Chipotle Earnings Call NUGGETS: New Unit Volumes, Marketing Strategy

On Thursday, Chipotle Mexican Grill, Inc. Class A (NYSE:CMG) reported its second quarter earnings and discussed the following topics in its earnings conference call. Take a look.

New Unit Volumes

John Ivankoe – JPMorgan: The question is on new unit volumes and obviously you guys don’t really report it and you talked about it qualitatively but it does look like at least to our estimates that for the units that were opened in the last 12 months in the second quarter, they’ve been trending at a lower percentage of the average volume, even lower than the units opened in the second quarter of last year. Could you comment a little bit more specifically in terms of what you’re seeing in terms of new unit volumes? In other words, has the economy perhaps affected new unit volumes more than it has? Is it the mixed A Model? Is it perhaps a mix of market or is it just kind of noise that can happen in the numbers on a given quarter?

A Closer Look: Chipotle Earnings Cheat Sheet>>

John R. Hartung – CFO: John, I think, to be honest it’s kind of all of the above. We look at our openings over a very long time. We continue to open up above our range of $1.5 million to $1.6 million, opening up at those volumes gives us the opportunity to expect very strong returns out of the box and then these restaurants typically comp stronger than the rest of our restaurant base and so they quickly catch up with the overall average volume for our stores opened more than 12 months. Those returns on our average restaurants opened more than 12 months or in that 60% range and so opening up above $1.5 million to $1.6 million, which we’ve been opening in that level for a couple of years now gives us confidence that we can achieve those kinds of return. What you’ll see from quarter to quarter is there’s going to be a mix of – we’re opening up in different markets. If we open up in the northeast for example, we expect higher average volumes, if we open up in some other parts of the country, we might open up at lower volumes and so, looking at quarter by quarter is not necessarily a good indication of whether our new store openings (relative to new trends) in terms of them opening up higher or lower. When we look back over the last several quarters, we are very pleased with the openings and we think the quality is very, very high, and we expect the openings to continue to open up the balance in this similar kind of range above the $1.5 million to $1.6 million range.

John Ivankoe – JPMorgan: In 2011, if we look at it right, Jack, I mean it looks like it opened even over $1.7 million. So, I mean is it like the $1.5 million, $1.6 million is what we should we be thinking going forward? Is 2011, again maybe there’s a geographic mix that tilted that number high?

John R. Hartung – CFO: Yeah. I wouldn’t talk you out of that. We are opening more restaurants this year and so when you open up more restaurants we are all seeing more in developing markets. Last year we did open a slightly higher concentration in our Peruvian market. This year we are opening up, with the incremental restaurants we are opening up, there are more in some of our developing some of our new markets. Those typically do start out of the box a little bit lower. And again, there were some quarters last year where we had some openings that happened to be concentrated in some of our highest volume markets that happened to generate average openings. But I wouldn’t see that as a meaningful trend change. It’s more just the way that individual quarters or individual batches of openings, spending out with markets, what types of markets you are going to open in. You’re going to get different sales results.

Marketing Strategy

Joe Buckley – Bank of America Merrill Lynch: Can you talk about the marketing, I assume like the market was a little bit light this quarter and I know you don’t see the type of marketing or some of the marketing you do is not getting immediate response, I guess the direct marketing is, your place change a little bit with the slowing of the traffic?

Steve Ells – Chairman and Co-CEO: I think it’s a timing issue really, and last year second quarter, I mean we were still convinced that a message that connects with our customers on a more emotional level was the right way to do it, but we were doing it through more traditional venues like billboards and radios and things like this. I think, with the success of Back to the Start, we realized that that our new way of speaking with customers and connecting with them is very successful, but we have to use methods like we used with Back to the Start. We have a lot of exciting things that are in production. So while, you see that maybe our spend was a little bit less in the second quarter this year, there should be no indication that we’re lightening up on the message in general. In fact as things finish production we’ll start to ramp up those efforts and you’ll be seeing them later in the year.

Joe Buckley – Bank of America Merrill Lynch: Then just a question again on the sales volumes. Are they still facing capacity issues? I know you’re continuing to work on the speed of service, but are the peak hours approaching capacity issues that would somewhat limit the traffic growth going forward or transaction growth going forward?

Montgomery F. Moran – Co-CEO: No, Joe. They’re not at all and in fact, some really neat news surrounding the throughput for the second quarter as well as the first quarter of this year, is that we were able to successfully drive a greater comp during the peak lunch that is to say 12 pm to 1 pm hour, and the peak dinner that is to say 6 pm to 7 pm hour. Those hours, we actually had a higher comp during those hours than we did during the rest of the day. So what that’s showing you is that our teams in the field, our teams in the restaurant are capably putting through more customers through our restaurants during those peak hours. So, those hours actually contributed more than their fair share of our comp compared to the shoulder hours or the slower hours of the day. Now, that’s not to suggest that that immediately translate into a incremental increase in comp sales, but it does translate right away into a better customer experience into shorter lines, into wait times during those peak hours. So statistically, that shows you, Joe, that even at a time when we’ve got more transactions than ever coming through our restaurants and even during the busiest time of year, our fuel teams have been able to step on the accelerators so to speak and put people through more quickly even during the time of day where its most difficult to do so, that it to say our peak hours. So, we are not experiencing any sort of roadblocks of being able to satisfy our customers even during our peak hours, much less during the rest of the day, and even in our busiest restaurants we’re not having a problem grilling enough meat, we are not having a problem cooking enough food or getting people through the line. So, not at all an issue so far, and not even in our busiest stores, not even in our smallest stores, not even in our A model stores. So, we’re pleased to report that the sort of the flexibility and the health of each of our restaurants to be able to continue to grow businesses as strong as it’s ever been.

Joe Buckley – Bank of America Merrill Lynch: Let me just one more if I could, the decision to hire area managers from the outside or field supervisors from the outside, it surprises me given the strength of the cultures. Can you talk a little bit about that and the type of person you try to recruit for that job and where you would recruit from?

Steve Ells – Chairman and Co-CEO: Yeah, Joe, I think it’s a great question and you were right. I think you’re right to be surprised by it, and it shows that you know us pretty well to be honest. It’s by far our preference just to continue to developing people from within and you’ll recall that we didn’t have this real focus of developing all of our managers from within our crew till about six to seven years ago and back then it was sort of maybe one in four or one in five of our mangers came from crew. Now it’s five out five managers come from crew. So obviously we’ve had a tremendous amount of success getting our managers from crew level and then again getting the general managers to restaurateur level we’ve had a lot of success with that lately and we’re proud that we’ve had a lot of success seeing a lot of our restaurateurs rise up to become leaders over 2, 3, 4 or even up to in some cases over 50 restaurants and so that’s tremendous and we’re very, very pleased with it and proud of that. The issue becomes that sometimes we are seeing someone become, for instance an apprentice team leader who goes from four to eight restaurants overnight and immediately develops or very quickly develops fours restaurateurs especially if they’re able to become a team leader and at the team leader level, all of a sudden, sometimes we have a tendency to wanting to oversee 20 or 30 or more restaurants and what we’re seeing is that sometimes that can tend to cause these very skilled team leaders to start being a little bit more reactive in their approach to running the restaurants and start to act a little bit more like a traditional fast food mid-management leader, which we don’t want. We don’t want our mid-management leaders to approach their job, essentially by putting out fires or chasing symptoms. Instead, what we want them to do is build individual special cultures, restaurant by restaurant that are sustainable and that will last even in the absence of sort of constant supervision by the field leader and what that means is that we don’t want to overstretch field leaders to where they have too many restaurants such that they’re not doing the wonderful culture building that made them successful. So, in order to avoid that, in certain areas where our growth has been very fast and where the growth of management leaders hasn’t quite kept peace with unit growth, we are going to hire some area managers to take a little bit of that pressure off so that these superstars rising up to the ranks remain superstars and we don’t push them to a point where they are not as successful as they could be. Does that make sense?

Joe Buckley – Bank of America Merrill Lynch: I am not sure. Where will you recruit from? What kind of people will you have joined?

Montgomery F. Moran – Co-CEO: Well, I mean, we are going to cast a very, very wide net, nationwide, for a very, very few people. We were planning to interview a whole lot of people in order to get just a few candidates. But what we are going to do in order to interview them is, we are having a broad team of people interview them, including at least three regional directors will interview each candidate, plus Jack and Steve and myself will be involved in personally interviewing the candidates. So, it’s something that we are approaching very carefully. It’s not something. We don’t need to hire them immediately or anything like that, but there’s a few places where we think that it’s going to helpful to have some help for the sort of the short term until some of these quickly developing apprentice team leaders get up to the point where we can responsibly give them more restaurants to oversee. So, it’s going to be a very careful process. We are going to hire a few people after interviewing a whole lot of candidates and we are going to get those candidates from word of mouth from our existing leadership and from recruiting messages that we send out to the country as well.