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Fed investigates Chipotle's hiring practices

Company now requires the use of E-verify database to check new hires

Federal officials have launched a criminal probe into hiring practices by Chipotle Mexican Grill Inc. in conjunction with previously announced immigration investigations, company officials said Wednesday.

In a call with analysts following the release of the Denver-based chain’s first quarter results, Chipotle co-chief executive Monty Moran said the criminal division of the U.S. attorney’s office in Washington, D.C., asked to review documents related to an ongoing investigation being conducted by the U.S. Immigration and Customs Enforcement, or ICE.

Moran, however, downplayed the news saying such investigations are “typical,” and that ICE often works hand-in-hand with criminal investigators.

“We’re not sure what they’re looking for, but we’ve worked hard to make sure that hiring practices have met or exceeded legal requirements,” Moran added. “We really are confident that, ultimately, the outcome of this will be a good one.”

Earlier this year, Chipotle dismissed 450 workers following a sweep by ICE of the chain’s units in Minnesota that questioned the validity of immigration documents required to prove eligibility to work in the United States. The investigation was later expanded to include restaurants in Virginia and Washington, D.C., and another 40 employees reportedly were fired in Washington.

Moran on Wednesday said Chipotle always has documented all workers, but the situation in Minnesota “showed us we remain vulnerable.”

As a result, the company has adopted new hiring practices to improve procedures for verifying eligibility for employment, he said.

As of the end of March, for example, the company now requires use of the electronic E-Verify system to check all new hires throughout the chain’s almost 1,095 units across the U.S. E-Verify is a government database that employers can use to check a new hire’s eligibility to work in the U.S.

Previously, the chain only used E-Verify in Arizona, Utah and South Carolina, where it is required by state law. Moran said use of the system has not impacted turnover rates or discouraged high-quality workers from applying.

In the coming months, Moran said Chipotle also will shift to an electronic I-9 form, which must be filed for all new hires to demonstrate eligibility to work in the United States.

Moran said the electronic version of the form would help eliminate errors and streamline managers’ immigration compliance responsibilities.

In addition, the company will designate an I-9 specialist who will be based in the company’s Denver headquarters and take over the second-level screening of the documents.

“We believe the steps we’re taking to improve our employee verification policy will reduce the likelihood of incurring the kind of distraction we saw in Minnesota and will help keep us focused on the things that really drive our business,” he said.

Following are other items discussed during the call, which followed the report of double-digit gains in net income, total revenue and same-store sales for the first quarter:

• Same-store sales rose 12.4 percent during the quarter, mostly from traffic increases. Contributing an estimated 1 percent to the increase was a two-week-long buy-one-get-one-free promo tied to the NBC show “America’s Next Great Restaurant,” which features Chipotle founder and co-chief executive Steve Ells. The national BOGO promotion was Chipotle’s first and generated more than 1 million visits.

The momentum caused the company to raise its same-store sales guidance from low single digits to mid single digits for the full year.

• A 0.7-percent increase in menu prices in certain markets during the second quarter of last year also contributed to the comp-sales gain. Among those markets was the Pacific region, where restaurants have a higher cost of living, but menu pricing has lagged, said chief financial officer John Hartung.

“After an increase of about 4.5 percent, a burrito in the Pacific [region] now costs about the same as the rest of the country, which means we’re still not fully recovering the higher cost of doing business there,” Hartung said.

Although prices increased in some markets, further increases elsewhere will be put on hold until the third quarter, when the company will have a better sense of the impact of inflation as well as the response to the price tweaks taken in the few markets where it occurred.

Higher food costs are expected to continue to pressure margins, Hartung said, “but we still feel it’s temporary and manageable.”

Hartung added: “We continue to believe we have pricing power but we want to be patient and allow our transactions to hold as long as possible in this still-recovering economy.”

• Chipotle expects to open 135 to 145 new units in 2011, mostly in the second half of the year. The chain’s first unit in Paris is expected to open this summer. Last year Chipotle opened its first location in London.

• Chipotle plans to launch its new loyalty program in the second quarter. Restaurant managers and crew will be charged with inviting the chain’s best customers to join the program, which initially will be open to about 100,000, Ells said.

Those invited will have access to an interactive website where they can learn more about “what makes Chipotle special,” he said. Those customers will then win prizes for sharing that information with friends.

• Ells gave little information about the company’s plans for the new ShopHouse Southeast Asian Kitchen concept scheduled to open in Washington, D.C., later this year.

The menu likely will have more vegetable offerings than Chipotle, he said, and the throughput may be a bit faster.

It won’t take the company long to determine if people like it enough to open more, Ells added. But the attention the concept already has received likely will cloud initial impressions.

“We will probably see lines out the door,” Ells said. “But we’ll let things settle down” before making a decision.

The new concept, he said, “will not be a drain or a distraction to Chipotle.”

Contact Lisa Jennings at [email protected].

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