Q2 2021 Chipotle Mexican Grill Inc Earnings Call
[music].
Good afternoon, and welcome to the Chipotle second quarter 'twenty 'twenty, 1 earnings conference call.
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I'd now like to turn the conference over to Ashish Kohli head of Investor Relations. Please go ahead.
Hello, everyone and welcome to our second 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 dotcom.
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, 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 second quarter results highlight the strength of our brand and our people as we demonstrated growing momentum in our business over the past 15 months. Our teams have done an admirable job navigating and executing against macro complexities, while giving us great optimism from where we go from here.
While COVID-19 challenges remain including uncertainty regarding the impact of the Delta variant.
I'm confident that our teams are up to the challenge and we're hopeful that we'll gradually see a more stable environment over time.
Specific to Chipotle, we're pleased that all of our restaurants are now open and most are back to normal operations.
For the quarter, we reported.
Sales of $1.9 billion, representing 38, 7% year over year growth, which was fueled by 31.2% comparable restaurant sales growth rest.
Our restaurant level margin of 24, 5% was more than doubled to 12, 2% we reported last year.
Earnings per share adjusted for unusual items of $7.46.
Renting a significant increase over the 40 reported last year.
Digital sales growth of 10, 5% year over year, representing 48.5 per cent of sales and we opened 56, new restaurants, including 45 with Chipotle.
And I'm delighted to report that Q3 is also off to a strong start.
While our trailing 12 month <unk> is $2.41 million the underlying run rate during the quarter is now above the historical peak of $2.5 million of UV.
When we started this transformation a little over 3 years ago I was often asked whether I thought we could get back to our peak $2.5 million dollar volumes.
Answer was yes, and when we achieve it we will talk about growth beyond that so it's a nice achievement for our organization to have 2 and a half million dollar agent vs. Again, but more importantly, we have growth strategies that will take us to the next leg of our journey $3 million of UBS, along with industry, leading returns on invested capital that improve as we continue to add chipotle.
Stronger restaurant level economics, combined with significant unit growth should allow us to optimize earnings power for many years to come.
In fact, we remain confident in our key growth strategies and believe that over the longer term. They will allow us to have 6000 restaurants in North America with au vs pushing well beyond $3 million, yes. The opportunity ahead of us remain significant.
So what are the key strategies that are resonating with guests and allowing us to win today, while we create the future to know 1 surprised they are the same ones. We've been talking about for some time, namely opening and running successful restaurants with a strong culture that provides great food with integrity, while delivering exceptional in restaurant and digital experiences.
Leveraging digital capabilities to drive productivity and expand access convenience and engagement engaging.
Engaging with customers through our loyalty program to drive transactions and frequency.
The brand visible relevant and loved <unk>.
And utilizing a disciplined approach to creativity and innovation.
Let me now provide a brief update on each of these starting with our outstanding operations. This is a key focal point as our business is building on our digital gains along with in restaurant strength due to a more confident and mobile consumer.
As well as the hard work our team has done to build more law for Chipotle.
We've continued to make operational adjustments to adapt to the constantly changing environment, which has led us to recovering about 70 per cent of the in restaurant sales, thus far while retaining about 80% of digital sales.
No secret that running great restaurants requires great people with a terrific culture and we are privileged to have the best of both despite the labor challenges in certain parts of the country. The team has remained focused on safety reliability excellent culinary and experiences.
I'm extremely proud of our world class employee value proposition were providing industry, leading benefits, including a new virtual mental health platform expanded debt free degrees attractive wages that were recently increased to an average of $15 per hour specialized job training and development and significant career advancement opportunities and because.
More than 90 per cent of our restaurant management roles are internal promotes employees, who joined the Chipotle family know they have the opportunity to grow their careers with us.
Through investing in our people, we have been able to maintain the stability of our work force over the last 2 years.
Knowing that our people are the key to our growth we have been diligent in our recruiting focus since the start of the year and re imagining the African experience, we're leveraging partnerships that allow us to engage in authentic conversations with prospective candidates and share all the opportunity to chipotle has to offer our coast to coast career day event last week resulted in us hiring.
Of additional team members to meet current demand and accommodate future growth. These efforts have dramatically helped improve our labor position and as a result, our restaurants are attracting and retaining excellent employees in a tough labor environment.
After visiting several restaurants this past month I'm encouraged to see more and more guests enjoying their meals in our dining rooms. They order chipotle because they can get the exact customize mill day, 1 made with real ingredients faster than anywhere else. As a result, we are committed to teaching training and validating the 5 pillars of throughput every day every shift to ensure we meet our high standards.
And provide a great guest experience.
Over the past few years Chipotle has evolved to a point, where we now have 2 sizable businesses in restaurant as well as a record breaking digital platform that are helping us become a real food focused digital lifestyle brand during.
During the second quarter digital sales grew about 11% year over year to $916 million and represented nearly 49% of sales.
While Covid has of course helped bolster these digital gains ongoing technology investments and operational excellence have been the critical success factors.
Some examples of the digital innovations. We've introduced include the addition of our concierge chatbot pepper to the Chipotle App, which has the ability to answer common questions and resolve issues more efficiently. Thus freeing up our customer care teams time to help guests with more complicated situations. We also gave guests the ability to easily right their order rate in the App and all.
Online a chipotle dot com, providing our restaurant operations teams with actionable insights on how to maintain and improve the digital guest experience.
Actually we have opened a digital only kitchen continued expanding our digital drive throughs with Chipotle and as being the majority of our new restaurant openings refreshed group ordering and invested in digital internationally by launching the Chipotle App in Canada, and implementing our digital assets in Europe.
While the results in positive feedback on these innovations show US we're on the right track, we know there's still more to do to enhance the customer experience by expanding access and minimizing friction.
Not only are we pleased with the level of digital sales and overall mix. We're also delighted to see that our highest margin transaction digital pickup orders is gaining traction and we expect this to continue as we add more chipotle and customers experienced the value of this occasion.
As I mentioned earlier, we held on to about 80 per cent of our digital gains exiting Q2. This highlights our digital experience is sticky because there's everything customers love about chipotle with added convenience and due to the pandemic. Many new consumers were introduced for Chipotle via our digital channels and are now using us for alternative and often incremental occasions.
Naturally we believe our digital sales mix will moderate as capacity restrictions ease and guest feel more comfortable physically ordering and dining in our restaurants. However, we expect absolute digital sales dollars to find a new equilibrium in 'twenty 'twenty, 1 and grow from there. We're encouraged to see that so far in July we continue to hold onto these digital gains even as in store recovery has strengthened.
Moving next to the loyalty program, which is a key enabler of our digital ecosystem and an expanding network that now has more than 23 million members with this large base of consumers chipotle can distribute its own content more and more effectively and drive deeper levels of engagement within this community than ever before.
We are leveraging our CRM platform to drive brand engagement and send personalized messages to help supercharge our super fans. We have proven that we can influence decisions along I guess buying journey when we offer them. The right individually tailored offers at the right time, we're continuously improving our analytics and our consistently able to generate more transactions from light medium and high.
Frequency users with.
With the recent announcement of rewards exchange, we're optimistic we can continue to build upon our success. The updated functionality provides greater customization and flexibility to redeem rewards and allows guests to earn rewards faster all of which is expected to improve engagement and drive additional frequency well we're off to a terrific start we will continue to invest in the program.
To take it to the next level and have other enhancements to the program that are expected to be rolled out by year end.
While the loyalty program is used to help drive frequency. Our marketing efforts are primarily designed to bring more people to the brand. The combination of reach based media and a successful frequency driven loyalty program make a great..1 2 punch that both brings in new users and increase as transactions with our existing customers. The marketing team continues to ensure that.
Relevant creative across a wide variety of media channels enables the branch remain visible and live at the intersection of Chipotle and culture their.
They're agile approach innovative mindset and relentless commitment to measurement have led to ongoing success.
For example, our campaign to support the case of <unk> launch was omnichannel with relevant creative across online video digital and social media platforms as well as via traditional TV spots.
We also celebrated team Chipotle, a group of American athletes, who loved the brand long before they became famous their personalized unwrapped videos provide an inside look at Chipotle athlete Super fans and what it takes to compete at the highest level.
It also highlights the training hard and eating real food with real ingredients go hand in hand.
Furthermore, our burritos and bitcoin campaign around National Burrito day was 1 of our most successful social initiatives to date with billions of impressions for this culturally relevant promotion.
These are just a few examples of the brands work to drive culture drive difference and ultimately drive a purchase.
Another important pillar of our marketing efforts as a steady stream of new menu innovation with a cadence of on average about 2 to 3 per year.
Cauliflower rice was a seasonal item that enhance our lifestyle bowls and was successful bringing in new guests. We launched case. It is as a permanent digital exclusive offering in March and this menu item continues to perform well as it appears in about 10% of our transactions and is also helping attract new customers to chipotle.
Our talented culinary team is far from finished and our pipeline is filled with promise I'm pleased to report that smoked brisket has been validated by our stage gate process. In addition, we are also in the early stages of developing other exciting menu items that we will validate using our stage gate that will bring news and new customers to the brand.
To conclude the 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 elevate our brand and cultivate a better world well.
Well trained and supported people preparing safe delicious food and delivering excellent guest experiences are at the heart of our success.
A big Thank you to all of our hard working employees for making this possible.
As a result, I'm convinced more than ever that we have the right team the right culture and the right strategies to allow chipotle to be a premier growth company for many years to come.
With that here's Jack to walk you through the financials.
Thanks, Brian Good afternoon, everyone. We're pleased to report solid second quarter results with sales growing 38, 7% year over year to $1.9 billion with comp sales grew 31.2 per cent.
Restaurant level margin of 24, 5% was more than double the 12, 2% margin from last year and represent the highest margin since 2015 and earnings per share adjusted for unusual items was $7.46.
A significant improvement over last year's adjusted EPS of <unk> 40 cents.
Last quarter, the second quarter had unusual expenses related to our 2018 performance share modification related to Covid restaurant asset impairment and closure costs legal expenses as well as transformation costs, which negatively impacted earnings per share by 86% leading to GAAP earnings per share of $6.60.
Looking ahead to Q3, while uncertainty still exists with the potential impact of the Delta variant as well as the pace of the economic recovery.
Current sales trends continue we expect our comps to be in the low to mid double digit range, which implies a nice sequential acceleration in our geometric 2 year stack.
This is due to the menu price increase we took in early June which is holding strong so far as well as in restaurant sales continued to recover of.
Of course, we will closely monitor developments regarding the Delta variant and follow all local protocols to ensure the safety of our restaurant teams and our customers.
As Brian mentioned in June we increased our average hourly rate to $15.
Subsequently took a 3.5% to 4% menu price increase to cover the costs in dollar terms, while average restaurant cash flow remains the same this lowered margin by about 80 basis points and an increase in sales by about $100000 from an annual basis. So the historic margin algorithm, we have to Scott is not as relevant going forward.
However, we maintain our goal of being able to pass through approximately 40% of incremental sales to restaurant cash flow, which is an important piece of our earnings growth potential.
This is critical as we March towards <unk>, a $3 million as higher sales will lead to higher margin and cash on cash return restaurant returns should increase well above the low to mid 60 per cent range, we're seeing today.
Let me now go through the key P&L line items food.
Food costs were 34% in Q2, a decrease of nearly 300 basis points from last year. This was due primarily to leverage from menu price increases as well as lower beef prices, which were partially offset by higher costs.
Weighted with new menu items and avocados.
Current environment it shouldn't be a surprise to anyone that Q3 is going to be challenged by several industry wide issue, most notably beef and freight costs as well as staffing shortages at our suppliers.
We anticipate these commodity headwinds will negatively impact per quarter by an additional 60 to 80 basis points essentially offsetting the benefit of price increases.
This will result in food cost per Q3 being at or slightly above the percentage we saw in Q2.
Over the next few quarters, we'll have greater visibility on how much of disinflation is permanent versus transitory and we can take the appropriate actions as needed to help offset any lasting impacts.
Labor cost per the quarter were $24.5 per cent a decrease of 370 basis points from last year to.
This decrease was driven primarily by sales leverage and to a lesser extent efficiencies related to digital orders, which were partially offset by higher wages that we saw for just 1 month during the quarter we.
We expect labor cost to be in the low 26% range during Q3 to reflect a full quarter of our wage increase.
Other operating cost per the quarter were 15, 2% a decrease of 400 basis points from last year, due primarily to sales leverage and lower promotional expenses.
Marketing promo costs for the quarter were $2.4 per cent, a decrease of 260 basis points versus the prior year due to a significant level of free delivery promotions last year, we anticipate marketing expense to be in the mid 2% range in Q3, while the full year 2021 marketing spend is expected to remain about 3 percentage of sales.
For all other operating costs are expected to be in the mid 50 per cent range per quarter.
G&A per the quarter was $146 million on a GAAP basis or $19 million on a non-GAAP basis, including $23.5 million from the previously mentioned modifications to our 2018 performance shares $2.1 million per legal expenses and $1.2 million related to transformation expenses.
It also includes $92 million in underlying G&A about $22.5 million related to noncash stock comp and nearly $4.5 million related to higher bonus accruals and payroll taxes on equity vesting and stock option exercises.
Into Q3, we expect our underlying G&A to be around $96 million as we continue to make investments primarily in technology to support ongoing growth.
We anticipate stock comp will likely be around $25 million from Q3.
This amount could move up or down based on our actual performance.
Also expect to recognize around $4 million related to performance based bonus expenses and employer taxes associated with share is the best during the quarter as well as about $1 million related to our all manager conference scheduled for Q1 of next year.
Our effective tax rate for Q2 was 23, 7% on a GAAP basis, and 22, 4% on a non-GAAP basis and similar to last quarter, our effective tax rate benefited from option exercises and share best thing and elevated stock price it for free.
Fiscal 2021, we continue to estimate our underlying effective tax rate will be in the 25 to 27 per cent range, though it may.
Vary based on discrete items.
Turning now to the balance sheet, we ended Q2 with nearly $1.2 billion in cash restricted cash and investments with no debt along with a $500 million untapped revolver during the quarter, we opportunistically repurchase $145 million of our stock at an average price of $1408.
We had about $208 million remaining on our share authorization as of June 30th and expect to continue to prioritize using excess free cash flow to repurchase stock.
But as I've said before the best returns, we can generate by investing in more chipotle and during Q2, we opened 56, new restaurants with 45 of these including at Chipotle.
Despite some external challenges the development team continues to do an excellent job building, new restaurants, as well as developing a robust new unit development pipeline for.
For the full year, we now expect to be at or slightly above our prior 'twenty 'twenty, 1 guidance of 200, new restaurants with more than 70%, including a chipotle.
As of June 30th we had a total of 244, chipotle, including 8 conversion and 6 relocations and they continue to enhance access to convenient forecast.
Demonstrating superior performance.
New Chipotle and our opening was about 20% higher sales compared to the non chipotle opening during the same time period.
Over the trailing 12 months Chipotle restaurants continue to drive about 15% higher overall digital sales mix compared to non chipotle and is skewed heavily towards order ahead, our highest margin transaction.
2 year geometric comp at the 88, Chipotle restaurants that have been open more than a year continues to outperform the non chipotle restaurants from the same period.
And while it's early days, Chipotle and conversions and relocations, which are both going through the stage gate process are yielding encouraging results will continue to learn and refine our approach to judiciously accelerate our chipotle and portfolio, whether it be an older existing restaurants strategic relocations of existing restaurants.
Through new restaurant additions.
In closing I want to reiterate how proud and thankful I am to all Chipotle team members for their tireless efforts are.
We're helping create value every day for our business our communities our shareholders and each other which is taking our maiden brand to new Heights.
As 1 strong team unified by our purpose and values, we remain committed to driving our powerful and durable economic model.
Needless to say my optimism for Chipotle long term potential has never been higher.
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 1 on your telephone keypad, if youre using a speakerphone. Please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then 2.
At this time, we will pause momentarily to assemble our roster.
Uh huh.
Yes.
Yes.
And our first question will come from Nicole Miller of Piper Sandler. Please go ahead.
Thank you great quarter, just wanted to ask 1 question around development, which.
Just 2 parts. Please the first is how are you getting to at least store or maybe above 200 units and when you started the year that seemed like you know it could be a really.
I'm more of a target. So I'm just wondering like what has changed in the marketplace. That's allowing you to get there now and maybe that's a function of also growing the pipeline for next year. If there's anything you can say even qualitatively on that and then just the second part is around best practices like how how are things going outside of the U S. How's Canada.
I think maybe the first Chipotle an open house.
How's the Western Europe, I think youre going to suburbs and testing technology, what are some shared best practices. Thank you.
Yeah sure Thanks, Nicole and.
Yeah, obviously, we're very delighted with our quarter results.
To get to your specific question about.
New unit openings, obviously, we're halfway through the year, so that gives us more confidence in where we're going to end the year and I think we talked about coming into the year, how we had a really strong pipeline of.
Of units that were planned to be open.
The team has done a phenomenal job in securing the people capability to be ready to open the restaurants. They have done a phenomenal job on the supply chain to ensure that we have everything we need to open restaurants, and we've continued to have really great openings. So the combination of sites lined up supply chain in place people capable.
<unk> ready to go.
It gives us just that much more confidence on how we will finish out the year.
To reinforce our guidance around 200, plus new openings and we continue to build a really robust pipeline going forward, that's primarily driven by chipotle.
Which is also a huge enabler for the business going forward.
Your second question about.
What are we seeing in Canada, and Europe, Canada continues to perform and we're really excited about the opportunity of opening more restaurants up there.
Obviously, Canada has been a little bit slower on the reopening process, but even despite that they continue to deliver great economics, and frankly are performing in line with the U S and we're very optimistic about how we can continue to open and grow in Canada and Europe I think I mentioned this in some of our recent investor meetings.
We just opened 2 new restaurants.
Outside of London, and both of those are off to a really good start for just a couple of weeks in but we love the diversity of assets that we're opening we love. The fact that we have our digital assets all in place and.
I'm optimistic about what we're going to learn.
So that we can really give clarity on the opportunity in Europe down the road, but that's still in the early stages of our stage gate process.
And I think I mentioned this in the past probably COVID-19 has slowed us down in our learning there than anywhere else, but.
Love, what we're seeing in the U S on new units and it's exciting to be economics for getting out of Canada.
Thanks for taking my question.
The next question comes from Dennis Geiger of UBS. Please go ahead.
Great. Thanks for the question, Brian just wondering if you could talk a bit more about the digital and the dining businesses I guess, specifically the customer overlap there where you think that overlap is now I believe historically, it's been sort of a net in the 10% to 15% range and just kind of curious if you have any decent sense on where that might be going.
Going forward as dine in traffic goes from 70% to 200, and depending on where digital shakes out just curious how you how you think about that dynamic going forward yes.
Yes, sure. So I think we mentioned this in our comments earlier, but we've hung onto about 80% of our digital sales and we're seeing about 70% of our dining room sales recaptured of where we were pre COVID-19.
And.
What we're seeing is the overlap is still a net 15 plus percent range.
People doing both channels.
Which leaves the door open for a lot of incremental occasions or different occasions.
The 1 thing that is driving some of the bounce back in our dining room business as we are seeing more business at lunch and we're also seeing that lunch business occur Monday through Friday.
And then when you look at it kind of like suburban versus urban that's another place where we're starting to see clearly people return to work or returned to normal I would say behaviors throughout their day. So the.
The lunch occasion is definitely coming back while we're hanging onto all of these new occasions around dinner and a lot of these off premise occasions, we've been talking about over time.
I'm guessing you know, we'll continue to see the overlap slowly go up from here because you know.
As more people return to the dining room I'm, hoping they've had really positive experiences digitally that will suggest hey, when it get chipotle to try in the dining room and vice versa. Hopefully people that are dining room only people have heard great things about our rewards program, our digital system and they'll start given that a try but the thing I love about the 2 businesses.
They serve different occasions different needs and I think that crews over the long run these things are incremental or complementary.
That's very helpful. If I could slip just 1 Moran just curious on the pricing increase Brian if you could just comment at all on the customer resistance that you saw there and maybe how that stacked up relative to expectations and what that might mean as you think about the the next increase thank you very much.
Yeah sure. So obviously I think we've talked about this before chipotle is a tremendous value proposition.
Always have known.
We have some pricing power, it's something we really would prefer to be the last thing we have to use.
It made sense for us to take some actions specifically in the delivery channel and then most recently across our menu.
Consistent with the past, we sold very little resistance to the price increase in any of these channels. So.
I'd say it went as expected and we will continue to keep an eye on our value proposition.
Forward.
I would tell you. The good news is I think our value proposition remains very strong so that if we're faced with any headwinds that warrants the need for pricing.
I think we can do it with confidence knowing that the brand is really strong and our value proposition is really strong.
Yeah.
Great. Thank you.
The next question comes from Andrew Charles of Cowen. Please go ahead.
Hey, this is actually Brian beaten on for Andrew. Thanks for Thanks, Scott for the question. So just start just thinking about long term margin.
Margins here now that we're essentially back to.
Peak <unk> is as we look ahead.
Kind of you know $3 million and movies and beyond just I guess just philosophically, what's the what's the right way to think about the restaurant margin as you can produce at that level. Just just given the efforts you guys have done to close the margin gap per delivery sales.
Well I'll start and then Jack feel free to chime in.
I think what Youre hearing from US is we believe we've got a lot of growth still in front of us.
A top line standpoint, and the model of how we flow. These incremental dollars is very much.
Strong.
And in place to continue to be a leader in the industry on this front.
<unk>.
As I mentioned, we also have pricing power. So you have kind of per those things up you realize look we're going to do all the right things we can on the supply chain front being as efficient as possible investing in the things that matter to our customers and our employees.
And then obviously I think will be rewarded with topline and then accordingly, we will figure out how best to flow down to the bottom line, but we love the situation we're in.
We believe we're going to continue to drive growth from here and where.
We're very optimistic about our future, but Jack I know if you want to comment on anything else as it relates to his question.
Yeah Yeah.
So the data point that we share today about.
When we grow our sales we expect about 40% flow through to the margin suggests there is still a lot of leverage as we grow our volume from $2.5 million you know up to the 3 million that our margin is going is going up and you know I would just in rough terms I would say from where we are today in that 24.25 per cent range.
We can add hundreds of basis points of margin as we move up from 2.5 up to $3 million and importantly, when we get into that range.
We're going to have cash on cash returns on our restaurants, which today are very attractive at $60.65 per cent, they're gonna be in the $80.90, even approaching 100% returns and that's frankly internally that's something we've always looked at we know that if we generate superior returns on all of our invested capital that we can have lots of shareholder value and we expect that to only get better over.
John.
Thanks, a lot guys and congrats on a great quarter.
Yeah.
The next question comes from John Glass of Morgan Stanley. Please go ahead.
Hi, Thanks, Thanks, very much first just going back to pricing just to level set where all the effective pricing be in the third quarter just given the price increase you took in the delivery I just want to make sure I understand that in the context of your comp guidance and related to that Jack I understand the mechanics of lowering restaurant margin with the increase in the labor.
You made it sound like that's just kind of be the way it is but but I think previously you'd sort of talked about well, we'll look at pricing over time. So that we can kind of get back to that 1 to 1 relationship with Evs and margins is that still the goal or do you just think it should be lower because you don't want to get too aggressive on pricing in the near term.
Yeah, John I mean listen there's still that possibility that we could take additional pricing action to fully close the gap I just think there's so much going on right now with inflation and the question about whether inflation is transitory or permanent we'd got labor inflation, we took a big move there, we'll see how that shakes out and.
We got the Delta variant as well, there's just a lot of unknowns and so what we don't want to do is sit here and declare that we're going to do something with certainty between now and the end of the year I think what you want to do is let's see how the menu price continues to.
We accepted by customers, so far really really good really seeing no resistance whatsoever, let's see what happens to inflation and let's see what happens to the economy over the next several months.
And we will make the appropriate decisions at that at the appropriate time.
But I think the important thing John is that we've got a lot of upward mobility on our margin we have pricing power now, it's just a matter of how and when we decide to use that pricing power to either protect margins or to investing our people like we just stayed with the with the wages, but nothing's been locked and loaded in terms of what we will do between now and the end of the year.
Hmm and the effective pricing for the third quarter.
Yeah, John It's you know the Q2 was about 9 ish percent call. It Q3 will be slightly higher what happens is you're going to get the full quarter for the wage.
Price increase we just took we got about a month's worth of it in Q2, we'll get a full 3 months in the third quarter. But then we're also starting to lap the delivery increase although we started taking in the third quarter of last year. So it will move from about call. It a 9 percentage.
Greece or the low 9 to about 10% in Q3.
And Brian just 1 more on did the did the increase in wages solve largely the labor issue or are you fully staffed in restaurants or you still needing to employee people live in with those higher wages and can you just talk to talk about maybe the tenure of your employees now I think in the past you had tenured employees you have great throughput, maybe theres been more turnover.
During COVID-19 or are you seeing the same kind of performance out of restaurants and throughput that you would hope for given this comp level.
Yes, so to answer your first question the employee value proposition that we're bringing forward with the higher wages the ability to grow into a $100000.
Opportunity in very short order has worked very well and.
I give a lot of credit to our guys in the field with being.
Out there recruiting and retaining our talent and.
We're in a really good labor spot.
Relative to as you look at our historical performances were back to where we were in 2019, and frankly, a little bit better.
Which is great to see.
And also the growth in our company is really resonating with our employees. Our general managers know that they have the ability to become field leaders in our field leaders know they have the ability to become team directors and folks that are ship managers in kitchen managers know theres going to be logic general manager jobs available. So.
That's why I say the whole employee value proposition I think is really resonating and combine that with the company's purpose and.
We've made tremendous progress on what was really a difficult situation that popped up in call. It February and March with the business, just frankly coming back faster than we were able to hire but now our hiring has caught up.
To answer your other part of the question, we still have work to do to get our great throughput model back in please.
It's Ben.
Jeez, well over a year since folks all lines and for some of our employees is the first time, you're seeing lines and for.
For our customers to part of the process of getting people to move down the line quickly as they need to know how to order what they want to order and getting back to individual meals as well as our team members being quick to move them down the line, but doing it in a accurately so we still have opportunity on the throughput front, but.
I think thats, just a matter of retraining building that muscle on our throughput pillars and I am confident.
We're going to capture that opportunity our operators are focused on it.
Okay. Thank you.
The next question comes from David <unk> of Baird. Please go ahead.
Hi, good afternoon.
Brian I'm curious if think curious to know how youre thinking about the appropriate growth rate for the business going forward. If you think longer term when you have great returns on capital and the units you have plenty of capital to put to work. So I'm just wondering how youre thinking about unit development in particular and whether you can add.
Salary over the next few years and you know maybe secondarily, whether chipotle can return to being a 10% type unit growth story at some point in our future.
Yes look I think here's the good news David I think every year since I've been here, we've been able to.
To accelerate new units.
And the good news is our operations are stronger our people capability I think is stronger the P&L now is stronger and I think youre seeing our ability to open more units to demonstrated even in a difficult environment right. We talked about how we plan on opening over 200 units this year.
So I think theres going to be an opportunity for us to continue to accelerate the pace at which we do that.
Yes.
We're going to be probably more on the conservative side than putting the pedal to the metal on that 1 because I just want to make sure. We continue to open with excellence and.
I know there is demand I know the economics are excellent and I know, we have the people capability I just want to keep doing it in a way where we're able to build upon our success and.
<unk> tons of runway in the space So.
Optimistic about our ability to accelerate from here what that ultimately looks like.
As we get closer to each year, we'll probably have a better idea of what we can build on.
Great. Thank you.
The next question comes from David Palmer of Evercore ISI. Please go ahead.
Thanks, just a quick follow up first on the pricing that you did on the delivery side did you see a shift to mobile order and pickup.
And do you think that's related.
If you did was it related to the pricing at all.
We saw a little bit of a move into our order ahead business.
But it coincided David with also kind of everything reopening a lot more so I don't know how much of that was driven by the pricing versus the fact that.
The customer was now more mobile and they clearly saw the trade off.
And paying for the convenience of delivery versus ordering ahead and picking up.
But we saw very little resistance in our delivery business. So.
Sure.
I think it has more to do with people wanting different occasions.
What they want to pay for those occasions, and the fact that theyre more mobile.
And frankly, the pricing driving those behaviors, but Jack I know, if you want to add anything to that.
Yes, Brian I would say the same thing.
We're really pleased with the trends.
We didn't see anything that was a sudden resistance to the delivery menu price, but because it coincided with people to be coming out in about a little bit more we did see a little shift in that business. So it's hard to sort through.
And figure out how much is due to pricing how much was due to.
Just people looking for the in store.
Ordering process, but the bottom line is our business moved up Okay. I did move backwards. It definitely moved moved up when you combine all channels.
Yes, and actually I think the only thing I would add to that David is 1 thing we continue to learn as these occasions.
Our unique if you want a delivery occasion, you usually don't trade it off with an order ahead occasion.
But the ability to have access to both is really powerful so.
That's where I think checkpoint is like at the end of day. We saw we did see a step back in our business. We continue to see steps forward and I think it was more driven by the fact that people were more mobile and then they realize these additional access points.
And just a.
Related question about.
This on premise ordering will end up at the end of the day. The consumer has been trained to do digital ordering for you.
The on premise ordering it feels like it's something like half a million dollars per store lower than it was pre COVID-19 and in some ways, you're not missing it because you'd have high margin digital orders.
Some of this is probably going to come back because people are still little Covid cautious you worker shortages work from home and some of those things will burn off. So how are you. How do you think about the melt shop in that on premise order business and how does that how much of it maybe is semi permanently shifted to digital ordering.
Yes look I think.
This is us just reading.
Consumer data and granted were only a couple of weeks really and where things are really been open in all restaurants have been open but what's definitely clear is that on premise occasion is a different occasion.
And I think I mentioned this earlier, we only have about 15% 17% of people overlapping between the occasions and when you talk to folks that in dining room experience.
As much as we've replicated the inline experience online.
There is still something to be said to walking down the line C and the food getting the sites the sounds the smells and getting probably another level of customization that I think is very engaging to customers and they want to have that experience. So.
I think our dining rooms are going to keep coming back and I also think it's human nature, you want to eat out Blake you like a change of scenery people like to share a meal.
And.
Probably been 1 of the few that keep saying dining rooms will come back and I think if we give a great experience.
Come back disproportionately to Chipotle.
Thank you.
Okay.
The next question comes from Chris <unk> of RBC capital markets. Please go ahead.
Hi, good afternoon. Thanks for the question so.
How does the continued recovery of the dining room business factor into how you're thinking about the opportunities across different restaurant types or models with respect to your long term develop or long term development plans.
And maybe related to that could you also share any learnings so far from the digital only restaurant you opened last year.
Yes, sure look that's why the focus for US just to build Chipotle that gives you all the access points right. You can order ahead and pick it up in your car you can order ahead and come in grab and go you can come through the line and.
We're going to be focused on building as many chipotle as possible.
As we think about these digital only or chipotle owned lease or these alternative formats. They really are.
I think about them as like seam restaurants are opportunistic to the trade area that to maximize chipotle sales coming out of a trade area, but the focus area for US is chipotle, we want all the access modes for our customers.
At the end of the day.
Keep talking about these as different occasions, arguably youre almost a different consumer when you decided you wanted to do digital versus being a dining room customer so.
That's what we're after I think it's what our customers want and I think it's what maximizes returns for us.
Specifically, our digital only restaurant in the trade area, where it made sense to do it it's doing really well.
But you know what if the trade area supported putting in at Chipotle I put a chipotle in there.
Great. Thank you.
Sure.
The next question comes from Jared Garber of Goldman Sachs. Please go ahead.
Alright. Thanks for the question somewhat of a follow up to the last question on your commentary Brian I Am just curious how you guys are thinking about sort of the chipotle an opportunity over the longer term obviously.
80% of the new units this quarter had a chipotle and versus I think.
Sort of the traditional guidance of about 70.
We think about that opportunity over the next several years are there day parts are their menu innovation items beyond sort of the case a day that youre thinking about that can really only be served with chipotle and that sort of some sort of critical mass that we should be thinking about over the longer term.
Yes look I definitely think as you get more penetration of the chipotle in asset.
It gives us another opportunity for our operating platform.
And the thing I Love is we got a multibillion dollar digital business that over time is going to have more access.
So of course, we can figure how to maximize that whether thats day parts, whether that's menu.
So as we get more penetration on these access points for our digital business that give customers less friction and more convenience.
We'll figure out how our operators can best serve it.
But the thing I love is the case to be as demonstrated we can run innovation off of our digital business without impacting our dining room business and I think we're also going be able to run innovation on our dining room business without impacting our digital business and our operators have done a great job of using great culinary single kitchen back there to that.
Service to businesses, whether it's our digital make line business from our frontline business. So.
That's how I would think about it.
Thanks, and then are there any operational changes you're thinking about as you fully recapture I know youre at about 70% of in restaurant dining today, obviously as that continues to increase if we were to assume that your digital business remains really robust.
Its additive business when things sort of fully normalized you talked about some tech investments that youre, making.
Are there sort of remodel thoughts about what is sort of a chipotle are the future might look like as you balance out maybe a very robust in restaurant experience with with the digital side as well.
Yes look the way I would describe it is we're going to be investing in ways to get better throughput executed in both the digital make line and our frontline.
And we're looking at investments on helping our teams with <unk>.
Smarter prep, having the right food available at the right time.
Better forecasting better staffing. These are all things that will just allow us frankly to provide more burritos and bowls digitally as well as more videos and bulls on the frontline. So we're really focused on the fact that we've got a lot of capacity in these restaurants. So whatever we can do to invest in our people.
Our operation to enable them to provide more burritos and bowls.
Per minute is a huge leverage point for us so.
Yes.
The highest level, that's how I would think about it I mean, there's various things and simple.
Simple projects that provide certain benefits, but the higher order thing. We're after is how do we ultimately ended up with just enhance throughput both for the digital business and the frontline business and in such a way, where we still get no compromise on customization quality of food and now our digital business accuracy.
Great. Thanks, so much for the color.
Yeah.
The next question comes from John <unk> of Jpmorgan. Please go ahead.
Hi, Thank you I guess.
At this point in the call I was curious if we could have seen it.
Some color about dine in you know and I guess the relationship between between dine in and off premise broadly in the markets that have been open the longest like the south Eastern Texas universes, you know I guess from North East and West Coast, how much of a difference in kind of customer flow or are you seeing kind of 'twenty 1 versus 19, and you know are there some perhaps.
Leading indicators that we can talk about is as all markets like it's fully normalized from to come the same in 2022.
Yes look I would tell you that.
I think the most.
Important leading indicator for us as we're starting to see our lunch business come back.
And what's great about that lunch businesses, it's usually an individual.
That.
Frankly, we hadn't seen in a while.
And while that's occurring we still have these what I would call. The group occasions that back in 2019 Chipotle didn't participate in to the level that we're participating in we have started our journey of getting into these group occasions in these off premise occasions, but.
Covid really accelerated that.
So what I would tell you is probably the.
Best piece of news that I have seen in our data is to see that our lunch business is coming back because as soon as people are given the opportunity to go back to their behaviors are going to their office dropping their kids off at school activities whatever it may be they are back to wanting to eat our lunch and that's an on premise occasion.
That we have seen a nice uptick of late.
Thank you.
The next question comes from Nick that John <unk> of Wedbush Securities. Please go ahead.
Thanks, I wanted to go back to the longer term commentary on margins again, I think you said.
40% flow through.
If I take every 100 K from a.
2 and a half and then I think that implies about 50 bips of margin uptick.
Per hundred 100, K or so.
I guess you know that.
And that's separate from any future price increases.
And also how are you thinking about sort of labor inflation and overall inflation in general.
As we kind of progress you know.
From this $2.5 million.
Moving to $3 million over the next few years.
Yeah, Nick listen.
That 40% flow through.
It's something that.
We will happen if we don't have anything.
Out of the ordinary happening with inflation, meaning net inflation just settled into a normal cadence and we use some of our pricing power to offset that we will have the ability to flow that 40% through if you have a dislocation for some period of time.
You know that 40% is going to vary.
But we know as I mentioned, a few minutes ago.
We know we have pricing power.
We're in a position because we're all company owned but we take a long term view, we can watch how the inflation unfolds over the next few months. The next few quarters. We can see how much is transitory how much is going to be permanent and we could take the right pricing action at the right time. So we don't have to be in a hurry to do it like like some franchise organizations might be.
Feel a little bit more pressure to do that but the 40% flow through that assumes just kind of over a longer period of time.
As you're moving from this $2.5 million dollar volume up to $3 million that as long as over that period of time, maybe not every quarter, maybe not every year, but over that period of time, we're able to offset inflation with some modest pricing.
Increases, we can have that 40% flow through.
And then just on the smoked smoked brisket near term is the timing on that Q4 or Q3.
We havent sorry nailed down.
Go ahead Jack.
Yeah that was timing and I think the price increase that we we haven't made it Jackie.
He was asking us asking about our brisket.
Oh, Okay go ahead, Brian that's yours.
While I do love the brisket, Thank you Jack.
The answer is it's been validated in our stage gate process, we've not nailed down exactly when we'll do it.
But.
It's always nice to have it ready to go.
We'll look at the marketplace and we'll figure out the best time to do it.
Okay.
Thank you very much.
The next question comes from Peter Saleh of B T. I G. Please go ahead.
Great. Thanks.
Brian just wanted to come back to that conversation on the brisket for a second.
I know youre not disclosing the exact time of launch, but can you talk maybe a little bit about how you are positioned in the menu is something else coming off to make room for the brisket or is this going to be purely incremental on the menu.
Yes, so right now our plan is it'll be a seasonal item.
And that's the way, we tested and validated.
So.
It's a nice incremental occasion as what we've seen and.
I look forward to you everybody gives me opportunity to try it because it's also delicious.
Great. Thanks, and just on the on the cash balance I know you guys had indicated about $1.2 billion of cash and investments.
I think Brian you also indicated you'll be a little bit more prudent maybe in development going forward, making sure that you're building the right units. So.
What's the right amount of cash to hold here I know you guys announced a little bit more on share repo, but any thoughts around maybe returning more of that capital to shareholders to a special dividend or an ongoing dividend or anything of that sort.
Yeah, well first of all I don't want you to misconstrue my comments on new units.
Our plan is to continue to.
Demonstrates that we have the ability to add more units.
Done it every year every.
Every year, we accelerated and.
I think we're going to still be able to do that.
So and the good news is we have the cash to do it and.
And we also know there is no better investment with our cash and to build more chipotle.
That's always going to be the first priority.
And then obviously I think Jack talked about in his remarks earlier, our share buyback program, that's going to continue to be a part of the puzzle, but there's no plans for dividend Jack.
Jack you wanted to add anything.
No listen I would agree with that the only thing I would add.
Is that where we've taken during COVID-19 and you know as we as we now look at the Delta variant and there's some uncertainty with that we've been even more conservative than normal with our balance sheet, but what.
But I think you can expect to see is as things stabilize as they become more predictable we will be able to return even more value to shareholders through buybacks.
We also have the revolver as well, which gives us a little bit of breathing room, but last year. When the pandemic started it became pretty clear that these were very different times and we needed to make sure that we had enough assets or enough cash in the balance sheet. So we can invest in our people and Thats and technology continue to open up our restaurants and not give up on many of our long term strategy.
We're still retaining a bit of a conservatism with managing our balance sheet, but again as things become more certain you can expect to see more buybacks in the future and again it will be opportunistic we will take advantage when the price moves down just like we did during this quarter.
Thank you very much.
Our next question comes from John Power of Wells Fargo. Please go ahead.
Great. Thanks for taking my question a lot of them been answered already but I guess I'll circle back on the loyalty platform that the 23 million members that you have today.
Can you talk about maybe how much that represents of the total customer base today and then.
Can you quantify how the rewards member uses the brand versus a non rewards member with respect to frequency the spend the mobile ordering platform versus perhaps just picking up at the store using delivery.
And can you maybe even tell us how much that percentage how much your loyalty membership represents as a percentage of total sales.
So.
Few different questions. There first of all the rewards program that probably represents about 25%.
Our customers roughly is the way to think about it.
And the thing that's great about our rewards customers are they have a higher ticket day of higher frequency.
Because usually they are more skewed towards digital.
Which is consistent with what we see in our digital business and I do believe as we continue to enhance things like a rewards program, where now you can redeem.
Your points or.
Lower denomination and get like chips, and guac or a T shirt or whatever that is.
She's going to dial up engagement for people.
We didn't change the reward necessary to achieve a burrito, but we did enhance opportunities to engage with the brand.
Different levels. So I think that's going to be enticing for more people to join the rewards program and those that are in will continue I think to incentivize their behavior accordingly.
So I think I covered all of them was that all your questions.
Yeah, I think you know that so thank you I appreciate it alright, great.
Okay.
This concludes our question and answer session I would like to turn the conference back over to Brian Nickel, Chairman and CEO for any closing remarks.
Okay, Yes, thank you and thanks, everybody for joining us obviously.
I'd be remiss, if I didn't repeat what I said earlier, which is a huge thank you to everybody in our organization all of our operational leaders and folks in our restaurants.
I think they have really demonstrated the power of great people, great leaders, great culture drives great results and.
This quarter is truly a reflection of that without a doubt.
The other thing I want to touch on is obviously, we're very optimistic about chipotle is long term growth plans.
I think we have the ability to grow units grow average unit volumes grow margins frankly grow everything you want to grow and then at the same time grow our organization. So people have the opportunity to grow with this company and participate in all this wonderful growth and Thats really what I think is driving the strong employee value proposition, that's resulting in us being able to staff.
Our restaurants at an effective rate right now so.
Im very proud of this organization is very proud of our results.
And also very optimistic about the future. So thank you for joining us and we're going to get back to cultivating a better world alright. Thanks, everybody.
The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.
Okay.
Sure.
Okay.
Good day.
Yes.
Mark.
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John.
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