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 for 2017 of our expected comparable restaurant sales increases and new restaurant openings, in addition to expected changes in food, beverage and packaging costs and discussion of possible stock repurchases, estimates of our effective tax rates, and discussion of an ongoing data security investigation and the potential consequences thereof, 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 whole, unprocessed 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 12.5% for the first six months of 2017. Our sales comparisons for the first half of 2017 were lapping an easier comparison due to lower sales levels in the first half of 2016. Additionally, sales trends during the second half of July 2017 have been adversely impacted by news regarding a norovirus incident in a Chipotle restaurant in Sterling, Virginia. However, we continue to expect full year 2017 comparable restaurant sales increases to be in the high single digits, assuming some easing of the sales impact from the Sterling, Virginia incident, as well as potential sales increases from a possible roll-out of queso and a likely menu price increase targeted for the fourth quarter of the year. 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 $1.957 million as of June 30, 2017, decreasing from $2.067 million as of June 30, 2016, but increasing from $1.868 million as of December 31, 2016. 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 6.7% in the first half of 2017 as compared to the first half of 2016. The decrease was primarily due to sales leverage, labor efficiencies, lower marketing and promotional spend, and lower food costs.
Restaurant Development. As of June 30, 2017, we had 2,339 restaurants in operation, including 2,295 Chipotle restaurants throughout the United States, 36 international Chipotle restaurants and 8 non-Chipotle restaurants. We opened 107 restaurants during the six months ended June 30, 2017 and we closed or relocated 18 restaurants during the six months ended June 30, 2017, including the closure of all 15 ShopHouse Southeast Asian Kitchen restaurants. We expect new restaurant openings in the range of 195 to 210 for the full year 2017.
Data Breach. 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. The malware searched for track data, which may include cardholder name, card number, expiration date, and internal verification codes; however, no other customer information was affected. We have removed the malware from our systems and continue to evaluate ways to enhance our security measures. At this time, it is not possible to reasonably estimate the number of cards affected and the resulting claims that may be made against us by each of our payment card networks. In addition, legal claims have been made against us related to this matter, and are further discussed in Note 7. “Commitments and Contingencies” within Item 1. “Financial Statements”.