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Edited Transcript of CMG earnings conference call or presentation 6-Feb-19 9:30pm GMT

Q4 2018 Chipotle Mexican Grill Inc Earnings Call

DENVER Feb 8, 2019 (Thomson StreetEvents) -- Edited Transcript of Chipotle Mexican Grill Inc earnings conference call or presentation Wednesday, February 6, 2019 at 9:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Ashish Kohli

Chipotle Mexican Grill, Inc. - Head of IR

* Brian R. Niccol

Chipotle Mexican Grill, Inc. - CEO & Director

* John R. Hartung

Chipotle Mexican Grill, Inc. - CFO

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Conference Call Participants

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* Andrew Marc Barish

Jefferies LLC, Research Division - MD and Senior Equity Research Analyst

* Andrew Michael Charles

Cowen and Company, LLC, Research Division - Director

* David E. Tarantino

Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research and Senior Research Analyst

* Gregory R Badishkanian

Citigroup Inc, Research Division - MD and Senior Analyst

* Jeffrey Andrew Bernstein

Barclays Bank PLC, Research Division - Director & Senior Equity Research Analyst

* John Stephenson Glass

Morgan Stanley, Research Division - MD

* John William Ivankoe

JP Morgan Chase & Co, Research Division - Senior Restaurant Analyst

* Joshua C. Long

Piper Jaffray Companies, Research Division - Assistant VP & Research Analyst

* Karen Holthouse

Goldman Sachs Group Inc., Research Division - VP

* Leonardo Zacche Vazquez

Sanford C. Bernstein & Co., LLC., Research Division - Analyst

* Sharon Zackfia

William Blair & Company L.L.C., Research Division - Partner & Group Head of Consumer

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Presentation

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Operator [1]

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Good afternoon, and welcome to the Chipotle fourth quarter and fiscal year-end results conference call. (Operator Instructions) Please also note, today's event is being recorded.

At this time, I'd like to turn the conference call over to Mr. Ashish Kohli, Head of Investor Relations for Chipotle. Please go ahead.

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Ashish Kohli, Chipotle Mexican Grill, Inc. - Head of IR [2]

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Hello everyone, and welcome to our fourth quarter 2018 earnings call. By now, you should have access to our earnings press release. If not, it may be found on our Investor Relations website at ir.chipotle.com.

I will begin by taking you through our legal safe harbor and cautionary declarations. Certain statements and projections of future results made in this presentation constitute forward-looking statements that are based on our current market, competitors and regulatory expectations, and are subject to risks and uncertainties that could cause actual results to vary materially. These statements will include commentary about our expected business strategies for 2019, including initiatives to support our digital system as well as forecast of expected comparable restaurant sales increases and new restaurant openings for 2019, expectations for food, labor and marketing costs, G&A expense and our effective tax rate for 2019 as well as other statements of our expectations and plans. Except to the extent required by law, we undertake no obligation to update publicly any forward-looking statement after this presentation whether as a result of new information, future events, changes in assumptions or otherwise. Please see the risk factors in our latest Form 10-K and subsequent Form 10-Qs for a discussion of risks that may cause our results to vary from any forward-looking statements.

Our discussion today will include non-GAAP financial measures. A reconciliation of those measures to GAAP measures can be found via the link included on the presentation page within the Investor Relations section of our website. We will start today's call with prepared remarks from Brian Niccol, Chief Executive Officer; and Jack Hartung, Chief Financial Officer, after which we will take your questions. Our entire executive leadership team is available during the Q&A session.

With that, I will now turn the call over to Brian.

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Brian R. Niccol, Chipotle Mexican Grill, Inc. - CEO & Director [3]

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Good afternoon. Thank you, Ashish, and welcome to the Chipotle team. We're really excited to have you onboard. Additionally, I'm also happy to share that we have hired our Chief Development Officer, Tabassum Zalotrawala in December, and therefore completing my executive leadership team. I'm confident Tabassum will make a terrific contribution to our development organization.

With that, I'm very pleased to report strong fourth quarter results with 6.1% comparable restaurant sales growth that included 2% transaction growth; restaurant level margins of 17%, 210 basis points over last year; and earnings per share adjusted for unusual items was $1.72. I'm also pleased to report for the full year 2018, restaurant average unit volumes achieved $2 million, and our digital business went beyond $0.5 billion, representing 10.9% of sales.

The growth acceleration this quarter gives us confidence that our strategy to win today and create the future is working. When we connect with guests in culturally-relevant marketing, focused on Chipotle's great taste and real ingredients, and provide more convenient access with less friction, they respond enthusiastically. I'm excited about the momentum we've built heading into 2019.

Now before I talk about the future, let me review the many positive changes at Chipotle during 2018 by going through the 5 key pillars that drive our purpose of cultivating a better world. The first is to be more visible with culturally-relevant communication and innovation that increases brand engagement.

Our marketing mandate is to drive culture, drive a difference, and ultimately, drive a Chipotle purchase. In late September, we launched our 4-wheel advertising, showcasing Chipotle's point of difference in real ingredients and real cooking techniques. We drove significant awareness of the brand through a holistic media plan and culturally-relevant programming. We published our entire ingredient list for the world to see in Times Square, across numerous social and digital channels, a full page ad in The New York Times and in our restaurants, with the headline, the hardest ingredient to pronounce at Chipotle is chipotle.

The next iteration of the 4-wheel campaign, called Behind the Foil, is launching February 11 and builds on this success. It feels more like a documentary than traditional advertising, and showcases our fresh ingredients, food preparation, and celebrates the work our talented team members do every day in our restaurants to provide our guests a great dining experience.

Our Free Delivery Bowl offering, which ran from December 17 to January 7, helped expand access, and was not only a great way to attract new guests to our app and delivery capabilities, but also to Chipotle, as nearly half of the guests taking part in this offer were new or lapsed users. Collectively, these marketing initiatives helped drive a noticeable lift in sales during the second half of the year.

Additionally, beginning January 2, we launched our first menu innovation, called Lifestyle Bowls, for mobile and web orders that really resonated with consumers in a big way. It generated over 1.3 billion earned media impressions in the first few days of January.

Overall, Chris Brandt and his team have done a great job of making Chipotle more visible and culturally relevant in social and traditional media channels. For example, our 2018 overall digital impressions increased nearly 20% year-over-year, while social impressions increased nearly 40% year-over-year. This was all accomplished without increasing our overall marketing budget.

Going forward, you can expect Chipotle to continue to be a part of culture, have a presence in national media where and when it makes sense, and to have an always-on social and digital program. I'm excited about the continued evolution of our marketing strategy as I look into our 2019 plans.

Our second pillar is to digitize and modernize our restaurant experience with enhanced access and less friction, creating a more convenient and enjoyable guest experience. We continue to hear the #1 reason consumers eat elsewhere is because they don't have convenient access to Chipotle. In 2018, we opened 137 new restaurants with industry-leading returns, and we'll continue to be one of the leaders in the developing new restaurants. For our existing restaurants, we completed the big fix and stayed focused on expanding the reach of our digital system to provide our guests easier access and greater convenience.

The digitized make-lines are now in over 1,000 restaurants and remain on track to be in all restaurants by the end of 2019. The digital pickup shelves are in approximately 1,000 restaurants, and we're moving quickly to get them in all our restaurants by the middle of 2019.

Curt Garner and his team continued to build momentum in digital this quarter, with digital sales growing 66% year-over-year, an acceleration from the 48% we saw last quarter. Digital sales totaled $158.6 million during the fourth quarter and represented 12.9% of sales. For the full year, digital sales exceeded $0.5 billion and accounted for 10.9% of sales. App downloads increased 72% year-over-year in 2018, and we continue to see strong interest from new, infrequent as well as frequent guests at Chipotle.

Similar to last quarter, we saw a particularly strong traction in delivery. Although off a relatively low base, delivery sales increased roughly thirteen-fold compared to the fourth quarter of 2017. The Free Delivery Bowl promotion drove growth in the latter part of December, offsetting normal expected seasonality. Encouragingly, we are seeing some residual lift in delivery sales that last beyond the promotion, and have seen very little guest overlap between our own in-app delivery and our third-party delivery partner apps.

As we continue to remove friction from the digital ordering and pickup process, we expect our delivery time advantage to continue to widen. Based on data shared with us by our white label delivery partner, we are consistently among the quickest delivery times in their system, and we expect this to only get better with the addition of pickup shelves and delivery prepay capabilities that enable delivery drivers to walk in, pick up their order and walk out without any delays.

As part of our goal to increase access, we are also exploring a new format that leverages digitally-enabled convenience. Our test of the initial 10 restaurants with the mobile order pickup lane that we call Chipotlane, is showing promising results with a higher mix of digital sales and total restaurant sales. We'll continue to explore and learn about this opportunity by opening a few dozen more Chipotlanes in 2019 with a mix of freestanding and end-cap builds. These restaurants are a great extension of our digital system as they help to increase convenience and access to Chipotle.

We're also encouraged by our loyalty test sign-ups and early user data. As we have seen with our app, we are seeing a nice mix of new, lapsed and medium-frequency guests, and while still early days, we are pleased to see changes in behavior across all frequency bands. Our stage-gate process is working, and we are making changes based on the feedback received thus far, and remain on track for a national launch in 2019.

Our third pillar is to run restaurants with great hospitality and fast throughput in a great environment. During Q4, we rolled out several operational improvement initiatives to drive better food, feel and flow. This includes training that reiterates our 4 pillars of hospitality, which are: Be and look your best, Be guest obsessed, Surprise and Delight, and Make it Right. In an effort to enhance our best-in-class food safety program, we adopted a quarterly food safety training requirement, which trains crew members on their role in keeping our food safe every quarter. In addition, we implemented a new prep process we called focus prep. Focus prep reduces the number of people preparing our great food, which makes it more consistent as well as food safe. Ancillary benefits include better service, as our hospitality teams are now singularly focused on delivering a great guest experience. And the GM is now in a position to lead the restaurant versus managing every single process of the production. Our teams have embraced this new process quickly, and we are already seeing benefits from the rollout.

In the coming year, Scott Boatwright and his team are focused on team stability, throughput and consistently great-tasting food. Additionally, reducing turnover, particularly at the GM level through better leadership training and a clear direction on career progression, are critical factors to our long-term success. Internally, we're calling this the year of the general manager. We're also doubling down on throughput training and providing our teams with an easy-to-use dashboard that provides greater visibility on their throughput performance.

Lastly, we are elevating our culinary prowess through chef-driven cooking demonstrations as well as consistently executed line tastings to ensure our food is cooked to perfection every day.

In the first half of 2019, we are also launching Cultivate You 2.0, whereby we bring leadership training to the restaurant general manager level to further drive in-market talent development. As a reminder, we retrained all of our field leaders during Cultivate You sessions at our corporate support centers throughout 2018. We previewed many of these initiatives at our All Managers Conference last fall, and our managers know that when I'm visiting with them in their restaurants, I'm always going to ask their team, how's the culture? And how is throughput here? I'm going to ask our general managers about team stability, the development of our team members, and obviously, the food safety 7. And of course, since we're a restaurant company, we're going to be doing food tastings. It's clear from my numerous restaurant visits this quarter that Scott and his field leadership team are making tremendous progress and are focused on the right operational initiatives.

The fourth pillar is to be disciplined and focused in order to enhance our powerful economic model. Our biggest lever remains sales and transactions growth. Over the past year, we've become more strategic about pursuing projects that generate sales growth and healthy returns. We're in the process of building sales growth layers for multiple years and putting them through our stage-gate process to ensure we are learning and iterating prior to national launches. While we are focused on winning today, we are also cultivating our future.

Last but not least, we are building a great culture of accountability and creativity. This is one of the things that I'm most pleased about, as we've made significant progress during 2018 in rebuilding Chipotle into an organization with an inclusive culture that sets us up to be more innovative, more connected to what our guests want, and better at executing so that we can capitalize on the tremendous growth opportunities ahead of us.

Our people are our biggest asset, and I could not be more proud of the team we have assembled. With our restructuring and relocation largely behind us, we are well on our way to building an organization with best-in-class and diverse talent that is dramatically improving our ability to deliver great food and service to our guests. I love the energy and enthusiasm I see every day when I'm with our employees in our restaurants and in our support centers.

Chipotle has always thrived by being different, by being the best version of ourselves, not another version of someone else. And we've earned the deep loyalty of our guests because we are different and deliver a unique experience. And being different means always changing. Right now, we are investing in many areas that further position us to win.

So as you think about 2019, the main initiatives that ladder up to our 5 key pillars are: digital system investments, which includes pickup shelves, digitized make-lines, loyalty and delivery; marketing programs that celebrate our real ingredients and classic cooking techniques; elevating our core menu by developing innovation that leads food culture and meets guest requests and lifestyle; and of course, a dedication to improving operations with general manager stability and development, excellent throughput, consistently great food, all in a great restaurant environment.

With that, let me conclude by thanking all of our team members for their belief in Chipotle, their dedication and passion to provide our guests with a great experience, serving real food, cooked to perfection and prepared in our restaurants with fresh ingredients. Their efforts are helping Chipotle cultivate a better world. We have an exciting journey ahead of us, and while we accomplished a great deal in 2018, I believe the best is yet to come.

With that, here's Jack to walk you through the financials.

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John R. Hartung, Chipotle Mexican Grill, Inc. - CFO [4]

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Thanks, Brian. I'm really pleased with the high-quality fourth quarter results, which provide a glimpse of our powerful economic model and the leverage we can deliver when we drive top line sales and provide a great guest experience. Our marketing and digital strategies led to increased guest visits, and our restaurant teams responded by ensuring every guest enjoyed a delicious meal.

Our revenue was $1.2 billion during the quarter, an increase of 10.4% from last year, and a comp sales growth of 6.1%, our highest comp in 6 quarters. Restaurant level margins of 17% expanded 210 basis points over last year, and earnings per share adjusted for unusual items was $1.72.

The fourth quarter had unusual expenses, mostly related to the transformation, and these negatively impacted our earnings per share by about $0.57, leading to GAAP earnings per share of $1.15.

For the full year, sales were $4.9 billion on a comp sales increase of 4%. Restaurant level margins were at 18.7%, up 180 basis points, and we generated earnings per share adjusted for unusual expenses of $9.06, an increase of 33% over last year. Unusual expenses, mostly related to the transformation, negatively impacted our earnings per share by $2.75, leading to GAAP earnings of $6.31.

In Q4, we recognized $23 million in nonrecurring expenses, with $7 million related to underperforming or closed restaurants and $16 million related to the organizational restructuring and other unusual expenses. We continue to expect transformation costs on the restructuring and restaurant closures as well as certain other charges to total between $100 million and $120 million. We recognized about $91 million of these charges during 2018, and expect that the remaining $9 million to $29 million will hit in the first half of 2019. We'll continue to provide specifics on transformational related costs each quarter so you can follow the underlying trends.

The Q4 comp of 6.1% was driven by a trend change in transactions, as 2% of the comp came from greater guest visits along with a higher average check. The check increase includes a price increase of 3.3%, which was a result of increases taken in late 2017 and at January 2018, and a mix contribution of 0.8%. Our For Real campaign during the quarter really resonated with our guests, and the Free Delivery Bowl campaign in late December made it easier than ever for our customers to enjoy Chipotle.

We expect full year comps in 2019 will be in the mid-single digit range, with the recent modest price increase contributing about 1.7%. This is lower than the 4% price increase seen in 2018. We're optimistic that with the recent trend change in transactions, plus the modest price increase combined with our 2019 growth initiatives, a mid-single digit comp is achievable.

We opened 40 new restaurants in the quarter, bringing our total count to 137 for the full year. The new restaurants opened in 2018 have continued to open up strong as our development teams have done a great job emphasizing high-quality and high-returning sites. For 2019, we continue to expect to open between 140 to 155 new restaurants, but these openings will be weighted towards the second half of the year. We expect about 10% of these openings will occur in Q1 and about 25% will open in Q2.

Food costs for the quarter were 33.2%, slightly lower than Q3, due to price increases as well as lower avocado prices based on our seasonal shift from California to sourcing from Mexico, Chile and Peru. We expect food cost to be approximately 33% in Q1 as the slight leverage from the December menu price increase is largely offset by an expected increase in beef prices. We also expect food cost for the full year to be about 33% as an expected rise in avocado prices this summer will be offset by other efficiencies. Our new supply chain team is now fully in place, and we expect to find efficiencies later in the year by strategically reviewing the sourcing of all of our ingredients. We'll keep you updated as these potential opportunities arise.

Labor costs for the quarter were 27.1%, a decrease of 40 basis points from last year. Our restaurant teams did a nice job of scheduling and managing labor in the quarter, while labor inflation in the 4% to 5% range was partially offset by the menu price increase. We expect Q1 and the full year labor to be in the low-27% range as leverage from the menu price increase and sales growth is expected to largely offset ongoing wage inflation in the 4% to 5% range.

Other operating costs for the quarter were 15.5%, a decrease of 30 basis points from Q4 of last year, and that was due to sales leverage. Marketing and promo costs were 4.2%, an increase of about 40 basis points compared to Q4 of last year, and that funded our For Real campaign in the fall as well as our Free Delivery Bowl campaign in late December. Marketing and promo finished the year at 2.9% of sales, and we expect to invest about 3% of sales in 2019, and this includes investing in the low to mid-3% range in Q1, which is higher than the 1.8% we spent the last year in Q1, as we'll launch our Behind the Foil campaign next week.

Other operating costs were also higher due to the inclusion of delivery fees, which rose with the increase in our delivery sales.

For 2019, we expect other operating cost to be in the 14% of sales or perhaps slightly lower, as sales leverage and M&R efficiencies are expected to be offset by our fast-growing delivery business. G&A for the full year was 7.7% of sales or $375 million, which included $32 million related to the transformation and other unusual expenses, $64 million in stock compensation, and nearly $11 million related to our bi-annual All Managers Conference. Without these items, our underlying G&A support totaled about $270 million in 2018. In 2019, we expect our underlying G&A support to be in the $275 million to $280 million range.

Our annual stock comp is typically approved and granted in Q1, so we'll be able to provide updated clarity during our next earnings call. And this underlying G&A does not include nonrecurring transformation costs, which we'll continue to clearly call out each quarter.

Depreciation expense for the quarter was 4.3%, an increase of 60 basis points from Q4 of last year. And this increase is due to the accelerated depreciation from the restaurant closures, as we discussed earlier, and to a lesser extent, the accelerated depreciation from our office closures. And we expect depreciation to be about 4% in 2019.

Our GAAP tax rate during the quarter was 26.3%, which is slightly lower than our underlying rate of 27.4%. In 2019, we expect our underlying effective rate to be in the 27% to 30% range. While our expected 2019 underlying effective rate has settled into a tighter range than it was throughout 2018, it may be affected from time to time by items such as executive comp-related adjustments, or deferred tax assets related to previously-issued equity. And we'll fully disclose these adjustments as they occur.

Our balance sheet remains strong, with a cash and investments balance of $677 million as of December 31. This allowed us to repurchase $45 million of our stock at an average price of $452 per share during the fourth quarter. And for the full year, we repurchased $161 million at an average of $370 per share. We also funded CapEx during the year, totaling $287 million, which is lower than the $300 million we guided early last year as we reprioritized our CapEx to support our new strategies.

In 2019, we expect CapEx will be around $300 million, with around 40% to 45% invested in new restaurants, 30% to be invested in growth-related initiatives, including digitized second make-lines and digital pickup shelves, and the remaining invested in normal upkeep of our restaurants and strategic corporate initiatives.

Our new restaurant investment will increase to an average of about $860,000 per new opening, and that's mostly as a result of further testing of the Chipotlane. The guest convenience with Chipotlane, along with the potential for superior economics, support allocating a portion of our portfolio to this new format.

In closing, we are encouraged by our fourth quarter and full year 2018 results, as our teams remain focused on the guest experience while seamlessly managing a significant restructuring and relocation. The result is a company that's well on its way to building a culture of innovation and great execution that will drive sustainable long-term growth. I'm excited about 2019, and I believe we're in a great position to win today and create a bright future for our guests, for our employees and for our shareholders.

And now we're happy to take your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question today comes from David Tarantino from Baird.

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David E. Tarantino, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research and Senior Research Analyst [2]

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Question, I guess, on the sales trends first. I think, Jack, you mentioned multiple times a change in the trend line during the quarter. So can you maybe elaborate on what you meant by that? Maybe talk about how the trends progressed during the quarter? I know you mentioned comps in October were up around 4%, so that implies quite a bit of an acceleration. So can you maybe talk about that and maybe what you're seeing so far in 2019? And then underneath that, Brian, can you maybe give an update on -- for what you think the impact from that For Real advertising campaign was on the comp trajectory? I know you pulled some of that advertising during the quarter. What kind of tail did you see from that approach when it wasn't running?

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John R. Hartung, Chipotle Mexican Grill, Inc. - CFO [3]

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Yes, David, I'll start. We talked about, during our third quarter release, that the For Real campaign did bring more customers in at that time when we talked about October sales, or actually sales in late December moving up to a higher level. We maintained that during October, and then through the quarter. October, November were pretty similar months, David. So even as we're getting near the end of For Real, we held onto those sales, and then we had a nice bump at the end of the quarter as we had the Free Delivery Bowls as we were advertising on all the college bowl games, and our customers responded in a big way. And so that was a nice acceleration. I think the things that -- the 2 things that make this really encouraging is that the For Real campaign was just resonating with our customers in terms of Chipotle stands for real food and real cooking, and that resonated with customers. And then, 2, when we made Chipotle more convenient to our customers by making it available through delivery and free delivery during the Free Delivery Bowl campaign, they responded because it was convenient access, and those are 2 levers that we can continue to pull throughout the year. In terms of January sales, it's really difficult to give you an underlying trend. We've maintained the momentum from the delivery bowl into the first week of January because we were advertising and offering the promotion through the BCS championship game. Then we also introduced the Lifestyle Bowls as well, and that created an awful lot of buzz and interest and activity as well. And then in the second half of the month, we have weather. And so really difficult to give you what the underlying trend is. I can tell you, we're just encouraged with what we saw during the quarter, and we're optimistic about how 2019 is shaping up.

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Brian R. Niccol, Chipotle Mexican Grill, Inc. - CEO & Director [4]

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David, this is Brian. The only thing I would add is the thing that was exciting to hear from consumers as well as our team members is, when we started talking about Chipotle's point of difference in regard to real ingredients, real cooking that results in just better-tasting food, everybody agrees that is why they originally fell in love with Chipotle, and that's why they're falling back in love with Chipotle. So the good news is that message is proving to be very sticky, and I think the team has done a great job of making the brand much more visible with that key point of difference, and it continues to carry momentum with the execution in the restaurant as well as the guest experience that consumers are actually having. So we're very excited. I think we mentioned, obviously, we're going to continue to pull that string, and the team's getting ready to launch kind of the next wave of the For Real campaign through Behind the Foil next week.

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Operator [5]

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Our next question comes from Sara Senatore from Bernstein.

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Leonardo Zacche Vazquez, Sanford C. Bernstein & Co., LLC., Research Division - Analyst [6]

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This is Leo for Sara. So I have a question on the restaurant margins. It seems that it went up this quarter, given the menu price increases, sales leverage. But we were just wondering if there were also some operating efficiencies in here? And if you could perhaps give more detail on what they might look like in 2019? But ideally, some kind of quantification, either the supply channel or labor metrics?

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John R. Hartung, Chipotle Mexican Grill, Inc. - CFO [7]

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Yes. There were efficiencies, and we talked about we started to see efficiencies in the third quarter, and this is the way our field teams and restaurant managers are scheduling and deploying labor. They found ways to get more efficient in the second half of the third quarter. That continued into the fourth quarter, and so that definitely drove part of the margin. The rest of it was from sales leverage and a little bit from the price increase. I think going into next year, it's really going to be more of the same. We're hoping that we'll -- or expecting that we'll hold on to the efficiencies that Scott and his team drove in the second half of this year. We're expecting with the comp guidance that we provided, with a very modest price increase, that we'll be able to offset some of the labor inflation. The biggest challenge is going to be labor inflation, and labor inflation, we expect to continue in that 4% to 5%.

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Operator [8]

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Our next question comes from Karen Holthouse from Goldman Sachs.

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Karen Holthouse, Goldman Sachs Group Inc., Research Division - VP [9]

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One quick housekeeping one, and then a real question. Could you just walk us through, given the pricing actions that have been taken, what the cadence of price through the year will be in 2019? And then there's some encouraging commentary on the loyalty test. In a best case scenario, what -- when could we think about that getting to a broader rollout?

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Brian R. Niccol, Chipotle Mexican Grill, Inc. - CEO & Director [10]

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Sure. So the way we think about pricing is we've taken a price increase of just shy of 2%, and I think we've mentioned this in prior calls, we now brought in a partner to help us manage our pricing approach going forward. So the good news for us is, even with the pricing below 2%, we continue to have the best value scores in the fast casual segment, and we're always going to want to hang onto that strength. So any pricing that we will take going forward will continue to be probably in the smaller increment than we've done historically with obviously a more frequent basis, and right now, we're working through what that frequency will look like. But through all of it, the thing that we've kept our eye on is how do we maintain the integrity of that value proposition that we provide to our consumers. Your second question on digital. The loyalty program, specifically, we're in the stage-gate process with the loyalty program. I think you've heard us talk about it. One of the things we're delighted to see is, one, the enrollments, and how -- this is one of those things that just keeps building upon itself. So when you get started with some level of enrollments, you see cohorts of people coming in, the thing that's nice to see is how those that enroll utilize the loyalty program in their behaviors, and then what's nice to see is how that builds throughout time. And what we continue to be very optimistic about is the cohorts that we're seeing are light, lapsed, medium users as well as our heavy users. But the thing that we're most interested in the data that we get on this, our ability to then turn around and remarket Chipotle to influence people's behaviors going forward. And we're still in the early days of understanding a lot of those implications, but so far, very promising, and that's why we continue to move this through the stage-gate process, still on track for a 2019 launch.

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Operator [11]

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Our next question comes from Sharon Zackfia from William Blair.

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Sharon Zackfia, William Blair & Company L.L.C., Research Division - Partner & Group Head of Consumer [12]

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Sorry if I missed this, but I think, Brian, you've talked quite a bit about throughput and the opportunity there. I don't know if that's anything where you saw any measurable progress in the fourth quarter. And then I guess, just to clarify Sara's question, can you just talk about how the price benefit will impact the quarters? So how much you're carrying in first quarter versus full year?

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Brian R. Niccol, Chipotle Mexican Grill, Inc. - CEO & Director [13]

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Yes. I'll let Jack answer the pricing question here, and then I can answer the other question around throughput. So go, Jack.

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John R. Hartung, Chipotle Mexican Grill, Inc. - CFO [14]

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Yes. The price, it's 1.7% through the first 3 quarters, and then about 1.3%, something like that. We took pricing in 2 stages during December. So it's pretty much going to be an even 1.7% through 11.5 months of the year.

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Brian R. Niccol, Chipotle Mexican Grill, Inc. - CEO & Director [15]

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And then your question on throughput. The guys have actually made a lot of progress on throughput. We just launched our throughput dashboard, and I think I mentioned this at our All Managers Conference, we reemphasized of the pillars of throughput. So we're in the process right now of giving our teams visibility that they did not have on throughput for a long time, and we're already starting to see that having an impact on our results. So it's very early, but the good news is the dashboard, coupled with the focus and going back to the core of what his business was built on, which is fundamentals of great throughput, we're already seeing an impact in the business.

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Operator [16]

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And our next question comes from Joshua Long from Piper Jaffray.

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Joshua C. Long, Piper Jaffray Companies, Research Division - Assistant VP & Research Analyst [17]

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Kind of following up on that point on throughput, was curious if you could talk about the opportunity around GM turnover. I know that's something that you mentioned in your prepared comments, Brian, but just curious in where turnover levels are at now, and then how you think about kind of rebuilding that over the course of 2019 and beyond, if there's other initiatives in place or if it's really a function of just getting the messaging and things that we've talked about here thus far on the call, and then other venues, getting traction with that as we go forward?

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Brian R. Niccol, Chipotle Mexican Grill, Inc. - CEO & Director [18]

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Yes, no. Thanks for the question. I think I mentioned in my remarks earlier, we're making 2019 the year of the general manager. And the reason is because we want to improve the stability at the general manager level, and we also want to improve the development of our apprentices and general managers so that they're ready to step in the growth opportunities that are going to be presented. It's a focused effort. We actually have all of our field leaders together here in a couple of weeks where we're going to be reviewing the best ways to develop future general managers and future field leaders in this organization. And Scott and his team are very much focused on keeping stability in the restaurant with our A+ leaders. And then those leaders that need development, they get the right development, so they become A+ leaders as well. And I think what you'll see is that builds a culture of growth, both from a standpoint of career opportunity as well as sales and guest experiences. So we're very much focused on continuing to roll out initiatives to drive more stability, lower turnover at the general manager level. Because from that, that just gives us a position of strength to get better throughput, better food execution and a better environment for our customers.

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Joshua C. Long, Piper Jaffray Companies, Research Division - Assistant VP & Research Analyst [19]

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I appreciate that color. In terms of thinking about the Chipotlane and the prototype that goes along with that, how should we think about that in terms of -- for those of us who haven't seen it in person? And is there an opportunity to shrink some of that square footage as the sales mix shifts towards digital and pushing things through, or pushing sales through the app, rather?

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Brian R. Niccol, Chipotle Mexican Grill, Inc. - CEO & Director [20]

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Yes. So great question. A lot of folks probably have not seen our Chipotlane. The way -- first, I want to explain it. So you order ahead in the app or on the website, and what it does is it provides another access point at the restaurant where you don't have to get out of your car. So you are able to just pull up to a window. Our team member then has a quick conversation with you. It's a set pickup time. And then what happens is, literally, it's like, I'm here for my burrito. Out the window comes your burrito, and you never get out of your car. So arguably, it will be, possibly, the fastest way to Chipotle is going through the Chipotlane. It does require you though to order in advance and pick your pick-up time. We have that in about 10 restaurants right now. The nice thing is, we're seeing both digital sales as well as total restaurant sales, elevate with this new access point. To your question about what does it mean from a restaurant design standpoint, this is one of the reasons why I'm really excited about Tabassum on our team. She is going to have the flexibility to think through, with this new access point, what are our opportunities to change the footprint of Chipotle. And I think that means finding trade areas that historically we add volume to because we haven't had this access point, and also finding trade areas where, potentially, we could have a smaller footprint because of this access point beginning to illustrate here. So it really opens door to, I think, additional convenience with less friction and get people to Chipotles closer to where they want a Chipotle. So we're still in the early days, though. I do want to make sure people understand that, because it's still very much in a testing phase, and we'll continue to test, learn, iterate throughout 2019, and we'll be happily sharing the results as we get them.

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Operator [21]

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Our next question comes from John Glass from Morgan Stanley.

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John Stephenson Glass, Morgan Stanley, Research Division - MD [22]

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I wanted to ask about delivery. First, how much of the fourth quarter sales, particularly, I guess, December sales results, do you ascribe to delivery? And particularly, that free offer, how much [complice] did that give you, if you can tease it out? Second, you did offer free delivery earlier in the year, so it sounds like this time around, it had a greater impact on sales. Why do you think that was? And third, maybe, Jack, I know you've talked about delivery economics in the past, but just to be clear, when you look at the delivery sale, I think it's generally understood it's lower margin because of the commission, and it's hard to offset that even if it's a higher check. Is that the way you think about it? Or do you think yours is structured somewhat differently? Or is somehow, there's a different proposition where you actually see a restaurant margin going up, and it's accretive, not dilutive, to restaurant margin? I'm talking about the average margin now, not maybe an incremental margin.

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Brian R. Niccol, Chipotle Mexican Grill, Inc. - CEO & Director [23]

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John, I'll touch on the first part, and then I'll let Jack share on your margin question. Two things to think about. The first time when we did the delivery promotion, it was not available both through in the app and across the marketplace. Now delivery is accessible both in our app and across marketplace. The other thing I would share with you is we now have more coverage of our restaurants than we did when you go back the first time we did this. The other key piece of the puzzle, obviously, is I think our marketing team and Chris did a great job of smartly connecting the idea of delivery to an event that was happening in a lot of people's homes. That just made the occasion that much more relevant. So I think it's a combination of more access, more visibility, the access being in our app, in the marketplace, and then the visibility being done through television-type communication, that basically tripped a thought for the consumer, hey, I should be doing Chipotle at home while I'm doing this event. So I think the combination of all those things just built on top of each other to really drive our delivery business in the fourth quarter. And the thing I'm excited about is the delivery business continues to stay with Chipotle because the speed at which it gets delivered, I think we talked about this before, we're still best-in-class when it comes to speed. And the second piece is our food is really great when it gets delivered. That burrito, it's really delicious. And so to get people delicious food in roughly 30 minutes at home while they're watching whatever they're watching, appears to be a good idea for our consumer. And Jack, I'll let you answer the margin question.

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John R. Hartung, Chipotle Mexican Grill, Inc. - CFO [24]

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Yes. John, the way to think about margin, first of all, is Chipotle is really set up where our operations are geared towards great delivery experience from -- through the entire process for our crew, for the driver and for the customer. First of all, let me start with our second make-line sales before you consider delivery has higher margins than our frontline sales. Okay. So we start with an advantage there. We have a second make-line, which means our operators are set up to take these extra sales. We're not running the sales through or the preps in through the same frontline that our customers are waiting through. We're investing to make that experience even better with digitizing the second make-line. So our capacity is going to go up, our accuracy is going to go up, and our timeliness is going to go up. We have stated times where when a delivery driver comes in, they know they can come to Chipotle at X time, they know that it's going to be ready. And we're putting shelves in a restaurant as well, and we're about to launch prepaid for -- even for our delivery partner so that there's no stopping to pay for the order. So everything is set up to be very efficient, very seamless in everything we do. There is a delivery fee, but John, the -- right now, the incrementality is so high. As long as these are extra customers, additional customers coming to Chipotle, we can cover the fee because our margin starts not at a higher level, but because it's incremental, we still can cover the fee and it's still accretive. So it's not just that it's profitable, it's accretive to our margins the way we've got it set up right now.

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John Stephenson Glass, Morgan Stanley, Research Division - MD [25]

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And Jack, just to be clear, you're talking about accretive to the consolidated average margin, not an incremental margin, that the second make-line can -- and higher check or whatever else elements, can offset that commission fee. Is that the way you look at it?

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John R. Hartung, Chipotle Mexican Grill, Inc. - CFO [26]

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That's right, John. When we're at a high-19s margin, when we cover the delivery fees, our margins are still much higher than the 19%. Now if you're going to compare this to an incremental customer that's going to order on their app and come in and pick it up, that is our highest margin transaction in the whole restaurant. When you then attach a delivery fee, it's going to be lower, but it's still going to be a very, very attractive margin. And again, the way we set this up, it is so convenient for everybody involved, our crew, the driver and the customer. We think our growth is just going to continue to grow here. We think it's going to continue to be incremental. And so we're bullish on where this goes, both from a sales as well as a margin standpoint.

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Operator [27]

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Our next question comes from John Ivankoe from JPMorgan.

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John William Ivankoe, JP Morgan Chase & Co, Research Division - Senior Restaurant Analyst [28]

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Yes, a couple, if I may. Firstly, overall -- if we do think about -- like what is going to be necessary at this point in terms of adding other customers in terms of your peak day parts? I mean, are we at the point now where overall throughput is now at the point where that customer can be reached? And then secondly, in terms of the shoulder periods that we've talked about before, between the 2 and 5, for example, if there are now programs in place to meet the shoulder periods that couldn't otherwise be met with the overall peak staffing and day part demand?

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Brian R. Niccol, Chipotle Mexican Grill, Inc. - CEO & Director [29]

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Yes. John, the simple answer is we still have plenty of capacity to handle more throughput during our peaks. I think we've mentioned this before. Chipotle, in the past, was doing $2.5 million, on average, out of these restaurants, and we were doing 35 transactions in 15 minutes. And we're still in the mid-20s today, albeit making progress from mid-20s. So Scott and his team know that when we have a line and they go faster, the good news is the line just keeps moving, as opposed to somebody peeling off of the line. And the peak business still has a lot of capacity when we execute throughput really well. So there's plenty of upside there. Then your question on the shoulder, the thing that's great about Chipotle is our proposition really resonates lunch through dinner, and consumers are becoming more powerless on the time of the day that they want to eat. And we're continuing to see us make progress in our throughput in those shoulder hours. But the focus right now is, those peaks, how do we get back to where we once were on that throughput because we still have so much headroom in that space, and it's just -- it's an impressive operation when you see us operating at our throughput capability. And I think we talked about this in the past. But plenty of headroom, but we have lots of focus to capture that headroom in our peaks.

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John William Ivankoe, JP Morgan Chase & Co, Research Division - Senior Restaurant Analyst [30]

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Yes. And from your perspective, it's more of a supply -- in other words, a throughput constraint than it has been a demand constraint as the numbers of customers that you serve in 15 minutes has been reduced?

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Brian R. Niccol, Chipotle Mexican Grill, Inc. - CEO & Director [31]

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Yes. Yes. I mean, look, I think our -- the good news is we smartly got our team members focused on their roles, accountability, and making great food. And now we're pivoting to, okay, now, this is how you do the 4 pillars of great throughput, which was at the core of Chipotle 5, 6 years ago. So we believe we can open more transactions during those peaks by getting people up to speed on what it's like to run the 4 pillars of great throughput in a Chipotle.

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John William Ivankoe, JP Morgan Chase & Co, Research Division - Senior Restaurant Analyst [32]

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That's great. And then secondly, if I may, on the supply chain, and I know that you've talked about this in the past. But in terms of the bigger structural changes that are happening in the supply chain, how far are we in this journey at this point? I mean, obviously, you've hired new people, you have new teams, you have a new office. I mean, you have a completely clean slate in terms of what Chipotle could be in 2020 versus 2015 or 2014. I mean, I guess, how much efficiency and effectiveness opportunity, maybe as a basis point number, I think we'd all love that. But whatever it is, maybe just a quality number or a service number that you can talk about in terms of the work that you've done on the supply chain in terms of how much that could deliver going forward?

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Brian R. Niccol, Chipotle Mexican Grill, Inc. - CEO & Director [33]

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Yes. And I think -- we've talked about this, and I think you're -- you categorized it correctly. We've got a new leader with Carlos, and we are really taking a clean sheet to how we approach our supply chain. With one caveat, throughput integrity is still going to be a key driving principle on how we operate in our supply chain. So that means supporting the farmer, supporting the right animal welfare, and then also protecting clean food and farming practices that we believe is the future of food culture. With that said, I think Carlos and his team, working with Jack, have already started to identify opportunities for our business that we're going to attack. And as we understand what that really means for the business, I'm sure Jack and myself will update you guys. But right now, it'd be premature to give a specific number, John, on what that entails. But I think it's part of one of our pillars of doing our business, which is we need to take a disciplined approach to protecting the economic model at Chipotle. And that's what we've tasked Carlos to do here. So I don't know if you want to add anything to that, Jack.

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John R. Hartung, Chipotle Mexican Grill, Inc. - CFO [34]

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No. The only thing I would say is it's a whole new team as well, John. And so we're fully staffed right now. The team is up and running. It's really a great team that believe in the Chipotle purpose. They believe in Chipotle, our ethos of sourcing high-quality, sustainably-raised food, and they've had a significant outreach to all of our suppliers. So we're really optimistic about the team, about the relationship with our suppliers. And Brian's right though, there's nothing to report right now. But if there's opportunities there, I'm confident this team's going to find them.

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Operator [35]

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Our next question comes from Greg Badishkanian from Citi.

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Gregory R Badishkanian, Citigroup Inc, Research Division - MD and Senior Analyst [36]

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Just your 2019 comp guidance calls for mid-single-digit same-store sales. Should we expect an inflection at some point? Or do you think it's really just kind of a slow and steady march back to the $2.5 million AUV level? You achieved 4% last year. So just kind of steady and slower would you expect the inflection point?

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Brian R. Niccol, Chipotle Mexican Grill, Inc. - CEO & Director [37]

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Yes. Look, obviously, I think the way we think about this is if we do the right marketing with the right communication, our consumers will respond enthusiastically to the Chipotle business. And is that slow and steady, is it inflection? That's not what we're focused on. What we're focused on is how do we get to a place where we're communicating the things that are meaningful to people about Chipotle, we're doing the initiatives that we believe will drive returns and growth, and we're running great operations so that when people come in, they have a world-class experience and they want to come back. I think we do all those things right, we'll continue to be rewarded with customers' business, and we'll be continued to be rewarded with employee loyalty and engagement. So we're optimistic about the various initiatives we have in our stage-gate process and how we're going to attack growth going forward, but what we're really zeroed in is how do we make sure we run great operations, do the right initiatives, and then give the consumer the message that makes them feel good about being a part of Chipotle. That's when we'll get rewarded with sales and transactions. How that plays out, we'll update you guys quarterly.

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Operator [38]

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Our next question comes from Jeffrey Bernstein from Barclays.

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Jeffrey Andrew Bernstein, Barclays Bank PLC, Research Division - Director & Senior Equity Research Analyst [39]

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Brian, you mentioned the 2 areas of focus for 2019. I'm just wondering, as you internally, I guess, think about measuring success, I mean, are you more focused, do you think, on the comp to kind of drive kind of the acceleration in traffic? Or do you think about it more as you've got the comp momentum back, now you're focused more on the margin. Just trying to think of this comp upside to '19 versus the mid-single-digit level. Especially because you're off to a strong start with the initiatives kicking in, whether or not you'd be reinvesting that in the variety of initiatives you have, or the initiatives really require stage-gating, and therefore, they would be more fluid through the margins and earnings in '19 if you were to beat that comp expectation.

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Brian R. Niccol, Chipotle Mexican Grill, Inc. - CEO & Director [40]

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Yes. Look, obviously, we're concerned about both, is the way I would respond to your question. We want to invest in the business so that we continue to drive momentum in sales and transactions, because the best -- look, the best leverage for that kind of model here is growing sales and transactions. We do that well, our margins will expand. At the same token, I think this is kind of, to somebody's question earlier, where there's opportunities to be efficient or take some of the upside to the bottom line, if we don't have an investment vehicle that would suggest you should go reinvest it, we'll take it to the bottom line. So the thing I'm excited about though at Chipotle is, we've got a lot of levers, and we're validating what those levers are worth through the stage-gate process, whether it's a delivery program, a loyalty program, a menu innovation or an ops initiative around throughput. We're starting to better understand how these things play out, both from a top line and then how close to the bottom line, and we're going to continue to run that balancing act. Because ultimately, and I think Jack has talked about this in the past, we want to get back to that 2 4, 2 5 with the margins that would be best-in-class at 2 4 or 2 5. So we're really striving towards doing both.

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Jeffrey Andrew Bernstein, Barclays Bank PLC, Research Division - Director & Senior Equity Research Analyst [41]

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Got it. And just because you mentioned the delivery and the loyalty and the menu, it seems like you have a variety of initiatives that there is stages of rollout as we think about '19. I know you started -- it seems like you're starting the year strong, it seems like, if you back into it, maybe December was up in the 10% range, so obviously, there's some nuances in short-term trends, but you're starting very strong. I'm just wondering whether you're expecting the comp to accelerate through the year, or whether for some reason you're posing some things in, some things out, that we shouldn't expect comps to accelerate through 2019 versus where they are today.

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Brian R. Niccol, Chipotle Mexican Grill, Inc. - CEO & Director [42]

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Yes. Look, I think we talked about this, right? The fourth quarter, we definitely saw a trend change with the combination of, I think, improving operations, a more penetrated digital system, delivery having more coverage, and being more visible about the point of difference in Chipotle. We're going to keep doing that in 2019, because we believe those are the right strategies to engage with our customers in a unique way. So what I would say is, we feel really good about the strategies and the programs we have in place. The trick for us in 2019 is executing those with excellence so that we maximize what each of those are worth. But I know -- I think it's really important for people to understand, it's a multi-lever that we've got going on here: great operations, a great digital system, more visible marketing that is more resonant than we have been in the past, coupled with some smart innovation, both done in digital and in the menu. So we're going to continue to drive that. It served us well in '18, and we believe it's going to continue to serve us well in '19.

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Operator [43]

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Our next question comes from Andy Barish from Jefferies.

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Andrew Marc Barish, Jefferies LLC, Research Division - MD and Senior Equity Research Analyst [44]

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Yes. Just a couple of points on the physical plan. Chipotlane, are you -- are those newbuilds as well as remodels? And then secondly, on the new stores, could you discuss kind of a recent performance history on new store openings relative to the $2 million system average where those stores are kind of coming in?

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Brian R. Niccol, Chipotle Mexican Grill, Inc. - CEO & Director [45]

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Sure. So your question on the Chipotlanes, it is really a newbuild effort. We are -- we're going to do 1 or 2 kind of remodel efforts. But the emphasis of this going to be really a newbuild approach going forward. I believe that's what our learnings would suggest to date. And then your question on the economics around our new openings, they continue to really perform with great opening volumes as well as terrific returns, both on a 1- or 2-year basis. Jack, I don't know if you want to add any more.

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John R. Hartung, Chipotle Mexican Grill, Inc. - CFO [46]

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Yes, just, Andy, I would say it's relative to some of the best results we've had historically. Meaning, they're about 80% or even a little bit higher than what our existing mature stores are. And so it's right where we hoped it would be. You might remember a few years ago, we had fallen down to about 70% of the average mature stores, so we closed that gap, and the quality really is really, really attractive. The team's done a great job.

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Operator [47]

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And our final question today comes from Andrew Charles from Cowen and Company.

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Andrew Michael Charles, Cowen and Company, LLC, Research Division - Director [48]

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Just, Jack, one quick housekeeping question, and then Brian, one question for you. Should we interpret mid-single digit same store sales guidance for 2019 to mean 4% to 6% or 3% to 5%? And then, Brian, why isn't the effect -- just playing devil's advocate, why isn't the effectiveness of the marketing spend you saw in 4Q, that 4.2%, why doesn't that lead you to rethink the 3% of marketing spend budget planned for 2019, because clearly, the efforts are working?

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John R. Hartung, Chipotle Mexican Grill, Inc. - CFO [49]

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Yes, just the housekeeping real quick. When I say mid -- low is 1, 2, 3. Mid is 4, 5, 6. So I'm saying somewhere in that 4, 5, 6% range.

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Brian R. Niccol, Chipotle Mexican Grill, Inc. - CEO & Director [50]

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And yes, to your question in regard to marketing as a percent of sales. The -- I think the way we thought about this is, how do we have a communication program that will get the brand to be visible where we want, when we want. And to Chris and the team's credit, as they've looked at the existing budget, we don't see a problem being able to allocate those dollars in such a way where we can be where we want, when we want and how we want to show up. I think we mentioned this in the past. If we find ourselves in a place where, look, there's an opportunity for us to go beyond the 3%, we're not afraid to go do it. But as of right now, we believe reallocating the budget is the better way to go to optimize the result we're looking for right now. But Chris appreciates that question, I'm sure. So thanks for the question.

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Operator [51]

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And ladies and gentlemen, at this time, we've reached the end of today's question-and-answer session. I'd like to turn the comments call back over to management for any closing remarks.

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Brian R. Niccol, Chipotle Mexican Grill, Inc. - CEO & Director [52]

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Okay. Well thank you, everybody, for taking the time. I just want to reiterate again how proud I am of the culture we're creating here, the leadership team that we've put in place over the last 9 to 10 months and the fact that our reorganization, a lot of it is behind us, and what we're really focused on now is executing our strategies so that we show up for our customers where they want us, how they want us. And then for our team members, that we continue to develop them, grow them, and get the opportunities of growth. I think Chipotle is a one-of-a-kind brand, and our goal here going forward is to continue to drive that one-of-a-kindness with customers and everybody who chooses to be a part of Chipotle. So thank you for taking the time, and appreciate all the questions. Take care.

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Operator [53]

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Ladies and gentlemen, that does conclude today's conference call. We do thank you for attending. You may now disconnect your lines.