Good afternoon and welcome to the Chipotle Fourth and Fiscal Year End Results Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please also note today’s event is being recorded. At this time, I would like to turn the conference call over to Mr. Ashish Kohli, Head of Investor Relations for Chipotle. Please go ahead..

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, competitive 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 the 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..

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 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 is Jack to walk you through the financials..

Thanks, Brian. I am really pleased with the high-quality fourth quarter results, which provide a glimpse of our powerful economic model and a leverage we can deliver, 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 comp sales growth of 6.1%, our highest comp in six 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 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 non-recurring 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 cost from 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 will continue to provide specifics on the transformation-related costs each quarter, so you can follow the underlying trend. 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 in January of 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 are 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 costs 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 costs 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 set to find efficiencies later in the year by strategically reviewing this sourcing of all of our ingredients. We will 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 in 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 last year in Q1 as we 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 costs 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 biennial All Manager 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 will be able to provide updated clarity during our next earnings call.

And this underlying G&A does not include non-recurring transformation costs, which will 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 it’s increased 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%. For 2019, we expect our underlying effective rate to be in the 27% to 30% range.

While expected 2019 underlying effective rate has settled into a tighter range than it was throughout 2018, it maybe effective from time-to-time by items such as executive comp related adjustments or deferred tax assets related to previously issued equity and we will fully disclose these adjustments as they occur.

Our balance sheet remains strong with 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 guests convinced 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 results as a company that is well on its way to building a culture of innovation and great execution that will drive sustainable long-term growth.

I am excited about 2019 and I believe we are 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 are happy to take your questions..

[Operator Instructions] Our first question today comes from David Tarantino from Baird. Please go ahead with your question..

Hi, good afternoon and congrats on the progress you made last year. Question I guess on the sales trends first. I think, Jack, you mentioned multiple times 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 are 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 and 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? Thanks a lot..

Yes. Hey, David, I will start. We talked about during our third quarter release that the For Real campaign did bring more customers in at that time and we talked about October sales or actually sales in late September moving up to a higher level.

We maintain that during October and then through the quarter, October, November, were pretty similar months, David.

So even as we are getting near the end of For Real, we held on to 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 nice acceleration.

I think the things – the two things that make us 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 two when we made Chipotle more convenient to our customers by making available through delivery and free delivery during the Free Delivery Bowl campaign.

They responded, because it was convenient access and those are two 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 maintain the momentum from the delivery bowls end of the first week of January, because we were advertising and offering the promotion through the BCS Championship game. Then we also introduced the lifestyle bowl as well and that created a 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 are just encouraged with what we saw during the quarter and we are optimistic about how 2019 is shaping up..

Hey, 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, a point of difference in regard to real ingredients, real cooking that results in just better tasting food.

Everybody agrees that is why they originally found what with Chipotle and that’s why they’re falling back in love with Chipotle. So the good news is that message is proving 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 are very excited, I think we mentioned obviously, we’re going to continue to pull that string and the team is getting ready to launch kind of the next wave of the For Real campaign through Behind the Foil next week..

Great, thank you..

Our next question comes from Sara Senatore from Bernstein. Please go ahead with your question..

Hi, this is Leo for Sarah. 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 efficiency in here and if you could perhaps give more detail on what they might look like in 2019, but ideally some kind of quantification through the supply chain or labor metrics? Thanks..

Yes. They 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. And then going into next year, it’s really going to be more of the same. We are hoping that will or expecting that will hold on to the efficiencies that Scott and his team drove in the second half of this year.

We are expecting with a comp guidance that we provided with a very modest price increase that we will 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%..

Thank you..

Our next question comes from Karen Holthouse from Goldman Sachs. Please go ahead with your question..

Hi, thanks for taking the question.

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

Sure. So, the way to thing about pricing is, we take in 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 of below 2%, we continue to have the best value scores in the fast-casual segment and we’re always going to want to hang on to that strength.

So, any pricing that we will take going forward, will continue to be probably in smaller increments than we’ve done historically, with obviously 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 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 on itself.

So, 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, like last meeting users as well as our heavy users.

But the thing that we’re most interested in has the data that we get on this, our ability to then turn around 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 are very promising, and that’s why we continue to move this through the stage gate process, still on track for 2019 launch..

Our next question comes from Sharon Zackfia from William Blair. Please go ahead with your question..

Hi, good afternoon. I’m 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 Sarah’s question, can you just talk about how the price benefit will impact the quarter.

So, how much are carrying in first quarter versus full year?.

Yes, I’ll let Jack answer the pricing question here. And then I can answer the other question around throughput. So, go ahead Jack..

Just make sure price, it’s 1.7 through the first three quarters. And then about 1.3, something like that. We took the pricing in two stages during December. So, it’s pretty much going to be an even 1.7 through 11.5 once a year..

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 in our All Manager Conference, we reemphasize the pillars of throughput.

So, we’re in the process right now, giving our teams visibility that they’ve not had on throughput in a long time. And we’re already starting to see that have 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 this business was built on, which is fundamentals of great throughput. We’re already seeing an impact in the business..

And our next question comes from Joshua Long from Piper Jaffray. Please go ahead with your question..

Great, thank you for taking my question. Kind of following up on that point on throughput, I was curious if you can talk about the opportunity around GM turnover. I know that’s something that you mentioned in your prepared comments, Brian, but just curious on 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 in the call and then other venues getting traction with that as we go forward?.

Yes, 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 of 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 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 plus leaders and then those leaders that need development, they get the right development, so they become A plus 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 with right initiatives to drive more stability, lower turnover at the General Manager level, goes from that, that just gives us a position of strength to get better throughput, better food execution, and better environment for our customers..

I appreciate that color. Thank you so much. In terms of thinking about the Chipotle lane and the prototype that goes along with that.

How should we think about that in terms of, for those of us who haven’t necessarily seen it in person and is there an opportunity to shrink some of that square footage as the sales make shifts towards digital and pushing things through or pushing sales through the app rather?.

Yes, so great question. A lot of folks probably have not seen our Chipotle lane. 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, you just said pickup time and then what happens is, literally it’s like, I’m here for my burrito, out of the window comes your burrito, you never get out of your car.

So arguably, it will be possibly the fastest way to Chipotle is going through the Chipotle lane. It does require you though to order in advance and pick your pickup 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 reason why I’m really excited to have 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 haven’t gone into, 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 to get into those trade areas.

So, it really opens the door, so I think additional convenience with less friction and get people to Chipotle closer to where they want a Chipotle. So, we’re still in the early days, so I do want to make sure people understand that.

This is still very much in a testing phase and we will continue to test, learn, iterate throughout 2019 and will be happily sharing the results as we get them..

Great thank you so much..

Our next question comes from John Glass from Morgan Stanley. Please go ahead with your question..

Thanks very much. I wanted to ask about delivery. First, how much of the fourth quarter sales particularly, I guess December sales results you ascribe to delivery and particularly that free offer, how much accomplish did that give, 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 a 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 the higher check.

Is that the way you think about it, or do you think yours is structured somewhat differently, or 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?.

So, 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, tied to an occasion that basically trip to what 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.

I think I’m excited about it, it 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, it appears to be a good idea for our consumer. Jack, I’ll let you answer the margin question..

Yes, John, the way to think about the 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, is higher margin than our frontline sales, because we start with an advantage there.

We have a second make line which means our operator setup who take these extra sales, we’re not running the sales through or the production through the same frontline that our customers are waiting through. We’re investing to make that experience even better with digitizing the second make lines.

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 stayed at times where when a delivery driver comes in, they know they can come in Chipotle at x time. They know that it’s going to be ready.

We are putting shelves in our restaurant as well and we’re about to launch prepaid for even for our delivery partners, so that there is 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, 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 morning starts out at a higher level, because it’s incremental. We still can cover the fee and it’s still a 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..

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 offers in higher check or whatever else elements can offset that commission fee, is that the way you look at it?.

That’s right John. When we are at a 19 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 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 attractive margin and again the way we’ve set this up, it is so convenient for everybody and about our crew, the driver and the customer.

We think our growth is just going to continue to grow here we’re just going to continue to be incremental and so you know we’re bullish on where this goes both from the sale as well as margin standpoint..

Thank you..

Our next question comes from John Ivankoe from JPMorgan. Please go ahead with your question..

Hi, just a couple if I may. Firstly overall, if we do think a while like what is going to be necessary at this point in terms of adding other customers in terms of your peak day parts are, we at the point now where overall throughput is now at the point where that customer can be reaching.

And then secondly in terms of the shoulder periods that we’ve talked about before in between the 2 and 5, for example, if there are now programs in place, again it’s meet, the shoulder periods that couldn’t otherwise being met with the overall peak staffing and day part demand?.

Yes. Hi 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, you know, Chipotle in the past was doing $2.5 million on average out of these restaurants and you know, we were doing 35 transactions in 15 minutes and we’re still in the mid-20s today.

I’ll be at making progress from the 20, so, you know, Scott, 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, you know, the thing that’s great about Chipotle is our proposition really resonates lunch through dinner and consumers are becoming more hour-less on the time of 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’ve talked about this in the past, but plenty of headroom, but we have lots of focus to capture that headroom in our peaks..

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 number of customers like you serve for 15 months has been reduced?.

Yes, yes, I mean, look, I think our – the good news is, we smartly guide 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 four pillars of great food, but which was at the core of Chipotle 5 years, 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 four pillars of great throughput in a Chipotle..

That’ great, thank you. And then secondly, if I may, on the supply chain, and I know you 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 hire new people, you have new teams, you have new office, and 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 there’s a basis point number, I think we’d all love that.

But whatever it is and then maybe there’s 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?.

Yes, I think we’ve talked about this and I think you categorize 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. But one caveat, food with 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 to pull back and that’s what we task Carlos to do here. So, I don’t know, if you want to add anything to that Jack..

No, it’s just the only thing I would say, it’s a whole new team as well John. So, we’re fully staffed right now. The team is up and running, it’s really a great team that believes in Chipotle purpose.

They believe in Chipotle, our ethos of sourcing high-quality sustained [indiscernible] food, and they’ve had significant outreach to all of our suppliers.

So, we’re really optimistic about the team, about the relationship with our suppliers and Brian is right though there’s nothing to report right now, but if there’s opportunities there, I’m confident this team is going to find them..

Thank you..

Our next question comes from Greg Badishkanian from Citi. Please go ahead with your question..

Great. Thanks. Just your 2019 comp guidance calls for mid-single digit same-store sales. Should we expect an inflection at some point or 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 inflection point?.

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 continue 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..

Alright. Thank you..

Yes..

Our next question comes from Jeffrey Bernstein from Barclays. Please go ahead with your question..

Great. Thank you very much. Brian, you mentioned a few areas of focus for 2019, I’m just wondering as you internally I guess, think about measuring success.

I mean, you’re more focused, do you think on the comp to kind of drive kind of acceleration in traffic or do you think about it more as you’ve got the comp momentum back and are you focused more on the margin, just trying to think if 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 a variety of initiatives you have or the initiatives really require stage-gating, and therefore, there would be more flow through the margins and earnings in ‘19, if you would have beat that the comp expectation?.

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 the economic 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 reinvesting, will 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 with those levers at work 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 it flows to the bottom line, and we’re going to continue to fund that balancing act. Because ultimately, and I think Jack has talked about this in the past, we want to get back to that 24, 25 with margins that would be best-in-class at 24 and 25.

So, we’re really striving towards doing both..

Got it. Just because you mentioned the delivery and the loyalty in the menu, it seems like you have a variety of initiatives at various stages of rollout as we think about ’19. And as you started – like you started in the year strong, it seems like you are 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 get posting some things and some things out that we shouldn’t expect comps to accelerate through 2019 versus where they are today?.

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, 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 with each of those at work.

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 as well in ‘18 and we believe it’s going to continue to serve as well in ‘19..

Thank you..

Our next question comes from Andy Barish from Jefferies. Please go ahead with your question..

Yes, just a couple of points on the physical plan.

Chipotle lane, are you – those new builds 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?.

Sure. So, your question on the Chipotle lanes, it is really a new build effort. We are going to do one or two kind of remodel efforts. But the emphasis of this is going to be really a new build approach going forward, at least that’s what our learnings would suggest today.

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 one-year and two-year basis. Jack, I don’t know if you want to add any –.

Yes, just Andy, I would say it’s relative to some of the best results we’ve had historically, meaning there are 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 store, so we closed that gap and the quality really is really, really attractive. The team’s done a great job..

Thank you..

And our final question today comes from Andrew Charles from Cowen and Company. Please go ahead with your question..

Great, thanks. 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 doesn’t the effect just play devil’s advocate? What is the effectiveness of the marketing spending you saw in 4Q that 4.2%, what does that lead you to rethink the 3% of marketing spend budget plan for 2019 is clearly efforts are working? Thanks..

Yes, just a 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..

And yes, your question 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 teams’ credit, as they’ve looked at the existing budget, we don’t see a problem with 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 result we’re looking for right now. But Chris appreciates that question, I’m sure.

So, thanks for the question..

Thank you..

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

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 months 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 brands and our goal here going forward is continue to drive that one of the kindness with customers and everybody that chooses to be a part of Chipotle. So, thank you for taking the time and appreciate all the questions. Take care..

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