Q1 2020 Earnings Call
Hello, everyone.
And Welcome to our first quarter 2020 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 home. Chipotle.
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. These statements are based on Management's current summer business and Market expectations and our actual results could differ materially from those projected in the forward-looking statements.
We see the risk factors contained in our annual report on form 10-K and in our form 10-qs for a discussion of risks that may cause our actual results to vary from these forward-looking statements 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 page of our website. We will start today's call with prepared remarks from Brian niccol chairman and chief executive officer and Jack part on our Chief Financial Officer after wage will take your questions. Our entire executive leadership team is available during the Q&A session. And with that I'd like to turn the call over to Brian.
Thanks, Ashish and good afternoon, everyone. We hope everyone is doing well and staying safe during this unprecedented time given the circumstances we will discuss q1 results and recent Trends in a few minutes, but want to start by updating you on a response to covid-19 and its impact on our business.
Let me say upfront how proud and grateful I am to all our employees for their positive attitude and efforts in providing guests access to our safe delicious high quality food made from real ingredients. I want a think our supply chain Partners who have been dedicated to keeping our restaurant stocked with gloves hand sanitizer mass and other necessary items to keep our employees food and customers safe. I also want to thank Our Song change Partners who have delivered our food with Integrity ingredients to every open Chipotle restaurant during these challenging times in a healthy and safe way as a result. I am pleased to report that only about a hundred restaurants are fully closed at this time. These are mainly inside malls and shopping centers as well as Seventeen locations in Europe while the rest of our restaurants remained open 4 to go and digital order ahead and delivery services, which is critical at a time where food options are limited cultivating a better world takes commitment from all of us and we are fortunate to have the financial strength to weather the storm. Jack will provide more details, but it's important to note that we were in
Main focus on conserving cash while prudently continuing to invest in several areas that will help us show a strong recovery once guests activity begins to normalize specifically. I want to focus my discussion on three key topics one our efforts to take care of our employees guests and communities to our emerging digital platform and three our recent con trends at Chipotle investing in our people always been the top priority after all they are a greatest asset. Well before covid-19. We had industry-leading benefits for all employees that include free meals paid-sick-leave crew bonuses and debt-free degree wage as well as mental health benefits and access to a healthcare concierge service for all employees and their families in the week. Since our world quickly changed. We continue to find ways to support our employees personally and financially
we expressed our
Appreciation for restaurant employees who are willing and able to continue work between March 16th and May 10th with assistance pay a 10% increase in hourly rates. We approved discretionary q1 bonuses of nearly fifty million dollars to field leaders general managers apprentices and eligible hourly employees. We're also providing an additional 2 million dollars in assistance bonuses to general managers and apprentices for their services in April and we expanded our emergency leap and if it's to accommodate those directly affected by covid-19
Beyond these benefits we are working diligently to ensure that we're doing everything possible to keep our guest and employees safe during this time of uncertainty at Chipotle food safety is more than a collection of programs and processes wage part of our DNA. We have a culture of continuous Improvement in which we regularly evaluate our processes to ensure that our customers have consistently excellent experiences over the past few years. We strengthen many of our faith safety initiatives including
Wellness checks done before every shift and trained nurses available to evaluate any employee who may feel ill in order to determine whether they should be excluded from work with full pay installed advanced technology air purification systems to reduce the risk of viruses supplied Purell sanitizer for employees and guests mandated hand-washing between tasks and at least every hour as well as gloves being worn for all tasks wage and food preparation and food handling practices designed to reduce food safety risks improved internal training and education to ensure that all employees thoroughly understand the company's high standards for food safety and food handling engaged a third-party consultant to perform regular inspections of all restaurants and finally created an independent food safety advisory Council comprised of food safety experts to provide ongoing guidance on best practices.
More recently at the cases of coronavirus started to grow in the US. We formed a cross-functional task force that has been holding daily calls this provides a real-time platform for us to stay current with market trends regulations and dates on covid 19 based on feedback from the CDC FDA state and local agencies as well as ensuring. We get frequent updates on our own operations. This is also allowing us to make quick decisions and not get these evolving circumstances including recent additional precautions to safeguard our employees and guests these include increased sanitization of high-touch high traffic areas providing Mass former employees and a tamper-evident packaging seal customers can leave instructions in our app and online to request contact list deliveries and carry out all of these initiatives give our employees and customers confidence that you should remain steadfast in our commitment to keeping them safe.
We are also doing our part for the community by donating excess food daily to various food banks celebrating National burrito Day by thinking Healthcare Heroes with 100,000 free burritos and offering a new card program that supports health care workers on the front lines Chipotle will be donating 10% to direct impact and organization working to provide personal protective equipment and Essential Medical items to health care workers through May 1st. In addition Chipotle is doing a buy one get one offer for burritos, whereby Chipotle will donate one burrito to a health care worker for everyone purchased digitally from April 21st through April 26th as she continued to support those on the front lines of this crisis.
as I mentioned
Earlier, the majority of our restaurants are open for to-go orders, which is allowing us to successfully leverage the digital platform. We put in place over the past two years. She won digital sales grew 81% year-over-year to 392 million dollars our highest-ever quarterly level and represented 26.3% of sales as people started to implement social distancing. We moved swiftly by driving further invest towards digital and delivery designed to reduce friction while increasing convenient access. Although queso blanco is off to a terrific start. We reprioritize our marketing efforts by offering free delivery from March 15th to at least early May and shifted from live sports to more online and streaming platforms. We also announced the successful National delivery partnership with Uber Eats that is helping Drive new customers and greater frequency.
Collectively these decisions translated into strong engagement with our guests as evidenced by March digital sales growing a hundred and 3% year-over-year and representing 37.6% of sales rep a recent survey among current Chipotle consumers suggest about 15% had Chipotle delivered for the first time during the last two weeks of March based on their desire for fresh ingredients craveable taste and good value. We believe this will be a lasting benefits. Well beyond the current crisis and our police report that we have maintained strong momentum into April with the month-to-date digital mix running in the high sixties.
Well delivery continues to be the fastest growing part of our digital platform. We are also pleased with our order ahead business or average daily sales have doubled from the level of seeing prior to covet this is part of the reason that we continue shift their development pipeline more aggressively towards Chipotle lines as it helps Drive our high-margin digital order ahead transaction another element that is benefiting from the current environment is our Rewards program, which now has more than eleven point five million enrolled members over the past month at least sign up Spike nearly fourfold, which is another sign that our digital platform is gaining traction. We are pleased to report that 65% of newly enrolled rewards members are new to the Chipotle brand up from 51% pre-code in addition. Sixty 1% of previously store only rewards members are now new to digital versus 8% pre-code while it's early days. We are starting to leverage this growing install base with personalized promotions to better engage in and sent behaviors. We are seeing dead.
This transaction increases across all frequency bands and expect this lever to become a bigger driver in the future as we gain greater customer insights while continuing to expand our digital ecosystem.
Lastly let me provide a few comments on Trends during the quarter and thus far in April despite laughing a 9.9% cop in q1 2019. We had a tremendous start to 2020 with our Consul running at plus 14.4% with nearly 11% transaction growth through the end of February including a two percent benefit for leap year. This highlighted are five key strategies continue to resonate with guests. And as a reminder, these are making the brand visible and loved trading Innovations, utilizing a stage gate process leveraging our digital make line to Iraq and accessing convenience engaging with customers through our loyalty program and running successful restaurants with a strong culture that provides great food hospitality throughput and economics. We began month on a very positive note, but his covid-19 restrictions became more prevalent are constituted rated and ended up declining 16% for the month with the week ending March 29th, being the trough it down 35% off.
this resulted in the
Pumping up 3.3% with transactions down 1.4% including a 1.3% lead date benefit restaurant level margins were 17.6% and adjusted diluted EPS was $3.08 down 9% year-over-year. April has seen our comps improve with the most recent week adjusted for Easter being in the Edge of High Teens range.
No, one can predict the magnitude in or duration of this crisis, but we are focused on winning today while we cultivate a bright future for our employees gas communities and shareholders by staying calm and working collaboratively to leverage strong brand business model and balance sheet. We are confident in our ability to get through the current downturn. In fact, we are continuing to judiciously invest in key areas of our business so that when we come out the other side, we will emerge even stronger. We know it won't be easy. But Chipotle is well prepared to regain our prior momentum and extend our brand leadership a recent consumer survey showed that the vast majority of our coronavirus consumers Envision coming back to the restaurants at a similar or higher rate than before as a result. We believe our long-term opportunity significantly expand auvs margins and store base wage remains in place. Thanks, once again to all of our employees and partners for their dedication and hard work during these difficult times. We will get through this together and be stronger as a result of the tremendous passion and commitment from birth.
And lastly I would be remiss if I didn't offer a heartfelt. Thank you to the healthcare workers for their heroic efforts on the front lines of this pandemic with that. Here's Jack to walk you through the financials. Thanks and good afternoon, everyone. These are unprecedented times and I could not be more proud of the way all of our people from crew and managers and our restaurants the support teams in the field and all of our support staff in Columbus and Newport Beach have all stepped up to support each other and do everything possible to help navigate through these challenges unlike typical earnings calls. I will not go through our financials line-by-line, but instead will bring you share how we were performing before the effects of covid-19 and then turned most of my focus on how we're managing the business to ensure we come out of the crisis stronger than ever.
I cannot through February was 14.4% which includes nearly 11% transaction growth including a two percent benefit from lead Day restaurant margin was nearly 22% through February as our restaurant managers and teams. We're doing a great job managing the business and leveraging the strong top-line to drive good margin flow through during the month of March are weekly comp progression was up 12% for the week ending March 18th down 4% for the week ending 15th and down 34 to 35% for the week Sunday, March 22nd and 29th sales improved to around down 30% as we entered April and then improved again over the past week with comps just free store in the down High Teens range.
Since the beginning of April in-store ordering is down around 75% while delivery is up about 150% in Order ahead is up nearly 120% highlighting the importance of our digital platform setting us up for bright future as digital sales tend to be sticky digital is currently accounting for nearly seventy percent of sales.
Give me uncertainty surrounding the impact of covid-19 on the US economy. And on our sales Trends were withdrawing our previous fiscal 2020.com guidance.
We ended q1 with $909 in cash and short-term Investments and no debt which puts us in a strong financial position to navigate this crisis as sales fell quickly from the Nova off of it impact. We proactively began to manage cash outlays to preserve liquidity situation is fluid and we constantly re-evaluate be here are some of the initiatives we have implemented so far, but we bought back about fifty-four million dollars in stock during the quarter. We suspended our buyback program on March 20th. Just a few days after our dining rooms were closed and we have no plans to restart the buy backs in the near-term the restaurants. Our operators have done a tremendous job adapting to lower sales as they are efficiently managing food ordering prepping and cooking to minimize waste while ensuring each guest receives a freshly prepared meal. They're effectively scheduling labor hours to accommodate the needs of our crew and shifting hours to support our growing digital business and they're reducing non-essential controllable costs.
As a result our restaurants are break, even at a comp of right around down 32 down 35% and that excludes recent employee Investments such as the 10% assistance pay for crew and discretion a bonuses for our managers and also excludes the free delivery that were operating in or out and these Investments have cost us about twenty million dollars for the month outside. The restaurants are supply chain team has been consult diligently working with our supplier Partners to ensure there are no major disruptions. They've done a tremendous job making sure that our restaurants have all the essentials such as soap cleaning supplies gloves and hand sanitizer as well as ensuring our Restaurant They're stocked with our delicious ingredients pleased to say that we've been able to avoid wide outages while minimizing food waste
We're also in contact with our landlords about rent deferrals and rent abatement. We're a strong tenant with significant growth ahead of us. And we expect our landlords will partner with us during this difficult time.
Front we of course halted all non-essential travel and we're reconsidering the hiring of project consultants. And we're negotiating longer payment terms on the larger contracts. These will help balance preserving cash in the near-term with investing for the long-term sg&a is running around twenty million to twenty-five million dollars per month and it's a recovery takes longer than expected. We have the ability to make additional adjustments as needed.
With regard to capex. We're delaying non-essential reinvestments including deferring all remodelled that don't involve a digital make line or the addition of which boat line, but we are pulling forward those remodels that involve adding a second line for the few restaurants that don't already have one digitizing the second make line of those restaurants that required a remodel to fit the digital make line and if you re models were able to add a Chipotle
And by with new store construction, which I'll talk more about in a few minutes and our Tech Investments. Our capex is running around 30 to 35 million dollars per month. That being said we have the flexibility or eliminate much of this cat back if needed but we believe making these Investments today will pay off in the long run. So to recap our monthly ongoing cash burn is around fifty million to sixty million dollars wage, assuming we break even at the Restaurant level and our G&A and our cat box is in the range. I just described encouraging it if cops can be sustained at the level seen over the past week of down. Hi team took cash flow would be in to plus twenty million dollar range for a net cash burn would be cut by about one-third.
Well, we don't plan to utilize the PPP loan provision of the recently-passed cares act. We expect to see a liquidity benefit of around a hundred million.
Primarily from differing Social Security tax payments and accelerating tax depreciation and previous returns and that we generated taxable income in q1. We don't expect to have any related tax liability wage tax deductions related to option exercises and Equity investing in the quarter.
Finally, although we don't currently need access to the market. We're working on a 250 to $500 revolving credit facility with our banking Partners. It's provided additional access to funding should it be needed in before adding this facility our balance sheet along with a care is tax deferrals can sustain us for well over a year and that assumed our comps are at the down 32 down 35% level where our restaurants break even bought last week trying to give this optimism that our Council continue to improve in the coming months.
I need unit development pipeline is continuing to build as we remain confident about the long-term opportunity to more than double the restaurants in the and we're already beginning to see an increase in sites available. As other businesses have pushed back. This will allow us to opportunistically expand the quantity of sides will also enhancing the quality of a robust pipeline during the quarter. We open 19 new restaurants with 11 having a Chipotle line and Chipotle's continue to have a higher overall digital mix than a recent weeks is approaching 80% in addition to mix of higher-margin Order ahead and pick up transactions has more than doubled for these restaurants as compared to the pre covid-19. Botla and opening sales are outpacing John Chipotle openings by about 5% to 10% before
Our optimism for Chipotle's is further enhanced by our most recent opening a few weeks ago in Eureka, California. They won sales of nearly $15,000 was one of the highest opening days of all time as a result of the continued strong performance of Chipotle names and less competition for new sites. We will see you can either even greater proportion of Chipotle things in our pipeline which will enhance customer access convenience package increase new restaurant sales margins and returns you today we have open 28 restaurants with another 49 under construction. However, we have begun to see construction delays and therefore have preemptively bought a groundbreaking on the majority of projects in April. So we have a better visibility into one construction will pick up momentum again, we believe it's prudent to withdraw our prior twenty-twenty new restaurant opening guidance.
So you may have seen we signed a deferred-prosecution agreement to resolve the doj investigation that was previously reported related to food safety incidents beginning in 2015. The agreement will be in fact three years. And in fact for three years and the doj agreed to not take further action so long as we comply with the agreement and pay a $25 fine with ten million being paid on June 1st and three page five million dollars every 30 days after that first payment these payments will unfortunately heard our liquidity a bit, but we're ready to put this old matter behind us.
And closing despite uncertainty about the near-term impact of covid-19 are talented and committed teams the strength of our brand and the resiliency of our economic model gives us the confidence and conviction to make a long-term investment for people for our customers for a company and for our shareholders and made these unprecedented conditions. We will remain focused and not simply managing through the crisis but taking actions that with emerge even stronger. I also want to thank all of our extraordinary team members for their commitment during these challenging times their efforts are very much appreciated with 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 and one on your telephone keypad. If you're using the speaker phone, please pick up your handset before pressing the keys to withdraw your question, please press star then to this time. We'll pause momentarily to assemble our roster.
The first question today will come from David Palmer with evercore is I please go ahead.
Thanks. Good evening. Jack a question for you. You were talking about some cash burn rates fifty million, but actually might be a third less than that off a monthly basis at the current comp decline rate. And I think you said something like thirty to thirty-five million of capex is included in that. So I guess that does that mean I'm roughly speaking that you're breaking even or a little bit better than that at this from a just a pure ebitda standpoint at the current decline rate that you've seen lately. Yeah that I have a quick follow-up. Yeah. That's right. That's right David So if you if you look at the sales for the last week and listen, we'd love for that to be the trend or for us to improve from there. But if we just hold it at the trend we're seeing from the last week is down in the high teen we earned cash flow the Restaurant level about twenty million dollars r g n a s and the twenty to twenty-five million dollar range. So you're absolutely right before capex were right about at at Birth.
break even
And and just a quick question on your on the coastal areas those Urban centers you can imagine certain parts of the country or a particularly hard hit right. Now. Are you seeing a pretty widespread type of comp decline you're seeing or is that mitigated by something more of a disruption among the competitive set in those areas and whatever you're doing digitally. Thanks Dave. It is a wide range of of out there as you can imagine. The Northeast has been hit the hardest parts of the middle of the country are much further had in terms of the recovery. And so it gives a great optimism that we can see our way out of it and get you know towards and then eventually, you know into positive territory a front from a cop standpoint.
Thank you. Thanks David. Yeah, the next question will come from Sierra said it tomorrow with Bernstein, please go ahead. I think I have a follow-up on a separate question. So the follow-up is just on the question of sort of disparities in your contract. And you know our sense is that you know things like daypart mix or off-premise versus on and off also things like Urban versus Suburban aren't are determining a lot of what's happening in terms of the recovery. Can you remind me sort of what your sales mix might have looked like before this weather, you know lunch or dinner or what percentage of your stores are in Urban Market versus Suburban. I'm just trying to get a sense of how much of this is just a function of you know, what the business was like before and not anything you need to the brand and then one other question.
so I'll start Jack and then you can chime in so
Obviously Chipotle had a pretty good split between lunch and dinner previous crisis. We've definitely seen a little bit of an uptick in our dinner or dinner occasion with a little down tick in the lunch occasion. And I think that's driven by just the natural consumer behavior of people not going out and about the positive or the digital experience. I think as introduced people to a new behavior in a new occasion for Chipotle, which is solving medication for a family meal or dinner story Klee. Maybe they already had Chipotle for lunch and they hadn't considered us for that. So we're seeing a slight pivot just in more dinner occasion and with a little decline in the lunch occasion and a lot of that I think is a good thing by um, just the situation of people being sheltered at home. Um, and then also the ease at which the digital occasion both contact list pick up as well as the contact list.
And I think one of the things that's also driving. All this order ahead growth is people are just realizing how easy and contact lists the Order ahead experiences, which is showing up in the Chipotle execution as well as using our mobiles pick up shells and then on your question about Suburban versus Urban and one of the strengths of Chipotle's our Suburban footprint, um, you know, frankly really they'll Concepts off from the Suburban standpoint and that's continues to be a strength and frankly one of the things that's worked out really well is as we brought on Partners, whether it's dog or who Grieves, we really spent a lot of time making sure they had coverage in the Suburban markets. And obviously we have a president's in urban markets as well and not surprising as Jack mentioned, you know the page or the store. The New York is more is a laggard as a region relative to what we're seeing in our other regions on the recovery, but you know, we're seeing a lot of positive wage.
Is happening in our digital business, it'll be very interesting to see as we are given the opportunity to start to open our dining rooms here in the next, you know, call of weeks or month about how we're able to continue to keep people engaged in a delivery business our digital business because the one thing that hopefully you picked up in here is our rewards database just went from 8 million to almost twelve million and that's going to be a very valuable asset I think going forward as we work through the recovery.
Check on if there's any bad know if I think you covered it really? Well Brian. Thanks. Thanks, very helpful. Just both of you were in the industry, you know back during the global financial crisis. If you think back to the way it would you anticipate as we come out of this, you know, if there's a silver lining, you know, possibly better opportunities around real estate or maybe some of the capacity come out. I was just curious what institutional memory might tell you, you know about what the what we look at like on the other side great question. I think this is really the strength of our branch and our balance sheet and our digital business is going to I think sets up very nicely on the opportunities that present themselves as we get to the other side of this, you know, the obvious opportunities, I think are some things we've talked about, you know, we're not shying away from sites and our ability to get the sites that we believe are best for our future digital business and our Chipotle ins and then Thursday.
something just very much being on Trend with people having access to real wholesome nutritious food is going to continue to be
At the Forefront of good health and I think good health and well-being is going to be an even more important Trend, uh in the consumer's psyche going forward and you know, I think we were very well positioned in the fast-casual category and the brand in the fast-casual category to give people access to that higher quality food with integrity and the the accessing the experience that they want, which is the least amount of friction with arguably the least amount of contact and we're well-positioned for all those things and then the strength of our balance sheet and the strength frankly of Faith able to flow every incremental dollar allows us to invest in, you know, Future Real Estate future sites future digital and we're optimistic once we get to the other side of the page.
Thank you.
You know next question will be from Catherine Fogarty with Goldman Sachs, please go ahead. Oh great. Thank you. Wanted to touch base on menu Innovation. It's not something that was really brought up on the call today, but how you're thinking about the forward here and in particular, you know is we're looking at the consumer here, you know, the financial impact the virus has had on the consumer. Where are the opportunities I think to to grow check or potentially even take share just given your price point relative to the competition. Thank you. Sure. So look, we are still big Believers in our menu program. I think we've talked about this. We saw opportunities in beverage. We still believe there is an opportunity in beverage for us to have beverages with the same type of home, uh, you know, commitment to organic no artificial ingredients, you know less sugar the juices so you're going to see us continue to push wage.
Beverages and then you know the case of Blanco launch I got to tell you was it was coming out of the gates, um and evidence by where are cops were off right in January February. It was it was getting huge positive feedback. Our teams were loving it. The customers were loving it. And I think there's an opportunity to steal to re-engage people in case of long once we get past this and then you know, we're still working hard to bring them back carne asada. And then there's a few other things that are going to our stage gate process, which we've had to delay just because wage is not the environment where you can go test in a restaurant to really understand consumer experience operational experience. Um, but we have some early reads on this and we feel really good about being on Trend off with, you know, different Meats, uh, different greens. Um, you know, I think we've always talked about it is, you know, we want to, you know, meet customer's request. So, you know, we're testing a quesadilla, but we also log
Lead consumers to higher quality food or different food experiences and that's why you see us talking about things like briskets and cauliflower rice and so on and so forth. So I'm a consumer sentiment hasn't changed on the desire for those things. We just have to make sure we do it at the right time because we want to come back operationally strong with the core business before we start adding some of those things.
That's helpful. And
And just one follow-up here on commodity. We've seen a lot of deflation, you know across the entire universe. Is there any opportunity for you guys to lean in and lock in some contracts with the environment life here? And how can you kind of you know, you know kind of Leverage this current backdrop. Thank you. Yeah Commodities it's likely to be a favorable commodity am going forward, you know, we deal with a lot of small farmers. And so generally we don't have a a great opportunity to lock in like you would if you were buying the commodity meets for example, but we definitely think that there's going to be a time for us to be able to support our farmers in a way where we can bring, you know, not only strong demand but hopefully growing demand as well and we think that will lead to favorable pricing but in terms of locking in that's that's not that's the only wild card is usual for us is is avocados and we'll see this should be a favorable or pretty favorable year for us, but we'll see how out demand and Supply match up and hopefully this will be dead.
Normal years since we've had, you know, two or three or four years now in a row of pretty volatile avocado cost.
Great. Thank you.
And the next question will be from David Tarantino of Baird, please go ahead.
I good afternoon. Hope everyone's doing well. My first question is on just the commentary around real estate and and dead, you know recognizing that you do have the enviable position of a good balance sheet that you might be able to take advantage of some some opportunities. Just wondering if you could maybe comment further on how you age envisioning the rate of growth exiting the crisis that we're seeing now, do you think there's opportunity to accelerate the pace of unit growth maybe in 20 21 22 m
Yeah, look David. I think there's going to be an opportunity for us for two reasons because I think we've made tremendous progress on the people front. So our turnover have that is really come down over the last you know year so we have more stability with our leaders. And then I also think in the environment we're going to have the ability to recruit and retain even more people going forward, which well really set us up nicely for an acceleration in development. And I think we've always talked about it. We just want to take a very measured approach to how we accelerate that growth because we want to open the restaurants with great teams, great experiences and great financials. And but this will definitely present an opportunity where I think our pipeline that will get bigger and will present the opportunity for us to staff them and run them really well so that we can continue to accelerate our growth plan.
Got it. And then the second question I have is related to operations.
I guess how do you envision the operations working in your in your format in the world of social distancing on the other side of this is you open up your dining room. Am I got what what steps are you taking and and do you think you'll see through put constraints come back as you try to maintain social distancing on the line as an example?
Yeah, so obviously this is something we've been spent a lot of time on and frankly this morning. We spent a lot of time on it. We're going to make sure that we provide all the indicators in the restaurant so that way the customer had the confidence to know what they're supposed to do to maintain the social distance as well as our team members, but you know you look they're going to see our team members wearing masks. You're going to see our team members of gloves. You're going to see a team member in the dining room that's sanitizing, um, you know, tables and high traffic areas. The hand sanitizer will be in the dining room, you know, we probably will have to move things off of the drink station and make sure that we had a little bit more control of that so that those things are clean and sanitized the way that we would want them to be so that every person that gets off, you know, or drink or grabs Tabasco bottle can have confidence but you know, look, I I think the one thing that is great about our businesses our customers that come in the restaurant they know how to off.
Chipotle and they're part of the process to move down that line quickly as much as our employees are part of the process and we've done that on it quickly and I I think the combination of our digital business, you know, hang up to the sixty seventy percent of sales. I think we're going to hang on to as much of that as we possibly can while we build back our dine in business and I think over time some of these restrictions or behaviors will migrate back to the way it used to be but the good news is our model is very durable in this environment for a one we actually are able to open the dining room, but we're going to be very specific on the actions. We've taken the restaurant to get people to confidence that they're having a a healthy experience, but you know the near-term it's going to it's going to be something that we're going to learn our way through and I'm confident Scott and his leaders will do a great job of managing the Dining Room reopening.
Right. Thank you.
The next question will be from Andrew Charles of Colin, please go ahead.
All right. Thanks in a normalized environment marketing promotional spends typically runs about 3% of sales and you know given the headwinds the sale that that we're seeing throughout the industry philosophically. Are you looking to pair back suggesting a name to run 3% Mark expense off the lower base twenty-twenty sales or you know, are you looking to maintain kind of a similar hundred eight hundred ninety million dollar budget that you had to give you the year. You know, I'm thinking the context obviously the shift from live sports streaming platforms is less expensive advertising, but I would imagine this probably gets upset by subsidizing delivery fees for the foreseeable future.
Yeah. Yeah, I mean
You kind of hit the nail on the head would I think Chris and the team are really focusing on is every dollar we spend in the marketing is how do we maximize the return for the environment? We're in and I think the team's done a phenomenal job of it being away from traditional television frankly and moving more towards, you know, delivery incentives around delivery. And then also using platforms social digital, you know, I I love how the guys you know quickly pivoted to like Chipotle together, right? These are things that we were the first ones doing because I think Chris and the team are very much in tune with where the consumer is and we're young people want to experience their brands and how they want to experience the brand. So we're going to spend to do those things off and you know, whether the absolute dollars end up being a little different, you know, probably but you know, really what we're focused on is getting the return page.
So that you know, we feel good about the dollars that were investing and then we see that showing up obviously in both the top line and then the bottom line so, you know, very proud of what we are and how we pivoted are spending and you know, I think we'll continue to see us lead in this space.
That's great. Then just my follow-up questions that you know, you guys just goes to high 60% almost 70% digital mix of sales so far in April, how does that mix the sales differ between carryout and delivery relative to what the page loads up to the digital carryout and delivery mix before covid-19. Is it safe to say that you're seeing delivery sales now represent the majority of the digital sales and most recent week.
No, you know what I would tell you is, you know delivery definitely those first couple weeks in March really took off but over the last couple of weeks. We've seen Order ahead frankly catch up and as our digital business has just grown in totality. So, you know the mix prior to covid-19.
That's great. Thanks guys.
The next question will be from Nicole Miller with Piper Sandler, please. Go ahead. Thank you. Good afternoon. I appreciate the update. I wanted to dig into the April month. Let's say less worse environment quite a big jump. There's probably now a half a dozen restaurant companies that had said the same and what do you think is happening on the consumer Behavior side? Because it seems like a great now. I'm going forward it's all going to be about what the behavior is now and then the the Tipping Point to see what changes so I'd be curious on really just what the heck do you think is going on is that so stir-crazy or wage? Um, you know advertising's kicking in. What do you think might be causing that?
Look, I think.
There's a couple of things one. I think all the pantry loading. Um, Behavior has uh-uh slowed down and I think also people at work through their pantries wage and I think also people realize they bought a lot of things that they ended up having to throw away and I think there's fatigue and cooking. So combine that with the fact that also, you know tax refunds and stimulus money is starting to get into the hands of people and you know, I think people were like, you know what I've got off the additional cash. I've worked through my pantry loading and you know, I think it's time to you know, break the routine of me cooking and being a little stir crazy and let's reach out to restaurants to solve the solution. So I think that's just the fundamental set up right now, which is
You know more stimulus money in the hands of customers and then the pantry loading Behavior I think is really slowed down dramatically and they've worked through all the goods that they purchased in their pantries.
That's helpful. And and so just to follow-up and last question on that point to what to what degree can this serve as a proxy for the recovery. So if I think about Chipotle and 15 and 16. What what happened then as you perfectly positioned as you've been outlining, you know for the last hour basically to take this head on so I think back to that time and would say that probably, you know, repaired the brand to some degree with diluted to the brand Equity to some degree specific to your brand obviously, but that's not the case here. Everyone's being treated equally. So is this more like a role model pattern, I guess the real question is everybody's I guess in the same boat you closed reopen and the question is how long to get back to the prior run-rate wage. Look here's what I would tell you is. I'm very excited about the opportunity to get our dining rooms reopen. Um, I'm very excited about how leveraging all the digital games we've made uh-uh, and then I'm also wage
So very optimistic about our ability to operate once the dining room is open. We have our digital business running next to us and environment where we're working with Ellen a wellness practices elevated, um, you know food safety practices because these are all things that we've been doing for years. Now that a lot of people are just starting to adopt so I I think you know, we're always going to be the ones that will look to figure out what we can do next on wellness and food safety, but I'm very confident about our operators being able to operate in that environment off and then I'm very optimistic about what will happen as the phase kind of reopening of the economy's goes into effect because I think we're going to hang out a lot of our games digitally and a lot of the games we've made culturally and operationally as we reopen these dining rooms, um, but looked at timetable, I think there's going to be driven dead.
Very much about when the economy gets.
Open so that people can start experiencing dining rooms and the full access of restaurants. Um, so you know, but I I it looks like that's going to start loosening up here over the next month or two.
Thank you.
Yeah, the next question will be from John glass of Morgan Stanley, please go ahead. Thanks very much for his jacket might just follow up on the restaurant. Margin question. You you answered earlier about the cash consumption or the cash Breakeven. What does that translate back into a concert down High Teens? What is the percent restaurant? Margin that that translates into and what is unusual about that number and that you talked about? How long is it fully loaded with the rent? For example, I think there was some increase in wages on the other hand. Maybe you don't I don't know if you fully staffed to restaurants. What's unusual in the current restaurant? Margin? Yeah, you know John I don't even have Monday a you know, what percentage of sales that would be. It's it's a it's still a very low-margin, you know, if we're still down in the down teens, it's still bumpy line item by line item. Our teams have done a great job of managing the business for the for the lower volume, but we're not going to cut our staffing, you know too short so that when the surge happens and more people come in and the orders start to rise we want to be ready for that. I think the point them
Is just that we can get break even you know at the thirty thirty-five we're hoping. This is a new trend and so it reduces our Casper and buy a lot. What I would tell you we're thinking about is when we think about what happens when the dining rooms reopen and we start to build back or dining room business and as Brian mentioned keep as much of our digital we feel like we'll be able to get back to the margins. We're running before I'm back to that run rate, you know, we were at a a better than 2.2 million-dollar, you know movie on our wait of 2.3 and we were already showing through February which January February are not great margin month already at 22% So we know when we get back to those volumes, you know the the the to 2 and then on our way back to to 3, that's the kind of margin you could expect us to you know to deliver but we're still down its you know, it's still going to be a you know, a single-digit kind of margin John but it's something that reduces the cash burn and allows us to make the right Investments for the long term.
That's very helpful. And it just a follow-up you mentioned in the release the exact tax benefits or about a hundred million dollars. Is that all inside a 2019 and is that all expressed through the tax rate was there some of that in this quarter? And how do we think about how those benefits flow over the next quarter's a year? It's it's all this year John but it's all Cash basis. So none of it is earnings basis. So for example, it's a deferral of things like Social Security taxes. We're going to have to pay those beginning next year, but it's saves us cash this year. We need it the most and then there's depreciation resets that we get for 2018 and 1980. So from a book basis, there's no change at all because the book depreciation doesn't change but our tax depreciation does so it'll affect our cash flow it affect our deferred taxes, not affect our earnings parts and Jerry p s
Got it. Thank you.
Yeah, the next question will be from Brian Bittner with Oppenheimer & Company, please go ahead. Thanks. Appreciate the question with Digital Trends now, I'm at 70% of sales. You know, I assume they're not going to remain that high when we're through this virus, but they're probably going to remain pretty sticky, which means your delivery business is probably going to remain a much bigger part of your business moving forward. Is there a Tipping Point where you potentially think about mixing in some of your own delivery drivers. You just talk a little bit more about the strategy for delivery if it becomes that large of a business. Thanks.
Yeah, so obviously we're optimistic that we'll hang on to both our order ahead business as well as the delivery business and but specifically to your question a delivery, you know, I think the the reality is it works off our digital make line which sets us up for a very different. Um walk on how we get to the margins we get through our delivery business and you know, what we have said is look as partners potentially change commission off each or you see various economic impacts on it. There's just a general understanding with the folks who work with where it's like look we need to make money at it. You need to make money at it and we'll figure out how we make this work. Unfortunately for us. Um, our food works very well in the delivery occasion. Our customer has had wage.
Positive feedback on the experience and the partners that we have are very willing, you know to have the right dialogue and be transparent with each other so that we can make the channel work for each other off. So, you know, we're going to take a very smart approach to it where it should be, you know still viewed as a positive to have this occasion for the Chipotle pork and that's the approach we're going to take and will continue to be you know transparent with our partners as we work through this. Thanks. Appreciate all the color Brian sure.
The next question is from Sharon. Zaxia with William Blair.
Hi, good afternoon. Hoping you could touch on the Restaurant level labor situation and you know how difficult recruitment might be in this environment or or else you want over has been trending separately Jack. It sounds like you've kind of implied this but are there any structural costs changes to the model coming out of this?
I'll take the Labor Day and then I can hand it over to you Jack and the structural question but on the labor side of things, I think this is really what we're seeing the power of our purpose and our culture shock because we're seeing turnover actually improve. We're seeing fewer people walking away from Chipotle. We're also seeing people that are with us were very proud to be with us. And you know, I think we've been very purposeful in executing against what we believe are our values and the right thing to do and you know, as a result of you know, our restaurant managers our restaurant tours, you know, these folks have more tenure with us than we ever have, you know, and they're excited about the opportunity of the new restaurants. We're going to open and they're excited about how to pole he's going to get to the other side of this so I think yep.
We Will based on the communication
And we've had with our employees, um, you know, they've been very very very supportive of the Chipotle business, which will they culture and each other and you know, they were very fortunate that way, um, you know, and I think going forward we're going to be a place that people are going to work and so and we're going to be a place where people are going to be able to grow and I think that's going to attract the right choice so that we can grow our business effectively, you know on the structural stuff. Um, I'll pass it over to Jack, but we don't see
That doesn't seem to be a headwind but over to you jack. Yeah, I don't think so. Sure. There's going to be stuff in the short-term like when the dining room rooms we reopen and we're we're actively talking about what exactly that month and we're going to follow everything that's happening in this state and the local jurisdictions and the like but it's likely for some period of time we'll have an extra person at the dining room just to make sure the customers see that we're constantly cleaning that you know, if they have questions, you know about social distancing or what-have-you. There's somebody there. So there's likely to be some extra cost for a while on the other hand with a higher digital. We know that our digital business is more efficient and takes less labor on that digital make line to serve as many customers. And so we're in fact seeing efficiencies in that we're seeing that we're using less labor to deliver some of the sales that that you know, that that we used to have to add our life or in the past. So I I think there's pushes and and both I think when we get fully to the end of this past the transition and let's say a year from now or something like that. I don't think there's going to be any meaningful wage.
Structural class. I think our model will be will be fully intact, but you know, it'll be a little bit bumpy when we get you know as we get from here to there.
And the next question will come from John Evancho with JPMorgan, please go ahead hi. Thank you a couple of clarifications. If I may at first were the hundred restaurants that were closed temporarily closed included or excluded in the same store sales commentary.
They're included in. Okay, perfect. Thank you for that. And then secondly, you know thirty percent of your sales, you know, being non-digital were a hundred percent of your restaurants. I mean, I guess, you know, you could they serve non-digital transactions. Were there any examples in any markets, you know where the stores had to be a hundred percent digital I guess by you know by market mandate or what-have-you or were you were you able to keep our restaurants open for that? Not to we had a couple of hundred where we were purely digital, you know, I think it's like the two or three hundred range. But otherwise the balance of the system was still able to do, you know come in and Carry Out.
And did you learn anything from any of those fully digital restaurants? I mean is that you you'd I mean do you think you could have done more of those restaurants and and still, you know, even taken up the digital mixing hire me what what what what type of experience or you know learning is that you get from from digital-only restaurants, which obviously were also cash flows as well. Yeah. So that's one of the things that's definitely true is the Inn Restaurant experience still provide another level of customization which people still appreciate for a certain occasion. We still have great customization in our digital app and on the website, but you know, look if you want to go that little extra mile of customization have something you get from an in-store experience, So that would probably be the biggest thing that we've noticed is some of our heaviest users are loyal users really appreciate having access to the dining room, but the good news is they're getting experience with our app now dead.
And they're realizing and you'll see us do this going forward. We're going to I think educate people.
More on how they can customize it via the app and the web because there's a lot of very simple practices on you know, if you want to put your sauce on the side you should see if you want to do half-and-half easy, you know and people still are getting used to how they do their customization but I would say the biggest learning is there are people that are very loyal to them coming into the restaurant and getting their Chipotle their way and that makes us unique so access definitely. Yeah, and it's it's it's an obvious difference and and the final kind of question in terms of reopening the dining room and me what type of uh, what were you look for in the marketplace. I mean, obviously some Governors Georgia being one or you know, ahead of the curve in terms of your kind of, you know, getting people back out others, you know for different and obvious reasons, you know kind of on the other on the other Spectrum, but you know in a lot of local market, you know mayor wage
Selves are making decisions. So I mean, is there do you want to open entire States at a time markets at a time and mean when you you kind of think about re-opening, you know your dining room Steven with a lot of social distancing, you know, probably in place when you open what are you looking for? You know for for the permission to go out and and start to reopen that full experience. Yeah. So look, I think this is going to be a buy restaurant approach for us and Chuck is one of the things that I think is terrific about us being all company-owned. We have the flexibility and the capability to do it. So we've got a very were very poor issue. We've got a leader of food safety and wellness carry bridges are name. She's very tied in right now with the CDC and the FDA and a tracking for us and having those conversations so that as the government and the science and the data comes in we can be best informed so that we can provide a healthy experience both for our customer and our crew.
And we're going to execute this restaurant by restaurant because I think what we're seeing is this virus is very much proving to be very different depending on where you are in the country. And you know, fortunately we're set up where we have the capability to open that way for dining rooms. And I think we have two people capability to execute in a restaurant and we have the people capability to get the right information. So we make smart decisions as we reopen.
Thank you so much.
The next question will be from John Tower with Wells Fargo, please go ahead awesome. Thanks. Hope you can hear me. Okay, just a few on the the Lifeboat Lane and and and frankly just think about this business going forward in terms of you know, you mentioned earlier the idea that real estate is opening up and you're getting access to potentially better sites. Are you also thinking that you may have potentially better rents going forward and then on top of that historically you've shied away from the idea of owning any real estate, but clearly, you've got a fairly strong cash balance. It does does that cash balance and and potentially real estate prices dropping make it more attractive to move towards that wage that that ownership structure and then I got another one after that place. Yeah. Listen good question. It's likely that rents are going to relax a little bit now. We typically go after birth.
You know a sites in a trade area.
Those tend to hold their their value their rent values more than if you're going to go to a b or c location, but I would still think When there's less competition out there that we're going to see relax rents. The thing that I think are most excited about is where landlords might have been resistant to add a Chipotle in the past like picture and cap and then a landlord having to redo the whole circulation around that property because cuz we've asked for a Chipotle while they might have resisted that a bit in the past. We're not seeing more resistant of that anymore the fact that we're looking to go into a site we're continuing to grow that's where most excited about but we do think we'll be able to get more sites hire qualified more Chipotle and I would expect that the rents would be should be at least mentally more attractive. We're we've never really been against buying if there's an opportunity to buy a site we typically going after you know going into somebody else's building so we don't do a lot of free standard when we do do free standards are all often on the pad of a shopping center and typically the landlord or developer. They like to keep those wage.
Have to tell you if a if a developer is cash-poor and they're looking to the cell a site and if the price is right, we'll certainly be there and we're willing to definitely buy that land so we can lock in our occupancy costs forever Thursday and then just on the Chipotle in following that line of thinking you'd mentioned. I think previous calls greater than 55% of the development was going to be tied to Chipotle in and for for twenty twenty at least in in thinking about the month where that can move for the balance of this year. And next year. We talking about, you know, this being a a higher run rate going forward in terms as a percentage of the mix and are we talking somewhere between eighty to ninety percent of new stores being in that Chipotle in format than it definitely got to be higher 8290 might be a little high cuz we still do open up in some storefronts and some urban areas as well. But it's definitely going to be hard not to fifty to sixty. In fact, we're even seeing that deals that that we've already done or have mostly done we go back and say hey, by the way, we talked about that chipotle Lane and you weren't that crazy about it. What do you think about it now, and we're getting land loge.
You know what if you're still, you know willing to go to the site will do it. So I I do think for this year. You'll see the percentage of Chipotle to inch up and then I think for an extra I think you'll see a stair-step. I don't know that a dog is is is realistic, but certainly higher than 60 and and and maybe maybe north of seventy as well, but we'll we'll see so far so far the reaction from the landlord's has been good. So we're very very optimistic. Great. Thank you. Stay healthy everybody. Thanks. You too.
And the next question will be from Jeffrey Bernstein with Barclays, please go ahead.
Great. Thank you very much. At first Jack just a clarification on the the restaurant margin conversation. We talked about earlier. It's obviously hard to read the most recent Trends but I still think it's fair to assume that hundred thousand dollars equating to a hundred basis points of margin, or is it in the short-to-medium term that there are going to be some structural headwinds that would make that a little bit harder to achieve wage. Even if you do think that I think you said ultimately you do think that those two numbers would once again go lockstep together. Yeah, I think long-term were a hundred percent on that same page that when we get back to call at 2 to we could be at $22 and then every hundred thousand dollars of volume, you can get an extra hundred basis points of March and I just think between now and then it's going to be bumpy. It's going to be bumpy because there's going to be two locations, you know throughout the country and how the recovery happens, you know, it's not always perfect when you add volume or pause on volume that you get, you know, the right response in terms of dead.
The Labor Management, you know the manager.
And of of food and waste and things like that, and let's we're not going to go crazy over that as we as we navigate through this recovery, but I think once you get through the recovery, I think our earnings power our margin power is going to be fully intact. And would that would that said Is We I know you withdrew your 2020 guidance which seems prudent but as we think about 20 20 and 20 21 modeling, I know it's difficult at this point, but from a sensitivity standpoint, you know, how do you think about you know, each point of copper each hundred basis point of margin in terms of a framework to think about our earnings over the next year or so.
Yeah, I tell you I I just wouldn't I wouldn't want to lock into what the next few quarters are going to be if you want to look a year ahead and let's look at when there's either a month or antivirals and the economy is, you know back in humming again. I think we're fully back to the hundred thousand equals a hundred basis points. I think in the interim, I think it's just too hard and I took to be bumpy. I mean EPS is not going to be that predictable. And so what is going to be predictable is the Investments we're going to make we're going to make them in our in our people we're going to be able to make investments in our faith, you know, in terms of real estate. We're to make sure that from a employment brand from a customer brand and from the Investments we're making for the future that were to do all the right things in terms of eps in the short term for the next few quarters. Just be ready for that to be bumpy. But I think the Investments were going to make and the the impact that we're having positive impact. We're having on our brand I think creates a bright future for us beyond that.
Understood. Thank you.
Ladies and gentlemen, this concludes our question answer session. I would like to turn the conference back over to Brian Nicole for any closing remarks. Yeah. Thank you. And thank you everybody for taking the time to discuss our current situation and the holy business, you know, I want to just first reiterate what I said the beginning a huge thank you and gratefulness to all our employees and supplier Partners better keeping the Chipotle experience up and running in our communities couldn't be prouder of the way. We have handled this month and the way that our our culture has really shown itself. Um, so very proud of everyone and frankly very humbled by seeing all of it. Um, the other thing I will leave you all with is dead and we've kind of talked about this throughout the whole Q&A, you know, we're very fortunate that the Chipotle brand is as strong as it is compounded by a very strong balance sheet with I think very smart Investments that we met.
Upon the digital side as well as on our operations and food safety culture. And uh, I think that just sets us up to navigate the current situation at hand. And may I look forward to getting back to achieving the results. We had frankly in January and February once we get past this crisis and I'm confident that as Jack mentioned we're going to be very prudent on managing our cash. We're also going to be very smart about investing in the Chipotle proposition for the future. So thank you again for everybody. Hopefully everyone and you know families and friends are healthy and safe out there and I look forward to talking to all of you in the future best. Take care.
Thank you, sir.
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Thursday