Q3 2021 Chipotle Mexican Grill Inc Earnings Call
Good day and welcome to the Chipotle Mexican Grill third quarter 2021 results conference call.
All participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing the Starkey followed by zero.
After todays presentation, there will be an opportunity to ask questions.
To ask a question you May press Star then one on your telephone keypad to withdraw your question. Please press Star then two.
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.
Hello, everyone and welcome to our third 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.
Patients 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.
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 discussions 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.
K 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.
One of our wax Ashish and good afternoon, everyone Chipotle third quarter results highlight strong momentum in our business fueled by our multi pronged growth strategy and a passionate team that is delighted to see more guests coming back into our restaurants.
We continue to retain about 80% of digital sales, but have now recovered nearly 80% of in restaurant sales.
Brian while COVID-19 impacts will likely persist for a few more quarters. We're hopeful that the worst is behind us and society can shortly return to a more normal environment.
Personally I'm thrilled to welcome our restaurant support center leaders back to the office beginning in November which will allow us to optimize creativity camaraderie and effectiveness key elements that helped.
<unk> wholly unique and powerful brand.
For the quarter, we reported record quarterly sales of $2 billion, representing 21, 9% year over year growth.
Which was fueled by a 15, 1% increase in comparable restaurant sales.
Our restaurant level margin of 23, 5%.
<unk> 400 basis points higher than the 19, 5% we reported last year earnings per share adjusted for unusual items of $7 <unk>, representing an increase of 86, 7% year over year digital sales growth of eight 6% year over year, representing 42, 8% of sales.
And we opened 41, new restaurants, including 36 with a chipotle.
And I'm pleased to report that Q4 is off to a great start.
These results highlight that our key strategies continue to resonate with guests and allow us to win today, while we create the future while we regularly get asked what's.
I believe our current growth drivers have plenty of runway and will be critical to us reaching our longer term goal of 6000 restaurants in North America with <unk> above $3 million and improving returns on invested capital to remind everyone. We're focusing on five key areas.
Number one opening and running successfully.
Next restaurants with a strong culture that provides great food with integrity, while delivering exceptional in restaurant and digital experiences.
Two utilizing a disciplined approach to creativity and innovation number three leveraging digital capabilities to drive productivity and expand access convenience and engagement.
Vessel roller engaging with customers through our loyalty program to drive transactions and frequency.
And last but certainly not least number five making the brand visible relevant and loved <unk>.
Let me now provide a brief update on each of these starting with operations well trained and supported employees consistently preparing delicious food.
<unk> excellent guest experiences are at the heart of our success, we're fortunate to have amazing employees at our restaurants, who have stayed focused on safety reliability and excellent culinary despite the dynamic and challenging environment.
I've said, it before and I'll say it again, our people are our greatest asset and I can't thank them enough for all their efforts.
And we're extremely proud of Chipotle is world class employee value proposition that includes industry, leading benefits attractive wages specialized training and development access to education in a transparent pathway to significantly career advancement opportunities.
We believe these efforts are helping to attract and retain great.
Employees, which is more important than ever given the challenging labor environment. We're all experiencing today over the past 18 months, we've made operational adjustments to adapt to a constantly changing environment and support of our in restaurant business as well as our record breaking digital business. As a result, we've had to allocate labor is needed among the different roles, including the D. M L.
Our frontline depending on available staff to accommodate the needs of our customers and our restaurant teams. This flexibility has allowed us to keep our frontline open given our ability to divert orders on the digital lines as needed to overcome periodic staffing challenges. This is part of the normal business balancing that occurs at the discretion of onsite managers and.
And that had a material impact on our business in the past. This was true pre pandemic and is more relevant now as dining room volumes recover.
The good news is that I believe we're finally getting back to pre pandemic operations and I couldnt be more excited.
We're fortunate to have a dedicated digital make line and a dedicated dining room serving.
It has now our frontline represented nearly 60% of our business were $1 1 billion of sales for the quarter. It is big and it is growing we are committed to ensuring guests on the frontline get the customized <unk>, one made with real ingredients excellent culinary and faster than anywhere else. We still have some work to do but our goal is to provide.
Line fill throughput speed of service is a foundational element of convenience that our guests truly value.
Therefore, we are committed to teaching training and validating the five pillars of throughput everyday during every shifts to ensure we meet our high standards and provide a great guest experience.
While taking good care of guests is always a top.
Exceptionally utilizing our stage gate process to continue innovating as critical to our growth. The great News is that Chipotle is delicious food that you feel good about eating which creates an emotional connection with our customers and they love to see ongoing innovation from us as a result, we introduced new menu items on a regular cadence as it helps bring in additional customers.
Priority Quincy with existing users and it gives us an opportunity to create buzz around the brand.
Recently, we launched smoked brisket for limited time across all of our U S and Canadian restaurants, our culinary team spent the last two years developing the perfect smoked brisket recipe that is unique to our brand and Paris flawlessly with our fresh real ingredients. This.
This is our third new menu item. This year following on the success of our cilantro lime cauliflower rice and handcrafted case a deal.
Early customer feedback on this entre, which is expected to last through November has been very positive and we're delighted to see an increase in both check size and transactions.
<unk>, which we launched as a permanent digitally.
Exclusive offering in March continues to perform well and is also helping attract new customers to chipotle by the way. If you haven't had a chance to try the brisket case of death, you really are missing out.
And we're far from being done plant based retail is currently being tested in a couple of markets and our talented culinary team is in the early stages of developing other exciting menu.
Items.
All that being said our stage gate process is not limited to new menu innovations, we use it for many parts of the business including development.
As you know, we validated new restaurant expansion in Canada earlier, this year impressive unit economics, with <unk> and margin margins equal to or above those in the U S.
<unk> led us to accelerate development in this market. We've opened one new restaurant in Canada year to date and have several more planned before year end, including our first ever Chipotle, that's scheduled to open next week.
Similarly, we are now in the early stages of using this process to learn iterate and eventually validated expansion in western Europe, Covid slowed our ability.
You had several critical initiatives, however, with restrictions easing, we're making nice progress and have implemented some of our digital assets as well as begun to test alternative formats and explore new trade areas. The recent openings have exceeded expectations. So while we continue to view international expansion as a medium to longer term opportunity I remain quite optimistic.
<unk> about its future contribution to the Chipotle story.
A more near term pillar of growth has been our ongoing digital transformation, which is helping chipotle become a real food focused digital lifestyle brand during the third quarter digital sales grew nearly 9% year over year to $840 million and represented.
43% of sales, we're not surprised to see the mixed moderate as the world continues to reopen however, we're pleased to see our digital sales dollars continue to grow despite lapping tough comparisons in fact, our year to date digital sales of nearly $2 $7 billion or just slightly below the $2 $8 billion, we achieved during all of last year.
Digital is proving to be sticky as it's a frictionless and convenient experience that has been aided by continuous technology investments to improve operational execution innovation and the customer value proposition as.
As a result of the pandemic many new consumers were introduced to Chipotle via our digital channels and are now using us for alternative occasions the thing I.
I love about having two separate businesses is that they serve different needs that will likely prove to be incremental and complementary over the long run.
This is reinforced by the fact that different cast are accessing chipotle through different channels currently about 65% of our guests use in restaurant as their main access point nearly 20% use digital as their primary channel and the remaining.
<unk>, 15% to 20% use both channels. We're encouraged by this dynamic as it gives us several future opportunities, including the ability to convert more of our in restaurant guests into higher frequency digital users.
Not only are we pleased with the level of digital sales and overall mix, but we're also delighted to see that our highest margin transaction digital pickup orders.
<unk> is gaining traction this channel represented slightly more than half of digital sales in Q3.
As always we're not being complacent and continue to look for ways to enhance convenience and access through alternate restaurant formats digital only menu offerings and leveraging our large and growing loyalty program.
Speaking of the loyalty program.
We should have more than $24 5 million members many of whom are new to the brand. This gives us a large captive audience to engage with and distribute content that promotes our values as well as motivates our super fans.
We continue to leverage our CRM sophistication by focusing a lot more on personalization and using predictive model.
We're excited triggered journeys, primarily for new and lapsed customers. These personalized messages are more brand related as opposed to offers or discounts, which is allowing us to optimize program Foundation and economics. All of these efforts along with the use of enhanced analytics are allowing us to consistently attract more visits from loyalty members and nonmembers.
Modeling no doubt the loyalty program has moved from a crawl to walk stage and we still have a lot of room to grow.
Offering new ways to engage with Chipotle is essential to the ongoing evolution of our digital business.
Our first enhancement was rewards exchange, which provides greater customization and flexibility to redeem rewards and allows guests to earn rewards.
More recently, we announced extras and exclusive feature that Gamify Chipotle rewards with personalized challenges to earn extra points <unk> collect achievement badges in order to drive engagement as the program grows so does our ability to provide sophisticated and relevant communications to our guests, which will ultimately deepen the.
Fast ship between members and the brand we are pleased with our progress to date, but believe with ongoing investments and further leveraging of data driven insights we can get even better.
Amplifying all the growth initiatives I've mentioned, thus far are the collective efforts of the marketing team, which are designed to make chipotle more visible more relevant and more loved we.
A relationship that real food has the power to change the world and using custom creative across a wide variety of media channels that allow us to drive culture drive difference and ultimately drive a purchase.
For example, we use numerous campaigns to stay relevant via important sporting events, such as the basketball Championships, where we hit a million dollars worth of free.
We believe those in our television advertising, we also utilize social media, including our website to authentically highlight real food for real athletes during the broadcast from Tokyo and of course to celebrate the launch of smoked brisket, we offered an exclusive peak to our loyalty members prior to a full launch supported by our media plan across online video digital.
<unk> media platforms as well as traditional TV spots all of these helped attract new guests into the Chipotle family as well as increased frequency of existing users.
We're fortunate to have an innovative marketing team that wants to be a leader not a follower in our marketing organization is built on a culture of accountability that encourages new ideas is committed to experimentation.
And some and as ruthless on measuring returns and isn't afraid to pivot to different opportunities. If they don't perform to our high standards everyday. This team is focused on driving sales today, while enhancing our brand for tomorrow.
Chipotle has committed to fostering a culture that values and champions our diversity, while leveraging the individual.
Patient all team members to grow our business elevate our brand and cultivate a better world. Our team has proven their ability to be resilient and successfully execute against macro complexities again, a huge thank you to our nearly 95000 employees for all their efforts as a result, I believe we are better positioned to drive sustainable.
Anable long term growth than we were before the pandemic, which makes me even more excited about what we can accomplish in the years ahead.
With that here's Jack to walk you through the financials.
Thanks, Brian and good afternoon, everyone. We're pleased to report solid third quarter results with sales growing 21, 9% year over year to $2 billion.
Comp sales grew 15, 1% restaurant level margin of 23, 5% expanded 400 basis points over last year and earnings per share adjusted for unusual items was $7 <unk>, representing 86, 7% year over year growth.
The third quarter had a GAAP tax benefit that I'll discuss shortly which is partially.
Firstly offset by expenses related to our previously disclosed modification to our 2018 performance shares and transformation expenses, which netted to positively impact our earnings per share by <unk> 16.
The GAAP EPS of $7 18.
As we look ahead to Q4, there remains uncertainty on several fronts, including COVID-19 related impacts as.
As well as inflationary and staffing pressures, but given our strong underlying business momentum, we expect our comp to be in the low to mid double digits, which is encouraging considering there will be about 200 basis points less than pricing contribution during Q4 versus Q3, as we lap some of our delivery menu price increases and our brisket LTI will be for a partial quarter as compared.
Paired with a full quarter of Carneous out of last year.
Let me now go through the P&L line items, beginning with cost of sales our supply chain team has done an outstanding job navigating the numerous industry wide disruption, which led to food costs being 33% in Q3, a decrease of 200 basis points from last year. This was due primarily to leverage from menu price increases.
Which were partially offset by higher costs associated with beef and freight that unfortunately are continuing to worsen.
Hard to predict how much of these headwinds will ultimately be temporary versus permanent but theyre likely to persist for the foreseeable future. In addition, Q4 will also include the higher cost brisket, MTO, which collectively will result in our food costs being in the low 30.
<unk> percent range for the quarter.
Labor costs for the third quarter was 25, 8% an increase of about 40 basis points from last year. This increase was driven by our strategy to increase average nationwide wages to $15 per hour, which is partially offset by menu price increases sales leverage and a onetime employee retention credit.
Given ongoing.
31 rate of wage inflation and greater new unit openings, we expect labor costs to be in the mid 26% range and Q4.
Other operating costs for the quarter were 15, 1% a decrease of 170 basis points from last year, due primarily to price and sales leverage.
Marketing and promo costs for the quarter with two 4% about 20.
<unk> <unk> lower than we spent last year.
While Q3 tends to be a seasonally lower advertising quarter. The timing of some initiatives also shifted into Q4. This year as a result, we anticipate marketing expense to be around 4% in Q4 to support smoked brisket and for the latest brand messaging under our behind the foil campaign for the full year 2020.
Monte based marketing expense is expected to remain right about 3% of sales overall.
Overall other operating costs are expected to be in the mid 16% range for the fourth quarter.
Looking at overall restaurant margins, we expect Q4 to be in the 20% to 21% range. Our Q4 underlying margin would be around 22% when you normalize marketing spend.
One removed the temporary headwind from the brisket LPL and the remaining cost pressures will continue to evaluate and take appropriate actions on menu prices to aside offset any lasting impacts our value proposition remains strong, which we believe gives us a lot of pricing power. Despite these challenges we remain confident in our ability to drive restaurant level margins.
And as our average unit volumes increase.
G&A for the quarter was $146 million on a GAAP basis were $137 million on a non-GAAP basis, excluding $7 6 million for the previously mentioned modification to our 2018 performance shares and $1 6 million related to transformation and other expenses.
G&A.
Higher includes about $100 million in underlying G&A about $28 million of related noncash stock compensation about.
About $8 $5 million related to higher performance based bonus accruals and payroll taxes and equity vesting and stock option exercises and roughly $600000 related to our upcoming all manager conference.
Also in Q4, we expect our underlying G&A to be right around $101 million as we.
To make investments primarily in tech to support ongoing growth.
We anticipate stock comp will likely be around $27 million in Q4, although this amount could move up or down based on our actual performance. We also expect to recognize around $5 5 million.
Looking at the performance based bonus expense and employer taxes associated with shares at best during the quarter as well as about $1 $5 million related to our all manager conference.
Our effective tax rate for Q3 was 14, 7% on a GAAP basis, and 19, 7% on a non-GAAP basis, both rates benefited from our option exercises.
Sizes and share vesting at elevated stock prices and.
In addition, our GAAP tax rate included a return to provision benefit for additional Nols generated on our 2020 federal income tax return and carried back to prior years.
For Q4, we continue to estimate our underlying effective tax rate to be in the 25% to 27% range, though it may vary.
Based on discrete items.
Our balance sheet remains healthy as we ended Q3 with $1 2 billion in cash restricted cash and investments with no debt along with a $500 million untapped revolver during the quarter, we repurchased $99 million of our stock at an average price of $1813 and we expect.
To continue using excess free cash flow to opportunistically repurchase our stock.
However, opening more Chipotle is continues to be the best return we can generate during Q3. Despite a few delays in opening timeline, we opened 41, new restaurants with 36 cities, including a chipotle.
While our experiment experiencing construction inflationary pressures.
Subcontractor labor shortages critical equipment shortages and landlord delivery delays our development team is doing an excellent job opening these new restaurants.
In fact, we currently have more than 110 restaurants under construction and while timing is somewhat unpredictable. This gives us confidence and ending the year at or slightly above the 200, new restaurants with.
Now more than 75%, including a chipotle versus our prior expectation of 70%.
Also the team has done a nice job building a robust new unit pipeline.
Which we believe will allow us to accelerate openings in 2022.
But because of the challenges I, just mentioned and how they could impact the timelines we will provide 2022 opening guidance during our Q4 call.
As of September 30th we had a total of 284, chipotle, including 12 convergence and eight relocations. They continued to enhance enhanced access and convenience for our guests while demonstrating stellar performance and while it's early days Chipotle conversions and relocations are yielding encouraging results.
We will leverage our stage gate process to learn and refine our strategic.
<unk> approach to accelerating our chipotle portfolio.
I'd like to close today by thanking all of our Chipotle team members for the exceptional results were reporting today as well as their hard work and dedication in helping sustain our long term powerful economic model, maintaining a 40% pass through on incremental sales as we expand <unk> will lead to higher margins.
And improving cash on cash restaurant returns you can see why we remain optimistic about our future with that we're happy to take your questions.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.
We're using a speakerphone please pick.
Pick up your handset before pressing the keys to withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Yeah.
And the first question will come from Andrew Charles with Cowen.
Please go ahead.
Great, Thanks, and Brian just to balance that Brisker case, it sure is killer.
Jack you noted the <unk> food and labor challenges. If we think ahead I think the more important question is that what is the business capable of achieving a $3 billion sales volumes in terms of restaurant margins is 27% to 28% is that.
Still the right level or do you think the industry labor pressures and to some degree the freight challenges that you mentioned does that make that margin level more aspirational.
Hey, Andrew listen Thanks for the question and no. We still believe that that kind of margin range of $3 million is still a very much in play listen it's very much of a labor.
Our challenge right now there is there is food inflation as we talked about.
We don't know how much of this is temporary or transitional versus permanent but what we do know is we've got what we believe is great value. Our customers continue to appreciate chipotle. They love the convenience they love the value and so we believe we've got pricing power.
Really better than almost anybody if not everybody in the industry. So we'll be very patient and we're not going to cover inflation that hits in one quarter or another immediately but we will carefully consider the fourth quarter what action we will take.
You know that it is about this time of year that we do consider what kind of pricing, we will take but we will.
Be patient and watch and see what happens with inflation, how much stays permanent but we've got the pricing power to ensure those margins are in exactly the range you just talked about Andrew.
Got it and then just my other question just on brisket.
The fact that it's ending a little bit earlier.
In November versus what you saw cardio side of last year is that just due to the supply that you kind of just ran.
Ran out or was that kind of be the case all along that November was probably be targeted end date.
We're probably getting a little bit shorter than we originally planned but that's just a direct result of degree response from the consumer and degree of execution of our operators. So.
We've got a great product people have loved it and.
Is driven both incremental transactions and check for us So we're.
We're really happy with it and I'm guessing, we will probably do brisket again at some point in the future.
We're looking forward to that thanks, Brian.
Yes.
Yeah.
And the next question will come from Sharon Zackfia with William Blair. Please go ahead.
And in.
I guess a question kind of building on Brisket I know you had indicated Jack that Cogs would be up sequentially can you kind of break that out into brisket versus just underlying inflation and then I'm curious with brisket I think it's the highest priced protein you've ever had I mean, what does that.
What is that taught you about where you can go on the menu.
Yes, Sharon brisket, it's about a 50 basis point impact.
And inflation is probably another about 100 basis point impact and he has got pushes and pulls and.
So.
Yeah, and then just to your question about the pricing on that just demonstrates the value proposition and the pricing power that we have in our business.
And I think John alluded to earlier so we're.
We're really happy with the value proposition and the strength of our business.
In the <unk>.
Beyond that we feel like we need to pull that pricing lever, we have the ability to do it.
Thank you and the next question will come from David Tarantino with Baird. Please go ahead.
Hi, good.
Vincent a couple of questions. One I wanted to clarify your fourth quarter comp guidance. So I guess, if I look at the two year comps performance delivered in the third quarter.
And what you're projecting in the fourth quarter. It does imply a fairly meaningful step down in that metric.
Afternoon, Jack I was just wondering if that's the right way to measure the business or I guess you know.
I know there's differences in comparisons if you look further back but I guess how are you viewing.
The two year comp metric as like as a guidepost for your business Yeah. David I think you have to go back further because.
If you think about it it was.
Back two years ago. So it would be if you look at a three year look now when.
When we first launched Carneous out and that was a huge hit and then we relaunched carneous order and it jumped over the original cardiac sada, resulting that we bought brisket debts that's caught up.
One on top.
Both of those years and so I think it's a two year doesn't take into account the strength and the strong comp we had in the fourth quarter back in 2019 to go back to 2019 to fourth quarter comp was by far our IR com. So I think I think a two year doesn't quite look at the whole package. When we look at the underlying trends with the exception David of the of the pricing.
Top levels after about 200 basis points related to deliberate that we took last year, we think the trends are holding up nicely.
Yes.
Thank you for that and then.
Ryan I wanted to ask about Europe.
Your commentary there sounded.
Fairly optimistic so you mentioned that you're you're seeing better.
Other than expected performance from some of the recent openings and I'm. Just wondering if you could elaborate on what changed for the recent openings and what exactly are you testing in the stage gate process and how long will it be before you make a judgment on whether whether you have the model.
<unk> network right for.
<unk> expansion.
Yes, so I would say the kind of the biggest differences is the first time, we opened our restaurants with our digital.
Many clients as part of the opening.
And also having the access point of delivery as well so.
We experimented with.
How big.
Really the seats are so all the restaurants.
Have a nice dining room, but some of the dining rooms are more like the size of our restaurants in New York City versus the size of the dining room, you might find in <unk>.
Traditional suburban outlet.
And the good news is we're seeing great results.
And both executions and.
It's great to see the power of our digital business.
With the great customized in restaurant experience, which again, so I would tell you that's been the biggest shift and then we've also gone back and put it into digital assets in all of our existing restaurants and.
We're starting to see that take hold as well so.
It's very early and a lot of these restaurants just opened in the last month or weeks.
And we're really happy with the way that it started hopefully we can continue to get learnings.
Environment over in the UK, I mean, ultimately France, where.
Covid is not putting restrictions on the business so.
I think you're right in interpreting.
Really excited about the results we've seen but it's early days and we want to make sure.
Performance ongoing not just at the opening.
Great.
Thank you very much.
Yes.
The next question is from Jeffrey Bernstein from Barclays. Please go ahead.
Great. Thank you very much.
Two questions as well just the first one in terms of specific cost outlook.
Seems like lots of attention on the commodity and labor front Jack.
I'm just wondering maybe you can share what.
What it was maybe in the third quarter in terms of inflation.
And more importantly, as you look out whether it's the fourth quarter or any kind of directional thoughts I know you mentioned, what's transitory versus what's permanent but just your.
Thoughts in terms of what it might be like as we look out into <unk> into 2020 two and then I had one follow up.
Yes.
Yes, Jeff I would say I mean listen we're dealing with the same inflationary environment that all restaurant that really all businesses are dealing with nowadays.
Some of it come from labor and I'm not talking about labor on our P&L I'm talking about our supplier labor everyone's dealing with the same kind of challenge some of it is raw material shortages as well.
So it's very hard to predict.
I would say the inflation in the quarter was not that bad it was mid single digit type inflation, but.
You've seen the same kind of lift that we have seen that there are forecast for some materials not necessarily what we're buying that are into the double digits, sometimes well into the double digits now we're not really seeing.
Seeing that I mean, we're seeing isolated spikes, but most of our ingredients are.
Okay.
<unk>.
Pressure to the upside.
And what we want to do is really.
Take a look be patient and see how much of this is really because of things like shipping like things that come in from outside this country.
The freight is extra astronomically high and the ability to get the supply we needed very very challenging. So we want to see how that normalizes, there's material materially shortages, not just with our food and paper, but also with our openings as well.
Some of that is going to normalize as well so theres a lot for us to learn definitely there is upward pressure and the thing that I would just.
Tell you is we feel very comfortable that any inflation that is affecting our margins today, we have the ability to offset it. It's just a matter of let's be patient, let's wait and see what holds and what is transitory and will make the right moves at the right time, but we'll be patient about it.
Understood and then the follow up was right on that topic.
In terms of menu pricing in the thought process in determining the right level.
I'm wondering whether your goal would be to fully protect the margin obviously, removing the the transitory, but if you felt like there were more permanent pressures is the goal to fully protect the margin or do you think about more of a long term traffic trends and maybe.
Don't necessarily take the full.
Pricing that you've cut otherwise potentially do I'm just wondering what's the thought process like maybe you've learned something with delivery. I know you took a very large increase there wondering whether youre seeing the desired result of consumer shifting to more of a chipotle site or any kind of learnings from that that you can apply to broader pricing decisions. Thanks, yes.
Jeff It's a great.
Question, and I would say that our ultimate goal. So this is this would be over the long term maybe the medium term is to fully protect our margins. Okay. We have great value. When you look at our pricing versus other restaurant companies for the quality of the food the quantity of the food and the quality and convenience of the experience.
We offer great value. So we believe we have room.
Room to fully protect the margin, but we're not going to do it quarter by quarter. So we're not going to worry about pressure out a particular quarter on the margins, we're going to watch it for a few quarters and see what happens, but ultimately our expectation I think it gets back to the first question about when we get the 3 million dollar volumes do we expect the margin to be that same kind of 27 2008 ish percent.
We absolutely do yes.
Yes, the only thing I would add to that is along those lines. The good news for US is we still have tremendous growth.
We still have a lot of work that I think can always be ongoing to drive more efficiencies and cost out of the business and then on top of that we've got this great value proposition that allows us.
Take advantage of pricing.
Once we understand the combination of growth cost efficiencies and then our value proposition. So.
That's why I think Youre hearing Jack said he is very.
Confident in our ability to at the end of the day capture the full margin and earnings possibility out of our business as we grow beyond three.
To tailor averaging of volumes.
But that's a 17% increase you took on delivery that you mentioned last quarter.
I'm, assuming something of that magnitude is having an impact in terms of shifting consumer preference or not necessarily.
Yeah.
First of all I would I would just clarify we didn't take it all at one time, we took about seven.
August we moved that up to 13% in the fourth quarter.
And then we moved it up to like 17%. So it was done in stages, Jeff. So we could see what the consumer response was we just didn't see that much movement you see a little bit of movement. We did see order had moved up a little bit, but we were pleased with the way that our.
<unk> responded and we felt strongly all along that that channel is.
Hi, convenience channel with a high cost and that channel related to bear those costs and we're really happy with the way it ended up.
Thank you.
Yeah.
The next question is.
Our consumer David Palmer from Evercore ISI. Please go ahead.
Thanks, just a quick follow up on on the price elasticity.
On delivery, particularly what do you think that was it.
What do you think the volume trade off for us.
I don't know that there was one.
As you can measure that accurately David because we we did see delivery.
But we also saw dining rooms open up as well during those periods, we didnt see much if any resistance back.
In the third quarter of last year, when we took a 7%.
When we took a 13% COVID-19.
One that I can to worsen as we moved into holiday. So there was so much noise going on it.
Hard to say, we lost a specific.
The amount of sales in delivery. So we saw some softness there, but there are other things going on as well and then of course, our latest price action.
Was happening when the economy and restaurants are opening up again, but when we look at the net.
We'll start at that at the hole.
Picture of what our overall sales were and then between channels. We're really pleased with the overall sales trends that we're happy with the way to channels that have shifted to the point where that shifting is moving back into our highest margin order ahead, and our second highest margin.
Coming into the restaurant and order so the way the way we've ended up.
Throughout.
The whole last year as we took these these these actions.
We ended up in a really good spot.
Yes, I was going to ask about that mobile order and pickup Scott.
It's got very high incremental margins I would imagine the advantage and because of labor efficiency would be quite large right now on growing because of the cost of.
Labor.
Yeah, It looks like mobile order and pickup mix, maybe moderated a little bit could you talk about that mix and if theres any plans that you have you think levers that you can pull with the database that you have to encourage that behavior, possibly help your margins. Thanks.
Yeah, you know Luckily the order ahead business continues.
To make nice progress and obviously as we open more and more Chipotle <unk>, we see that business get even bigger.
And Youre right, David the efficiency of that debt.
That order or that.
Is the best.
Margin transaction in our business. So we love opening more Chipotle <unk>.
Our marketing team our digital team they continue to drive customers to that access point.
Because it's highly convenient I think actually I just saw some numbers on this where.
Action behind from order to actually your food being ready is now less than 10 minutes in our business. So we've gotten even faster at this space to make it even more convenient and.
Just to give you perspective, a couple of quarters ago that was in the 12 minute range. So we're getting better.
As we continue to provide I think more convenience more speed.
And get more Chipotle means youre going to continue to see that occasion continue to grow in.
I mean, it's great for the business and its great for our customers.
Thank you.
The next question is from Nicole.
And with Piper Sandler. Please go ahead.
Thank you good afternoon, I wanted to ask a little bit about labor and how youre getting informed their youre. Obviously ahead of the curve on benefits, but just thinking about some of the decisions you have to make let's say if the digital make line or digital closing.
Miller.
What are you learning about the labor pool, when will you decide as some of those pressures are transitory or not and if theyre not.
What would you do to wages go up do you have to over staff.
Count for not enough bodies or is it just simply so.
So much demand.
Close it will so the approach we're taking is we're doing this team by team. So it's a restaurant by restaurant.
Approach and we're fortunate that.
We've got great leadership throughout our organization. So when you go into a restaurant that is struggling with staffing.
We seek out to understand why do we have the right leader do we have the right culture. Once we understand that we make sure. We've got the right wages benefits and people understand the true career opportunity to grow that Chipotle and what we find is once they we know we've got the right leader.
And people.
You heard it into a great culture, they understand the career growth opportunity.
We do a really good job there.
Winning that hiring competition.
And then obviously in each of these markets, we have to make sure that our wages continue to be competitive in.
This is another.
Give or opportunity that I think is unique to chipotle that we've got the ability to move if we need to on a restaurant by restaurant basis and.
Put ourselves always on a strong footing. So we never want to find ourselves falling behind we always want to be leading when it comes to attracting and retaining the best people and that's our approach.
Another Avenue.
It's really it's a simple approach we want the best people, we want to be rewarded correctly and then we want them to develop so that they can grow with us.
Thank you for that and then I think I actually lost track of price.
I think it was 10% in the quarter, but if it's going to be like 200 basis points lower.
There had too much rolling off for maybe some more came on so could you talk about price, maybe a little bit of color by month in <unk> and then for Q.
Yes.
I'll do it by quarter the call that's but it's it didn't change that much by month, either theres roughly about 10.
<unk> percent in Q3, that's going to drop to about seven 5% or so in Q4 and just to remind you guys of the component 10, it sounds like a lot. It's the 4% that we took in June to support the higher wages, it's roughly two 5% related to delivery and Thats way to based.
Our delivery business there is a national pricing that we took last year thats, two or a little bit more than two and then there is the final piece.
<unk>, which we took some feedbacks in last year or early this year when be prices started to spike spiked again, so we were behind on that as well. So those are those are the components I don't I only.
Based on it that way because all the actions we have taken.
Has been very targeted very specific and very very purpose driven and then we will move down to that seven five in the fourth quarter because the.
A good part of the delivery pricing that we took in.
The third and fourth quarter of 2020 completely rolls off into.
Break that.
Into the fourth quarter.
Thank you for that appreciate it.
Yeah.
And the next question will be from Lauren Silberman with credit Suisse. Please go ahead.
Thanks for the question on loyalty can you share any metrics on how customer spend or frequent.
Two the changes once customers join our rewards program and then I know early but anything you can share on what you're seeing with.
Chipotle exchange, an extra with cohorts youre seeing the greatest responses from.
Yeah sure so what we have.
Demonstrated over time is.
Feel better in our rewards program, our loyalty program they come more often.
And they spend more and we've definitely seen as the rewards program is also I think created another level of engagement where those before.
Before werent participating now are being influenced with the opera.
Is PBT of these different incentives right where.
I don't know if you are enrolled in our program, but youll see something like a streak.
<unk> become X number of times you get.
Bonus points the thing that's attractive about that is not everybody wants to wait to redeem.
For a full.
Opportunities entre.
And this opens the door for them to redeem faster kind of rewarded for taking action.
As we see people continuing to engage in the rewards program. So.
We continue to work really well.
Good.
Take advantage of new users medium.
Ciders are heavy users that want to engage with the brand and then we're able to influence their behaviors, resulting in more frequency and higher ticket.
Definitely enrolled in the program one of the best.
Okay.
On the asphalt.
Are you seeing the greatest challenge.
User with.
With creating new staff retention and any differences that you can call out in the labor environment across the market.
Yes.
Yeah, So I.
I would say it kind of ebbs and flows.
This is unfortunately the cycle when the restaurant gets understaffed.
He.
Charter job for the individuals that are working there. So we work aggressively to go recruit train. So that we do retain those that are with us and I would say the greatest challenge has been.
When kind of the.
Dining rooms reopened.
We need to staff up quickly.
In terms of money.
To catch up with the demand and.
That was harder than we had hoped but luckily I think we took a lot of the rate actions, where we've got a lot of our restaurants now good footing and now we have these scenarios where things pop up and you have to deal with it accordingly, whether it's exclusions as it relates.
Quickly or kids going back to school.
Youre in kind of the normal course of having to make sure that you're always recruiting and then we've got to make sure. We're getting people trained up theyre being successful in their job.
They stay with US and then ultimately they are.
<unk> able to hopefully get a general manager job in progressing.
Into our organization to above store leadership as well so.
Our focus has been on making sure that we're getting these restaurants staffed and trained correctly because thats the best remedy for retention.
Thank you guys.
And the next question is from Chris O'connell.
Cole with Stifel. Please go ahead.
Thanks, Good afternoon guys.
My question relates to Chipotle and I was hoping you could provide some color on the average volumes margin and investment in that format versus the traditional format.
And my second question is that given the chipotle and format really unlocks the use of different.
Real estate sites, how much does the format increase the domestic unit potential of the brand.
Yeah, Yeah listen I'll start with the performance. The Chipotle is typically open up somewhere in that 10% to 15% range higher on sale their margin obviously is higher for two reasons.
Different one because the sales are higher and we know that our higher volume restaurants flow through a higher margin and then there's also the efficiency that we've talked about we're much more of the digital business first of all the digital business is usually 10% to 15%.
Higher so if we're doing 45% so say in a non chipotle and we'd be doing.
<unk> five or higher.
In a chipotle and it skews towards order had our highest margin transaction. So the return is much much better the incremental investment costs generally is going to be about $75 85, something like that so with those kind of sales and those kind of higher margins and it's by far.
<unk> return in terms.
So chipotle chipotle in the typical restaurant that Youll see open up its not any smaller than a typical restaurant. So it doesn't take a different footprint. What we are experimenting with though is a smaller footprint with a chipotle.
Where we might be able to go into a scene location at the same location would be where you have got to.
Two restaurants already.
<unk> could be very very high volume restaurants, and there just isn't really enough room to economically he put our third restaurant in between those two well if you can reduce the footprint, which reduces the rent reduce the investment cost and because we have higher margins with chipotle and because customers more than 50% of them want to go.
At Chipotle and order ahead and pick up well, it's mostly digital and almost half of that is order ahead and pick up.
We do have an opportunity to economically to drop in a restaurant in between those two.
Those two high volume restaurants, we're in the early days of that which is experimenting with that but we think that that's got some legs going forward.
That Chris would be incremental those would be deals that we wouldn't have done without the chipotle format.
Just as one follow up I know digital only chipotle. They are still in the testing phase, but does that format potentially allow you to have a much broader menu with items more maybe more difficult to execute than you could in a traditional format.
Go through definitely allows for some additional.
Innovation on the menu.
As evidenced by our <unk>.
So thats something that I think our culinary team and our marketing team continuing to take a look at it.
Regardless, though you want to.
The only thing that's great about Chipotle is people can get.
I mean organization that they won.
And also that we can provide it.
Really exciting speed and so we just we have to be careful that we don't create complexity that slows us down even even in the digital channel, which look the digital channel that gives us some additional flexibility, but I love. The fact that we're now closing.
The comfortable being able to order off premise have their food ready to be there and less than 10 minutes.
That's that's really exciting for us so.
We're going to keep an eye on the throughput for digital.
I think we keep an eye on the throughput on our frontline. So it definitely opens the door for some things I just want to make sure.
Yeah.
Do you understand that at the end of the day, we still want to have great speed.
Even in our digital business.
Understood. Thank you.
Yes.
And the next question comes from Jared Garber with Goldman Sachs. Please go ahead.
Thanks, and I appreciate all the commentary on top line growth and margin.
In on specifically I wanted to switch topics, a little bit and think about unit growth here.
It seems like the unit growth number in the quarter came in a bit lighter than some of your expectations, but you maintain that full year guide just wondering if you could comment on on the construction and the permitting environment and what youre seeing from that perspective.
If there is any risk that some.
<unk> for units need to get pushed out into next year.
Yes, Jerry.
I made a few comments in the prepared.
Comments as well, but.
It's a challenge it's a challenge in all the areas you just mentioned, it's a labor challenge for our contractors and the subs at a material challenge.
And that's all.
These netting challenge. It's one reason why we mentioned that even though we've opened we've opened 137 restaurants. So far we've got about 110 or over 100 restaurants are under construction.
There is not a risk that we won't get to 200 opening I don't think there is a risk that we won't get to or beyond 200.
But more than a previous.
Also a <unk> than a typical year.
There is timing risk in that and so I think we will get to that 200, plus but I think it gives you an idea of how robust our pipeline was without these timing risk we would have been well beyond 1200, alright, well beyond the 200 for next year I also mentioned that we've got a very robust pipeline. So the good news here is our pipeline is really really.
Here more strong we're doing everything we can to try to work through the timing issues like we're preordering supplies for example, so that we.
We're not going to run out because we're preordering things, we're doing everything we can to work with our contractors, but if they have short labor or if they have exclusion because people are exposed to COVID-19.
Construction site.
Shut down those are those are things that are just unavoidable.
Navigating as best we can through that but most important is the pipeline is really really strong the quality when we open up these restaurants.
Really really good so it gives us great optimism and the timing issues were just going to navigate the best we can.
Thanks, I really appreciate the color there and then just one more sort of on that I know you are.
Really really holding off on giving 'twenty two guidance in terms of unit growth, which you typically do in the third quarter, but fully understand the volatile environment there.
If you were to think about sort of a normalized environment without without some of these timing issues and especially as it relates to kind of the very healthy cash balance you have is there any reason that.
Outside.
Again, COVID-19 specific or supply chain impacts, we shouldnt be starting to think about accelerating levels of unit growth in 'twenty, two and maybe even 'twenty three and beyond.
Yes, listen our pipeline will support that acceleration. So then it really does come down to timing and it's not just about the capital I mean, just because we have the capital doesn't mean will accelerate.
Right, but it's a combination of good sites are available the openings are strong we're getting now to 75% of our new openings, our chipotle, which you heard us talk about the performance there and so there's every reason to continue to invest in the success and so you definitely will see some acceleration.
Awesome. Thanks, so much.
Outside next question is from Jon Tower from Wells Fargo. Please go ahead.
Awesome. Thanks for taking the questions Ive got a few so just a clarification first on the fourth quarter same store sales guidance right. Now are you guys trending towards the higher end of that range, given youre expecting some mixed shift lower as well as some pricing rolling off.
Yes October.
October results are good so far so we didn't see a falloff at all in October.
But.
In terms of the range Theres a lot of uncertainty going on and we still have two five months to go so I'd hate to I'd hate to want to be more specific at this point.
Got it and then just go into the.
I think quest.
<unk> earlier or some of the labor challenges you alluded to in the press release and on the call, but did that impact same store sales.
Specifically throughput at all during the quarter.
I mean look obviously.
Fully staffed restaurants, outperforms and understaffed restaurant, one of the things Thats.
Terrific for our business, though is the fact that we have most of the digital make line and the frontline we're able to flex that digital make line. So that we can keep the integrity of our frontline experience. So.
We never have to close our restaurants.
And what we're able to do is then.
Allocated accordingly, and the other thing that we've learned that's another benefit of this digital business is.
You know.
We have restaurants within a couple of miles of each other and delivery doesn't get impacted if you ship in one restaurant to another so if we have to.
Throttled back our digital business and one restaurant, because we were a little light.
Staffing.
So that we can keep the frontline running smoothly.
As we get another restaurant right around the corner that is able to fulfill that digital order.
So we don't see a lot of drop off in the business that way, but.
At the end of the day I wish all of our restaurants were fully staffed and I know we're missing sales.
Sales because not all of them are fully staff. So there is still upside in getting our staffing.
<unk> solved in every single restaurant. The good news is we're in really good shape for the majority.
We already have our restaurants, our teams have done a phenomenal job and it's going to be something that we're going to continue to work hard in.
It's one of those things, where it's not going to get any easier.
Therefore, we have to continue to get better at recruiting training and keeping these restaurants staffed so.
We're fortunate that we've got these two businesses and we've got the flexibility.
But I wish every restaurant staff that would be a better job for everybody and it would be a better experience.
It's a customer.
Got it. Thank you and then just one more follow up on the pricing decision.
Can you walk us through how youre thinking about the fourth quarter or maybe it's not even in the fourth quarter, but in terms of taking incremental price from here is it believes that.
Youre going to see protein inflation.
Well into 'twenty.
<unk> for two and therefore, it makes more sense for pricing to be taken now or I guess can you walk us through the thinking around why or why not to take any more pricing sooner rather than later.
Yes, I think the one thing Jack mentioned this as we traditionally always look at.
We want to approach pricing.
Next year in the fourth quarter.
One of the things. We're obviously evaluating is where is labor going to land not just in our restaurants, but across.
One of our suppliers, we don't see wages as one of those things thats temporary and going backwards now there's other things like free.
And some of those things, where we think those are more temporary so we just wanted to understand where those things are.
And the good news is we've got a great value proposition. So that if we realize we need to take a little more take a little less we have the flexibility to do it and then when you marry that up with all the growth that we have in this.
<unk> for this.
We don't want to get ahead of the pricing if we don't need to.
We're not afraid to use.
You know and we've demonstrated that if we need to take pricing we will in the business has the pricing power to do it but we want to make sure.
We're taking pricing because it's stuff that's permanent.
That stuff that's temporary and we also want to think about how we blend that with all the growth and other cost saving initiatives, we've got going on.
Got it thank you.
And our final question today will be from Dennis Geiger with UBS. Please go.
Go ahead.
Great. Thank you Brian I, just wanted to ask a little bit more on some of the key incremental drivers of sales growth or maybe the coming months and quarters. Just curious based on what you've said it if it's kind of fair to think about incremental benefits from a few I guess, including that dining room traffic goes from 80%.
100, <unk> at some point digital cells remain incremental in that scenario, obviously, the additional pricing that you just spoke to you know I guess stepping up and then maybe the efficiency from from the crews and just getting better is starting from traffic comes back curious if it's if it's kind of fair to think about all of those as incremental from here and then if there's any others that you would that.
Could you call out kind of above and beyond everything that that's been working and supporting momentum to date. Thank you.
Yeah sure so look I definitely think.
You touched on a lot of them, which is we still have opportunities for better throughput honor frontline I just mentioned that we're continuing to get faster on our digital business.
So just running the operation to your point as we continue to get more fully staffed with more trained well developed people executing against the three.
Pillars of throughput that we know we need to execute there is upside in the business. There there's also upside in.
The strategies.
<unk> find in the beginning of the conversation today, which is we're going to continue to take advantage of our huge and growing rewards program.
We've got we're closing in on $25 million or $24 5 million.
So that's like a 40% increase versus where we were a year ago at this time so.
Obviously, you're not going to continue to grow at that clip that database, but we are growing as our capability and taking advantage of that database to drive behavior engagement and commitment to our business absolutely. We'll continue to smartly use menu and culinary innovation.
So that's not going to stop and.
When you think about our access that we're providing to people I think our value proposition is going to really shine through going forward.
I just think that's another huge advantage even.
As I look around I.
I would put our chicken burrito is up against a lot of food out there.
<unk> and.
When you start to look at where pricing is going on a lot of their menus.
Our value proposition I think what's even more compelling so.
Don't know what that's worth but what I do know is I like being in a position of a really strong value proposition.
Going forward given the environment that I think we're all going to be facing.
Great. Thank you.
Ladies and gentlemen, this concludes our question and answer session I would like to turn the conference back over to Brian Nagel for any closing remarks.
Yes, Thank you and thanks, everybody for joining the call and thank you for all the questions. Obviously very proud of our results for the third.
Third quarter, and I think it speaks volumes to our strategy, our culture and our ability to commit ourselves to great execution in a constantly evolving environment.
I continue to be very optimistic about our ability to get to $3 million plus <unk> with really.
<unk> impressive.
Earnings growth behind that.
So I'm very confident that we are focused on the right strategies. There's a lot of growth in those strategies and then I love what our innovation pipeline is looking like whether it's experimentation in new assets.
Cost opportunities international.
Our national Theres, just a lot of growth in our business both in the U S from a new unit standpoint, as well as average unit volumes and then as you think about the model that we take outside the U S. So very proud of the team a huge thank you to them again.
It's been it's been a challenging environment.
I think we're demonstrating the strength of the Chipotle culture. The Chipotle purpose. If you don't have those things I don't think you'd get the results that our company, we're able to achieve in the most recent quarter. So thank you again for taking the time and.
We will talk to you next quarter.
Care.
The conference has now concluded.
Thank you for attending today's presentation you may now disconnect.
[music].