ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cautionary Note Regarding Forward-Looking Statements
Certain statements in this report, including projections of our expected comparable restaurant sales increases for 2017, projected new restaurant openings for 2017 and 2018, discussion of the potential impacts of our roll-out of queso and of menu price increases, projections of expected changes in food, beverage and packaging costs and marketing and promotional spend, estimates of our effective tax rates, and discussion of liabilities associated with the recent data security incident, are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. We use words such as “anticipate”, “believe”, “could”, “should”, “estimate”, “expect”, “intend”, “may”, “predict”, “project”, “target”, and similar terms and phrases, including references to assumptions, to identify forward-looking statements. These forward-looking statements are based on information available to us as of the date any such statements are made, and we assume no obligation to update these forward-looking statements. These statements are subject to risks and uncertainties that could cause actual results to differ materially from those described in the statements. These risks and uncertainties include, but are not limited to, the risk factors described in our annual report on Form 10-K for the year ended December 31, 2016, as updated in Part II, Item 1A. of this report.
Steve Ells, our founder, Chairman and CEO, started Chipotle with the idea that food served fast did not have to be a typical fast food experience. Today, Chipotle continues to offer a focused menu of burritos, tacos, burrito bowls, and salads made from fresh, high-quality raw ingredients, prepared using classic cooking methods and served in an interactive style allowing our customers to get what they want. Chipotle seeks out extraordinary ingredients that are not only fresh, but that are raised responsibly, with respect for the animals, land, and people who produce them. Chipotle prepares its food using real, whole ingredients and without the use of added colors, flavors or other additives typically found in fast food.
Throughout our history as a public company, we have pursued a mission to change the way people think about and eat fast food. We have expanded our mission to: Ensure that better food, prepared from whole, unprocessed ingredients is accessible to everyone. Additionally, our focus during 2017 is to return to sales and profitability growth and restore our restaurant economic model. To do so, we have a renewed focus on ensuring that every guest in every one of our restaurants is provided with an excellent customer experience.
Sales Trends. Comparable restaurant sales increases were 1.0% and 8.3% for the three and nine months ended September 30, 2017, respectively. Our sales comparisons for the first nine months of 2017 were lapping an easier comparison due to lower sales levels in the first six months of 2016. Additionally, sales comparisons for the three and nine months ended September 30, 2017, benefitted from lower revenue in the comparable periods of 2016 due to revenue deferrals for outstanding rewards under our limited-time Chiptopia Summer Rewards program (though the first quarter 2017 also benefitted from the recognition of a portion of the deferred revenue). During the third quarter of 2017, increases in comparable restaurant sales were offset by adverse company-wide sales impacts resulting from news regarding a norovirus incident in Sterling, Virginia, and to a lesser extent due to restaurant closures and lower customer traffic resulting from Hurricanes Harvey and Irma. We expect full year 2017 comparable restaurant sales increases to be around 6.5% including impacts from a menu price increase planned for the fourth quarter of 2017 and the roll-out of queso. Comparable restaurant sales represent the change in period-over-period sales for restaurants beginning in their 13th full calendar month of operation. Average restaurant sales were $1.948 million as of September 30, 2017, increasing from $1.914 million as of September 30, 2016, but a decrease from $1.957 million as of June 30, 2017. We define average restaurant sales as the average trailing 12-month sales for restaurants in operation for at least 12 full calendar months.
Restaurant Operating Costs. Our restaurant operating costs (food, beverage and packaging; labor; occupancy; and other operating costs) as a percentage of revenue decreased to 82.4% in the first nine months of 2017, as compared to 87.5% in the first nine months of 2016. The decrease was primarily due to lower marketing and promotional spend, sales leverage, labor efficiencies, and lower food costs. Food costs were lower in the first nine months of 2017 despite significantly higher pricing of avocados during the third quarter of 2017.
Restaurant Development. As of September 30, 2017, we had 2,374 restaurants in operation, including 2,330 Chipotle restaurants throughout the United States, 36 international Chipotle restaurants and 8 non-Chipotle restaurants. We opened 145 restaurants and we closed or relocated 21 restaurants during the nine months ended September 30, 2017, including the closure of all 15 ShopHouse Southeast Asian Kitchen restaurants. We expect new restaurant openings for the full year 2017 to be slightly below the low end of our previously-disclosed range of 195 to 210. For 2018, we expect new restaurant openings in a range of approximately 130 to 150, as we focus our resources for the next 12 to 18 months on improving our operations and delivering an outstanding experience to every one of our guests.
Data Security Incident. As previously reported, in April 2017, our information security team detected unauthorized activity on the network that supports payment processing for our restaurants, and immediately began an investigation with the help of leading computer security firms. The investigation detected malware designed to access payment card data from cards used at point-of-sale devices at most Chipotle restaurants.