Q2 2020 Chipotle Mexican Grill Inc Earnings Call
Participants will be in listen only mode.
Should you need assistance. Please signal a conference specialist pressing the star key followed by zero.
After today's 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 is that is being recorded.
I would now let's turn the conference over to Ashish coli head of Investor Relations. Please go ahead.
Hello, everyone and welcome to our second quarter 2020 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.
These statements are based on management's current business market expectations.
Our actual results could differ materially from those projected forward looking statements.
We see the risk factors contained in our annual report on form 10-K.
And in our form 10-Q's 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 section of our website.
We will start today's call with prepared remarks from Brian Nicole, Our chairman and Chief Executive Officer, and Jack Hartung, Chief Financial Officer.
After which we will take your questions.
Our entire executive leadership team is available during the Q <unk> session.
I'd like to turn the call over to Brian.
Thanks, Ashish and good afternoon, everyone. Since our last earnings call. The World has continued to face unprecedented challenges with regard to health economic and social issues. However, I'm. So proud of our employees those in the field managing in running our restaurants, our support center staff were working remotely as well as her supply partners for coming together to contain.
To provide or say delicious high quality food made from real ingredients.
As a result, AAA successfully delivering on its commitment to help cultivate a better world for employees guess farmers communities and shareholders.
Hey, I want to focus my discussion on three key topics first our efforts to take care of our people and guess as restaurants reopened for in room dining.
Second provide details on are improving comp trends and third highlight how we've built in operating model. That's designed to generate strong performance in a wide variety of environments such that we can win today well, we create a bright future.
As I've mentioned previously the health and wellbeing of our employees and gas has always been and we'll continue to be our top priority.
Our strong financial position, we're able to make investments in our people and the triple the business, what you're not only helping us manage through this crisis, but set us up for a strong recovery in future success.
Our top priorities for the rest of the year include safely running our restaurants and reopening dining rooms, using best practices to support alternate restaurant support center working arrangements, ensuring supply chain consistency and strengthening our digital ecosystem.
Within our restaurants, we have taken a number of steps to enhance our robust food safety and wellness protocols, including the creation of the steward role, which is focused on sanitization in high touch in high traffic areas, providing mass for all employees and having a temporary packaging steel for all digital orders were also delighted to see many of our guests doing their part by worrying.
Yes, socially distancing and where appropriate leaving instructions and our app and online to request contact list deliveries and carry out.
These initiatives give our employees and gas confident such pull they remain steadfast in our commitment to keeping them shape, especially now that the dining rooms are starting to reopen.
As of last week about 30 restaurants remain fully closed and these are mainly inside malls in shopping centers, we began to open dining capabilities in the middle of May and currently have about 85% of our restaurants are offering limited in restaurant candour patio dining with the remaining being open for to go services, which includes delivery order ahead.
And pick up and coming into the restaurant in ordering a meal. That's taken then off premise encouragingly sales troughed in late March we've been able to retain 70% to 80% of our digital sales gains while recovering 40% to 50% of our in store sales. This supports our thesis that digital tends to be highly sticky and was a key factor in helping improve our sales.
Performance as the quarter progressed.
Our Q2 comp was down 9.8%, which includes a 1.9% headwind from closed restaurants, our restaurant level margins were 12.2% and adjusted diluted EPS was 40 cents down 90% year over year.
In terms of monthly comp cadence April was down 24% with may being down 7%.
Then June showing further progress to finish up 2%.
Well I comps continue to improve interrupt 6.4% month to date, including about a 1.4% positive impact from the July 4th weekend and about a 2.7% negative impact due to underperforming restaurants in the northeast in international markets as well as restaurant closures due to covert 19.
And keep in mind, we're comparing against a nearly 10% positive comp in July of 2019.
Overall these trends highlight that despite these unprecedented conditions are five key strategies continue to resonate with guests and position us for success in the near term as well is giving us more confidence in doubling our restaurant base, well ultimately expanding or you beeson margins above two and a half million dollars and 25% respectively.
Let me spend the rest of my time, providing a brief update on each of these strategies, which are making a brand visible on loved grading innovations utilizing a stage gate process, leveraging our digital make line to expand access inconvenience engaging with customers through our loyalty program and running successful restaurants with a strong culture that provides great.
Good hospitality throughput and economics.
To begin with our marketing team has been remarkably IDE trial and proactive during the crisis by quickly pivoting from traditional television advertising creative social and digital media to help keep its fully brand relevance and drive awareness of our digital capabilities, whether it be health care heroes to support frontline workers lifestyle balls to keep people healthy while working from.
Oh for virtual events, such as prompts concert eating tournaments and the virtual farmers market. These initiatives are helping support our customers suppliers and communities in the time of need. These efforts continue to drive awareness expand access and gross sales by driving culture, driving difference and ultimately driving a purchase and can you.
Function with marketing or stage gate process. The key enabler to develop innovation that leads food culture and meets guests request over the last 18 months lifestyle bowls carnitas autos Super Green Salad Nicks NK cell block a were all successfully validated by this process despite less marketing support than initially planned our new CAISO, which uses third.
Team real ingredients and has just the right spice level and texture has been a hit would guess our current attach rate of high teens is roughly 70% hired them with the previous case.
The latest innovation to make it through the stage gate process and upgrading existing item is a suite of tractor beverages. These are organic non GMO less sugary and align well with our food with integrity eat those we received terrific customer feedback and expect these to help improve our drink incidence moving forward.
While told that of course is the Lee testing menu items over the past few months the pipeline of potential new options continues to build.
Now the regions are starting to reopen we anticipate being able to test new items, again, which will allow us to deliver on our goal of rolling out one to two new menu items on average per year.
Give you a couple of examples we recently launched a pilot to test the larger lime cauliflower Rice and began offering case ideas as a digital only entre, which we believe can overcome the throughput challenge presented on the front line.
These menu items are in various markets, where we are gaining valuable guest in operational feedback.
We will update you on our progress of all potential new what menu items as they move to our stage gate process.
Next our digital platform has been a big beneficiary of the current environment.
In order to digital sales grew 216% year over year to $829 million, which is by far our highest ever quarterly level and represented 61% of sales.
Working from home driving increased digital awareness be advertising new delivery partnerships with it we're eating grubhub as well as expanding our digital capabilities into Canada are attracting new customers in helping reduce friction while increasing convenient access.
Notably partnering with all the major third party delivery Aggregators has led to an increase in orders a reduction in delivery time, and cancellations and an improvement in overall customer ratings.
As you know all digital orders from Triple layer for Philby, our digital kitchens, which are comprised of a dedicated make line in operated by special team in nearly all AAA locations.
Recent digital investments such as pepper, our concierge spot on Facebook Messenger group ordering and complete customization or further optimizing a seamless ordering experience for our guests.
Even with in restaurant dining opening backup we continue to see strong digital sales momentum in July with a mix of nearly 50%.
Breaking this down further shows that a little more than half is coming from order ahead and pickup transactions, while the remainder is coming from delivery.
The channels continue to perform well well. We're pleased that order ahead is now our fastest grower due partly to being less promotional and delivery partly to more customers. Realizing the value of a pickup transaction as our new delivery fees and to a lesser extent more triple wins.
Free delivery promotions likely to be less frequent moving forward and us pivoting more aggressively towards full lanes were optimistic that the order ahead transaction will continue to be a big driver a future growth, which should benefit both sales and margins.
Another element that is seeing a meaningful acceleration over the past few months is our rewards program, which now has nearly 15 million enrolled members wondering amazing accomplishment. Considering this program was launched only 15 months ago. The rate of enrollment has roughly doubled during the cold crisis as customers flock to triple These digital ordering channels.
Today. The question I hear most frequently is how are we going to benefit from us.
Trusting we even in the early stages of utilizing the customer data, we're seeing a significantly higher frequency of transactions from members versus nonmembers. It's early days, but we're starting to leverage this growing installed base with personalized promotions to incent behaviors, especially considering more than 70% of current digital orders are from our members.
We're also using this tool to help make our digital platform stickier by Reengaging customers if their usage drops.
As we continue to enhance our CRM journeys, we're seeing incremental transactions across all frequency bands not only as a result of the offers but also from our brand safety and purpose driven messaging.
We will continue to leverage our data over the second half of this year and expect loyalty to become a bigger tailwind overtime as our install base expands and we increased our level sophistication with this large base of consumers.
Driving more people, which fully is only part of the equation. The other key is to ensure great restaurant operation. So the guests have an enjoyable experience and continue to come back as I visit our restaurants, it's apparent that the investments, we're making and our people are paying off as our food taste, great employee retention continues to stabilize and service levels are improving not only is this benefiting us care.
And we but these factors should position us well to drive higher throughput post coded as in restaurant demand returns to a more normal level.
What is always attracted me to AAA and what I believe is a key point of differentiation as our unique purpose of cultivating a better world and a culture that has always been committed to fostering a diverse inclusive and safe environment, where everyone can belong and had the opportunity to build personal and professional success and make a positive difference and their families and communities. This isn't always easy.
Especially given the unrest and uncertainty at the moment, but we must do what is right even when it's hard more recently each fully has taken several actions to help drive out inequality and injustice, including listening sessions with our employees financial contributions to organizations advocating against systemic racism and forming a multi cultural employee research.
Bottom line is that we're all in this together and when we do our part we can make a difference store employees, our food our business practices and in our communities.
Before I conclude I want to publicly welcome our two new directors married Winston and Greg angles, both bring excellent experience to our board and will be valuable assets virtual.
Finally, I want to thank all of our employees for delivering excellent guest experiences and supporting our restaurants and each other their belief in our purpose commitment to living our values and hard work is was pulled us through what we hope is the worst the colby prices by channeling, our energy into programs and initiatives that help us becoming stronger team innovate and grow our business.
I believe we will finished 2020 with good momentum and be well positioned for the long run.
With that here's Jack to walk you through the financials.
Thanks, and good afternoon, everyone before discussing our second quarter results I also must recognize and thank our incredible teams I personally been inspired to watch everyone come together to face our current challenges embracing new ways of working and decisively taking action to sake, we serve our gas in the face of unprecedented conditions.
Our operators doing a tremendous job managing the restaurants in providing gas a delicious customize meal, our supply chain diligently working with our partners I'm sure. There are no major disruption that's support teams and development team working virtually to keep the business moving forward I could not be prouder to be part of this team.
Looking at our Q2 performance, while the comp was down 9.8% for the quarter improved sequentially. Every month, we're pleased to see this progress continue into July.
Relative to their pre Kogan environment, you start ordering currently is down around 37% order heads up 140% and delivery is up 125%.
So encouraged by the fact that there are the higher incidence of new customers majority coming via <unk> digital platform, making their second purchase in the same month and spending more than before.
This is another example of our digital access being sticky, resulting in our July today digital mix being nearly 50% of sales.
Restaurant level margin for the quarter of 12.2% was negatively impacted by significant number of investments, including promotion to acquire digital customers through bonuses and it fits in Spain.
Along with costs related to coded as well as higher supply chain expenses, most notably the spike in beef prices that it seems eased somewhat since the peak in may.
During the quarter marketing at promo costs were elevated at 5% of sales due to free delivery.
With his promotion behind US, we expect marketing spend to normalize during the second half 2020 towards your typical target of 3%.
Well the investments in our people to acquire and to acquire digital customers put pressure on our margins in the quarter. We're confident that these were the right investments to make it will make our brand and our culture much stronger overtime.
Would you consider them as of June work comp turned slightly positive we're trending a little over $2.2 million you'd be run rate restaurant level margin was roughly 20%.
GAAP relative to the theoretical 22% margin, we would expect it to sales level is primarily the impact on higher delivery mix and partially the result of the temporary costs I, just mentioned, including higher beef costs.
Similar to what many of our peers are already doing we're about to experiment with delivery menu prices its way to potentially help offset this kind of headwind and fully capture the margins expected at this volume.
Brian mentioned, we believe our powerful and Europe durable economic model remains very much intact.
In fact, our performance through the cold the crisis, particularly the strength of our digital business is giving us confidence in hitting the $2.5 million you'd be mark earlier than we previously expected.
We continue to expect margins around 25% at that sales level.
Same time, we're aware that the uncertainty surrounding the Corona virus pandemic makes it difficult to predict the near term and medium term impact and therefore, we're not providing fiscal 2020 comp guidance.
Q3 margins get EPS will likely remain bumpy as we continue to make further investments in our people our business in our communities.
To the margin we expected to be in the high teen.
Based on continued price volatility in a few ingredients, including avocado as we introduced transition for improving into Mexican fruit.
Well as higher labor costs, given that reopening of our dining rooms.
Well I broke we see no major coated related market progression in the fall, we expect our sales to continue building, which could lead to Q4 being the first quarter, where margins and earnings began to normalize and this should help set us up for a successful 2021.
We ended Q2 with $935 billion in cash restricted cash and short term investments and no debt, which gives us a strong balance sheet, along with a 600 million dollar untapped credit facility with which to continue to navigate the crisis.
Our team remains focused on reducing non essential controllable costs, and judiciously spending and return generating projects to preserve liquidity.
Pete report that we generated positive free cash flow into second quarter, despite essentially normal level of cap of growth Capex investment, which we believe it the right thing to do and will pay off in the long term.
Furthermore, assuming a comp improvement we're seeing continues it gives us greater confidence in our potential to generate positive cash flow, but the rest of this year, which will help support ongoing strategic investments.
We didn't buyback any stock in Q2 in order to preserve cash and we'd likely won't over the foreseeable future. We are open to revisiting the program returning excess cash to shareholders once the environment stabilizes.
During the second quarter, we're delighted to have opened 37, new restaurants with 21, having its gold mine.
We recently announced the milestone will be opening up a 100 100 people might be formats continue to perform very well and have a higher overall digital mix and in recent weeks is approaching 60%, but about two thirds being from the higher margin order ahead and pickup.
Also if you look at the sales coverage bolt on cohort of the 13 Chipote mine at our inner comp base, and therefore opened well before Colgate.
Sales were over 10% higher than the non Chipote mine comp restaurant constraint opening period.
A more recent openings during cold they are actually 30% higher.
We recently relocated three restaurants, we added 2.9.
We remodeled three three more and all are seeing higher sales so far.
Okay. Great results are fueling our desired opened more than 60% of new restaurants, where did you pull made this year with the goal of exceeding 70% in 2021.
In March but length will enhance customer accessing convenience as well as increased new restaurant sales margins and returns.
Given packard out of our control there was a pause in new groundbreaking during April we started construction again as soon as we began reopening but we continue to build new units currently and expect to have a sequentially higher number of openings in Q3.
Remains uncertainty around your potential spiking koby cases in the fall, which makes it difficult operate 2020, new restaurant opening guidance at this time.
However, we remain confident in the long term opportunity to more than doubled the number its phoneme restaurants in the U.S. and in fact, our strong financial position along with less competition for high quality sites as other businesses pullback is allowing us to build a robust new unit development pipeline.
As a result, we expect to see an acceleration in the number of new units open and 2021.
In closing despite uncertain about near term impact of Kogut, we're very excited about our future given the strength of our brand our talented employees, a solid liquidity position and the resiliency of our economic model and with that we're happy to take your questions.
We will now begin the question and answer session.
To ask the question you May Press Star then one on your telephone keypad.
If you were using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then too.
Our first question comes from David Tarantino with Baird. Please go ahead.
Hi, good afternoon.
Well go going so on corn in the Burger quickly Brian Roberts question about some of the new car. The merger that you think you've acquired.
The start of the data that I was wondering if you could.
Perhaps give us a sense of how big of a contribution to sale that new customer layer, how broad and then that that way.
I got what are your tactic or plan required to keep those folks and the gold and report.
Sure Yeah. Thanks, David So you know the bulk of our digital customers that we've gained.
As we mentioned in our comments a lot of them are new customers to the business and obviously since dining rooms have not reopens.
They have yet to experience the business or I should say dining is reopened fully right they've yet to experience the business from that access point. The good news is because so many of these new customers came through our digital business. The bulk of them also signed up for our rewards program and so we've got.
Created these journeys that are targeted to you know new customers existing customers, whether they are light medium or heavy and what we're seeing already with these journeys is we do have the ability to influence behaviors, whether it's getting another occasion or getting them to add onto an occasion that they're already.
Doing with us so.
What I would tell you is.
A lot of the digital growth came from new customers. The thing that's nice about that is there in our rewards program a lot of and what we're seeing already is really great progress on using the data to then influenced their behavior going forward.
Got it and then maybe outside a slightly different angles, but yeah. That's under your dine in business of our traffic was down 37% or running down 37%.
First can you clarify what that for the quarter for I guess, but quarter to date period in July and then I guess, what what I got the percentage of that number do you think is.
People that that maybe you have shifted into the digital channel versus versus not.
Yes, I mean, one of things to keep in mind, David is art.
Trays per transaction, our significantly up so we've not seen you know just think about our sales performance, we still have kind of the saying gap that we historically have had on call. It check in number of entrees, if you use entrees.
As a transaction proxy and so we're definitely seeing is people are slowly, but surely returning to the dining room.
But the bulk of what we're seeing is.
All the huge gains are in I would say a more entrees per transaction are coming from our digital business. So you know the in store ordering obviously, we only have reclaimed about 40% to 50% of that business and Oh, a lot of the opportunity.
We still will be reclaiming that in store business as people get more confidence to come back into the restaurants.
But at the same token what we're seeing is a nice increase on entrees per transaction order with the digital business. So I think some of the customers that have shifted from in store to digital what we've seen is their tickets have gotten bigger because they're ordering as groups.
So that helps explain why were down in the dining room. Because you just don't have the same occasions that used that with people that are driving to work and having that lunch individual occasion.
But we are picking up the entrees I think through our digital business is the way that way to think about it. So I think we mentioned in the scrip rate order ahead is up like a 140% deliveries up 125% and then obviously as we continue to get the dining rooms operating closer to full capacity I think we'll continue to make progress on the.
Transactions that occur in the restaurant as well.
Great. Thank you very much.
Yep.
Your next question is from Peter Saleh with BTG. Please go ahead.
Hi, Thanks, I wanted to ask about the keys. So block I think you guys had indicated that you saw pretty substantial high teens attach mix with that.
Talk about what you did differently there and how you can apply some of those learnings that maybe some of the new products you plan to launch hours of course there.
Yes, sure well for starters the case, a block I think was a huge improvement over the prior k.. So and then I think with the team did a really nice job of doing was doing the marketing to those that were already case of users as well as people that may.
Have traded in the past, but if not purchased it in a long time and so you know I think the team did a great job of using our data.
To do very targeted marketing and then the advertising I think that they ran one or more broad scale based did a nice job would bring into life.
What was different about this case, though.
And you know look the learnings that we've gotten with using our data to drive attachment.
I think it's something we'll be able to use with beverages, we'll continue to use frankly with all sorts of programs coming down the pike. So.
We feel really good about how cases block always performed and I'm also really proud of what we've learned in how we can use of this database to better inform a customer's what's available and whats right for them. So that we get a better attachment in each ticket.
Thanks very helpful. Just a question on the development going forward I think in the past one of the governors on development.
Go faster has been just finding enough people I think the environment that was such that.
It was tough to find enough employees do you feel like that has changed for you I know capital is not an issue. It sounds like real estate is not the issue. So I jumped to restraints on finding enough people to go faster on the development side.
No I would say, it's two things on the people one was having access to hire the additional people and then two was having I think the people culture and capability in place that when we brought these people on the quickly could be trained and learn the AAA a way of executing our business and I think Scott.
And our HR leaders were Risa and all the folks in the field have done a phenomenal job doing a really good job of recruiting the right people a and then when we recruit them, we're able to train them. So that they are ready to go to open a new restaurant or take over restaurant in the event, we need to move at an apprentice or a manager to anyway.
Restaurants, so we're feeling like we got all the components to really continue to have success with opening new restaurants access to really good people the right people capability in the operating model for these people to get trained and ready to roll and then as you mentioned.
The returns continue to be really really strong because we're able to have access to really good real estate and then we've got.
All the different access points, whether its chipotle Wayne to just a traditional triple play.
Alright, Thank you very much congrats on the corner.
Thank you.
Your next question is from Catherine Fogarty with Goldman Sachs. Please go ahead, great. Thank you.
Great. Thank you.
The kids being offered as additional on the path.
Maybe the learnings have prior stage gate.
Sought out when you launched it initially as digital only that give you confidence that this digital only strategy will work and Kevin It seemed in are there other items or even other day part.
To kind of digital only offerings, they might fit well I'm here is that expanded or change the potential for menu innovation going forward.
Yeah. Thanks.
Thanks for the question, yes. So.
One of things has been a nice benefit of all the growth in our digital businesses. We now have scale. We're you know we're doing over a million dollars a business off this digital make life right and we've got some restaurants doing well beyond that and what we've found is.
So we can have success.
Providing.
Digital only menu items. So we started we kind of dipped our toe in the water when we did lifestyle bowls and we've kept that going and what we've seen early days is people are willing.
To do the App slash digital experience Smoldered have access to a case India.
And we feel really good about what we've seen in the early days up the test that we've got going obviously want to finish the test out, but what I would tell you is the things we've learned in the stage gate process was just that which is.
A huge improvement over making a case study on the front line with our new approach, but you know once we started to get meaningful scale, we realize what we don't even need to put that challenge in front of our operators on the frontline because we can run it through this digital business and everybody gets a better experience the team member as a better experience in the restaurant.
The customer gets a better experience from a speed and having the product ready to go when they show up and then the product itself. I think you might have heard me talking about this with our digital business you kind of make your reservation for when you're going to get your case, India. I mean, it is fully so there is really good in this case it is really good but when it's ray.
Really hot and it's right there when you reserve your time, it's extraordinary so we feel like it's hitting on all the marks you would one you know better operational experience better experience for the customer arguably better food experience and then operationally it plays really well in our throughput.
Initiative, so that folks in the frontline can really continue to stay focused on speed and then our digital may find is really focused on being on time and accurate. So we're feeling really bullish the good news is this does open the door for additional innovation and Chris and the team are working through what are things we can be doing.
That are dedicated to the digital make line and you'll see us continuing to test those in our stage gate process, while we still do things like cauliflower race, which frankly, we're gonna be both on the front line in the digital make line.
So we're feeling we're feeling very optimistic about what our ability is going to be to your point to open kind of that innovation spectrum using the digital make line whether its day parts are menu.
While we can protect the integrity of our throughput model on that front line.
Great. Thank you yeah.
The next question is from Nicole Miller with Piper Sandler. Please go ahead.
Thank you good afternoon.
Dig in a little bit to direct and indirect so I understand digital order heads up 140%. So let's celebrate that 125, if you isolate delivery.
How evil are you to keep the consumers coming directly to your App and I imagine you know clearly that changes from month to month quarter to quarter.
How do you keep that imbalance please.
Yeah sure so.
Right now, it's pretty evenly split between marketplace in our own app experience and the thing that I think you've seen has done is over time, we can run very targeted.
Efforts within our app into our rewards customers to incentivize them to stay within our App for that delivery occasion. The thing. We also like about our you know frankly, our delivery app execution as we can control more of the variables on you know delivery fees as well as.
Menu prices. So that we can also incentivize behaviors towards our app as well so.
And then obviously the big differentiator as you continue to get rewards points. When you do delivery to our app versus using a third party. So we're feeling really good about the growth that we've seen in our white label business and continues to be an access point that.
We're going to continue to drive because it does still appear to be a unique occasion.
That's very helpful. I'll, just ask first second and last question and admittedly, it's as much about supposedly as it is trying to understand the consumer.
Behavior at a very high level. When you think about July there's many reasons for your rebound I just want to understand what would you be willing to tell us that week to week or region to region, So and big restaurant geography, there's less mobility I know, California would be the most obvious.
Hi, Barry I'm very curious to understand if the customer maybe doesn't go back into the dining room, that's understood and I'm wondering if that drives the more and more into Poland or drives your in general a more more more more to digital.
Yeah, I mean look what we've seen Nicole is the regions that opened the earliest I would say we've made the most gains in.
You know comp and.
The thing that has been really promising is the digital business has remained sticky even while we've seen dining room business.
Make a comeback okay and I think we've mentioned this archipelago lanes. We just now have 100 of them or just over 100.
We have seen that you're pulling business stay robust and outperform.
Our system and I think there is a consumer behavior, where even if they want you know even if they're going into the dining room, there still taking it for take out there not sitting down and eating at least what we're seeing today, it's come in and get your food and go for the most part.
And digital is still I think perceived as even more convenient the coming in.
Building it and then going on so I think you're going to continue to see that in.
As the California rolled back some of the in dining room experience.
So you know we quickly pivoted to just relying more heavily on our order ahead business, which Fortunately AAA has those access points, where we can pivot depending on what happens state by state municipality by municipality.
So you know.
I'm, hoping that we don't have to go backwards before we can go forward on this proposition, but I think were position nicely to be able to weather whatever way, we need to Bob in order to get through the next couple of months.
Great. Thank you so much.
The next question is from Sarasota Tour with Bernstein. Please go ahead.
Great. Thank you very much I wanted to just follow up on.
Questions about it didn't delivery the decision to kind of pull back on promotions.
Anything you might be seeing there early on just in yes, easiest way to think about it that now order ahead is growing 20% percentage points faster than delivery and that's how we should think about needless to say you know or is that not really the full rate at that.
Are you seeing those down shift to order ahead.
Kind of from your lowest margin sales to your highest margin.
Just any kind of color and on that front.
The implication is that that should be helpful. From margin. So I was just trying I took a square that with Jack's guidance for you know kind of high teens.
This isn't the 20% run rate that we saw when you were yes, you kind of spending heavily behind data library. So just anything on the topline and then how to think about the implications for the margin.
Yeah, So hey, Jack why don't I start and then I'll hand, it over to use that sounds good.
Perfect Okay.
Okay. So obviously one of the things that occurred as soon as if we kind of rewind on the quarter right everything moved to off premise and you had a huge just shift to delivery that over time as we got people into delivery and into the digital business.
They learned about the other access mode of order ahead in pickup and so what I think people have discovered is what from a value proposition standpoint.
No I can skip the delivery fee I can skip you know some of the waiting.
If I order ahead. So we've we've heard from our consumers. It as you look at by qualitative side of this.
Hey look the convenience of ordering ahead in picking up what something they discovered as a result of bringing them into our business through the delivery channel, which I wish I think is kind of surprising I don't think people would realize that people would join which fully digital system because they came in through the delivery occasion, we brought him into the system and then we gave him the experience of the.
Order ahead, and what's been nice is we've seen that there are occasions, where people want the convenience of delivery because I can't get to a AAA, but they also really value of the ability to order ahead and go pick it up because.
Frankly puts them, even more control of the convenience that they want.
And you don't look they can avoid some fees right. They don't have to pay delivery fees.
Service fees or what have you when you look at whether its marketplace or white label and so what we pivoted to now is we did put in the dollar delivery fee versus being free the whole time and I do think some people view you know is it worth paying the delivery fee or should I go head and just hopping my car and pick it up and Luckily for US we've made it very key.
The union for people to make that tradeoff with that said the delivery occasion appears to be a very unique occasion that when people want to do it they're willing to pay the delivery fee or.
The added price associated with delivery so.
We see them was working really well together, but you know over time, we obviously want to migrate that delivery business to not just be an acquisition tool, but to also be an occasion, where we don't mind. The trade off between you know delivery order ahead overtime and I think.
Thats, what Jack was alluding to in his comments, so Jack I'll I'll hand, it over to you.
Yeah, Yeah. Thanks, Brian.
Sure. So when you look at I talked about June being a pretty clean month. Our March was 20% I think that gives an idea that when we normalize the p. now we can bounce back we're only 12% during the quarter, but the first a couple of months of the quarter had big investments in terms of free delivery, we did start charging the dollar.
Delivery. So we went from zero to one dollar in June and that helped contribute to the higher margin during that period up there's no question that our margin potential as we experiment with and we figure out which levers to pull with between delivery fees and the menu price with delivery that we think theres more upward potential I would argue going from 20 per.
And in getting back to more like a 22 when we're at a 2.2 million dollar volume, but we're going experiment in Q3, So I would call Q3 more of a learning quarter not a recovery of the margin quarter. That's why I signaled that Q4 could be the first quarter that we actually feel more normalization.
Of that upper overall margin. So so we'll learn in Q3 will figure out what to do in Q4, and then also you know Q3 is gonna be hit by Avocados, we have to do that transition back the Mexican avocado and we're looking at potentially higher prices were still picking up some of the higher price of beat even though beep has begun to normalize that's going to hit us as.
Well, so I just want expectations in Q3 to be there will be some bounce back on the 12%, but it's not going to stay at that 20% and then what's kind of looking ahead. The Q4 in the next year and everything that we're seeing we have confidence that our march potential.
Is intact as it's ever been.
Okay, Great I guess, if I could ask one housekeeping you said that there is a 2.7% negative impact to come from the northeast and international are we write and being in the northeast is about 20% or your stores, then maybe but more than that sales is that is that sort of the order of magnitude.
You know its and I I would say seretse in that maybe 15.
The 20%, it's one of eight regions.
And so it obviously was was hit the hardest so I'd have to go back and check 20% might be a little a little on high side.
Okay. Thank you.
The next question is from John Glass with Morgan Stanley. Please go ahead.
Thanks, very much I wanted to just go back to delivery as well how incremental has the adding extra incremental third party delivery providers Ben to comp how do you. How do you measure that are they all providing the white label delivery service. You. This is what indoor dashboard that service and really just will.
On the marketplace, and but I just wanted to make sure I understood, you're saying, 50% of sales in June or delivery, how could I have 2% or digital half that's delivery. So 25% of your sales now is delivery is that like what would that have compared just say pretty cobot.
Yes, So let me unpack that.
To answer your first question, we use all the major Aggregators for the third party delivery, we are only using door dash for our INAP white label delivery.
And what we have seen is as we brought on Grubhub and who burritos and you know, we obviously already had postmates with door dash. Each time, we brought on people, we have seen incremental customers come into the business.
For the delivery channel specifically you know we're watching this firm delivery transactions.
And you know, it's pretty consistent I think we've heard over and over again from what we've done our analysis on the others, 20% to 30% overlap with some of the big players. So we definitely have seen a nice uptick in our delivery business then to answer your question on our digital business you know thing of the digital business as.
Roughly 50% of sales and half of that are almost a little more than half is order ahead.
And then within that other half that right now is delivery thinking that as another like call. It 60, 40 split of marketplace and white label.
It's kind of a way to think about it so and we've seen nice growth I think as we highlighted in both the order ahead business and the delivery business.
Thank you and then.
As a follow up you talked about the dine in business being down what percentage of your store bases in urban cores that rely on that lunch business. It probably doesn't exist much world fashion, how much headwind is that how much that's what did that come back as we go back to work over the next six months.
I think John I think it's around 150, maybe a few more restaurants, where they are in those really caught that dense urban.
Setting.
But I think in general dining rooms will benefit.
As that lunch occasion comes back with people going back to work in a more normal pattern versus the heavy skew right now which is the work from home environment.
Thank you.
Sure.
Your next question is from Jake Bartlett with Suntrust. Please go ahead.
Great. Thanks for taking the questions. My first is to try and one of the better understand the performance of stores when they open dining rooms, well how much you opened overall lift that is and then you mentioned that 85% of the stores have dining room or patio can you break that down to two to tell us.
What percentage habit dining rooms open on just alone right now.
Yeah sure. So the last part of that's pretty 70% or dining rooms, and then there's like 15%.
That are patio only okay and then your question on when the dining room opens what type of lift do we see it's a gradual.
Build back what we have seen to date on average is we recaptured about 40% to 50% of that dining room business.
But it's a gradual thing you know it's like every week goes by I think consumer psyche starts to build with the idea of going back into the dining room again, the bulk of that is people end up still taking it off premise to eat.
Versus actually sitting down in the dining room, because remember when we have these dining rooms open in some cases of only up 25% of our seats available.
So it's very limited seating to sit in the dining.
Got it and just to understand that better.
Having such a kind of it seems like there's a minimal impact of people sitting sues whats the big changing in terms of the consumer behavior. When when you open up the dining them you already had people able to come in and in order by standing in line.
I guess, a little confused as to why would change the sales. So much you got it doesn't seem like.
The actual dining is very material.
I think it has more to do with the consumer psychology of.
[noise] going to restaurants versus doing it all from hall.
[music].
Or in your car, okay like anything even I think I might have shared this with some of you in prior meetings as I've gone into the restaurants and talk to folks that are in the restaurant. So a lot of them are like all you know. Thank heavens you guys are open for me to sit down because I'm just tired of eating in my car I'm tired of eating at home.
There is a consumer psychology to the idea that more things are open and therefore on more mobile AD on mountain about so.
That's what our research shows and as you talk to consumers that's the feedback we get.
Got it and then real quick just on pricing and I was hoping you could provide what I don't think you have what traffic and overall check growth was.
We also found some menu pricing recently taken in our markets like like California, If you could maybe confirm that all in and just talked about your strategy for taking menu price.
This year I know in years past, it's been kind of concentrated over a month or two.
He any color on your strategy fruit for taking price this year.
Yeah sure. So we've been very limited in our pricing because of just I think the.
Nature of the consumer psychology, right now, but one thing we have done from a pricing standpoint is we've gotten very strategic with our partner official and there are places like California, where minimum wage moved and accordingly, we did some pricing action to go along with some of the minimum wage movement.
So that might be what you're picking up but it's very uneven that is not market wide. It's very still strategically are executed on a restaurant by restaurant basis.
But I think thats, what youre referencing is you probably saw some of the pricing moves in conjunction with recent minimum wage movement that were pretty significant minimum wage movements.
Great and then just the traffic in the check.
We don't break that out.
Go ahead, Jack sorry.
You know I think Brian alluded to it earlier the transaction has changed the group size has changed significantly both because people have moved to digital and digitally as a higher group size and then even within.
The order in the restaurant the group's prices change and I think thats, because and set up.
You know the person working and going out the lunch, maybe with a group, but they're all paying themselves now it's going to.
The restaurant and then ordering for the family. So I think a better way to look at it is when we had the 9.8% negative comp during the quarter. If you look at just entre because an entre kind of lines up with a person entrees were down about 15% and what that suggested there there's a 5% effective lift in and you know in the Czech and that would have come from.
From a couple of points from menu prices. We also saw a bigger incidents of stake people are buying stake more and that is a higher price item and then the attachment with case, though so I think that's the best way to think about it.
I think you know as as we go from a negative 10 into a.
Positive comps situation, it's going to be a similar gap where people are still buying stake more you're still buying k. So.
We still have the small menu price. So I think you're going to still see it kinda, 345% gap between our sales and our transaction I think that's probably the best way to think about it.
Great. Thanks, a lot.
The next question is from Andrew Charles with Cowen. Please go ahead.
Great. Thank you Jack two part question for you now that you're at 100, you pulled in locations I'm curious what the early read is that on cannibalization or do you prefer sales trends are relative to what you see typically when you open a traditional store near an existing store and then my follow up is just now you have line of sight to development plan through 2021 and perhaps.
Point, even visibility into 2022, although not finalized our usual extrapolate out or or expressed your desire for what makes the stores to pull and represent we reached that milestone 5000 5000 U.S. location.
Yeah, Andrew Thanks for the question, we're not seeing anything unusual in terms of impact we open up a chipotle lane versus a another restaurant I mean, you might see the impact that we expected be a little higher a little lower it might be higher but the volume is higher.
The volume in the treatment is higher so nothing unusual or nothing concerning their whatsoever.
We do have internally, what we'd like to see over a caught a three to five year period, and if not ready for us to disclose yet, but we're looking at individual markets some of our oldest markets and looking at.
Now we may not be opening up a lot of restaurant in our Denver, Our Kansas City somebody early as markets, but we do have old restaurants. There would you can look at relocations and rebuilds in fact in my prepared comments I mentioned that we did pretty remodels and analytical lane and free relocation and it added each bolt nine and the way I would think about that is where do.
Doing some early test call. It you know running it through the stage gate to see how these restaurants perform and as they performed well in the first six that we've done have come out of the box with a higher sales were going to look to add more relocations more remodel. So that we can bring more difficult lane not just through new stores, but through these other approach.
Just as well in the good news is.
In this environment, our landlords are more willing to work with us.
To do a remodel and if they're not willing to work with us on a remodel there's a site across the street that will take a look at as well. So we think the opportunity to move more trouble nine over the next three to five years is it's pretty encouraging.
Check I ask someone bookkeeping question why have you can you speak to labor costs that you were 20.2% you know the implied labor dollars per store actually declined 90 basis points. It's obviously, a very impressive dynamic when considering the investments that were made in supplementing team member wage as well as manager bonuses can you speak to some of the tailwinds in the quarter to help better understand what is temporary and what isn't.
During within that favorable labor expense.
Yeah, well listen our labor as a percentage of sales was up and it was up because we we had the assistance bonus that we had some discretionary bonuses for our managers, but we had some stores that were close for a while we had lower sales and so.
The labor hours, we will schedule with lower sales is going to go down in that might be why you're seeing a just lower absolute number when you look at that just as a percentage of sales about two thirds of the increase as a percentage of sales was brumby bonus and assistance pay about one third of it is because of a de leverage.
Going forward and the other piece that's in there we have some labor efficiencies Scott and his team out in the field there really good job navigating making sure. We had the right number of people show up early on that was hard to get the store staff, our stores where staff. They were efficient when you see volumes move up and down it's very hard to staff the stores, while they did a great job.
I think part of that is also we expected and we saw some efficiencies with the digital make line as well. So now in terms of Andrew what carries forward in terms of those efficiencies.
Some of that depends on how much of the business days digital if 50% of the sales stay digital or somewhere in that ballpark lets say, 40%. Some of those efficiencies will pass through too early to put a number on it yet, but I think our teams did a great job in you know to do an average of $3 million and in some cases, Brian alluded to it to.
Million dollars it even greater on that gives you don't make line you know with with far fewer labor just gives us a.
A lot of optimism about what we can do in terms of sales and what we can do in terms of driving margin as well.
That's helpful. Thank you Jeff.
Your next question is from Lauren Silverman with Credit Suisse. Please go ahead.
Hi, Thanks, I wanted to follow up on the commentary regarding the can you be run rate.
Yeah.
<unk> margin to 200 basis points differential from the framework is it primarily there.
Are there any other cost center and then is there any offsetting benefit from a shift more margin accretive or Medicare.
You know that the biggest pizza delivery for sure. There is some other pressure beef was a little bit of pressure.
Our customers buying more more beef was a little pressure and we're selling fewer drinks and so you know drinks are very accretive to margins weren't selling fewer of them. So there's other things that we're in there but by far the biggest piece. The piece that we can act on is the delivery piece, we know that have to liberty stays at this.
This current level that that the higher delivery fees was going to be a permanent impact on our margin and that's why we're going to do some experimentation in Q3. The other pieces are going to work their way out we do think that that's to attack tractor beverages were going to sell more beverages, we suspect that there will be some shift back.
You know away from from beef to other menu items, if not we'll need to understand that a little bit more but but there were a number of thing but by far the delivery piece of the biggest piece.
Great and then with regard to the loyalty program now.
Number one of the fastest if not faster.
Sorry, what do you think driving the outsized adoption I suppose the faster than you originally expected and then just thinking about the composition of the loyalty program members what portion is like.
Have you there.
Yes, so obviously the adoption of the rewards program has exceeded our expectations and it's gone really well and obviously with the fact that so many people switch to our delivery and digital business over the last couple of months really enabled us to get people to engage in.
The rewards program. The thing that has been really refreshing is a lot of folks that have joined our rewards program have been new users or light users and show you know we're already using these customer journeys to start influencing behaviors. So that we thing happened.
No more frequent customer and I think thats going to prove to be a nice tailwind for us in the future because.
I don't think we're done at 15 million I think $15 million can become 20 million and so on and so forth and as everyday goes by we learn more and more on how to use that data to better influence light medium and heavy users behavior.
Any color on I guess, the magnitude of light medium heavy either.
Graham.
No we haven't broken that out so what I can tell you is we're really pleased with the mix that we're seeing a light medium heavy users.
Hi, Thanks, very much HM.
The next question is from Chris Kirill with RBC capital markets. Please go ahead.
Hi, Thanks for taking the question. So I wanted to ask about how you're thinking about store formats going forward. So clearly the current environments validating the opportunity with Chipote lands, but are you rethinking at all any other aspects of the restaurant, perhaps around how much in restaurants eating is necessary going forward and do you.
I think there's an opportunity to drive new restaurant returns even higher by contemplating these different formats.
Well, what I will doesn't tell you is we are testing different formats, whether it's a restaurant that is a chip Alain only to a restaurant. That's all order ahead with the tripling access point.
So we're going to test various formats, because our goal is to have a suite of assets that we can then put into a trade area to maximize totally sales on a trade area.
So you know the good news is.
We're seeing these access points all to be truly viable and a I feel like we've got terrific flexibility and what we want to build whether it's in line traditional triple A.'s all the way too you know the freestanding Chipote Wayne we've got a lot of flexibility in between those two or call. It.
Bookings, so and we're going to continue to experiment with what are the you know the sites, we can push fully and that maybe historically would have said that we can't which fully there but now we can because we've got this different execution and also the scale of our digital business, which supports the additional access points checking on if you want to add anything.
To that.
No I couldn't be more Brian I think this pool for other digital business is already allowing us to look in additional trade areas and you can flex the investment and you can flex.
The size and the access points within the restaurant and so but we're gonna be thoughtful like we've done with anything and take on stage gate type approach. So you'll see some different formats come out and then you when they do well you'll see more of them.
Great that's really helpful. Thank you.
This concludes our question and answer session I would like to turn the conference back over to Brian Nicole for any closing remarks.
Alright, Thank you and thank you everybody for taking the time to listen and ask questions. Obviously, we're very proud of all of our employees the way that they have managed.
The business the way that they've taken you know high high importance on the safety of themselves and their customers.
Very fortunate to be a part of this company and leading this company of so many talented leaders. So many talented people that are so committed to triple A.'s purpose and a really honored to be where we are with its fully business.
Obviously, we're very proud of the investments we've made in digital and how that has played out for us over the last couple of months I'm very optimistic about how much fully business with now the combination of a very robust digital business combined with great. Colin Aerie, great speed and just tremendous value is going to play out in the future.
And we're very optimistic about what the future holds both for the health and wellbeing everybody in this country and then obviously the health and wellbeing of AAA, both the people that work in it and the business that we're going to lead going forward. So thank you for taking the time and I look forward to speaking with you all soon take care bye.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
[music].
Oh.
[noise].
Yeah.
Yes.
[music].