Q3 2020 Chipotle Mexican Grill Inc Earnings Call
Good afternoon, and welcome to the <unk> third quarter 2020, <unk> earnings Conference call.
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I would now like to turn the conference over to Ashish Kohli head of Investor Relations. Please go ahead.
Hello, everyone and welcome to our third 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 IR 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 and market expectations and our actual results could differ materially from those projected in the forward looking statements.
Please see the risk factors contained in our annual report on form 10-K.
In our form 10-Q 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 Brighton nickel, 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 and a session.
And with that I'd like to turn the call over to Brian.
Thanks, Ashish and good afternoon, everyone. Today, we are sharp sharing strong third quarter results that highlight ongoing progress in these unprecedented times, however, before I dive into the details let me acknowledge and thank our incredible fully team members remain focused on great execution and on advancing our purpose of cultivating a better world.
For our employees guess farmers communities and shareholders I'm sure.
I'm truly humbled to have the privilege to work alongside this team their efforts are helping us not only successfully navigate this pandemic, but highlight the chipotle, whose business model is durable flexible and to perform in a challenging environment.
As always the health and well being of our employees and guests continues to be our top priority. We are benefiting from investments made a few years ago, including advanced air filtration systems Sanitizers throughout the restaurant wellness protocols and improved Handwashing. In addition, we are closely following the recommendations of the CDC and local health upon.
Mitch and have implemented social distancing wearing face mask, the tamper evident packaging seal for all digital orders as well as creating the Stewart role to sanitize high traffic areas. Collectively. These efforts have made the pivot to enhance COVID-19 safety protocols much less complicated and give our employees I can guess confidence that chipotle they remain.
James steadfast in our commitment to keep them safe as we reopen restaurants for in restaurant died.
We continue to monitor and adhere to state and federal mandates and at present have roughly 10 restaurants closed at about 85% offering limited in restaurant indoor patio dining with the remaining being open for to go services since sales dropped in late March we have been able to retain 80% to 85% of our digital sales gains while recovering 50.
55% of our in store sales the stickiness of digital is a key factor in allowing us to deliver strong results and we will continue to invest in making the digital experience as easy and frictionless as possible.
As illustrated by the recent launch of our group ordering feature on the trouble yet.
For the quarter, we reported sales of $1.6 billion, representing 14% year over year growth, which was fueled by 8.3% comparable restaurant sales growth restaurant level margins of 19.5%, which is 130 basis points lower than last year and earnings per share adjusted for unusual items of $3.
And 76 cents, representing a decline of 1.6% year over year.
Comparable restaurant sales were strong in each month of Q3 with August being the high point sales trends remain strong in September even though beginning mid month, we rolled over the successful 2019 carnitas out appropriate beginning.
Beginning mid September comparable restaurant sales impressively delivered mid single digits and this trend has continued in October.
The two year compounded comp stat is a healthy 20.2%, which is similar to the 20.4% pre corporate level. We delivered in Q4 2019 and highlights that are digital system, along with running great restaurants with the right leaders in the right culture can deliver outstanding performance despite external challenges.
As you can see from the Q3 results our key strategies continue to resonate with guests and position us to win today well, we create the future in fact, they give us confidence and ultimately having more than 6000 restaurants, and expanding it you'd be above $2.5 million with margins at or above 25%.
Let me provide a brief update on each of these strategies, which are number one making the brand visible relevant and loved number two utilizing a disciplined approach to creativity and innovation.
There are three leveraging digital capabilities to drive productivity and expand access convenience and engagement.
Number four engaging with customers through our loyalty program and number five running successful restaurants with a strong culture that provide great food with integrity, while delivering exceptional in restaurant and digital experiences.
Beginning with marketing, where the goal remains to increase awareness expand access and grow sales by driving culture, driving a difference and ultimately driving a purchase our team is showing a heightened sense of urgency since the beginning of cobot. They quickly adapted to the evolving environment and experimented with creative social and digital media initiatives designed to help enhanced Bovies brand and.
Purpose, most recently demonstrated by a round up or change feature that has raised over $2.1 million for organization supporting underserved communities. We also connected and engaged with gas through our behind the foil TV campaign, highlighting real ingredients real cooking techniques and real employees.
Innovation is a core component of AAA and our stage gate process is a key tool in which we test listen and learn from customers and operations before moving to a national launch fully continues to explore menu initiatives that align with our food with integrity standards. They successful example is carne asada, which we're delighted to bring back for a limited time across the U.S. and Canada.
As well as in France for the first time, given that only 5% of U.S. beat me to Chipotle restrict sourcing standards, we have embarked on a year long mission to partner with new farmers, whose practices emphasize quality and responsibility to ensure supply through Q4 and into Q1 of next year. This guest favorite is off to a great start helping drive sales and traffic.
The actions again this year.
In addition, our upgraded suite of tractor beverages that launched in July has been receiving terrific customer feedback. These organic teas in lemonades have elevated our drink options to match, our food quality and food with integrity those while their full benefit won't be seen until more customers visit our dining rooms. They have already helped improve drink incidents and position us for ongoing beverage.
Gains.
We have two other menu items currently being tested cauliflower, rice, which further enhances healthy eating options, which fully in case. It is the number one requested new menu items by our customers. The case. It is available as a digital only menu option and a few test markets given our digital scale as well as removing operational friction by utilizing our digital kitchens, we are optimistic.
About the potential for case it is to be available nationwide at some point in the future. We're good.
We're gaining valuable feedback on both of these items and we'll update you on their progress as well as other new menu items that are in early stages as they move through our stage gate process.
Next our digital platform continues to be a big beneficiary of consumers adopting the digital off premise occasion.
Production of dining services more people working from home increased advertising and digital awareness recent partnerships with new breed and Grubhub and expanded digital capabilities into Canada. All have helped attract new customers into our digital ecosystem, while increasing convenient access to Tripoli.
As a result, Q3 digital sales grew 202% year over year to $776 million and represented 49% of sales assuming this momentum continues in Q4, we believe digital sales could exceed two and a half a billion dollars and 2020 more than double what we did last year at this sales rate our average restaurant delivers.
A digital ayubi of well over $1 million up from just a few hundred thousand dollars per restaurant, a few years ago.
During the quarter about half of the digital sales <unk> sales came via the delivery channel with the remainder coming from order ahead and pickup transactions.
Both channels continue to grow nicely with delivery benefiting from our expanded partnerships order.
Order. It had also remains robust as guests better understand the value offered by this channel as well as the convenience of mortgage holdings, which provide an extraordinarily fast experience I'm pleased to report that the strong digital momentum has continued into October with our digital mix remaining in the high Fortys.
<unk> has transformed itself over the past few years to a real food and people company powered by technology. A Prime example is our rewards program, which has expanded significantly since March and now has 17 million enrolled members to put this in perspective. This is more viewership that on a typical Monday night football broadcasts and gives us a content distribution and.
Engagement network that we can use to elevate engagement and awareness or brand initiatives.
Additionally, many of these members are new for triple like not just dining guest who switched to off premise.
To date, our loyalty program is already proving quite fruitful we are seeing an increase in frequency across the board with consumers, resulting in an extremely strong return on investment.
However, what really excites us is that we are in the early stages of using this valuable tool to understand consumer behavior that will allow us to enhance their journeys and ultimately drive higher sales. We can also utilize these learnings to reengage members if their visits declined which should efficiently sustain the stickiness of our digital platform over there.
Over the next few years, we expect loyalty to be a key enabler of our digital flywheel as we optimize the use of this important data set.
Switching now to our great operations, where today more than ever guest demand and deserve a safe and enjoyable enjoyable experience as they venture back into our restaurants. We now have two large and growing businesses to manage with digital now comprising roughly half of our sales despite.
Despite Toby challenges our operations team has done an outstanding job, providing consistently prepared delicious food, while improving service levels. Our genes have maintained a strong presence and stay closely connected to our crew who are at the heart of our culture and our business.
A strong culture is a critical part of running successful restaurants, I think leadership team. We continued are listening sessions with employees to understand their experiences and hear their ideas on how we can better support them.
In response, we have further invested in our people, including diversity equity and inclusion training voter education and most recently expanding debt free degrees to include Paul Quinn College, the nation's first urban work College and one of the oldest historically black colleges and universities in the country of those.
Of those enrolled in our educational assistance program, 85% or crew members and the benefit has a significant impact on their tenure and growth.
We've seen a retention rate that is three and a half times higher among employees enrolled in the program and crew members participating or seven and a half times more likely to move into a management role within the organization in fact.
In fact, nearly 70% of our Gms our internal promotions. This is extremely important as we promote and higher new leaders to help support continued growth in our digital business as well as the meaningful acceleration in 2021, new restaurant openings as we.
As we look ahead, we still operate with some uncertainty regarding a potential second wave and the longer term economic impact of Cove. It yet I'm really hopeful that if we do the right things as a company and does it community. We can avoid major disruptions I've never been more confident that chipotle is a resilient brand committed to fostering a culture that values in champions our diversity while.
Leveraging the individual talents of all team members our core.
Our core purpose of cultivating a better world through food with integrity remains the guiding force in all company decisions and it still is a great sense of pride among our employees, which will far out last this pandemic with that here Jack to walk you through the financials.
Thanks, Brian Good afternoon, everyone.
Despite the ongoing external challenges, we're pleased to report outstanding third quarter results, which highlight the durability of our economic model and the strong performance or a restaurant teams.
Sales were $1.6 billion in the third quarter, an increase of 14.1% from last year comp sales grew 8.3%.
Restaurant level margin of 19.5% was 130 basis points lower than last year and earnings per share adjusted for unusual items was $3.76, representing a 1.6% year over year decline.
The third quarter had an unusual expenses related to legal reserve <unk> acid.
Asset impairment and closure costs as well as our transformation that negatively impacted our earnings per share by 94 cents, leading to GAAP earnings per share of $2.82.
We remain optimistic about the future given our strong Q3 results as well as well as the great start to this quarter. Despite lapping a 13.4% comp in Q4 of 2019 that being said, it's certainly from cold. It makes it difficult to provide comp guidance for the remainder of 2024 for 2021 at this time.
Food cost for Q3 were 32.3%.
The decrease of 90 basis points from last year, due primarily to a menu price increase in lower avocado prices that were partially offset by cobiz related impacts, including elevated pricing increase incidents at stake if your sales of high margin.
In Q4, we expect food cost to be in the low 32% range as the benefit from a full quarter of delivering menu price increases, which I'll discuss shortly will be offset by the launch of carnitas out.
Labor cost in the quarter were 25.3% a decrease of 130 basis points from last year.
This decrease was primarily driven by sales leverage partially offset by labor inflation as well as expanded emergency leave benefits to accommodate employees quite directly impacted by cobot.
[laughter] labor costs to be around 25% in Q4 as the benefit of delivery menu price increases will be slightly offset by lower seasonal sales.
Operating profit for the quarter was 16.8% an increase of 400 basis points from last year.
Primarily to higher deliveries and marketing costs in the quarter.
Delivery expenses were elevated year over year, given the significant growth, where we've experienced in our digital business a trend we expect to continue.
Therefore to help improve economics on this important access point, we're currently testing delivery menu price increases.
Remember that we have reduced delivery feet white label from $3 per order before told it to just $1. So the net increase to our guess is relatively small it typically about 2% to 3% we expect.
We expect this new delivery pricing strategy to be dynamic dynamic in evolve overtime as we gauge consumer response, and we'll make adjustments as needed as needed, including perhaps during the approach market by market.
Our goal is to ensure we provide convenient access to our guests. So they can enjoy chipotle, they how and where they choose to.
Customers choose a premium convenience channel that attracts higher costs. Our objective is to largely cover those costs within that channel.
Marketing promo cost for the quarter were 2.6% an increase of 60 basis points from last year due primarily to advertising campaigns to support our digital growth.
For Q4, we expect marking it from a cost to be in the mid to high 3% range to score carnitas auto and for the latest brand messaging under our behind the oil campaign.
As a result of higher anticipated marketing spend and ongoing momentum in our delivery business.
Other operating costs to be the low 70% range in Q4.
Looking at overall restaurant margins, we expect Q4 to be at a similar level to what we saw in Q3, while underlying margins are expected to improve by around 200 basis points sequentially Q4, yeah.
Due to the delivery of menu price increase and other patients.
These will largely be offset by higher flu cost associated with cardio south as well as the roughly 100 basis points incremental marketing spend relative to the third quarter.
Normalizing to a 3%, adding promos gun and without the near term margin impact. According our Q4 underlying margin would be in the 21% range, but the gap.
Looking beyond Q4, we expect koby related direct indirect costs to ease overtime, we have a number of plans in place to ensure we're able to deliver our full margin potential.
Do you need for the quarter was about EUR $33 million on a GAAP basis or $102 million on a non-GAAP basis, excluding $29 million or settlements of older legal matters and.
And $2 million related transformation expenses.
You May also include $84 million, an underlying Gina expenses and $18 million related to noncash stock compensation, which include a $3 million cumulative life to date downward adjustment on our 2018 P.S. use relative to kogut impacts.
As expected our underlying DNA increase sequentially as we grew headcount and investing in technology to support our growth.
Looking ahead to Q4, we expect a similar underlying expense well stock comp will likely be around $22 million. Although this amount could move up or down based on actual performance.
Turning now to the balance sheet, we ended Q3 with nearly $1.1 billion in cash restricted cash and investments and no debt along with the $600 million in untapped credit facility.
Financial strength gives us the opportunity to make ongoing strategic investments in our people and our business and in our communities, which we believe will benefit us for years to come.
Well, we didnt buyback any stock in Q3, we will continue to evaluate the operating and economic environment, each quarter, and we'll return excess cash to shareholders. When the environment is more stable and more predictable.
Another area of strength, particularly as restaurant design and development. During the third quarter were delighted to have opened 44, new restaurants with 26, including <unk>.
We now have a total of 128 tickle antiquity, five conversions and performance for these formats continues to be stellar they do.
The digital GAAP versus non triple A. restaurants remains around 10% and that's driven entirely by the higher margin order hadn't picked transaction.
Also if you look at the sales of our <unk> cohort.
The 17th quote lanes that are in our comp base, and therefore opened well before cobot sales are over 10% higher and the non chipotle and comp restaurant from the same open period, while the more.
While the more recent openings during cold there actually 25% higher.
These results for further reaffirm our strategy of an accelerated pivot towards what might sites going forward.
We continue to expect about 60% of new restaurants, with Chipotle and this year. Our goal is to have more than 70% openings included <unk> in 2021.
Well be more trouble and will not only enhance customer access and convenience, but also my recent new store restaurant sales margins and returns.
It's hard to predict the external environment, but if we assume there are no further koby related construction packages, we expect to have a sequentially similar or perhaps slightly higher number of openings in Q4 and why.
And while the current environment prevents us from being able to provide reliable new store opening guidance for 2021.
Development team has built a very robust new store inventory, which under normal circumstances would lead to opening around 200 restaurants next year as the.
As the permitting process and groundbreaking become more certain in the coming months will provide as much visibility as we can or unexpected opening by quarter and for all of 2021.
Longer term, we remain confident in our ability to more than double told.
Total number chipotle restaurants in the U.S.
In closing I want to thank our incredible teams, who continue to collaborate find ways to safely serve and delight our guests in the face of unprecedented conditions with a strong brand a team of committed employees and broad financial strength.
We feel well prepared to weather any near term coded related headwinds and we remain excited about small powerful economic model and therefore, our long term potential.
With that we're happy to take your questions.
We will now begin the question and answer session.
To ask a question you May press Star then one on your telephone keypad.
If you are using a speakerphone please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then too.
At this time, we will pause momentarily to assemble our roster.
And our first question will come from David Palmer of Evercore ISI. Please go ahead.
[music].
Thanks, Jackie you mentioned some two things.
One was the.
How co bid related costs were hurting margins could you lay that out how you expect those to taper off how many basis points margin is that and then.
And then also just when it comes to the inevitable tapering off of mix on digital how do you see that playing out in terms of your margins for next year. So for example, if the sale.
The sales were flat to this in third quarter of 21, and the digital mix was say, 25% versus roughly 50, what impact would that have on your margins as well. Thank you.
Okay. Thanks, Thanks, David Let me take the first one first when we look at the direct and indirect costs. So we can identify related to coated there's about 100 basis points of margin drag up there's direct costs that we mentioned in the script. For example that talk about how this is kobe when people are excluded they there have been exposed or they tell us that.
As a family member that you know that tested positive that may have been exposed.
We pay those people to not work and you know so so that is the piece and that's most direct piece. There's also things like during this profit that new customers that come in and they ship it to you did.
There's a higher mix will stay can stay at the lower margin. Then then chicken people are buying more burritos, and it's something that 100% due to the digital channel, we're bringing a lot of new customers into the digital channel, they're starting their journey, what chipotle. They will read out and also the other thing that we know that our customers tell us is that.
Brito travels better than a ball and so they are buying more read out we're also adding tortillas and digital as well and until recently those work those works rate and we've got fewer beverages, we only David have about 5% of our customers, even though 50% are coming in the restaurant to order only 5% are staying the restaurant and so they are buying a lot fewer beverages. So.
Those are the direct and indirect impacts everything and they they have about a 100 basis point impact hard to tell how these will cycle in and cycle out. Some of these things we can control like but you know we can stop giving away free tortillas and if somebody wants to buy the tortilla.
They can pay a slight premium of 25 cents other things like sales mix, we're going to have to watch and see how that how that plays out in time.
In terms of.
Looking forward a year from now really hard to answer that question I will tell you. This it all depends on delivery delivery is the channel that attracts a premium and the way I would think about this is our margins were hit and the other line item other expense light out was hit because we had a about a 15% shift.
You know that was in store customer that went to delivery and we all know that delivery brings a much higher cost. So between now and next year in your question if delivery shifts into in store and shifts into order ahead.
Pickup.
I would say our marquee for sure are headed on the way up.
Delivery stays the same or increases you know, we'll have some challenges, but we think that the experimentation that we're doing with menu pricing. We think we can offset those prices and get back onto our algorithm that we've always talked about with our margin.
Thank you.
Our next question comes from Catharine So already of Goldman Sachs. Please go ahead.
Great. Thank you.
And Jack you walk through some of the details about passing on delivery pricing through digital channels I Wonder if we could dive into that a little bit more you know when you have a your initial findings around this are you seeing any shifts and consumer preference here and then you know are you treating whiteley about the same.
Marketplace.
Yes.
Yeah.
Katy where we are treating white label and marketplace. The same in terms of menu pricing so in it.
In a in a given market, we do have different pricing in different markets different delivery prices, but if we raise pricing for example, 7% with our white label, we're doing the same with marketplace everyone's on equal footing.
Equal footing, there and then in terms of I'm sorry, what was your other question.
Are you seeing any decline in consumer demand.
I know, it's early still Kt, but no we're not seeing we're not seeing any decline there might be a slight shift into order hadn't pickup, which we'd be absolutely delighted by because that's our highest margin transaction, but.
No no no noticeable moves to call out so far.
Great. Thank you.
Our next question comes from David Tarantino of Baird. Please go ahead.
Hi, Joe.
Jack just a quick clarification on your your fourth quarter commentary on the margins I think you mentioned restaurant margin on an underlying basis, a 21% of that.
A fourth quarter number because I know fourth quarter, usually is a seasonally lower margin quarter. So I guess with that Annualizes something higher.
Yeah, David Great. Great question, that's correct. The walk forward that we did was the Q you know the Q4 and you're right Q4, and Q1 are typically seasonally lower margin quarters.
Okay, Great and then on on the comps.
I'm curious on your thoughts on you know.
You mentioned, you're cycling much tougher comparisons now related to the launch of Carne Asada as you look underneath the surface and look at kind of seasonally adjusted sales.
Sales trends on a daily basis, or however, you want to answer. This do you think your thing a softening of the trend line or do you think.
Yeah, the underlying business really hasn't changed or maybe it's even improved as lower because of the comparison.
Yeah listen David I'll start and then Brian may want to add on as well when we shifted from August into early September and then we started a tougher comparison in the middle of September we saw the dollar sales trends hold up really really well and so we can we can look at those sales trends, we understand what we expect from a seasonality standpoint, it's a little more debt.
Got with coated but the sales trends themselves held up really well so the only called out that way.
I called out that we had was as we compare to these tougher comparison you know the comp is is we're delighted with the fact that out through the second half of September into October So far we're still solidly in that mid single digit and so the adjustment in the comp percentage is merely because of a you know a tougher comparison to last year.
Yes, the only thing I would add David is you know hopefully you saw this as we were talking about the two year compounded performance.
We're getting close to being back to where we were performing pretty cold it even though we're still in a coded world and clearly the composition of our sales are different coming from you know are much more significant digital business, but that you know we're feeling really good about the trends, we're seeing in the business and as Jack.
I mentioned the good news is the feedback we get from customers on Carney Assad coming back is there really excited to have it back and as a result, they are coming back to AAA to come get Carne Asada.
Great. Thank you very much.
Our next question comes from John Tower of Wells Fargo. Please go ahead.
Great. Thanks, just wanted to dig a little bit into the default lane stores I'm curious if you could talk a little bit about the profitability piece of those stores I think the seven theaters. So you had mentioned in the comp base.
You talked about the sales side of the equation, where they're doing much better on a comp basis and the digital mix is higher but obviously, you're seeing some of your stores today due to the higher delivery fees. Some margin pressure. So can you talk about where that sits today and honestly.
On a comparable basis versus the they average store base out there.
Yeah, I I guess.
<unk>.
I I was going to say, there's a couple of different angles to this first of all you know we look at our comp base Chipotle.
Chipotle restaurants are about 10% higher than not your fault line for our comp restaurant and that and the same color to open for more than 12 months. So right out of the box that you too that that 10% equates to about $200000 in volume that's about 200 basis points in margin right. There. The other thing is even though we have.
About 10% higher overall digital our delivery needs to propane is actually lower okay. So while overall digital it is 10% greater the order hadn't pickup is more like 50% greater so there's there's a shift from the delivery component into the order had and that enhances margins as well so it's at a minimum.
Just the sales volume alone is 200, and then that mix shift you know add a meaningful margin as well. So it's a it's a meaningful change in margin and therefore.
A meaningful improvement in returns as well because it's full nine is around 70 500000 more expensive than a nod to Poland and obviously when you go through the math of returns are you know our extraordinary on that extra hundred thousand dollar investment.
Yeah, the only because I think I've yeah. The only thing I would add to that is I really do think as Jack mentioned when you hear the results of our order ahead business. The additional convenience the incremental sales I really think we're in the phase of proving you know really the digital drive through the future and I'm glad we're on the front end.
So you know obviously, we're very optimistic about where this can take us.
Great. Thank you.
Our next question comes from Andrew Charles of Cowen. Please go ahead.
Great. Thanks, Brian Great say, what my question that you spoke about the opportunity for 6000 Ultimate Chipotle locations and I think you once mentioned during the quarter that Chipotle and could ultimately be featured at the majority of <unk> four locations, we get that 6000 number. So I'm just curious how many conversions of existing traditional stores chipote lanes. When this entailed long term.
Is it presumably getting ready to do some conversions in the coming years, how are you prioritizing which stores are going to be converted from a traditional store to a chipotle and format.
Yeah, So I'll start and Jack feel free to add here you know we've mentioned this I think in prior calls because of the success, we're seeing and the return on the investment that we're seeing we pivoted.
Weve pivoted aggressively into our pipeline to have triple aim to be the majority of what we're going to build going forward. So that's.
So that'll be a big driver of why the portfolio mix will change in the future and then we're in the early days of working through conversions, we've done a handful of conversions and the thing that is you know I think really good news here is before I would say there was some resistance by landlords and such to convert and.
Caps, let's say, we're not seeing.
We're not seeing that that resistance and we're also having some success with the idea of even relocating.
When it makes a lot of sense to do that so it's going to be a combination of you know we've got Chipotle is that are you know now 20 years old and when the opportunity presents to relocate we look at it from the standpoint of relocating so we can hedge Alain and then we're starting to see much more traction with landlords being willing to work with us on the conversion.
And we're also seeing nice results from the conversions that we've tested to date. So that's what gives us the confidence is saying the chipotle, it's going to play a major role in our portfolio as you look out into the out years, Jack I know if you want to add anything.
No Brian I think you said it perfectly that the key there is even our oldest markets. Those are the sites that are coming up for renewal either they are coming up to to either exercise an option or they're coming up to the end of the term and so nice thing there is because landlord to more agreeable, even our oldest markets, which don't have a whole lot of new stores over.
Over the coming three to five years, we can do a lot of conversant than a lot of lottery, though so we're very optimistic about it.
Just a follow up to that is the conversion relocation opportunity for 2021 going to be greater than what you saw what you're able to achieve in 2020 summit relo and conversion opportunity perspective.
You know I know, it's early to tell but I would expect that we would see a step up in conversions and re those you know next year compared to this year and then a step up the year after that as well because when you just go back to 10 and 20 years ago and these are the leases that are coming up we had an increasing number of openings you know back in that 10 year period.
Thats one year period, so I had the opportunity should increase every year. So I would expect to see a step up each each and every year hard to exactly quantify at this early stage, though.
Got it thank you.
Our next question comes from Nicole Miller of Piper Sandler. Please go ahead.
Thank you. Good afternoon, just one point of clarification and it might be self explanatory, but I hate to make assumptions at this point.
Jack can you just go ahead and to find what a mid single digit comp is for you I mean, I'm tempted to take the comp this quarter and just shave off about 200 basis points from year over year compares but maybe you have a figure that figure that out if you're at the low or the higher end of that range.
Yeah, Nicole listen it at this early stage.
Quarter, when I say that when we say mid single digits, we're thinking out about four or five six within that range of course week to week, it's going to change based on you know weather and other things, but its solidly within that range.
Thanks for that and.
Then the question, Brian You had mentioned 17 million loyalty members more than some sporting events.
So it really begs the question at least for me what is the appropriate level of spend. Thank you are an avant to 3% range for this year and under.
Understandably, you would be getting with more sales and more units more dollars to spend but the big global brands, which it seems where chipotle is headed we're spending 5%. So when would you pull the trigger on marketing.
Yeah look I think the good news is we're starting to get a lot of leverage out of that $17 million database and obviously, it's served us very well, especially during kind of the environment, where more traditional marketing channels, probably haven't had the viewership.
That they've had in the past so you know I think.
I think the way we've approached it nickel is we want to look at where we're getting a return for every investable dollar and the good news is Chris and the team continue to find great ways to drive purchases with our marketing dollars. So we're less fixated on a you know in the future what the right percentage were more.
Fixated on what's going to be the right dollar amount. So that we can continue to get great returns and continuing to drive sales the way we have to date so.
No I think I've mentioned this in the past not opposed to spending more one we know we've got opportunities that would result in great return.
Excellent. Thank you so much.
Our next question comes from Sharon Zackfia of William Blair. Please go ahead.
Hi, Good afternoon, I guess I'm a point of clarification could you help us understand after the delivery price increase kind of what the gap is between non delivery and delivery price point and then on development is 200 kind of the right yearly cadence at this point or is there some pent up.
Flow over a units that are flowing into 2021, and so we shouldn't think of 200 as maybe the right number.
Next year.
So I'll I'll tackle the first one and then tackle your prior quick.
Prior question too and then Jack chime in so you know look I think what we've been doing is continuing to test out alternative formats.
And the good news as we've gotten more and more scale in our digital business. The alternative formats like at your polling.
You know are proving to us that we've got more by.
Viable opportunities for Chipotle, both in developed markets and emerging markets. So we're feeling really good about getting back to 200, and I think I've mentioned in the past.
We think we've got the option to go beyond 200, So you know as we.
As we get further along than we better understand the impact of Covance going to have on building going forward, we will be able to give you better guidance, but you know I think.
I think what we're trying to share with you guys is we've got a great pipeline a week.
We've got great formats that give us great returns and we're feeling really bullish on the ability to get back to building 200 restaurants and then our hope is we'll go beyond that in the future.
And then your other question on was it delivery margins was that right.
Relative no. It's really it was really from a consumer standpoint, so what would be the the average difference in price points right now what the task between delivery and non delivery.
Oh, So weve yeah, we've got a couple of different tests in place.
Anywhere from seven per.
7%.
Tests that we've got a 13% test that we have and we even have some.
17% test in menu prices the thing I would remind you is real.
Remember before co bid, we were charging $3 for delivery in all those scenarios now what we've done is we kept the delivery fee at a dollar so the effective price on the transaction is only two to three points higher so like when you look at the total cost it ends up being about 2% to 3% more than what they were used to.
Paying for delivery.
Before we started promoting the delivery channel, which actually coated I think was the right thing to do to pivot to that channel and get the digital business going.
So all in all it's it flows into totality of about 2% to 3%.
Jack was there anything on that one.
No that was it Brian and just you know Sharon debt to give you an idea the seven the 13 to 17, they wash out to on average to be a low double digit kind of increase that Brian made the point about we offset that in our white label.
Lowering the delivery date and treat OIC took to $1. So so far so our folks at her shopping in our white label, It's a really really good value at their shopping in marketplace. You know it depends on what the others are charging up.
For their delivery fee, which we don't have control over.
Yes, good point, yes.
Our next question comes from Jeffrey Bernstein of Barclays. Please go ahead.
Great. Thank you very much.
Two questions one just.
As we think about the volumes versus the margin correlation, which you've talked about many times in the past you know it seems like the two areas that can move in lockstep I think you noted that the third quarter. The visas are in the 2.2 million range and I think you said the underlying margin would have been 21, we're actually 22, if you back out the hundred basis.
Quite kind of cool that hit so one I just want to make sure I'm getting that right and then it seems like.
It seems like your peers are talking more and more about maybe doing more with less you know perhaps seeing.
Perhaps seeing some cost savings through covert that seemed like they're sustainable so I'm wondering whether you're seeing some of those cost savings.
Yes, there is potential to see restaurant margin re accelerate faster than any you V. And then I had one follow up.
Yeah.
Yes.
I think you're thinking about it right.
The key to note that we know that there is a gap you know a temporary gap some driven by cobot, some driven by other thing.
Other things, but we know that that that that what it will take to get from where we are today to what the algorithm is the key to note is that we're not going to be in a hurry to get that we know what levers well, we know how to close that gap. So we get all the way to that algorithm.
You know, we'll pull those at the right time in the right places that we don't for example, disrupt a consumer demand for its pulled back but it's important for you guys to know that that these are levers that we know that we can pull we know that that we can deliver the margin that that you know the full market potential that we know is there, but we will be.
It will be very very patient.
In doing it.
Got it and then just a follow up in terms of the you know if that was a silver lining to come out of this very difficult pandemic. It does seem like commodities not a big issue and you're seeing nice leverage labor inflation.
Using seemingly and you're seeing some leverage real estate costs. It sounds like things are getting better and maybe locations are becoming more favorable. So I'm wondering whether you see that the same way and maybe how you'd prioritize the magnitude of those benefits, whether you believe that all sustainable or not thanks.
Sure I'll get started Jack.
Yeah, So I think well the way we would look at it is in our business. We always plan for the unexpected. So our approach has been when opportunities present itself, we want to make sure. We take advantage of it when challenges present themselves. We want to make sure. We have plans in place to handle them you mention.
And some things that may true proved to be some tailwinds going forward.
But you know one thing I've learned about these businesses, we can expect the unexpected so.
Look where there's tailwinds, we'll make sure we capture it where there is headwinds will figure out how to maneuver through it so.
So Jack I don't know if you want to add anything specific to that yeah. Brian I think that was that was well said and you know we are seeing for example, our our teams in the field are doing a fantastic job not just a peeping their teams say not just making sure the customer is safe, but also running the business well and so they really are doing a great. Great job you know you hinted at this.
And your first question.
You know I'm out.
You know some some opportunities there are some savings they're doing a great job managing things like that that are Matt anything, but like food cost effect that digital has become a.
Become a much bigger part of the business.
We always charge when somebody orders extra station digital that's the only way to do it. So there there are some advantages there and those are helping us along the way our goal will be to Brian's point is to make sure that we called out of those as we deal with the future challenges ahead of us.
Thank you.
Our next question will come from Peter Salah of P.T.I.G. Please go ahead.
Great. Thanks, Brian I wanted to ask about the Chipotle is a value proposition now historically chipotle has been a better value for the consumer relative to many of its peers and its competitors.
Over the past couple of years, you guys have been raising menu prices and introducing higher price point items like Carne Asada and now I think you're talking about raising delivery menu pricing is somewhat so can you talk about the value proposition. How do you see any insight you may have answered the value scores, especially through the pandemic.
Yeah sure. So here's the great news is our value proposition continues to only get stronger. So you know you got to remember 60% of what we sell or chicken burritos and bowls and those are still great meals purchase for less than eight bucks.
On our menus and even when you look at other channels like delivery, where theres. Some additional cost associated with it. We still then maintain our same value gap relative to peers because a lot of people are pricing a lot higher than what we are in the delivery channel. So you know the feedback we get consistently is the food.
It's delicious the customization is unlike anywhere else I get and the price I have to pay for that at the speed of which I get it. This is still a tremendous value proposition and I think well I know based on the surveys we put out there we're continuing to get feedback that our trust is going up and our value is going up so.
You know these are obviously customer surveys, but we feel really good about the strength of the brand because of those metrics, where we have strength, which is you know food quality slush food integrity Trust speed customization and then not surprising when you have all good things in those areas you get really good value scores. So.
It remains very strong.
Thank you very much.
Our next question comes from Dennis Geiger of UBI, Yes. Please go ahead.
Great. Thanks for the question, Brian I wanted to ask a bit more about new product innovation and whether there's much else you can share on kind of takeaways from from some of the products that you mentioned that that are in test and maybe what that's done to your excitement level call. It as it relates to a broader roll out eventually and just related to that I guess of the results of the stage gate.
Process to date and they increase.
The rate of new product rollout as you kind of hold the process rate of success as you hope.
As you hoped that process over time, just curious your thoughts there. Thank you.
Yes, sure well look we're feeling really good about the process you know, we've we've had some really powerful initiatives chips.
Chipotle Lane is one of them that went through the process.
Obviously menu items like Carne Asada CAISO tractor beverage.
You know these things are all proving that our process works to identify.
The winners so that we bring those forward and we do it in a way that protect the integrity of our financial model and the integrity of our operating model while gives.
While giving the customer what they want and sometimes leading to customer.
In food.
Some of things that I'm really excited about is look I I'm really fired up about this cauliflower rice and really fired up about the case idea.
For two reasons one the case, India is proving to be very effective in our test markets in a digital channel execution, which keeps the channel very much engaged for the customer and I think we'll continue to make it a sticky and a acquisition tool for people to come into the business.
As you know and then the cauliflower Rice I think is just in Chipotles wheelhouse of continuing to push real wholesome ingredients done in a delicious way and you know I'm fortunate that we've got that in Orange County, So I get to heavier cauliflower rice with some frequency and it's just that it's delicious and the guys are working on some additional things that I think you mentioned that.
Yeah, you'll see us continue to rollout into various.
[noise] test markets, but you know the good.
Now the good news is the ones that didn't do so well we haven't rolled those out nationally. So the stage gate process is working you know the ones that work, we move forward to national the ones that don't work, we learn from it and you know.
Stop stop the trains from just moving down the tracks. So it's working.
Thank you.
Our next question comes from Sara Senatore of Bernstein. Please go ahead.
Hi, Thank you just two clarifications if I may the first is just Brian you said that you know people are coming back for Carnegie SATA. That's that's a change from their customers I guess, so the implication as I understand it is that you know even though your compares are self tough you do have this extra you know Paul if you will on your on your menu. So I don't want to.
The words in your mouth, but is is that a is that right. There are people, who maybe don't come from then.
The menu without the carne asada much like how many on Ams.
So that was the first clarification and then just on the margin.
I know you've gotten a lot of questions. There was there any savings from not having dining rooms open we've heard that from some other companies that just being able to start up I know most of the sales through M&A to drive your carry out does allow some some labor savings and I was just curious you know that if that's true as we think about you know more.
Normalization of sales thanks.
Yes. So the first question on Carne Asada, Here's what I think you should know is the good news is even when people come in for the first time for Carne Asada, what we do see is their second or third purchases. They move within the menu. So they experiment with chicken or they experiment with our regular state and it proves to be pretty sticky. So it's.
Yes, I'm sure we can pull forward some frequency with carne Asada, we get some new users and with Carne asada, but the good news is it proves to be sticky because they love the AAA experience they love the carne asada, but they love the AAA experience and so you know I think thats why you're seeing us in a hosted environment being.
Able to lap.
Carne Asada initiative does wildly successful a year ago.
Because we're getting both we're getting.
Frequency play and we're getting some new users into the business.
And then your second question was.
Can you remind me the second question was.
Yeah, just on margins were there any kind of you know saving.
Savings from a different Oh Lieberman.
Labor matrix it be.
He kind of dining.
Yeah. So you know I think Jack.
I think Jack kind of outlined some of these things where our teams have done a really great job of.
You know flexing between the front line and the digital line. The good news is our frontline is now our opening I think it's like 90% of our restaurants, almost and obviously, we're doing really smart things from a labor management standpoint.
But you know, we still operate or dining rooms, and we've committed to making the dining experience really say so we've invested in things like the steward.
And that's an important position to get People's confidence to come in and get take out. So you know there are some places where we've seen efficiencies and we've captured those efficiencies and the teams have done a great job of managing the labor effectively for where the businesses, which is now split 50 50 between did.
Little and the front line.
So you know I think.
I think where we are able to capture the savings we capture them and then in the other areas, where it's necessary for us to invest to ensure there is a common.
Competent work environment for the employee and customer we do that as well.
Jack I don't if you want to anything.
Yes, Brian.
Brian I think it was really well said the other thing that I would just.
That I would just point out Sarah.
Sarah is that.
Some of the other like traditional fast food if they have 90% of the business goes through the drive thru up they have almost nobody that's really tending to the to the dining room and so I know that some folks are hesitant to even reopened a dime or if they can keep it close that will be great. That's not really an option for us for the reasons that Brian mentioned, we still want to have our frontline staffed and ready to go.
I'll have half of our sales that are going through that front line and so but having said that definitely there is an efficiency.
Inherent gift out of the business going from 20% digital to 50% and Scott and the team out in the field have after that efficiency and that that has no growth.
Understood. Thank you so much.
Our next question comes from Lauren Silverman of Credit Suisse. Please go ahead.
Thanks, just a follow up on the delivery menu pricing with a one dollar delivery see what menu price increase would be necessary for delivery transaction at parity with the dine in transaction and is that something that you would explore assuming they delivery next sustained at these levels.
Yeah look I think what we want to do is figure out the best way in the channel.
To capture the additional costs. So you know we will figure out how we do that whether it's through the menu price or if there's other ways to even be more efficient, but we want to.
Figure out how we you know we understand the cost and then how we make sure we address those costs in the most effective and efficient way.
Because we want to give the consumer the access that they want.
And so you know, we obviously work through various iterations and that's why I think you heard Jack mentioned earlier, we're still experimenting with various approaches.
Okay and right now 18 months into the loyalty program, what can you share regarding what you've learned about how customers across frequency cohort to use the triple A., Brad differently, and then specific to just customer using delivery do you see any outsized usage among light users are new to the brand.
You know I will what it has been great is the delivery channel has proven to be a great access point and an acquisition tool for our digital system.
You know and what we've seen is a nice increase of light lapse, new users into the business not surprising we see more of a frequency gain with that cohort group versus somebody that's a heavy user.
The utilization, which is also really nice to see is as they become more familiar with our app and the ability to order ahead and do the grab and go we see people adopt that with some really nice frequencies. So you know there are those occasions that are dedicated to delivering but theres also these occasions for everybody in these cohorts.
Where the order ahead proposition makes a lot of sense and.
We're very bullish on being able to use the data and the insights to drive the behaviors around these various occasions that maybe fully before wasn't top of mind that now they are.
Thank you.
Our next question comes from Gregory Francfort of Bank of America. Please go ahead.
Hey, Thanks. Thanks for the question I just had one quick one and then and then another question just can you remind me if there's any big differences in the compares last year between the months I, just don't know if you're lapping a particularly tough or easy period and in the first part of the month a for profit first part of the quarter and then my question is on labor.
Can you maybe give us a little bit of the background backdrop on what's happening on the labor front in terms of turnover.
The ability to source labor and.
It seems like you guys have seen.
We've done a really good job of managing denim just kind of curious if you could talk a little bit about that environment. Thanks.
Sure. So the first question is really easy to answer you know for the fourth quarter were rolling over a plus 13.
Off of the heels of our successful Carne Asada launch last year as well as a lot of that throughput gains that we made operationally so.
So that's why we mentioned starting in mid September the rollover got harder. The good news is when you look at the two year compounded growth rate.
We're continuing to perform in that 20% range.
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So we feel really good about where we are and then your second question was Oh, sorry, I forgot what the second question Doug.
You're getting a lot from all of US. So just just on the labor side you below label.
New talent in turnover, just what the environment looks like for triple It yeah.
Yeah look I think we've got a great employee value proposition so not surprising.
We're attracting a lot of applicants.
Investments that we've made and the way that we've handled I think is cobot environment in regard to you know honoring bonuses are providing our employees with restricted stock and are also giving them all the tools they need whether it's mental health benefits that three degrees.
Obviously, a lot of the work around diversity inclusion and all these things I think make the job really exciting and then you layer in the simple fact, we're a growth company right. So you're going to come into this company. Maybe you join as a crew member may be you join as a kitchen manager, but we're going to be building 200, plus restaurants, and there is a growth opportunity for us.
During the next 18 to 24 months, you could find yourself being a manager running a restaurant so that creates stability because people want those opportunities and it also creates the ability to pull people in to want to become a part of the AAA culture and opportunity. So you know I think Scott and Risa and all of our restaurant leaders are doing a turn.
Terrific job of sharing the story of look we're a company that cares about cultivating a better world. We do it through food with integrity and we are a people business, we are and we're going to invest in our people and do what we need so that they can be successful and that their development hopefully results in their ambitions that they have.
So you know, we're seeing a very positive situation out there right now.
Thanks for the thoughts Brian appreciate it.
Our next question comes from Andy Barish of Jefferies. Please go ahead.
Yeah, Hey, guys.
Excuse me a question on the current.
The Carne Asada price premium I think you took it up.
This year can you just give us a sense of.
Sort of on margin neutrality, how much higher would it go and just comparing.
Versus sort of your you know your your basket of product mix and and then how much of an impact you expect in the fourth Q versus I think it was about a 50 basis point headwind a year ago when you launch it.
Yes. So obviously our go ahead, Jeff go ahead.
And he just just real quickly.
Ballpark it still.
Profit.
Yes.
Oh.
Right.
Thanks Mark.
Hi.
Uh huh.
<unk>.
But.
Correct.
Yes, I'm not sure if you heard Jack on that he is kind of faint on that but I didn't know if I phone or your phone.
No. He's got think there, but I think what you're saying is you know the guy.
The good news is kind of sad is proving to be incremental.
And obviously, we priced it such that you know from a penny profit standpoint, it looks really good and I think the numbers that you talked about a pretty consistent with what we see as the margin impact.
Okay. Thanks, Mike.
Yes.
This concludes our question and answer session I would like to turn the conference back over to Brian Nicole Chairman and CEO for any closing remarks.
All right. Thank you and thank everybody for taking the time and for all the questions. You know I do want to just take a moment to recognize like even despite being at Cobiz situation. You know this third quarter really I.
I think talks to the power of our brands and the power of our culture. If you just stop and think for a second we had record sales with a two year.
Number close to 20% and we did over $1 billion in delivery now a year to date for a billion dollars of order ahead business year to date.
You know and we have a really strong balance sheet with a billion dollars of cash. So I think we are also at the same time moving our margins on our way to be consistent with the model that we've been talking about and I think we've talked about that quite a bit and you know obviously, we continue to invest in our creativity and innovation through this.
Okay process and I think when things that I'm really excited about is how we're proving I think the digital drive through the future with Chipotle Lane, which I think is going to have a huge impact going forward and I'm really excited to be talking about building over 200 restaurants again. So you know, we're obviously going to continue to invest in our people. Obviously continue invest in our culture, because we know that results in driving better.
In class operations and our teams again I just want to say huge. Thank you. They have stayed focused they have committed to the covert protocols. So that we can keep each other safe and we can serve our customers in a safe way and I think my takeaway from all of this is the brand is powerful our future is really bright and we're going to continue to.
To make progress on cultivating a better world really through our intention around food with integrity. So I look forward to the next quarter. When we can share our results, but so proud of where we are today and just so proud of our team and our culture for how we've navigated through these really challenging times of late it's done.
It's demonstrated that when you do the right things for your people you do the right things for your community you get rewarded with great results. So thank you for.
Thank you for your time, and we'll talk soon bye bye.
The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.
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