Q1 2021 Chipotle Mexican Grill Inc Earnings Call
[music].
Good afternoon, and welcome to the Chipotle first quarter 2021 earnings conference call.
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After todays presentation, there will be an opportunity to ask questions.
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Please note this event is being recorded.
I would now like to turn the conference over to Ashish Kohli head of Investor Relations. Please go ahead.
Okay.
Hello, everyone and welcome to our first quarter fiscal 2021 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 Chipotle 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 management 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.
And in our form 10, Qs for a discussion of risks that may cause our actual results to vary from these forward looking statements.
Our discussion today will include non-GAAP financial measures.
A reconciliation to GAAP measures can be found via the link included on the presentation page within the Investor Relations section of our website.
We will start today's call with prepared remarks from Brian 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&A session.
And with that I'd like to turn the call over to Brian.
Thanks, Ashish and good afternoon, everyone Chipotle is off to a promising start in 2021, which gives me optimism for the rest of the year.
There is still uncertainty related to COVID-19, but it's more people become vaccinated, including many chipotle employees I'm hopeful we're getting closer to brighter days ahead.
In fact, all but about 20 of our restaurants are now open with 92% of them offering in restaurant dining with capacity limitations.
For the quarter, we reported sales of $1 $7 billion, representing 23, 4% year over year growth.
Which was fueled by 17, 2% comparable restaurant sales growth, including about a one 5% headwind from winter weather in February.
Restaurant level margins of 22, 3%, which is 470 basis points higher than last year earnings per share adjusted for unusual items of $5.36.
Representing an increase of 74% year over year digital sales growth of 133, 9% year over year, representing 51% of sales and opened 40, new restaurants, including 26 with the Chipotle.
Not surprisingly comparable restaurant sales were the highest during the month of March as we lap easier comparisons and I'm pleased to report that April is off to a good start.
These results highlight that our key strategies continue to resonate with guests and position us to win today, while we create the future.
Let me now provide a brief update on each of these strategies, which I believe will help fulfill our long term vision of more than 6000 restaurants au vs above two and a half million dollars in restaurant level margins above 25%.
These are.
One, making the brand visible relevant and loved to utilizing a disciplined approach to creativity and innovation three leveraging digital capabilities to drive productivity and expand access convenience and engagement.
For engaging with customers through our loyalty program and five running successful restaurants with a strong culture that provides delicious food with integrity, while delivering an exceptional in restaurant and digital experiences.
Let me start with our marketing efforts where.
Where the team is doing a great job being agile and remaining relevant to our consumer mindset that continues to evolve internally, we encourage curiosity and experimentation, which takes advantage of our digital and social capabilities in conjunction with TV advertising to consistently reinforce our messaging.
For example, we leveraged the return of sports to showcase our brand and purpose, our first ever Super Bowl commercial titled cannot Burrito changed the World was very successful at highlighting Chipotle Chipotle dedication to cultivating a better world through real food sustainable sourcing and a commitment to the farming industry.
We also connected and engaged with our guests during March madness, with a mouthwatering commercial showcasing real ingredients real cooking and real people in order to support the launch of our handcrafted case it is.
Got to be out on our digital communication strategy involves supercharging the super fans, who are true advocates.
Content on social platforms is a key way, we interact with our guests the angle for all of our creative initiatives is to drive culture drive a disk drive a difference and ultimately drive a purchase.
Helping these marketing efforts were a handful of new menu innovations, which provide wonderful examples of the stage gate process and our team's ability to execute new food experiences.
Cauliflower Rice, which we launched in early January and will continue through mid May is continuing to bring in new guests. In addition, we launched case it is across the U S and Canada as a digital exclusive offering on March 11th. This is our first new customizable entre in 17 years and was the most requested item by guests not on our existing menu we made.
Sure. We took the proper time to develop an excellent product that consumers love and also works well operationally. The end result is a case of the year that is perfectly crispy on the outside with delicious melted cheese on the inside my.
My personal favorite is the Barbara Cold case it at that.
The benefits of a digital only offering or that it leverages, our digital scale, while removing operational friction by utilizing our digital kitchen, although it's only been out for about a month. We're encouraged by its performance thus far with an incidence mix of approximately 10% and expect it to remain a guest favorite moving forward.
Last but certainly not least we also had carnitas sada for the majority of the quarter and we're pleased to say that he had an incidence mix similar to what we saw last year.
And our talented culinary team has not done innovating we have several market tests of new items. Scheduled later this year that have shown promising early stage consumer testing, we are gaining valuable fad that feedback and we'll update you on their progress as they move through our stage gate process.
Also it's likely that we will put another marketing push behind some twenty-twenty initiatives like tractor beverages later this year to optimize their performance once COVID-19 normalizes.
Let me now I'll talk about the next strategic driver of our digital platform our investments in new digital features and innovations helped Q1 digital sales growing 134% year over year to $870 million and represent 50% of sales.
Mentum continue to build within the quarter with March setting a new record for digital transactions supported by our best ever Digital order ahead month over 800000, App downloads and the most new digital customer since may of 2020.
With the overall digital mix.
Remaining relatively stable for the last three quarters, we're delighted to see that our highest margin transaction digital pick up orders were slightly more than half of digital sales during Q1.
Within the delivery channel about 40% were initiated through the Chipotle app or website, while the remainder were through a handful of partners.
Our digital sales are a sticky frictionless and convenient experience as evidenced by our April digital sales mix holding around 50% aided.
<unk> aided by the case it would be a launch our digital sales are now slightly above the COVID-19 peak from last year, while we've recovered roughly 60% of in restaurant sales as dining rooms have reopened. We also continued to see outsides digital performance in Chipotle, <unk>, which have revolutionized the drive through experience towards order ahead for pickup transactions, which is our most.
<unk> channel.
As our digital ecosystem has evolved from a commerce system to a platform of engagement. We continue to look for ways to enhance convenience and access including Chipotle <unk> alternative store formats digital only menu offerings and Chipotle rewards, we are regularly making enhancements to our app website delivering group offerings to support the current and expected.
<unk> future growth within this channel will also continue to make important tech investments to create a path for the future. One. Such example is our recent investment in Europe in early stage leader on autonomous delivery Neuro uses robotics in their fleet of on road occupant lists and autonomous vehicles to deliver everyday consumer goods and we believe has the potential to <unk>.
The delivery experience to the next level.
Speaking of our loyalty program, we now have more than 21 million passionate members that receive targeted and personalized messages. We are leveraging the CRM platform for.
Purpose, driven messaging as well as tempting fans with our latest promotions.
Indications store customers are individually tailored so that specific customer activities prompt targeted responses each digital message can vary along the customer buying journey, such as the latest promotional offer and a new menu item or a more targeted offer to entice a customer that is not visit our restaurants for a certain period of time.
For example customers receive communication about the case deal launch featuring their favorite protein based on their ordering history.
Our loyalty program has been very successful in driving additional transactions across our light medium and heavy consumer segments, but we continue to increase the level of sophistication and experiencing our information and targeting which should bode well for the future of Chipotle rewards. We're also investing in talent and infrastructure for rewards and have several enhancements to the program planned for later this year.
That consumers have indicated would increase their engagement and purchases.
Let me end by talking about the foundational ingredient of our success and that's our restaurant operations, where the team has done a great job staying focused on safety reliability and excellent culinary.
Running great restaurants requires great people and Chipotle is privileged to have amazing employees. Our continued investment in our team members to ensure they have the resources to develop and thrive in their career, including the recently announced expansion of debt free degrees in agriculture, culinary hospitality and supply chain is paying off.
Turnover continues to be relatively stable and we're seeing great applicant for open positions to staff, our expected growth in <unk> and new restaurant openings.
After visiting a number of our restaurants recently I'm encouraged to see more guests enjoying their food in our dining rooms. As a result, we've been reiterating the importance of executing great throughput by teaching training and validating the five pillars of throughput every day. During every shift after all guests need to feel safe and deserve a great and fast in restaurant experience.
Chipotle is a unique brand committed to fostering a culture that values and champions our diversity, while leveraging the individual talents of all team members to grow our business and cultivate a better world to show how passionate we are about inspire a real change in people food and the environment. We are tied 10% of officers annual incentive bonus to the company achieving.
Certain ESG goals, our updated sustainability report, which was published last week showcases our desire for transparency and being a leader in sustainability I.
I also want to take this opportunity to welcome our two new independent directors, Matt Carey and Maurice Yo Gutierrez, both bring excellent experienced store board and will be valuable assets for Chipotle.
Finally, I want to thank our employees for their incredible level of collaboration and tireless dedication, which were critical in helping demonstrate the brand's resiliency.
While the past year has been full of ups and downs in the volatility related to Covid may not be fully behind us I believe chipotle is stronger today and is well positioned for growth as a result, I'm excited about our future as we remain a premier fast casual brand focusing on all stakeholders a leader in culinary a leader in food with integrity.
And an innovator, providing convenient access inside our restaurants as well as through our expanding digital ecosystem.
With that here's Jack to walk you through the financials.
Thanks, Brian and good afternoon, everyone. We're proud of our performance during the first quarter with sales growing 23, 4% year over year to $1 $7 billion as comp sales grew 17, 2%.
Restaurant level margin of 22, three percentage was 470 basis points higher than last year and earnings per share adjusted for unusual items was $5 36.
Representing a 74% year over year increase this include a benefit from lower taxes related to option exercises and share best thing, which is more than offset by higher G&A related to performance based catch up adjustment and taxes on equity exercises investing and all.
I'll discuss these factors in greater detail shortly.
The first quarter had unusual expenses related to our 2018 or for mature modification to account for the unplanned effects of Covid restaurant asset impairments and closure costs as well as.
Asian cost, which negatively impacted our earnings per share by <unk> 91.
Leading from a GAAP earnings per share of $4.45.
While the impact from Covid appears to be lessening, we're not quite out of the woods yet as seen by the recent spikes in a few regions.
As well as a pause in administering certain vaccines in airports still difficult to provide comp guidance for full year 2021.
But we're encouraged by the strong start and we're optimistic about our full year performance in 2021.
The geometric two year stack for Q1 comp was about 21% due to dining rooms reopening our cauliflower rice launch effective marketing continued digital performance and the introduction of cases, a day, which all helped drive a strong finish to the quarter.
For Q2, we expect our comp to be in the range of the high 20% to 30% with Taser Dia incidents normalized on a lower marketing investment.
Food costs were 30% in Q1, a decrease of 280 basis points from last year, mostly.
Due primarily to a menu price increase on mix shift towards higher margin proteins.
Lower waste, which were partially offset by costs associated with cauliflower, rice and fewer sales of high margin beverages.
In Q2, we expect food cost to be in the mid to high 30% range and the benefit from our delivery delivery menu price increase will be more than offset by seasonally higher avocado prices.
Labor costs for the quarter were 24, 9% a decrease of 300 basis points from last year.
This decrease was driven primarily by sales leverage and efficiencies related to digital orders, partially offset by labor inflation.
We expect labor cost to be in the low 24% range. During Q2 due to the benefit of our delivery menu price increase as well as seasonally higher sales.
Other operating costs for the quarter was 16, 9% an increase of 200 basis points from last year due to higher delivery fees, which were partially offset by sales leverage and a onetime insurance credit.
Deliberate expenses remain elevated year over year, given the significant growth in delivery and as you may have seen we increased our delivery menu prices by 4% earlier. This month to help cover the higher cost with its premium access point and we will continue to evaluate and fine tune our delivery strategy in this dynamic market.
Marketing promo cost on a quarter were three 5% a decrease of 20 basis points from last year.
Given the significantly lower level on delivery promotion this year.
But we invested more marketing dollars in order to support KBC in copper price as well as the first ever Super Bowl at.
When you say marketing expenses to be in the mid 2% range in Q2.
Time period tends to be less responsive.
Tyson channel.
Similar to the past few years full year 2020, Mark what 2021 marketing is expected to be around three percentage of sales.
Lower marketing spend in Q2 other operating costs are expected to be around 16% for the quarter.
Q1 restaurant level margin was 22, 3%, while our trailing 12 month average unit volumes, excluding the delivery menu price increase where roughly.
2.2 dollars 7 million normalizing for the higher marketing spend our underlying restaurant level margin was essentially in line with that theoretical margin of 22, 7% expected at this sales volume.
We're pleased with this progress and we remain confident that we have taken and will continue to take the necessary actions to ensure the margin stays on the algorithm as our <unk> rights throughout the year.
In fact, we expect our trailing 12 month average unit volumes to past $2 $4 million from Q2, and we expect our margin algorithm to keep pace.
G&A for the quarter with $155 million on a GAAP based on $329 million on a non-GAAP basis.
<unk> $24 $4 million from the previously mentioned modification to our 2018 performance shares and about $1 $6 million related to transformation expenses.
They also includes $89 million in underlying G day.
$30 million related related to noncash stock compensation, which includes $7 $7 million increase related to our strong performance in Q1, and $10 million related to higher bonus accruals and payroll taxes on equity vesting and stock option exercises.
Looking to Q2, we expect our underlying G&A to be around $94 million as we continue to make investments, including in technology to support our future growth.
We anticipate stock comp will likely be around $25 million in each of the remaining quarters in 2021 to reflect the new run rate. Although this amount could move up or down based on our actual performance.
We also expect to recognize around $5 million in each quarter related to performance based bonus expenses and employer taxes associated with shared that best during each quarter as.
As well as $1 million related to our upcoming virtual field leadership conference in Q2.
Our effective tax rate for Q1 was 22% on a GAAP basis, and 18, 5% on a non-GAAP basis.
Our effective tax rate benefited from option exercises share vesting at elevated stock prices and as I'm sure. You know we receive a tax deduction for the value of our employees receive upon matching exercise or share best name on a net value exceeds the accounting charge both shares.
Benefit from a higher tax deduction.
Fiscal 2021, we continue to estimate our underlying effective tax rate will be in a 25% to 27% range, though it may vary based on discrete items, such as the equity related impact I just mentioned.
Turning now to the balance sheet, we ended Q1 with $1 $2 billion in cash restricted cash and investments with no debt along with our recently refinanced $500 million untapped revolver with a five year term and more favorable terms on our previous facility.
We also restarted our buyback program in late February when our stock price, often and we repurchased $61 million of our stock on average price of $1425 during the quarter.
We had nearly $154 million remaining on our share authorization as of March 31.
To continue to Opportunistically use excess free cash flow to repurchase our stock.
That being said the best use of our cash remains investing in more chipotle, which continued to deliver outstanding returns. We opened 40, new restaurants in the first quarter more than doubled the number opened in Q1 last year with 26 cities, including a chipotle.
Well only 65% of the new units had a chipotle on in Q1 for the full year, we still anticipate opening around 200 day restaurants with more than 70%, including a chipotle.
As of March 31, we had a total of 196 chipotle, including five conversions.
Customers Love the Chipotle experience as it is the <unk> channel that excels at providing convenience speed and great value all the time.
From its continues to be stellar.
The trailing 12 months Chipotle restaurants continue to drive 17% higher overall digital sales compared to the non Chipotle and order ahead, our highest margin transaction is nearly 80% higher than non chipotle.
On delivery of our lowest margin transaction is about 30% lower than our non chipotle restaurants.
New Chipotle opening was about 15% higher sales.
And the comp restaurant at the comp at the 69 Chipotle restaurants that have been opened more than a year continues to outperform announced bolt lane restaurants from the same open period.
Beyond the significant significant growth opportunity in the U S. We're excited to accelerate new restaurant openings in Canada, which was recently validated by our stage gate process. We're building a healthy new restaurant pipeline and expect to open a handful of restaurants over the next 12 months, including our first Chipotle in late summer, we will continue to experiment with different location formats in restaurants.
<unk> throughout the country to gauge consumer preferences.
Ultimately, we believe we can open at least a few hundred restaurants in Canada, especially what their unit economics now approaching those of the U S. The recent Surrey, British Columbia opening which is our first new Canadian location three years opened very strong and gives us even greater confidence about our growth strategy.
Let me close by thanking all of our team members, who have proven their agility to operate through uncertainty. While also staying focused on our long term purpose their commitment to constant improvement of the customer dining experience, while strengthening our branded business is what helps drive our strategic growth initiatives. The combination of investing in our people delivering relevant and compelling marketing.
Leveraging our digital system to enhance convenient access and great execution on our restaurants is leading to a better guest experience, which ultimately allows us to further strengthen our powerful economic model.
With that we're happy to take your questions.
Okay.
We will now begin our question and answer session.
To ask a question you May press Star then one on your telephone keypad.
If you are using speaker phone please pickup your handset before pressing the keys.
Q1, John Your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
On the first question comes from David Tarantino of Baird. Please go.
Hi.
Hi, good afternoon, everyone.
My question is really about the reopening of the dining rooms to a more full extent.
The resumption of consumer activity, we're starting to see is the vaccines rollout and I guess.
Ryan or Jack can you elaborate on what you're seeing as as that activity returns in terms of sales and mix.
And then secondly.
Based on what you're seeing is as the dining room traffic might be coming back how are you thinking about the overall unit volume opportunity in the U S. Assuming that some of these digital transactions might stick.
Yes.
Hey, Thanks, David.
We're definitely seeing is people.
People want to be back on our dining rooms.
I've had the luxury of traveling.
Recently, and Scott and I have been at numerous restaurants, and it's great to see the lines again in our dining rooms.
And we're seeing a nice rebound obviously in those dining room sales because.
There werent any a year ago.
And at the same time, what we're seeing is our digital business is really continuing to thrive.
In the quarter I don't know if you guys picked up on this but let me we had record sales for our digital business.
Despite the fact that our dining rooms are opening so I think it just demonstrates the power of both access modes, meaning the in restaurant dining access mode and the digital access mode.
And then not surprising youre seeing the occasions come back based on whether you are coming into the dining room or whether youre ordering off premise.
It's more tied to help open the region is is how I would kind of describe it.
So we're feeling great about where we are consumer sentiment is definitely one where they wanted to get back out to socialize and get back into the dining rooms and have that in dining experience and then at the same token for those occasions that they build the behaviors around digitally.
Our remaining in the business.
No I think Thats why youre seeing our results in Q1, and frankly, what I'm really proud of our teams that we're managing these two businesses out of one kitchen with really high debt excellence.
Great and then.
My other question is on the case of D. A N I.
I guess from a consumer behavior uptake it sounds like Youre getting a high incidence.
For that product.
Do you have information that would tell you whether that's kind of new customer is very incremental customers or existing customers trying the product I guess, what do you think the increments of that might look like.
So youre exactly right David the incidence is high on that 10% range. I think is what we just covered and the thing that's really exciting is it's comprised of a lot of new users.
So we're seeing two things happen a lot of new users coming to the business through the case of the proposition and then our existing customers. We're also seeing them.
Utilize.
That case a day.
Platform as part of our new eating occasions. So.
It was actually our highest penetration of new customers in the month of March.
I think it is just a testament to <unk>.
One people coming back to the dining rooms, and two I think a really meaningful innovation around cases.
Great. Thanks, so much.
The next question comes from John Power of Wells Fargo. Please go ahead.
Great. Thanks, hopefully you can hear me okay.
Just curious on the delivery side of the equation. It sounds like Jack you had mentioned the company has taken another 4% or so pricing in the delivery channel during the quarter does where does that set the delivery occasion now relative to an in store transaction.
And do you feel like there's even more potential to take pricing.
And in that channel if necessary down the line and when I asked the percentage piece.
Okay margin basis the gross.
Well.
John you cut out at the very end.
Okay I was just asking gross profit dollars versus the.
Margin percentage when it comes to the delivery transactions, how those have changed with the incremental pricing.
Versus in store transaction.
Jack do you want to take that or you want me to start or.
I'll go out and start Brian Okay.
The conduct the last price increase debt that we took.
It doesn't get us all the way to where a delivery trends at <unk>.
<unk> delivers the same margin as an in store transaction is certainly not as much as our highest transaction the order headquarter.
They get their very very close from a dollar standpoint, they're pretty close but as you know when you are charging higher prices, you're grossing up the sales and so it makes it a little harder to fully capture that margin, but I would say, we're within striking distance, where maybe a few percentage points away. If we wanted to completely equalized.
The margin on an in store transaction for delivery. So we've made a lot of progress over the last year and.
When we've taken these increases along the way we've seen either acceptable.
Sure.
Resistance and we've also seen what looks like people are shifting channels because it does look like our order at moves up when we when we do see customers maybe presents the higher pricing in the delivery channel Tibet.
Great and if I may on the loyalty side of the equation I believe Brian you had mentioned earlier there is some some efforts internally to improve engagement per customer feedback that you've received so what have you heard from customers in the loyalty program.
EBIT.
Brian done today.
Yes, so you kind of cut out near the end, but I think I got the adjusted the question, which is how are we seeing more customers become more engaged within our rewards program.
And the simple answer on that is.
I think we've gotten a lot smarter with the analytics.
So that I mentioned this in my prepared remarks, we're really trying to figure on how we move just from a commerce experience to an engagement experience experience.
And so what Youre seeing is the power of that playing out by people shopping more often with chipotle.
Experimenting with other things on the menu and obviously theres going to be further enhancements to our rewards program going forward, because we want to respond to our customers to keep them engaged in this rewards program.
Yes.
Great. Thank you very much I appreciate it.
Okay.
Yeah.
The next question comes from Sara Senatore.
Brian.
Please go ahead.
Oh, Thank you I wanted to ask a little bit about the loyalty members and also on your comment about the 40% I think you said of delivery orders coming to proprietary apps.
So first on just on loyalty members I guess do you have a sense of what percentage of your total customers that might represented Inc.
Do you have a certain AED 100 million unique customer or something like that I guess I'm trying to sort of reconcile the loyalty membership with your.
On your delivery orders or the digital orders that are coming through here.
Your garden native apps because it.
It seems like the share of orders that are coming to your own ordering platform has gone up and I'm trying to figure out is are you shifting people away from third party by virtue of.
Incentivizing them through loyalty or that kind of thing.
Or is it just that the people who are ordering directly are very high spending customers on bad debt.
Minority about what ultimately download your apps versus preferring the convenient for Brian.
In aggregate our platform I know theres a lot in there, but I'm trying to understand sort of.
The power of the Chipotle brand versus like kind of like call. It the convenience of the Aggregators and here on the customer there.
Yes look I think where you just ended your question is the answer which is we have a very powerful brand.
And as a result, when people join our rewards program download the app and start ordering through our app and they realize that they have the access of.
Order ahead and pick up whether it's at a Chipotle order ahead and pick up meaning I can grab it off the shelf and go or I can get delivery through our app.
And all of those occasions, you are able to accrue points and get recognized for being an engaged customer and.
We're providing lots of access to lots of convenience with a very powerful brand position behind it and.
That's why I think youre seeing our order ahead business continue to grow our white label or delivery business in our app continuing to grow as a percentage of the delivery occasion, and I think it's just a function of the brand continues to resonate. Our first strategy is all about building the brand Trust and love and.
I think while we do that and provide a great experience both digitally and for whatever occasion, you want associated with our digital experience.
And then you give them rewards, it's a really powerful system that keeps people engaged.
Great that makes a lot of sense and then just do you have any sense of like kind of what share of chipotle customers are on your loyalty.
Program versus you know ultimately what you might get to.
Well look we've got 21 million customers.
In the rewards program.
60% of those are active.
Ongoing and then we've got programs with those that we see lapsing.
But we don't see a whole lot of crossover still between the dining room experience and the digital experience there is only.
10%, 15% better doing both occasions. So there is still a lot of upside in getting our dining rooms reopened for that customer experience customer occasion.
And Thats why I think the earlier question I got I'm still optimistic about our dining rooms reopening because it's not cannibalizing from our digital business. These are really two distinct occasions that people want to have access to great food with integrity. So.
There is 100 million chipotle customers coming through these doors and.
The good news is we know when we get that dining room open.
There's a lot of people that are going to come back that we haven't seen in a while.
Thank you so much.
The next question comes from Lauren Silberman of Credit Suisse. Please go ahead.
Thanks, a lot so on cases.
Most of the stage gate process, you talked a lot about your focus on operation with each day is now available across the system are you seeing any impact on throughput or operation relative to what you expected.
Yeah, you know look.
I'm really happy to say the stage gate process work.
Because two things one we've got the right kitchen equipment to create a great product at great speed.
And then two we've got the right operational process in place so.
If in the event somebody does order still on the frontline, obviously, our guys will figure out how to accommodate it but it is a much faster experience with a much better product. So we've improved our employee's experience when that happens and then for our customers. They are learning. The case deal was made to be an on premise.
Solution.
What chipotle food and.
I think it's a testament to our teams are operators that validated our marketers that have explain to customers how to use it and then the marriage of our technology to actually get the transaction in place. So it's a great example of using the stage gate process in the most effective way possible.
Okay. Thank you Scott you talked about expectations for <unk> incidents to normalize in Q2. So just to clarify do you expect the mix to settle below the 10% and then how does the attachment rate.
Walk inside compare to what you see with greater than volume.
Yeah. So look we're just saying we're only what a couple of weeks into this.
And the good news is we haven't seen it.
Backwards yet.
So and the feedback from our customers are they love it.
On the attachment rate looks really good it's frankly, a little bit better than our burritos and bowls. So.
I think that's the power of showing our food going really well with guac or queso.
Again, it's chipotle food is really good and guess what it's really good when it's in a case of the year.
Great. Thanks, so much.
Okay.
The next question comes from Brian Bittner of Oppenheimer. Please go ahead.
Brian Your line is open.
Okay.
Our next question comes from Peter Cella of BT.
Please go ahead.
Great.
Thanks for taking the question I wanted to come back to the conversation around delivery menu price increases and you guys mentioned, a 4% increase.
And most recently I think the test that you guys are running was substantially higher than that on the delivery price increase. So can you talk a little bit about the did you see pushback on the testing.
Why did you decide on a 4% why was that the right.
Now of a price increase to take.
Yeah, So just to clarify.
Go ahead Jack.
Brian you are probably good to say the same thing Peter just to clarify.
We are running 13, and most of our restaurants across the country. We had a few that were at different levels. So we could see differences we took the entire country opening up another 4%. So we're now now charging a plus 17 and the reason we did that was we were comfortable.
The debt the resistant debt. We saw was acceptable resistance. So we did see people move into other convenience and other value driven channel. So I think that's a testament to we had the 13% price increase running for several months and.
And we were.
So very comfortable that we could go another 4% so they're not the 4%. We just took earlier this month.
In addition.
Great understood Alright, and then just on the Chipotle and conversions I know you have.
Around 400 freestanding stores.
Maybe 15 or 1600 end caps.
Have you guys thought a little bit more about how many.
Conversions, you can actually do I know I think a quarter or two ago, you said potential for several hundred has that number increased at all.
It's not.
It hasn't changed per se our desire.
You have more chipotle <unk> end to end to push the percentage of new restaurants that opened with Chipotle and we want to continue to push the envelope. There and then with conversions, we want to Opportunistically look at relocations and rebuilds.
Models, where we can add a chipotle Inc.
We still think that we can have hundreds of conversions, it's hard to pin that down now because in essence. What you do is we have to as we as we approach the end of a lease term like let's say you've got a 10 year primary term with options when you get to year seven or eight that's the time you have the conversation with landlord.
If you try to have the conversation with landlords to try to get permission to modify this space in year, two or three when you've got seven years left landlord doesn't really want to have that conversation. So we have those conversations and we have.
Many of them throughout the year. If you look back to 10 years ago. You know, we will have 100 or more maybe in the one hundreds 150 range, where we're having conversations with landlords and those conversations are going well, but it's too early to tell exactly how many hundreds of these conversions, we can get but we're definitely pushing the envelope.
Thank you very much very helpful.
Yeah.
Right.
The next question comes from David Palmer of Evercore ISI. Please go ahead.
Thanks, I just wanted to get a few clues from you about how the sales layers might shake out after the full reopen after we get <unk>.
Past, all the vaccinations and things get up and running at least reasonably so I'm sure work commute will be there'll be some areas will be lagging there, but what are you seeing from some of your early read on most reopened markets in terms of that on premise business sales layer and it looks like overall on premise might be only 70% of.
Pre COVID-19 levels right now as a system.
Where is that getting too in some of your most reopened markets and when it does get to that level. How much is your off premise business. The digital side really hanging in there and I have a quick follow up.
Yes, so day.
The the way to think about it is like in our regions that are the most open obviously.
Youre not that far off on your average of.
On the return in our dining business the places where we're more open we're above the average.
And the thing that I love to see us, regardless, our digital businesses, maintaining debt, 80% to 85% run rate. The thing. That's also exciting though is as I mentioned in the quarter, we still had record level.
Levels of digital business and that's because we're going to continue to use our system called rewards case it is to drive people.
Further and further commitment on our digital platform for those occasions, where it makes sense. So.
In the places where we're more open we got more of a dining room business back and our digital business is hanging in there.
I'd say, it's actually our digital businesses operating from position of strength.
And then the places where it's slower for the dining rooms come back I think Kevin's, we've got such a strong digital business.
Yes and no.
And I guess this might be one for Jack in terms of how you think about sales and margins over time in the past you've had a rule of thumb of Youre aav's tracking with margins. The way. The world is working feels like sales will be higher on average for the average company out there, but margins maybe more challenged for the average company out there.
You might have some better defense mechanisms than others in terms of your digital business and whatnot, but how are you thinking about that relationship is that changing even as you see some of the recent measures you've been taking and I'll pass it on.
Yeah, David listen, we still feel very confident that our margin algorithm.
Is alive and well we made some important steps over the last several months so that we're within striking distance of that algorithm and we see from here on out as our volumes grow.
<unk> was 2 million $2 17, as we grow to 2425 et cetera et cetera, we think that our margin will move to 24. It on a 25 now that's not going to happen every single quarter, it's not going to be perfect, but in terms of seeing our margins move up with our volumes, we still expect that to happen now there is a slight degradation as you move from two five.
<unk> two 3 million for example, you might not get to all the way to 30% in terms of the margin for $3 million restaurant, but you certainly should get in the 28% to 29% range. So we still fully expect that we'll be able to expand margins and one of the things that's enabling that is with the gross.
Significant growth in the delivery business that has been still is our lowest margin transaction, but we closed the gap considerably and our customers are still choosing that channel or theyre choosing another channel so, giving the customer is choice and let them pay for debt.
The more extreme convenience channel of delivery, let them pay the going rate seems to be a a workable strategy for us.
Thank you.
Yeah.
The next question comes from Andrew Charles of Cowen. Please go ahead.
Great. Thank you Brian based on the experience of the case ideas. How open minded are you around future digital only menu innovation that can't be done on the front make line such as the potential for not not chosen enchiladas and perhaps from an ops perspective are you confined only one to two possible digital innovations Inc.
Robbins or could there be several more items launched before you become capacity constrained on this digital make lines.
Yes look the good news is we're far from capacity constrained on those digital make lines and we're continuing to make.
Make enhancements to our digital make lines so that our.
Employees become even more accurate more efficient the.
The equipment that we've chosen it gives us a lot of flexibility.
Whether it's additional entrees or desserts or whatever it may be.
The good news is we've got a lot of great ideas and our culinary team, obviously, we will get them through the stage gate process.
But look the goal is to be balanced at the end of the day we won.
On to have a great experience in the restaurant and a great experience if you choose to go digital and.
I don't think youre going to see us.
Ever get out of equilibrium, where we're providing a great experience for whatever channel it could be.
I don't want to come across this CML all of a sudden means youre doing something every month.
That's not who we are.
Who we are our great ingredients done in very simple way so that you can customize.
And the good news is we've got lots of capacity on that line and now we've got more flexibility because of the additional equipment that we have.
No.
Not surprising I think theres a lot of growth still to be had on their digital business and theres still tremendous growth to be had on our dining room business.
That's helpful and then Jack I just had a follow up question on development on this might be a.
A little technical but looking at the proxy it looks like there were 324 site assessment requests over the next 12 to 18 months.
About 50% higher versus the 227 that was in the proxy from a year ago and so when I look at the guidance for 200 store openings this year.
It's not quite 50% above the 161, you did last year. So in terms of the guidance for 200 openings. Besides conservatism just on the availability of construction crews is there anything else in there that might be.
Renting pressure on 2021 development.
No I would say, it's more of a timeline challenge we've seen that the timelines have elongated over the last year or two or so and so this year. For example, we target 201st quarter was was exactly on pace to do 200, I think you'll you can expect us to see.
To open up similar numbers in Q2, and Q3 now what might happen, Andrew we might over perform a bit in the fourth quarter.
Too early to say that right now we certainly have a very healthy pipeline that pipeline is chockfull of Chipotle and so we think the numbers go up from here not down but right now the responsible numbers 200, I think still applies but let's let's let's see how the.
How things shape up in quarter, two and three what the fourth quarter looks like.
Very helpful. Thank you.
Yeah.
The next question comes from Nicole Miller of Piper Sandler. Please go ahead.
And good afternoon, just one question from me I'm curious about on traditionally thinking about restaurants and unit level economics from what I'm wondering is with your 21 million royalty relationships on the CRM platform, you're talking about can you talk now about customer lifetime value like what's the economics of a customer now that you've found.
Some of them outside of the four wall store.
Yeah.
It's a great question the coal and one of the reasons why we're so optimistic about our rewards program is.
These reward members versus non reward members, they're coming more often and they are also spending more so.
Thats, obviously a grill.
<unk> outcome, putting somebody into a rewards program and then I think the team has really become so much more sophisticated in our ability to understand what day, one from Chipotle and as a result, youre going to see us, making some further enhancements to the rewards program and the experiences that people can have.
So there'll be even further engaged in the whole reason why we're doing that is because we think we can get even more frequency out of people and potentially continued influenced that check further so it's it's a very valuable asset and I think it is going to continue to become more valuable.
Thank you for that appreciate it.
The next question comes from Jared Garber of Goldman Sachs. Please go ahead.
Thanks for the question I wanted to touch based on the labor environment and what you guys are seeing from that respect obviously, we've heard a lot on the news lately about the availability of labor on the challenges of staffing up so I wonder if you could talk there a little bit about what youre seeing and if youre seeing those similar challenges play out.
And then as it relates to that how you guys think about potential pricing power or pricing in different markets. Thanks.
Sure. So obviously one of the things that's great is we're seeing the economy come back in a big way with customers out and about and getting back to the business of I'd say normalcy.
That obviously, we are quick to want to step up our restaurants accordingly.
In sync with where our business is growing.
The positive is it came back really fast in March.
The negative and that is what you got to play a little bit of catch up with the staffing.
But I think our employee value proposition is world class and as people realize these opportunities are available.
Usually we have no problem with the applicant flow and then we turn our attention to training and developing these individuals because it's a great opportunity for not just the job now, but our future career. So.
It's great to see the business come Roaring back. It's also exciting to see our need to staff more people.
<unk>.
That is the growth debt, we'd like to have we like to have growth that results in more jobs and more people having upward opportunities.
We had I think 13000 plus promotions.
Recently.
So I mean, that's just a testament to the growth that we have the strength of our proposition for those that stay with us commit themselves to being developed and trained.
And then obviously, we're going to staff accordingly, as the business comes Roaring back so.
I am very optimistic about the people we can attract the culture that we create for them and then the opportunities that are available for them and what was the second part of your question.
Just as it relates to kind of.
Increasing wage pressures across the industry. How you guys think about mitigating that through price increases obviously, you've taken on delivery, but more broadly across even like the dine in side of the business on how you think about that geographically as well.
Yes, I think we've talked about this in the past you know the good news is our value proposition is I would say.
Top top tier.
So that gives us a lot of flexibility on how we price and when we price we.
<unk> taken a very conservative approach on it we've been more on that 1% to 2% range on an annual basis I think Jack has talked about this debt usually offset any labor inflation that we deal with.
So.
I think we're in a really strong situation both from a brand value proposition and then the ability to attract and retain people with our employee value proposition.
Thanks.
Our next question comes from Andy Barish of Jefferies. Please go ahead.
Hey, guys. Good afternoon, just taking that a little bit further I know some of the traditional.
Metrics.
I have kind of gotten a little bit skewed by everything going on right now, but can you quantify sort of what type of what type of wage inflation.
Youre seeing and then.
Also on the commodity Brian.
Certainly the commodity proteins have been significantly higher just wondering if you're starting to see that.
And the non commodity markets that youre buying from.
Yes.
Yes, I'll take this.
First of all Andy in the last year, what we've seen with labor inflation has its more modest than it had been in the last five years in last five years, we've seen inflation in kind of a mid single digit range and with some of the dislocation going on with that with Covid actually debt.
Labor inflation dropped to the low single digits, but we.
We expect I think most people expect that is going to tick back up.
And let me just give you.
An example, because the other thing that you might be thinking about is what if we have a national minimum wage.
That over time approaches $15 now the way to think about this is our minimum wage or our average weighted right now is $12 for our crew it's $13 for all of our hourly employees. So we're not that far off of like for example, a 15 dollar number but lets say for example that there is going to be an across the board.
10% increase in our in our wages.
That would have an impact on our margins at call. It 150 to 200 basis points and that would to offset that with menu pricing that will take a 2% to 3% price increase so all of that is very very manageable and we feel like if there is going to be significant increased inflation here because of market driven or because federal minimum wage we think ever.
The body in the restaurant industry is going to have to pass those costs along to the customer and we think we're in a much much better positioned to do that than.
And then other companies out there in terms of commodity is the one that we're seeing for sure and this is more of a seasonal shift that we see pretty much every years avocados, we are going to see an increase in avocado prices as we as we shift into the next season.
We don't see anything else moving up dramatically right now Andy I mean, I think everyone's kind of waiting to see what happens in terms of demand in it and if there are any disruptions with supply chain, we're not seeing any of that we're worried about right now, but with everyone's talking about with the stimulus and the reopening of the vaccine there is going to be a.
Surge in demand and we think we're well prepared from supply chain standpoint, but that's the only kind of a wildcard as the as the year on poles as well, but will there be nave, yes.
A cyclical or interim dislocation, where maybe there is some commodity inflation, but nothing that we're seeing right now.
Okay. Thanks very much.
Okay.
Our next question comes from Brian Vaccaro of Raymond James. Please go ahead.
Hi, Thanks, and good afternoon, I was hoping to better understand the sales cadence that you saw through the first quarter, perhaps you could comment on the two year stack by month end and where that stood quarter to date in April and then I know you mentioned more normal case of Dia incidents, but could you walk through or walk us through kind of the other puts and takes.
That you considered as you set the second quarter, our sales guidance.
Yeah sure. So obviously the first quarter I think Jack covered it in his remarks.
Geometric average was in the.
The 2021% range.
I would obviously tell you January was a really good start February kind of flattish in March was really strong obviously, you got a much easier rollover and then we've talked about all the things we did around launching case. It is in dining from start to reopen so on and so forth. So as you move into April.
If you think about this two year I think thats, probably the best way to think about our business right now because of what Youre seeing in Canada.
The year ago performance on Easter.
So on and so forth. The good news is we've seen days and weeks, where you are in the Twenty's and we've seen days and weeks, where you are in the high teens. So its bouncing around a little bit and I think a lot of things are driving that right youre still seeing things flash around COVID-19 in different parts of the country.
Unfortunately, we had the pause in the vaccines. So you've got some consumer sentiment I think bouncing around.
Which obviously plays a role and then obviously you know.
We're going to we're going to be more on the leverage phase of our cases day launch versus our launch phase, which is which we're taking into.
Account as we think it will normalize as you go down into the rest of the quarter. So.
Those are some of the puts and calls what a couple of weeks into the second quarter.
We love, where we are and we will see how the rest of the quarter unfolds, because I think we've got the right strategies. So.
We're going to stay focused on what we know has been working force.
Alright, that's helpful and could you also comment on California, specifically, obviously, a big important market for you could you just ballpark where volumes there are versus the rest of the country and have you seen an acceleration more recently as COVID-19 restrictions are lifted.
Yes look I mean this is not just a California phenomenon. This is a phenomenon that's happening across the country, which is.
As I think places see a reduction in Covid cases, and an increase in vaccines and people get back to maybe their old habits.
As well as some of the habit created in this new environment, you see the business respond accordingly, so more people being out and about results and really good things for a restaurant concept like us because when you're on the about Chipotle is a great option. Obviously, we've demonstrated we're a great option when you need that off premise occasion as well.
So the dining rooms become more open people are more confident to be on about that bodes well for us.
In every state so it's not just a California phenomenon, that's a on American phenomenon.
Yes makes perfect sense I'm in Atlanta, and I see it every day. So it makes pretty assets. Thank you I'll pass it on.
The next question comes from Crystal cooling of Stifel. Please go ahead.
Thanks, Good afternoon guys.
Brian I was curious what you believe the risk may be to sales growth from pulling the cauliflower Rice I think you said in mid May.
Look I think this is.
A great initiative that we did I mentioned in the past our goal is to keep people engaged with our menu will have some things.
On for a time period, and then take them off and bring them back.
You've seen where we've tested this in the past is.
It's not anything debt results in us.
Taking pause in moving forward with our strategy of taking it out in may so.
The good news is we've got a lot of strength in the business.
I'm sure it'll be something we'll bring back down the road, but we feel really good about our strategy of having some items that come off the menu and other items like the case of the year that'll be permanently on the menu.
And then I was curious if youre seeing a similar level of beverage attachment rate with dine in usage today that you saw pre pandemic.
Well look debt I think Jack has talked about this debt is one of the things that's been a little bit of a drag is as people stopped coming into dining rooms or beverage incidents went down.
We fully anticipate as the dining rooms come back.
We will recapture that beverage incidents and.
Things really start to normalize I think we've got another shot at it.
Making people aware of the new tractor beverage offering which the reason why we initially did that is we were hoping to drive more beverage incident. So.
That's our plan as the dining rooms come back our plan is to figure out how we can drive more beverage incidents accordingly.
Great. Thanks.
Okay.
This concludes our question and answer session I would like to turn the conference back over to Brian Macdonald for any closing remarks.
Okay, well, thank you everybody and thanks for all the questions.
I just wanted to start off with first saying how immensely proud I am of all of the Chipotle employees.
What we've seen in the last quarter and frankly, the last year is the power of great people, great culture being focused on the things that needed to be.
Handled right now and it's pretty powerful to see an organization of 100000 people come together and do the right thing for each other and their communities. So very proud of this organization very proud of our employees and look I think we're off to a great start in 'twenty, one because our <unk>.
Employees have demonstrated the resiliency of our business on.
Confident that we will continue to do the right things so that as the dining rooms reopen we will give people great experiences will continue to invest in our digital business, that's not done growing as evidenced by what we shared here and then obviously we've talked about this two we're very.
Committed to seeing the <unk> margin algorithm come to life and.
That's really exciting to see that starting to emerge in a meaningful way.
And then lastly, it's really exciting to be building 40, plus restaurants in the quarter, we're going to build from here and I think we're well on our way to getting back to the business of Chipotle growing in a meaningful way both top line bottom line and new units.
And then that results in great opportunities for all our people that have just demonstrated the power of the Chipotle culture on the Chipotle purpose. So thank you for joining thank you for listening and look forward to touching base and a quarter take care.
Okay.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.