "let's go knock it down" but do say "let's look at locations nearby since there is strong demand in that area". {my note - isn't that the same thing? what kind of doublespeak is that?}

A split would be kinda hard for some random reasons. Not considering one any way.

Jethro from Wachovia - material costs for stores and renewable materials in stores?
Cost inflation for building materials is leveled off. Was in the high single digits, now it's mid single digits. Currently reducing the size of the restaurant.

Renewables: spending time on what kinds of energy the buildings are using. New tortilla press should consume a lot less energy. Lighting is a big thing they are working on. Some "Green" buildings certified in Austin. LEED certified building in Gurney just outside Chicago.

Prognosis for Chipotle Stock

I wanted to listen in to see if the company was doing well. It sounds like the analysts were all really "happy" - many started their questions by saying "great quarter" - so I imagine tomorrow will be a strong day for Chipotle.

Of course, all I know is that I'll be eating more new Chipotle corn tortillas.