Q3 2019 Earnings Call
Good afternoon, and welcome to the Chipotle Mexican Grill third quarter results conference call. All participants will be they listen only mode should you need assistance. Please ignore conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad to withdraw your question. Please press Star then too.
Please note this event is being recorded.
Now, let's turn the conference over to Ashish coli global head of IR. Please go ahead.
Hello, everyone and welcome to our third quarter 2019 earnings call.
By now you should have access to our earnings press release.
Got it may be found on our Investor Relations website at <unk> Dot AAA Dot com.
I will begin by reminding you that certain statements and projections made in this presentation about our future business and financial results constitute forward looking statements, including projections about comparable restaurant sales growth.
New store openings, our effective tax rate.
Did you get a expenses.
These statements are based on managements current business and market expectations.
And our actual results could differ materially from those projected in the forward looking statement.
We see the risk factors contained in our 2018 annual report on Form 10-K , adding or subsequent Form 10-Q 's for a discussion of risks that may cause our actual results to vary from these forward looking statement.
Our discussion today will include non-GAAP financial measures.
A reconciliation 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 that Cole, our Chief Executive Officer.
Jack Hartung, our Chief Financial Officer.
After which we will take your questions.
Our entire executive leadership team is available during the Q and <unk> session.
With that I'll turn the call over to Brian .
Thanks, Ashish and good afternoon, everyone. We're pleased with our third quarter financial performance, which reflects further progress on our key strategic initiatives that are providing guess, what a great experience and positioning the business to deliver above industry growth for many years to come.
In fact, this marks the seventh consecutive quarter of accelerating comparable sales, which highlights the running great restaurants way purpose of cultivating a better world is a compelling proposition.
For the quarter, we reported 11% comparable restaurant sales growth that included nearly 75% transaction growth.
Restaurant level margins of 20.8%, which is 210 basis points higher than last year.
Earnings per share adjusted for unusual items are $3.82, representing 77% year over year growth.
And digital sales growth of 88% year over year, representing 18.3% sales.
I'm often asked whats next I believe we still a whole lot of opportunity executing our five key strategies, which are number one making brand more visible in loved number two running successful restaurants with a strong culture that provides great food hospitality and throughput.
Three leveraging our digital make line to grow sales and expand access number for engaging with our customers by launching a new loyalty program.
By creating a stage gate process for innovations.
Let me give you an update on each be starting with her stage gate process, which is designed to test tonight them in a few markets on three key areas delighting, our customers driving a financial benefit and of course, ensuring a seamless integration into our current operations.
This test tends to be predictive of what happens nationally and helps increase the likelihood of success.
I'm pleased to announce the carnitas out is the latest item behind lifestyle balls kind of rewards program to be successfully validated through this process and all three are meeting or exceeding our expectations.
Turning to side is a limited time offering that is easy to execute operationally and has a unique flavor profile.
It's a tender kind of stake season with fresh squeeze line and finish with hand, chops Latrobe and a blend of signature spices, no wonder is receiving terrific customer feedback.
Hi greatest carnitas ought to taste. It success is amplified by all elements of our strategy coming together in unison.
Typically digital providing more frictionless access marketing enhancing awareness and emphasizing that delicious NASA carnitas ATA.
Operations delighting, our guests with great hospitality and throughput and our supply chain assuring we had the highest quality ingredients that meet our food with integrity standards.
So proud of the collective efforts of our teams rolling out this new premium stake.
Beyond Carnitas auto we're also testing case, a blanco salads in case Indias. These items are in various markets, where we are gaining valuable feedback as I've stated previously we're not going to roll out new menu items at the sacrifice throughput normal we added complexity tour restaurants by Overemphasizing your menu choices.
We'll update you on our progress of all potential new menu items as they move through our stage gate process.
Now, let's talk about our marketing efforts, which have been will continue to be an important enabler of our growth. In fact, you saw this with carnitas auto launches, we leveraged our digital capabilities as well as a national TV campaign by teaming up with film Director David Gill. Please.
He spots or a continuation of our behind the oil campaign that watched earlier this year and high like real trouble, we team members and providing inside look at the real fresh food and scope of preparation that happens inch boldly kitchens every day.
These efforts are designed to increase transactions and gross sales by driving culture, driving a difference and ultimately driving a purchase.
In addition, we effectively utilize social media and ramp several strategic promotions during the quarter to make the triple the brand more visible well, helping expand access.
Going back to the question of what's next we watched pulte rewards in March and are just now beginning to levers that platform. We currently have 7 million in gold members and have only scratched the surface. One database marketing. We're encouraged by early signs of transaction increases across all frequency bands and going forward will double down on her ability to leverage this data to incentive.
Haters.
We expect this lever to become a bigger driver overtime as we gain more experienced gathering customer insight, while continuing to expand our digital platform.
Reducing friction and providing more convenient access for our guests has been critical to increasing our digital system penetration over the past couple of years.
This quarter digital sales grew 88% year over year to $257 million and represented 18.3% of sales during the seasonally slower summer quarter for digital.
And we're knocking on the door, a digital becoming a billion dollar business.
Consistent with past quarters delivery remained a key driver of our digital growth given enhanced capabilities on her happened website as well as our expanded availability for more than 97% of our restaurants importantly, digital remains highly incremental and we continue to see residual lifting delivery sales that last beyond any promotion.
Additionally, I'm pleased to announce that we have finished installing artificial make lines and all relevant restaurants and this was completely completed slightly ahead of schedule. It makes the system more efficient for our guests team members and delivery partners, while driving more sales and loyalty for <unk>.
Now that we have the digital make lives installed we are focused on ensuring that execution for this large and growing business matched that at the traditional frontline.
This brings me to the evergreen topic of operational excellence. The reality is that all the growth initiatives I. Just mentioned are being supported by the terrific job. Our operations team is doing and providing a great guest experience.
And we know cultivating a better world includes investing or people and we believe that's the right approaching creating an environment where employees can thrive professionally as well as personally and being a position to win not only today, but also in the future.
Enhanced training and development industry, leading employee benefits, including the recent debt three degrees program. In addition to our newly expanded tuition reimbursement program and a new crude bonus that was paid out to more than 2600 employees last quarter or just a few examples of how we continue investing our people to couple cultivate a better restaurant.
Culture.
The result is our employees, putting their best foot forward and remaining focused on our core fundamentals. This is leading to us attracting and retaining the right talent and having higher team stability, which is allowing them to spend more time together and deliver on two important benefits.
One delicious food consistently being prepared and served every time something our guess is definitely noticed number two we're seeing a steady improvement in throughput aided by training focus and providing our teams with an easy to use dashboard that provides greater visibility on performance.
I want to recognize our team for their efforts and hard work in delivering another outstanding quarter.
I believe we are still in the early stages of her journey and we need to stay focused on our priorities in executing flawlessly to support our growth, while providing our customers with the experience they expect from AAA.
Thank you to all our employees for all that you do we have unique brand and I love the passionate determination that I see during my restaurant visits as our crew members passionately strive to be better today than they were yesterday.
With that here Jack to walk you through the financials.
Thanks, Brian and good afternoon, everyone.
We deliver outstanding financial results in the third quarter as comps in margins continue to expand.
Other highlighting the strength of our economic model.
Connecting with gas through culturally relevant marketing focused on supporting these great taste and real ingredients, while providing more convenient access is helping lead to greater overall demand.
Sales were $1.4 billion in the quarter, an increase of 14.6% from last year comp sales grew 11% in the quarter, which includes a 10 basis point reduction as a result of deferred revenue from our rewards program. This deferral is lower than previous quarters due to a combination of an increase in free entre redemptions as guests earned an appointment.
And an adjustment and breakage rate assumption for chips and guacamole now that we have more history.
Moving forward, we expect quarterly deferrals to range between 20, and 40 basis point based on various factors, including the pace of sign ups and promotional activity.
Restaurant level margins of 20.8% expanded 210 10 basis points over last year and earnings earnings per share adjusted for unusual items was $3.82, a 77% year over year growth.
The third quarter had unusual expenses related to our transformation as well as legal reserves that negatively impacted our earnings per share by about 35 cents, leading to GAAP earnings per share $3.47.
Our top of 11% was driven by an acceleration in transactions at nearly 70.5% of the comp came from greater guest visits the higher average check includes a price impact of about 2% and the mix contribution of roughly 1.5%.
<unk> predominantly by digital orders, which have a higher average check.
Looking to the fourth quarter factoring in the strong sales we have seen thus far in October as well if the tougher comparison for last year, we expect Q4 comps to be in high single digit range. This will result in our 2019 full year comp guidance being at the top end of our high single digit range.
We have been 20 thought five new restaurants in the quarter, bringing our total openings for the year to 60.
Based on the early success at Chipotle, and we shifted our real estate strategy to seek more site that can accommodate <unk>.
As a result of the more than 80 restaurants currently under construction about half of them, we'll have a default lane, which will result in a total of about 60, Chipotle and by the end of 2019.
Given the longer construction timeline associated which Paul Knight. Some of these new openings are likely to ship from Q4 into early 2020. So expect our total openings for 2019 to fall at or slightly below the low end part 2019 range of 140 255 opening.
For 2020, we anticipate opening between 100, 1500, 65, new restaurant with more than half, including its <unk>.
We expect these openings will be better balance throughout the year, what about 60 openings in the first half of the year versus only 35 openings for June of this year.
Food cost for the quarter were 33.2% a decrease of 20 basis points from last year due primarily to a menu price increase that was partially offset by higher cost of several ingredient.
That's a sequential basis avocado pricing moderated as we expected. This was the result of sourcing more supply from Peru, which reduced our reliance on Mexico.
For Q4, we expect ongoing moderation avocado pricing as a result of increasing supply in the back half of the quarter, but we believe this will be largely offset by the higher cost of cardiac Sato, resulting in cost of sales remaining in the low to mid 33% range.
Labour cost for the quarter were 26.6% a decrease of 60 basis points from last year. This decrease was driven primarily by sales leverage partially offset by labor inflation, which continues to be in the 4% to 5% range.
It also includes a 20 basis point additional investment related to our restaurant level performance incentives, including the crew bone as Brian mentioned earlier.
We expect Q4 labor cost to be in high 26% range given extra initial labor expenses associated with a significant number of new restaurants being open in this quarter as well as lower seasonal sales in the fourth quarter.
Other operating cost for the quarter were 12.8% a decrease of 90 basis points from Q3 of last year due to lower marketing and promo costs as well as sales leverage.
Marketing promo called for a 2% in the quarter decrease of about 50 basis points compared to Q3 of last year as we decided to shift some of our marketing investment into Q4 to support carnitas data and other promotions.
As a result, we expect our marketing investment to be at or slightly above 4% in Q4, which will result in the full year investment remaining right around 3% of sale.
Your name for the quarter was approximately $115 million under GAAP basis, or $105 million on a non-GAAP basis, excluding about $7.5 million for settlements of several legal matters and $2.5 million related to transformation expenses.
Yeah ill also include $72 million, an underlying Gina expenses.
$25 million related to noncash stock compensation.
$5 million related to higher bonus accruals from our strong performance and payroll taxes on stock option exercises.
And $3 million related to other expenses, including our all manager conference, which will be held in March of next year.
Underlying gene I was a little lower than expected as we continue to finish rounding out our organizational structure.
We're expecting to fill open positions in Q4, and therefore, we believe our underlying DNA support we'll get to around 74 up to $75 million in Q4.
Although if we assume our current financial trends continue.
Compensation, including performance adjustments, along with the higher bonus expenses should be right around $25 million.
Lastly, we're expecting to recognize between two and $3 million expenses in Q4 related tore up upcoming all major conference and we expect the total expense to be right around $16 million, most of which will hit in Q1 of next year.
Our effective tax rate for Q3 was 17.9% on a GAAP basis and 18.3% on a non-GAAP basis. Both these rates are lower are below our full year guidance range due to the recognition of excess tax benefit on stock based compensation during the quarter.
For Q4, we expect underlying effective tax rate to be in the 26%, 29% range, though it may vary based on discrete items as well as any stock option exercises.
Our balance sheet remains strong with cash and investments totaling $844 million as of September thirtyth, we've repurchased $39 million ever stock at an average share price of $783 during the quarter.
In closing, we're pleased with our Q3 results as our strategic growth initiatives continue to sustain strong sales momentum, which is a key driver of our economic model. We remain bullish about the future and we believe we still have plenty of runway ahead I want to thank all of our restaurant team members for their contribution and their passion as they remain support late most valuable asset as we work together.
Other to cultivate I better world.
That we're happy to take your questions.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone, if you're using to speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then to at this time, we'll pause momentarily to assemble a roster.
The first question comes from Katherine Fogarty with Goldman Sachs. Please go ahead.
Great. Thank you I'm, just trying to get a handle around the new unit guidance. So do you guys expect a year or additions to the new units to go at it now at the lower end of the 140 to 155 intimated, they're getting pushed into next year does the new unit guidance then implicitly.
A state that that you guys are slowing down the pace as new restaurant adds I'm just trying to get a handle I had a where did the puts and takes between unit growth here, coupled with a very strong <unk> and <unk> in the quarter. Thank you.
Yeah. Thanks, Katy so no. The plan is actually I think the guidance that we shared is we're going to be accelerating new units as we move into 2020 and I think what we just wanted to share with people is.
A greater blended that will now include opening which.
You know, we've accelerated the composition of triple wage and our new unit.
Kind of growth trajectory going forward. So the good news is with 11% pump and 7.5% transactions and really strong margins.
We're now going to be able to push on how we continue to expand our new units going forward. So.
This is really just one of these temporary things, whereas we take advantage of an opportunity with Triple Lane, which really I think is a terrific outcome because it will drive our digital results as well as drive the total business, which hopefully as we've seen to date will result in even better returns going forward as we build out.
The new units so no plan to slow down if anything our guidance was intended to inform people, we're going to be increasing and we also wanted to be share with folks that were going out of greater mix now trouble.
Can you help US also I, just just to remind us on the these four restaurants, which about lanes versus a those without how we should think about how that blend might progress.
Yeah, I don't think we're disclosing exactly with the EU. These are on this but here's what is I think we'd give you some.
Interesting facts on it which is our digital business is roughly 50% bigger and the driver of that additional growth is our order had business, which as you know it's got the best margin associated with our business going forward. So we love the composition of the sales and we love the economics associated with new units whether.
They have tripled range or not.
But were very positive on which owing brings to our new unit program and why we're raising guidance for next year.
Great. Thank you.
The next question will be from David tariff Terrence you know with Baird. Please go ahead.
Hi, good afternoon, and congrats on another great quarter, Jack I was wondering if you could.
Maybe clarify what you meant.
Around the Q4 guidance I think you mention that October so far has been strong and you're expecting maybe that is as it is a cycle tougher comparisons coming up so Jim maybe just elaborate on what you're seeing in October . So we have the right context for the rest of the quarter.
And then Brian you mentioned that you're seeing some progress on.
Throughput in the restaurant. So just wondering if you could.
Contextualize.
What that progress has been so far and how you see that playing out in 2020. Thanks.
Yes, David on on comp.
We saw comps accelerate into September when we initially rolled out carney side, which is around.
September 12, or so and then we started media around September 22nd So we saw sales accelerate at the end of the quarter and then we saw that was higher sales levels continue into October the guidance that we're giving for the fourth quarter, though it takes into account the strong comps as we start the quarter, but also that our strongest comp month last year.
It was was December so were going up against the tougher comparison to December that's when we had the delivery bold and those were very very successful. The other thing I want to mentioned is we only have enough supply for carney aside out to last us for part of the quarter. We think will probably run out around the end of November maybe into early December and so we'll be.
A little cautious with what happens once we run out of Carney is not up at the moment momentum to start the quarter is great, but we got to tougher challenge as we move through the quarter.
And then yes to your second question David on throughput the thing that I think is really exciting to see is as each quarter has gone by with the focus on this we continue to see every region, making progress on their from foot goals.
Not all the way to where we have targeted but we're making great progress and our throughput is better than what last quarter and it's definitely better than it was two quarters ago. So the operational team is very focused Scott has the guys dialed in on this and our throughput is continuing to improve.
Quarter to quarter month to month, so I'm very optimistic about what that's going to do for the business going forward.
Great. Thank you.
The next question will come from Sara Senatore with Bernstein. Please go ahead.
A question about margins if I could purchase just about the fact, but it's been a little bit volatile this year, but in the and very good margin expansion and maybe for the full year, you know EBIT margin on a recurring basis, maybe as much as yeah, hi to wander second or basis point, something in that range, but I guess that.
Implies a very high flow through margin, even on a 10% comps. So could you just deconstruct that a little bit yeah, especially because you have a traffic driven comp there's not a lot of price and there is that digital mix. Our their cost savings that are are coming through and you know is it's still the case that when we think about potential return to.
Peak volumes, we should think about restaurant level margins that are maybe below what they would have been a at previous peaks or are you finding opportunities again between throughput that you know order had is sort of structurally I sat.
Whatever the headwinds may have been.
Yes, you're right the way I would think about margins is I think most of the leverage.
It's from flow through so we do get a higher.
You know at very attractive flow through when we have.
On higher sales, especially when they're transaction driven like that with some headwinds in there that that.
We have to overcome like we do have labor inflation, that's 4% to 5% that's about 100 basis point headwind.
Because to get better in the quarter.
So we had bigger headwinds from avocados in Q2, then Q3.
And then moving into Q4, we've got a little bit of a challenged the carnitas out of more expensive.
Got it needed to higher quality premium kind of upstate so.
That puts a little bit of pressure on our food costs, but I would say that from a overall margin standpoint, we're pretty much right on track, we talked about a $2.1 million volume, we should generate a margin of about 21% and we're right about there in terms of as you move from from 2.1 to two two to three up too if we get back to our peak volumes have 2.5 billion.
We're still confident that we'll be right in that same kind of margin range up like a 25%. So we think the flow through so far it's pretty much right on track.
Thank you.
Our next question comes from Nicole Miller of Piper Jaffray. Please go ahead.
Thank you good afternoon, I wanted to understand what might be that tipping point on the acquisition of customer data you. I believe you said 7 million loyalty members. So right now the comp you're producing I would imagine it's not doing much yet with that data. So maybe you could talk about what you're doing with the data.
The power of what it can be what it can do now that you have a 7 million basin is that enough of a base to produce results.
Yes, Thanks, Nicole the obviously, we're delighted we've got 7 million used in.
Rewards program.
We anticipate that's going to continue to grow and as I mentioned in the past we're already starting some experimentation with the various cohorts and the good news is.
When we have done some do experiments, we've seen meaningful changes in people's frequency.
And their engagement levels with the brand.
So I think this is something that ongoing.
As you roll into 2020, it start it's going to start being a contributor to our sales growth.
Because we'll have a meaningful database with meaningful numbers of users and.
I think we're learning really quickly and figuring out what really does result in behavior changes that rewards people and at the same time rewards the business with incremental transactions and incremental sale. So.
I'm very optimistic about what this can do for us.
The database marketing is showing signs of.
Being really meaningful growth lever going forward.
Thank you and just a follow up and last question Chipotle is clearly getting stronger every day. So when you think about the development acceleration for next year is there anything in there for international gross and if not when and how do you leverage that international acuity.
Yes so.
The reality is exactly what you said, which is the health of the business and the operational performance gives us confidence to accelerate new units next year.
And then you compound that with adding to the mix a new growth lever cultural way, which is a driver a digital sales in highly profitable sales were really excited about what our growth opportunity is from a new units standpoint in the United States. So very excited about that at the same time, we're continuing.
Turning to work on our business in Canada, which they have made tremendous progress today.
And they continue to deliver the financial performance that they're delivering which is now getting close to what we're seeing the U.S., obviously that will be a place down the road that we will look to accelerate new units as well, we're still probably in the earlier innings in Europe , because we're still learning there on what we can do with arch fully business, but again.
The team there is making great progress as well, but still have some work to be done there on.
Both the the model and how we continue to introduce to fully into new markets, but.
I just want emphasize there's so much opportunity in the U.S. with the performance that we're getting out of our business as well as frankly the types of restaurants, we can build going forward. The combination of end caps and now in cash which are full wanes as well as the.
In line unit and then the freestanding restaurants that we've done today. So we're very optimistic about where we can go with our unit growth in United States and then obviously down the road, we'll figure out how we pivoted outside the U.S.
Thank you.
The next question will be from David Palmer of Evercore. Please go ahead.
Thanks, Good evening question on labor.
I think your labor hours per unit went up.
Like high single digits this quarter versus mid single digits in the first half the year.
You can tell me if I'm right on that but if it did ramp up.
Why and and more broadly even beyond this quarter, how do you view that that bad leverage point going forward is that second make line for example, fully staffed and ready to go and should we see similar levels of labor leverage or is there more to be had or even less because you're not up to.
Do you need to be thanks.
Yes, David I would say the labor leverage hit exactly where it should be I'm not sure how youre doing your calculation, we had trent additional transactions up 7.5%.
We grow our labor hours at a lesser percent than sales quite a bit lesser present, so when you say high single digits.
That's not what we actually added we would have added something.
Quite a bit less than 10, 7.5% in terms of of the hours and if you break down to labor leverage we had labor leverage of about 60 basis points in the quarter and that's despite the fact that we had about 100 basis points of.
Inflation challenge.
Yeah that we had to deal with so so we really labor leverage the labor line by about 160 basis points and that's really right on target now going forward with digital we do think there's an opportunity with digital for us to get even more efficient we're in the early innings there.
Got you bolt laying we've only got 20 to bolt lane restaurants, right now, but we're going to have 60 by the end of the year.
And we'll learn more about how we staff tangible lanes and how we can.
Really I get as much of the efficiency that we know is possible.
Moving more of these sales towards that second make line. So so far we're really pleased with where labor is but we we do think that there's additional efficiencies as the second make line growth.
I guess my my second point was really about.
In that second make line are those staffed and is are you effectively at a low capacity utilization on that second make line currently and therefore that incremental margins going to be.
Outstanding, perhaps even better than the first.
Line or is.
Is that that's something that you're not where you need to be in terms of staffing when they that mix gets up to where some of your better digital make line stores are our staff Keith thanks.
David I heard.
I get your question is a good question.
And our very busiest.
Digital restaurant those things are fully staffed and I think there's additional leverage to be had there are areas of the country in their individual stores, where the digital business is it is not at that same 18% we do have.
Challenges and making sure we've got the right staffing throughout the day and every single day and so there are opportunities for us to.
To choose to staff those restaurants, so that the business will build but I will tell you in terms of the levers that youre getting at with the restaurants that are already at 18 2025.
And digital those restaurants, our staff and as we add more sales to the second make line you're going to see greater sales leverage in those in those stores.
Great. Thank you.
The next question will be from John Glass of Morgan Stanley . Please go ahead.
Thanks, very much just on digital sales I understand there's some seasonality, but it was still surprised to see sequentially about the same percentage of sales as digital so maybe what gives you confidence that you weren't hitting some sort of ceiling in that.
The consumer doesn't want to transact more than they aren't and digital channels.
And can you talk specifically about how deliveries performed this quarter relative to prior quarters.
Yes, sure. So what we've seen is the seasonality was more around the delivery aspect of the business.
In our digital business, because we continued to see growth in our order ahead business.
And so what we've also seen as we've come out of kind of the summer months, where the seasonality was is that strength in September continued on with the order ahead business and then consistent with what we've seen in the past the seasonality played out in the delivery side of business. So.
We are definitely confident that we're far from the ceiling.
And then we've got other indications where when we've added additional access like that's allowing you get well beyond 20%. So.
Thats, what gives us confidence that we're far from the ceiling on this.
Okay. That's helpful. And then just on Carnitas <unk> is this was this intended to be at LTL or what why are you running out of product and is it just temporary or is it you're just going to pulses send it out I thought it was more like you were good try attempting to build sort of permanent new sales.
It's not not LT OWS.
Yes. This was intended to be a seasonal offering where we would bring it in and out.
There are other items like case Blanco were assuming it is successful at this stage gate process that will be more permanent but yes. This one initially was intended to be more of a no products present, some news and you know we may use it again, depending on how the whole.
Springs plays out, but you know the early feedback we've seen from our customers and our crew members is they definitely would like us to do.
Through this again, so we'll figure out exactly the right pacing and sequencing and whether or not it's something we want to have permanently in the business or if we continue to use it more like a seasonal items.
Got it okay. Thank you.
Yep.
The next question comes from Jake Bartlett of Suntrust. Please go ahead.
Great. Thanks for taking the question I just wanted to ask a follow up on the cornea SATA.
You might might kind of chatter just given my experience in the stores was it the corning's thought it was selling significantly more than than the regular stake in so I assume that there was driving a a decent amount of check so within that context <unk> of those statements can you talk about how October has been impacted by the car.
So and maybe what we could expect to kind of fall off with the Carney says removal.
Yes sure so.
We have gotten great response to the Carnitas ATA initiative, and we're really excited to see that stage gate process was predictive of what we've seen nationally.
So we're really delighted about that.
We're seeing a dry both check and transactions.
Which is also another thing we're very excited about and where you're seeing is you know it's sourcing new users as well as having people that have been users of the fully business to try and do occasionally and so we're seeing frequency compression and we're seeing new users come in.
What will obviously wanted to continue to understand which.
We've got some understanding on is what happens all those new users that came in now that they've experienced which fully business and historically chipotle has been very sticky beyond just one product its the whole value proposition that get people excited about triple play.
Idea of food with integrity.
Yeah customization the idea of speed and then obviously putting that altogether at a you know a really reasonable price is something that's very sticky burbage fully business. So we think this is much bigger than just the.
The product, it's more about introducing people to the AAA experience.
Ongoing.
Got it in but an object with the one is just share what it's kind of done to how how much it's been helping the October sales in mix, but also just in.
Building on that question if it.
Sounds like its successful driving check in driving traffic and kind of hitting everything you want to to what why not keep it around or do it or permanent leaves. It is in a matter of of the throughput or is it a matter of open to supply being a little more difficult what would be the reason why not to keep on offering it.
Yes. So look the the main driver is we were not willing to compromise on food with integrity principles on the supply.
For this program and so going into it we knew the supply available would take us through November to early December .
And you know something we're going to work on going forward given the response, we've seen is okay. How do we work on the supply.
Oh stake in that particular cut to be consistent with our food with integrity principles to give us the flexibility to do it.
Beyond just the seasonal program, but.
I don't think we can answer your specific question that you're looking for on exactly how is it playing out in the product mix in the comp.
Obviously, it's playing a positive role.
Got it that's where I would leave it.
Okay I appreciate it.
Sure.
The next question is from Sharon Zackfia with William Blair. Please go ahead.
Hi, good afternoon.
Wanted to follow up on the Chipotle and and as well on the Carne Asada. So on Chipote lanes could you just give us any idea on kind of what the incremental cost is when you added chappelle lanes to locations and maybe what the unit economics are that we should think about for 2020 associated with those does.
And then on Carne Asada any quantification around what it did to Cogs either in the September quarter, or what we should expect in the fourth quarter.
Yes sure in on the investment the investments about an extra $75000 to add digital line.
That would be for like an uncapped building.
It's it's the same 75000 on a pretty standard, but a pretty standard just cost more than encapso arm. Our emphasis so far has been on getting.
The vast majority of our of our sites should be on the end cap.
We're trying to get as many end caps with each cortlandt as possible. That's why we've been able to pretty quickly pivot. So that we can have more than half of our portfolio. Now we'll have the each fault line. So that's a relatively modest investment too early to stay on the sales.
But the difference is 20 to put lane and knowledgeable and sharing we've got 20 of the they're spread throughout the country. I'll tell you. They are opening up nicely. We're very pleased with the result, I just wouldn't want to put a number on whether it's performing at or above from a sales standpoint, but the fact that it's 50% above on digital.
Is a very strong starting point, we know that when you can offer chipotle by with less friction, meaning it's easier to order it's easy to.
Stop in and pick up to pull it without even getting out of your car that tends to cause our customer to want to get AAA, even more often so.
Our Upton is our optimism even though it's very early is very strong and the economics.
I would even a modest.
Accretion sale.
At that kind of.
Incremental investment is going to be very attractive.
And then on Carne Asada, if you could help quantify the impact on on your Cogs for the third and fourth quarters.
Yeah, it's going to be about it's very small in the third quarter Sharon because it it was only in for a few weeks, but it's got to be the ballpark that 50 basis points and so that's why we mentioned in our guidance that our food costs. In Q4 is going to stay about the same maybe a take or to higher.
Even though avocados are going to cost less in the fourth quarter, that's going to be offset by Carney aside and we're guessing right now again, we're trying to predict what the rest of the quarter is going to look like and one will run out but it looks like it's probably going to be right around 50 basis point impact in the quarter.
That's helpful. Thank you.
The next question will be from Jeffrey Bernstein of Barclays. Please go ahead.
Great. Thank you very much to question is just one following up on the I guess menu innovation and Brian It sounds like the Carne Asada a success I'm wondering.
How you literally would define success in terms of maybe what mix you've achieved thus far are what you think is the target level and maybe any color on the case a D. A salad in case that you've talked about what potential hurdles there would be too to overcoming the stage gate process before we might see any or all of those and then had one follow up.
Yes look on Carney aside I mean.
What we did in this at this stage gate process was we wanted to make sure. We had you know a.
A product that consumers wanted we wanted to make sure we had a product that are operators could execute and then obviously when it make sure it made sense financially.
And the way, we derive that financial benefit through check in transactions.
The good news is carne Asada is done.
Terrific on the traffic driving as well as the check driving and then our operators to their credit have done a great job executing and the feedback we're getting from consumers both new users in existing consumers as they loved the product. So by all accounts, we're delighted with what carnitas out is doing for the business.
And as you fast forward to other initiatives.
Our intention is we want to derive all those types of benefits when we're launching a product so.
Okay. So bronco.
Same expectations.
Needs to be something our crews can execute with excellence consistent with our food with integrity principles, it's got to be something to consumers going to say they love it and they want to try it again.
And then obviously, it's kind of play a role on the financial model. So that is continuing to move triple a forward and that's the reason why we test these things and.
You know some will play a bigger role in traffic driving than others and you know thats why you've got to have a pipeline of different products to play a different role in the business. So I'm really excited about with the pipeline looks like and very delighted really about carnitas started going through this whole process and then everybody.
That's how you end up with a successful initiative.
Got it and can you just well for color maybe Jack on the marketing spend I think you said, 4% in the fourth quarter, which would lead to full year, 3% I'm. Just wondering how you measure the return on that and whether we should think about 2020 being more in the 4% range or whether there's a reason why you'd prefer to keep it at that lower 3% level.
No I mean, Jeff we have no plans to do that.
That could change as the year unfolds, but right now we think 3% about the right.
You know level right now we think we're getting a great return.
No the marketing team every single campaign, they look at what what what's happening in terms of transaction. What the return is and so far we've been getting a great return on our dollar. So right now we think 3% is the right level, if we should change out in the future, we'll we'll communicate that.
Thank you.
Next question will be from John Ivanhoe with JP Morgan. Please go ahead.
Great. Thank you I was hoping to get an update on some of the supply chain initiatives that we've been talking about in 2019, if there's an update in terms of how much money was saved in the third quarter. If there was an outlook for the fourth quarter and what the visibility as for some of the supply chain work on fiscal 20 to start to contribute contribute more meaningfully the margins.
Overall.
Yes, John we saved another few million dollars during the quarter, but it was offset by other things including.
Some of the summer I carnitas auto pressure that we saw in the last three weeks of demand, but listen the team's been doing a lot of great work and.
We think that we'll see more savings in 2020.
Too early to predict what those are going to be I mean, a lot of these things will take time, because youre talking about long term relationship with suppliers, but I expect we'll be able to.
Talk next year about even more savings from the from the efforts of the supply chain team.
Thank you.
The next question is from Andy Barish with Jefferies. Please go ahead.
No wonder in on kind of looking out obviously that the second half margin progress, which you thought wasn't quite going to be a strong as the first half me Hey May Act, otherwise, but wonder if you look out to 20 and kinda give us a sense of the the puts and takes I assume price.
Saying is going to remain around 2% any early thoughts on kind of the protein basket just.
As we try to gauge.
Some of the margin levers for for next year as as we sit here today.
Yes, Andy we're not seeing anything out of the ordinary right now it's too early to get a.
Price a precise prediction, but it looks like beef generally to the extent that we can get the supply or the food with integrity cuts at Brian mentioned looks like that should be pretty stable.
Don't see anything out of the new ordinary in chicken.
We see what's happening with pork supplies throughout the world. Our supplies are separate from from that and so we havent seen any impact there. So right now we're kind of crossing our fingers and hope that everything continues to look stable. We're also hoping for a benign or maybe even a positive benefit from avocados next year is.
Going to be the alternate year, where we should see a more plentiful harvest and so.
Right now in a knock on wood cross fingers, all that kind of stuff it looks like a pretty stable.
Cost of goods sales environment for next year.
And do you anticipate menu price kind of staying in this twoish area.
You know, we're studying that right now Andy if we did anything it definitely would be in that kind of 2% range.
But but no decisions have been made.
Thank you.
The next question is from Andrew Charles with Cowen and company. Please go ahead.
Great. Thanks, guys on Chipote lanes, what percent of the existing 2500 non should pull in locations have the capacity or the ability to add chipotle lane versus the amount that instructional unable and just also was curious about your appetite to retrofit. These locations as you go through 2020 and beyond.
Yes sure so.
They are on our current state there really aren't that many options out there for us to retrofit individual Wayne.
Only because we don't have that many end caps.
Shortly.
AAA really was in line.
Unit execution.
So we're just limited with the real estate that we have and then you've got to have the end cap in the right location in order to do a retrofit with that said, whether you opportunity exists we've done one and or.
Not surprising we saw positive result, given for which I said earlier when you get people more access.
With less friction the order had business continues.
Take steps forward so.
Limited opportunity to retrofit, but lots of opportunity going forward as we.
Build new restaurants.
That's helpful and I know you're reluctant to give.
Numbers in details on bolt lane, but when you talk about your two cash on cash returns for new store around 40%.
Right to think that Chipotle is higher than that just given this is the winning prototype for future development.
I mean, it's early but yeah, we would expect to pull ins are going to be a higher returns on the the average portfolio.
Thanks, guys.
The next question will be from Gregory Francfort with Bank of America. Please go ahead.
Maybe just going back onto Andrew's question in terms of the operating model for Chipotle and going forward I I.
I guess right now you can only order ahead as you pull up to a tripling.
What's the likelihood that you shift this model to more of a traditional drive through.
Operating structure at some point down the line I guess, what what's kind of I guess prevent you from making that shift at some point. Thanks.
Nothing would prevent us from making the shift we just don't believe it's the right shift.
So our what we've seen is giving people the access through ordering ahead. So that they don't have to get Undercar is a nice unlocked for this fully business. So that we don't have to provide the additional complexity of running.
A traditional driver.
Frankly, I think this is the future of how people will want to interact.
With.
Restaurant companies because this is arguably.
Faster.
Than any other way possible to get your food you order ahead, and you don't have to get out of your car in.
Our models already bass now now we've made a patrick assuming that to get out of your current coming at the restaurant Cracker food and go so.
We don't see any reason to make that pivot going forward.
Got it can you maybe talk about the experience so far in terms of balancing consumers kind of timing when they show up at the restaurant with kind of when the food is ready and if they show up related how youve managed through that and kind of how you would expect to manage that as you go forward. Thank you very much.
Sure. So you have.
Our smart pickup times you to select.
Time for when your food is going to be ready and then you show up with it if you show up early.
We usually have people just pull forward and telling they can come into the restaurant at their time or and there are times, where we will bring the food out to them where they pull forward. The good news is what we've seen is.
After the restaurant openings and two or three weeks in people get into a pretty good rhythm where they show up on time and.
Once they realize this is how the triple aim works.
You know, we've gotten really great consumer acceptance and the rate type of behavior.
Going forward so.
That's not been a problem today and it's really just a matter of people adopting the new new approach to how you get your food in your car.
Hello perspective, thank you.
The next question comes from Peter Sala with B T. G. Please go ahead.
Great. Thanks.
Loyalty members now.
Little bit about the composition of the customer are they new users are they lapsed customers.
And just maybe a little more detail our loyalty customers are they spending more are they coming in more frequently I mean any details around that would be helpful. Thanks.
Yeah of course. So this is a question I'd love to answer.
Because the thing that's been great about the program to date is it's definitely.
Got bigger representation of new and lights flashing medium users.
And what we're seeing is.
When we do.
Communicate with them with certain incentives, we see behavior changes.
That are very positive.
Positive and so we're seeing all the things you would want to see in a rewards program.
From a standpoint of.
The composition of those that are in the rewards program and then the behaviors associated with those that are within the program. So.
A lot of new light and medium users and then we're seeing really nice behavior associated with all those various cohorts.
Great. Thank you very much.
The next question will be from Chris Ocull with Stifel. Please go ahead.
Yeah, Thanks, Brian given the supply of current air side. It was going to run out late November one of the plans to continue driving usage from gas. They came in for the product I mean I'm. Just wondering if we should expect a new product news before the end of the year and then I had a follow up.
Yes, our you know our plan is those that come in with carnitas out to you know they get acreage fully experience that is going to result in them wanting to come back.
Even when Carney side is not on the menu and Oh.
We're.
Obviously focused on continuing to drive that message throughout the whole quarter. So you probably have already seen it on television.
We are running ads that both talk about AAA as the brand.
And the total restaurant company as well as driving Carne Asada. So.
And what we've seen is the response.
Has been positive to both messages. So people are very much in tune with the idea food with integrity real culinary real ingredients cooking done right in front of them as well as some new product menu news around carne Asada and the good news is Chris in the marketing team they've got a strong.
Plan to finish the year that goes well beyond just products.
Okay. That's fair and then Brian would you talk about how the company determine the appropriate number unit openings for 2020, and what you would need to see to accelerate the number of openings.
Yes look the good news is.
There are plenty of sites.
And the economics would support going faster and doing more well we wanted to really make sure is we've got the people capability in place and I think we're seeing more and more confidence as our stability has gone up.
And as we've opened new restaurants, they continue to open really well. So we're going to continue to build a really strong pipeline, which we have for next year and if the opportunity presents itself to go a little faster, obviously, we will but I think I've been pretty consistent with this one which is the key for us to continue to have great unit growth is to have great.
Unit economics, and I think Thats, what were demonstrating his tremendous unit economics, so not surprising as these unit economics continue to improve there's more and more sites that are available for us and then now we've just added another lever called the Triple aim, which I think is going to open even more sites for us in the future. So.
We've been very purposeful to be I think very measured in how we go about ramping up or new unit development, but I think there is plenty of opportunity for us to grow from where we are today and what we probably will do in 2020.
Great. Thanks.
And our last question today will come from John Tower with Wells Fargo. Please go ahead.
Taking a question just I'm.
Just going back to the digital piece of the business with with digital and specifically order ahead mix moving higher as a percentage of your sales does this potentially open up more opportunities on the menu overtime I'm thinking specifically about your case at the a and how.
At least the when you're testing now requires about a 32nd Cook time with new kitchen equipment. So.
Traditional store that might come up throughput, but if you're doing a chipote lanes, where you've got a greater mix of order ahead, obviously that seems to tie in better and that type of a store. So does it potentially open up more opportunities for your menu.
Yes look I think they think it's great about the digital business and the digital make line is it does present the opportunity for us to.
Look at opportunities that historically, we may not have been able to look at.
Because I think you can use that make line in.
Various ways, whether its fulfilling directly digital orders or helping alleviate the the from so.
It's definitely something we're continuing to contemplate.
Because it just presents a tremendous opportunity for us we've got no additional capacity with really great economics associated with that additional capacity.
We'd be foolish not be thinking about how we can drive why can't we drive that harder and that's what the teams focused on it is how do we drive that harder because we'd like to results.
Any time that business growth.
So and I wouldn't.
Have it be kept the idea of just products I think theres other ways to drive people into that digital business and then ultimately leverage that digital make life.
Thank you.
Ladies and gentlemen, this concludes our question and answer session I'd like to turn the conference back over to Brian nickel for any closing remarks, okay. Thank you and thanks for all the questions and thanks for joining US today, obviously, where I started this conversation is I'm tremendously proud of the Chipotle 18, all of our team members.
In the field.
The liver.
7.5% transaction growth and an 11% comp unless you've got an organization that is all rolling together.
I think the culture is tremendously strong both in the support centers and in the restaurants and I think what we've demonstrated with Carney. Aside is we also now have a muscle where we can do new product innovation as well is driving the digital system and I'm also really delighted about the unlock that I think triple aim is going to present for us from our new unit ops.
Attunitys going forward, so lot of growth opportunities in front of AAA, a tremendous quarter I think that the team delivered most recently and couldn't be prouder of where we are but I'm also really excited about what we're going so thank you for joining us and we'll talk soon take care.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.