Q1 2022 Chipotle Mexican Grill Inc Earnings Call

Okay.

Good day and welcome to the Chipotle Mexican Grill first quarter 2022 results conference call.

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I would now like to turn the conference over to Adam Rimer VP of Finance. Please go ahead.

Hello, everyone and welcome to our first quarter fiscal 2022 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 Taco.

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 our Form 10-Q s for a discussion of risks that may cause our actual results to vary from the 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.

With that I will turn the call over to Brian .

Thanks, Adam and good afternoon, everyone before I share our first quarter results I want to express my gratitude for the 3200 outstanding General managers and field leaders that attended our all managers conference in Las Vegas last month.

Our first time together in nearly four years, allowing us to celebrate our general managers as well as inspire and learn from one another as we codified our 2022 strategic priorities. It truly was great to be back together again.

Chipotle is performance in the first quarter was strong despite challenges from the omicron Varian for.

For the quarter sales grew 16% to reach $2 billion, driven by a 9% comp.

In store sales grew by 33% over last year digital represented 42% of sales restaurant level margin was 27% a decrease of 160 basis points year over year adjusted diluted EPS was $5.70, representing six 3% growth over last year.

And we opened 51, new restaurants, including forty-two Chipotle.

Although our restaurant margins remain bumpy two due to inflation, we have the ability to be patient while costs are volatile.

And the growth in pricing power to recover our margins over time.

And I'm pleased to report that Q2 is also off to a strong start fueled by POI overshadow, our most popular new protein to date.

Our five key strategies continue to position us to win today, while we create the future. These include number one running successful restaurants with a people accountable culture that provides great food with integrity, while delivering exceptional in restaurant and digital experiences number two sustaining world class people leadership by developing and retaining diverse.

At every level number three making the brand visible relevant in love to improve overall guest engagement number for amplifying technology and innovation to drive growth and productivity at our restaurants and support centers and number five expanding access and convenience by accelerating new restaurant openings.

Let me provide a brief update on each of these strategies starting with restaurant operations. Our people are our greatest asset and well trained and supported employees preparing delicious food served quickly equates to an excellent guest experience. We're currently focused on improving our throughput as our sales continue to increase throughout the spring and our in restaurant business.

Continues to grow.

Recently I was in Denver at our sixth and Broadway location, which opened in March of 2000, and I met to employees, who have been with this restaurants since the day. It opened so that's 22 years.

We're training our new team members online demonstrating how to execute with excellence and speed. It was incredible to see our teach and taste chipotle value being brought to life, we know throughput a foundational element of convenience that our guests value is an opportunity for us and we are committed to teaching training and validating the five pillars of throughput everyday during ever.

We shift to ensure we meet our high standards and provide a great guest experience we have daily goals in place for the number of entrees per 15 minute period on the front make line and promised time execution on the digital make line. These goals are now included in the restaurant manager and crew bonuses to better drive performance and accountability and both measures improved during the quarter.

We are also in the process of rolling out a new scheduling tool, which will help ensure the right people are in the right positions at the right time.

I believe that we're finally getting back to pre pandemic operations and I couldnt be more excited we've been intentional in our recruiting efforts and we have made investments in our people we offer a world class employee value proposition that includes industry, leading benefits attractive wages specialized training and development access to education, and a transparent pathway to significant crude.

Our advancement opportunities. We believe these efforts are helping to attract and retain great employees as our staffing levels are better today than they were in late 2019.

We are constantly looking for ways to be better at training and development with that in mind, we have enhanced our training and development programs recently rolling out an AI based learning management system, the Spice up which offers immersive learning and development opportunities and upscaling for future roles for all employees. We believe our team members are today will be our leaders tomorrow and we were.

We're looking for them to grow with us opening 8% to 10% new restaurants per year means we need more crews more G. M's Moorefield leadership in fact team members can advance the restaurants, who are the highest general manager position in as little as three and a half years with the average compensation of $100000, while leading a multimillion dollar growing bid.

And it doesn't stop there a G M can become a certified training manager a field leader a team director and a regional Vice President in fact, we just recently promoted an individual to regional Vice President who started as a crew member and he's the second one of our regional Vice presidents to share this incredible career trajectory.

Our marketing team continues to do a tremendous job of keeping chipotle relevant in culture driving difference as well as transactions, we continue to leverage both traditional and non traditional media to increase awareness and amplify the brand may have seen our knowing tastes better television campaign, which highlights chipotle is real ingredients like antibiotic free chicken.

[noise] freshly prepared food like our hand, mashed guac and features our real team members. Additionally, we remain a leader in the digital space with our latest Chipotle meta versus experience that locks on national Burrito day, garnering more than 4 million game plays in the first week.

From a product innovation standpoint, we generally introduce two to three new menu items per year, using a disciplined stage gate approach to innovation. These new product introductions are extremely effective as they bring in additional customers drive frequent drive frequency with existing users and increase check while giving us an opportunity to create buzz around the brand.

<unk> was our first chicken innovation in 29 years and the reaction has been outstanding in addition to adding new variations to our health oriented lifestyle bowls in January we also attracted new guests with our plant based Cerrito limited time, offering which proved that you don't have to sacrifice flavor or food with integrity to enjoy a vegan or vegetarian protein.

And we're far from being done we've got an exciting new menu item that will start testing in the coming weeks, which I think guests are going to love and we have a robust product pipeline for the remainder of 2022 and beyond.

A key part of guest engagement is our Chipotle rewards program, which now has nearly 28 million members. We recently celebrated the three year anniversary of the program by Relaunching Guac mode in.

And exclusive benefits for Chipotle rewards members that unlocks access to surprise freak walk rewards throughout the year, which resulted in our highest social engagement of all time and loyalty enrollments up 35% week over week.

We continue to leverage our CRM sophistication by focusing more on personalization and using predictive modeling to trigger journeys that can influence guest behaviors as well as make their experience with chipotle more relevant for them. This approach uses personalized messaging to learn more about an item to guests as previously ordered view their ordering preferences.

Or to see their cumulative real food print, which is a guest potential environmental impact based on their order history, we're constantly learning evolving and optimizing to drive more frequency with rewards members. We are pleased with the progress to date, but believe we will get even better over time.

Our ability to share relevant personalized communications with our guests will ultimately deepen the relationship between rewards members and the brand.

Our digital sales remain a big part of our business due to it being a convenient frictionless experience that has been enhanced by continuous technology investments to improve operational execution on average it only takes about 10 minutes from the time of guests places an order until it's ready for pickup which is simply outstanding.

<unk> also continued to outperform non chipotle locations due to the convenience, which is encouraging since digital order pickup is our highest margin transaction.

We continue to look for ways to increase access and convenience through alternate restaurant formats digital only menu offerings and leveraging our large and growing loyalty program.

As a people first company, we are investing in human capital technology to enhance the team member experience in our restaurants, creating a more efficient consistent and compliant environment. We recently rolled out a new labor scheduling program as well as began testing radiofrequency identification technology to enhanced traceability and inventory systems also in test.

Autonomous kitchen assistant chippy that integrates culinary traditions with artificial intelligence to make tortilla chips and our cultivate center innovation hub. Our goal is to drive efficiencies through collaborative robotics that will enable chipotle team members to focus on other culinary task in the restaurant, we will not sacrifice quality in Deliciousness weird.

We're going to place chip you know southern California restaurants. Soon so we can leverage our stage gate process to listen test and learn from our crew and guest feedback before deciding on our implementation strategy.

To accelerate our strategic priorities, we recently announced that we created a new venture fund called cultivate next to make early stage investments into strategically aligned companies that further our mission.

As a digital disruptor, we're looking to support early stage companies that are forward thinking and will enhance our employee or guest experience advanced our food with integrity mission and perhaps revolutionize the restaurant industry.

Our last strategic pillar is to expand access and convenience, which today is still a top request for consumers and less than 30 years, we reached 3000 restaurants with over half in the last 10 years, we are relentless in our pursuit of bringing food with integrity to more communities weren't even halfway to our goal of reaching 7000 restaurants in North America and are building a real estate.

The plan that will accelerate new unit growth in the range of 8% to 10% per year with more than 80% of new restaurants, featuring a chipotle or digital order drive thru pickup lane continues to be a favorite among guests, giving customers more easy ways to access chipotle.

Yes.

Last week, we issued Chipotle is 2021 sustainability report update which highlights our commitment to people food in animals and the environment.

We've been tied a portion of our executive compensation to achieving various goal was to ensure we held ourselves accountable for making business decisions that cultivate a better world. The report talks about how we invested in our people supported our communities and work to reduce our environmental impact.

Proud of the strides that we've made to showcase real meaningful action and measurable change in closing none of the results that I've shared with you today would be possible without our world class teams I want to thank our employees in the restaurants field teams and support center staff are constantly pushing the boundaries of what's possible.

As I mentioned at the start we just brought together 3200 of our general managers and field leaders and hearing their ideas passion and enthusiasm for this company convince me more than ever that we have the right people and the right strategies in place to position Chipotle for accelerated growth in the years ahead.

With that here's Jack to walk you through the financials.

Thanks, Brian and good afternoon, everyone sales in the first quarter grew 16% year over year to reach $2 billion as comp sales grew 9% restaurant level margin of 27% decreased 160 basis points compared to last year and earnings per share adjusted for unusual items was $5 70, representing six 3% year over year.

Growth the first quarter had unusual expenses related to our previously disclosed 2018 performance your modification transformation costs as well as restaurant asset impairment and closure costs slightly offset by a reduction of legal expenses, which negatively impacted our earnings per share by 11, leading to GAAP EPS of $5 59.

As we look to the remainder of 2022, there remains uncertainty from macro economic impact as well as COVID-19 that make it difficult to provide full year comp guidance comps in April so far continued right around the same 9% we saw in Q1 and while it's difficult to predict the comp in Q2 due to these factors assuming current sales trends continue we expect it to be in the 10.

Percent to 12% range as we expect the comp to increase throughout the quarter.

Our restaurant level margins continued to be impacted by unprecedented levels of inflation I Q1 margin was impacted by a higher level of commodity inflation than we expected primarily from avocados tortillas and dairy, resulting in a Q1 margin falling below the nearly 22% guidance. We provided on our last earnings call to offset these rising costs, we increased menu prices over 4%.

At the end of the quarter.

And looking ahead to Q2, we expect our restaurant level margin to be around 25%, which will benefit from a full quarter of the new menu prices and assuming we don't see additional inflation above our current estimates.

I'll go through the key P&L line items, beginning with cost of sales.

Cost of sales in the quarter were at 31% an increase of about 100 basis points from last year costs were higher across the board, but most notably beef avocados and paper and more than offset the leverage from our menu price increases.

Additionally costs for avocados, tortillas, and dairy increased during the quarter and in Q2, we expect our cost of sales to remain near 31% as the benefit from our menu price increase will be offset by a full quarter of these elevated cost layer.

Labor costs for the quarter were 26, 3% an increase of about 140 basis points from last year. This increase was driven by our decision to increase average wages to $15 per hour in may of last year, which was partially offset by menu price increases in Q2, we expect our labor cost to be in the mid 24% range due to leverage from our menu price increase.

As well as seasonally higher sales.

Other operating costs for the quarter were 16, 4% a decrease of about 50 basis points from last year. This decrease was driven by menu price increases as well as a decline in delivery expenses, partially offset by higher costs across several expenses, most notably utilities, including natural gas.

Marketing and promo costs for the quarter were three 5%. The same level. We spent last year to support plant based chorizo as well as the launch of <unk>.

In Q2, we expect marketing cost to shut down to the mid to high 2% range with the full year to remain around 3%.

In Q2 other operating costs are expected to be in the mid 14% range.

G&A for the quarter was $147 million on a GAAP basis or $144 million on a non-GAAP basis, excluding $3 million related to the previously disclosed modification through 2018 performance shares and $1 million related to transformation expenses offset by a $1 million reduction related to legal settlements.

It also includes $101 million in underlying G&A 'twenty.

$20 million related to noncash stock compensation $6 million related to higher performance based bonus accruals and payroll taxes, and equity vesting and exercises and $17 million related to our all manager conference.

We expect our G&A underlying G&A to be around $104 million in Q2, and continuing to grow slightly thereafter, as we make investments in technology and people to support ongoing growth we.

We anticipate stock comp will likely be around $27 million in Q2, although this amount could move up or down based on our performance.

We also expect to recognize about $5 million related to performance based bonus accruals and payroll taxes on equity vesting and exercises, bringing total G&A in Q2 to around $136 million.

Depreciation step up in the quarter to 17 $72 million as we accelerated depreciation for several in store Tech items. We plan to upgrade this year for example, adding contactless payment for our in restaurant guests as well as for Remodels or relocations that will expand our chipotle footprint.

We expect depreciation to remain at an elevated level for the next few quarters.

Our effective tax rate for Q1 was 16, 7% for both GAAP and non-GAAP and both rates benefited from option exercises and share by staying at stock prices above their grant values for fiscal 'twenty 'twenty. Two we estimate our underlying effective tax rate will be in the 25% to 27% range, though it may vary based on discrete items.

Our balance sheet remains healthy as we ended the quarter with $1 $2 billion in cash restricted cash and investments with no debt along with a $500 million untapped revolver.

During the first quarter, we repurchased $260 million of our stock at an average price of $1490. We.

We increased our level of stock repurchases during the quarter when our share price fell with the over what the market overall, and we will continue to opportunistically repurchase our stock.

We opened 51, new restaurants in the first quarter of which 42 had a chipotle and the performance of our choke Chipotle continues to be strong driving our new store productivity to record levels.

The development team continues to do a tremendous job delivering new restaurants. Despite the many issues, we're facing including construction labor shortages permitting delays and raw material and equipment shortages.

Although these issues have lengthen the timeline of our new restaurants, our pipeline continues to be strong and we expect to open between $235 and 250, new restaurants in 2022 with at least 80% including at Chipotle.

Let me add by expressing my appreciation to our over 100000 team members in our restaurants and field leadership teams and in our restaurant support centers for their efforts to serve and delight. Our guests I was thrilled to see our general managers and field leaders at our all manager conference last month and personally thank them for their dedication and hard work over the past several years and share with them the opera.

Community that they all have as we grow up on 3000 restaurants to 7000 restaurants in the years to come with that we're happy to take your questions.

Yeah.

We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone if youre using a speakerphone. Please 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.

And the first question will be from Nicole Miller with Piper Sandler. Please go ahead.

Great Good afternoon, and thanks for the update them if I could just ask two quick ones.

I guess, both really centered on first on the topline.

If the comp is set to improve them through the quarter is it basically saying you haven't seen any pushback on price and if I'm looking back a year going to kill it looks like traffic comparisons ease like as you exit the quarter is there anything else is that what's going on is and is there anything else you have to take into consideration.

In terms of a digital influence or a party size influence around mix shifts.

Yeah, I mean, obviously.

What we've seen is very little resistance to the pricing so far.

And you know in regard to.

Kind of entrees per ticket as our in store business goes up.

You know I think it was up like 30, some odd percent.

This quarter and kind of digital is held as a percentage.

You'll see some shifting a number of entrees per ticket.

The in store occasion is more of an individual location in the digital age.

Alright, So you give that's where you see a little get back in the next shift right is around an individual order essentially versus a big party order.

Okay.

Nicole.

These actions actually are up even though we had pricing that was in that about 10% range, our transactions were up 5%, but our check it down 6%, partly because of group size, which is the shift from digital to the in store that that Brian talked about and then also with digital you tend to have attachment rates that are a little bit.

Higher with things like Queso Avocados extra me now we're also comparing against <unk>.

The far right from last year as well. So those are all the things that drove the truck count, but trying to underlying transactions are healthy and the price increase.

It's sticking just as expected we don't see any resistance.

Okay, and so just a second and last question I mean that that's exactly what we'd be looking for any weakness you would observe in the consumer on price or other behavior and it's really just a reconciliation of the in store I could see one of the criticisms down the road.

Consumer does weekend or the macro whichever way you want to take it I'd be curious if your underlying assumption with the development going to be a record setting year. You don't have franchisees that slow you down you don't have landlords are lenders that slow you down. So if you feel the pressure on the consumer will you slow that development purposely to lower end of the range or will you just keep pushing through.

No I mean, our plan is to grow and we think the strategies that we have and the results that we're getting.

Give us a lot of confidence to stay the course on our growth plans.

No I would just add I literally just had a conversation with her bathroom, who heads up our real estate, we had a leadership meeting and she is out in the field with our teams and we had that conversation, saying listen there's a lot of noise going out there. The market is under stress interest rates are going up.

But no matter what happens out there we have a strong balance sheet, we don't have strong economics and we're in this for the for the long haul so I'll make sure your T realize.

We're not slowing down if anything if there's opportunities because others do pull back let's take that as an opportunity to go faster not slower.

Thank you.

Yeah.

Okay.

Thank you and the next question will come from David Tarantino with Baird. Please go ahead.

Hi, Good afternoon, Jack I, just wanted to come back to the Q2 guidance for for my first part of my question could you just explain why the comp you expect to get better as the quarter goes on is it strictly related to comparisons or is it something else.

There's a lot going on David comparisons a lot of it you know Easter shifted we see a nice seasonally ship right after Easter and we and we saw a.

A nice shift this past week Easter last year was in the first week. It was like the third or fourth. So it was two weeks later, so we definitely saw that step up which gives us confidence that now we're in kind of a normal.

First Easter phase in the last week or so since Easter.

Easter is behind US we are seeing that step up we're seeing the full flow through of the menu price increase and we take those sales trends and then project out through the rest of the quarter. It gives us confidence that we're going to step up from the approximately 9% that we've seen so far month to date in April up to that 10% to 12% guidance range that we gave.

Got it Okay. That's helpful and then.

I wanted to come back Brian to your comments about throughput I guess this is one of the first.

Calls you've highlighted that as a big opportunity and a while could you maybe give us a framework for where you are on the metrics, you're you're tracking versus where you used to be I guess prior to the pandemic I guess to frame up how much opportunity there is to to really.

Drive better throughput and potentially better sales through that through that attribute.

Yes sure so.

If you kind of go back just to kind of set kind of a like a range for you.

In our past time period, we were kind of in the low thirty's.

15 minutes peak.

And then I think you heard me talking about this before the pandemic.

Targeting to get back to the mid twenties high twenties, and we're making a lot of great progress, where we're closing in on the kind of mid twenties.

And now where we are is we're closing back in to get back to those mid twenty's, So still a lot of headroom.

Where we can grow from here, but the thing thats been really nice shoes as we've gotten stability in the teams and restaurants are staffed and we are seeing performance and throughput and we're also seeing great performance in our digital make line of being on time and accurate so.

Lots of opportunities on both of those but you kind of give you the gauge we're kind of in the mid twenties on.

Throughput and we'd like to get closer to 30.

Sooner rather than later, so lots of work to do lots of opportunity, though with it.

Great. Thank you.

And the next question will come from Andrew Charles with Cowen. Please go ahead.

Great. Thank you Jackie if we look out past the commodity and labor inflation, that's weighing on the industry. In 2022, you guys had previously talked about 27% plus margins were $3 million volumes are reached.

Is it still realistic is it still realistic level that could be reached without having taken outsized level of pricing.

Yeah, Andrew listen, we still can get to that level I mean, the question is.

When and how lumpy is it going to be between here and there I mean, it just really has been the most difficult period I've ever seen in terms of commodity month to month quarter to quarter, but we know that.

We told you in our guidance, we shared that we expect to get back in the mid 20% range and based on that volume to go from the current volumes and a $2 $7 million range up to 3 million.

Most of the flow through most of the gap from the mid Twenty's to get up to 27 will happen from flow through and I think there's gonna be other efficiencies that we find along the way again in a normal operating environment I still think the 27% gives them play at that kind of volume.

Super Thats very helpful. And then Brian I know, we're talking a lot on this call as dining rebounds about priorities in place before the pandemic such.

Such as throughput.

One question I had for you just on catering could you talk about the opportunity there and how chipotle is positioned to seize on that is as gatherings are happening I know may is obviously a high volume month for you guys for catering given cinco de Mayo given graduation parties, how chipotle setup to capitalize on this opportunity.

Yes look it's a great question and I think it is.

Great opportunity for us the good news is we're already seeing catering interest come back.

And you mentioned you kind of got kind of the key events for our group gatherings coming up with graduation season.

The team has done a great job I think of making our digital process a much easier process for.

For people to do the catering and then we've got a team focused on how we continue to drive those group occasions going forward.

We think there's upside for sharing it.

To see the consumer coming back to the occasion and I think we're well positioned to continue to grow in that space.

Very helpful. Thanks, guys.

And the next question will come from Jared Garber with Goldman Sachs. Please go ahead.

Hi, Thanks for taking my question my questions.

Related to the Labor line I wanted to get an update on where you are I guess, our staffing levels and maybe I don't know if that's the way to frame that is versus pre COVID-19 or maybe.

More appropriate as where those staffing levels are versus how.

How you're expecting them to run right now given the level of volume in the business and then a follow up on that we saw last week in one of your releases that.

Turnover was high I mean, I'm sure it with you as the entire industry, but I'm just wondering if there's any way to frame, maybe how much incremental labor costs flowed through the system last year and are still are flowing through the system given some of the incremental training costs and maybe some lower productivity from from new employees.

Yes so.

The first part of your question.

I'd say the good news is we're in the call it 85%, 90% of restaurants being staff that model.

Which is really tremendous.

We will always want to strive for 100%, but being that 85% to 90% range is really something that you know which is better than we were pre pandemic just to kind of give you a gauge prepaying down for probably more than the 80% range.

Going forward one of things that we're really happy to see actually is at the manager level and above.

Seeing more stability.

So we're seeing less turnover take place there usually how that works and is that cascades into the CRU.

You are coming up on kind of a season, where you've got some transition just with kids coming out of college and.

At the end of the school year for people, it's just a shifting peoples.

Habits.

So we do see some.

Amps in kind of turnover at that timeframe, but I really think we've got a lot of strain in our management leadership and when you have strengthened the management leadership that cascades into the CRU. So we're liking how we're set up for kind of coming into the spring summer season.

Okay.

Great. Thanks, and then Jakob I'm not sure if there's anything on just thinking through labor productivity in the stores as we think about the margins for the balance of the year and go forward.

Yeah, I would I would say we're in it.

I'd say, a normal operating environment environment, meaning are our turnover is normal at the crew level, it's better than normal for the past few years. The manager level. So that means we always have hours built into our P&L for training.

And that works as long as you have a few people a month that you're bringing on.

In terms of new crew to train now during a time like last year at about this time, when we were losing more people our turnover was up and it was harder to retire that would put a lot of stress on the system put a lot of stress in terms of training for a lot of stress in terms of overtime.

There are stresses not just from how the team's performing the customer experience, but also the stress on our P&L and I would say we're back to business as usual right now so I think other than the inflation that we've already taken on the labor line I think going forward in terms of the training the turnover exclusions, you know knock on wood seem to be largely behind us with Amazon.

It's business as usual with our our hiring training and.

Leading our crew.

Very helpful. Thank you.

Okay.

Thank you and our next question will come from John Glass with Morgan Stanley . Please go ahead.

Thanks, very much first as Paul where did wage inflation fall in the first quarter. Some of some of your competitors are starting to talk about some stabilization of wage growth. So it's not and it's getting better but the rate of inflation starting to cool off are you are you experiencing that or and or is it still an inflationary meaning accelerating.

A quarter over quarter or month over month.

No. It was it was normal Johnny was more in kind of that mid single digit kind of range. I mean, remember we took that big step up that 15% range back on the second quarter and so it's been more than normal range, but on top of the 15, we already took.

Thank you.

And Brian you mentioned automation and this chippy robot or whatever it is that it makes chips, how big an opportunity do you see this I understand these are longer term bets, but is there a how big an automation opportunity insert within Chipotle is this something that could have a meaningful impact over time on store margins are there more task.

Youre looking at to automate or was it sort of a one off and kind of an interesting thing to test.

No look I think there's a real opportunity.

Frankly to make the restaurant being much more efficient.

Obviously chip use our first.

Attempt.

And we've worked with a lot of our employees to identify what are the tasks that they would love to see us bring automation to ore.

So that hopefully the role can become.

Less complicated.

And then I think there's just other places in the back of the restaurant, where we have the ability to automate.

It's on the digital make line or other tasks.

There's just tremendous opportunity for us to become even more efficient where it results in a better employee experience and also a better customer experience and that's really the lens we are using on this.

And do you think that's years away or quarters away and what's the.

If you look at where the technology is today, what's the time horizon, which just starts to really materialize.

Look I think the technology is very close in.

The ability then to scale it and get it installed.

That's what we have to learn and you know.

We're getting ready to put <unk> into a restaurant and then we've got a lot of other initiatives and works at our cultivate center.

So the technologies actually closing the prototypes are close and it's been putting it through the stage gate process and really understanding people's ability to scale up.

And then actually install.

It performs the way, we think it's going to perform.

Okay. Thank you.

The next question is from David Palmer with Evercore ISI. Please go ahead.

Oh, Thanks, a quick follow up on the throughput opportunity you mentioned, where where do you often see the bottleneck. If there is one or you know that when baby on the other side lead you to an initiative or an area of focus for you obviously, you're measuring people against this in terms of speed, but maybe there's a certain area.

And in that whether it's the kitchen or other and I'm wondering also as your labor scheduling tool a part of this solution.

Yes, so its two fold it is having better deployment.

Which obviously the labor scheduling tool will help us with that it also better informs our forecasting.

As well you know versus moving from just looking back over prior four weeks in trying to project off prior four weeks. It's now using real time information to project, what's going to happen in the coming week. So what we see is a better forecast, which results in a better schedule and then when it also helps US do is deploy correctly.

The reason why the deployment is important as we need people to be in their positions right and most probably most pressing spot is that expediter role.

Which is really in between kind of the last phase of making your bowler brito and getting to cash.

You know and if the team isn't deployed correctly, sometimes that's the spot that doesn't get the right support and as a result of it kind of slows the wind down, but obviously it all has to work in concert right you need that people that have had a lot of reps they need to be trained.

To be able to move people down the line and make make the bowls and burritos correctly, but.

It's the combination of those two things you know having people in the right positions.

Arguably one of the most important positions that expediter position. The way you get there is to make sure you got a rate forecast.

And then I just one about just insights as we get into a little bit more of a mobile.

Consumer environment, and maybe people getting back to work are there any sort of emerging realities that are surprising to you about perhaps your dinner staying where it at higher levels your lunch not coming back as quickly as you'd like maybe.

Competition, taking share as they're reopening in certain trade areas or any any insights there about the reopen.

No you know the biggest thing I would tell you is the more we see people.

<unk> mobility.

The more we see our lunch business come back and the nice thing is we've seen these new occasions, whether it's a dinner occasion or group occasion.

<unk> remained pretty sticky in the business. So I think the thing that is playing out as you know what people that have had experience with us for new occasions loved the culinary and they're using us for these other occasions and.

Our rewards program I think is doing a nice job of understanding those journeys and then building the right engagement going forward. So.

Mobility is a key piece of the puzzle because you want people out and about and you want people go into their office or going to their activity.

That's how you get that restaurant experience back.

Thank you.

The next question will be from Jon Tower from Citi. Please go ahead.

Just a quick in terms of a bookkeeping and then a question.

In terms of the delivery mix for the quarter I was wondering if you could comment on where that that settled and then just thinking about the labor situation going back to that point I know, obviously, you guys had made quite a bit of investment in your employees overtime and have given them a nice path to make a lot more money over time, assuming they earn it in the system, but I'm curious when you think about.

The investments that you've made do you think that's enough to keep people engaged into you know the balance of this year and going forward or do you foresee, perhaps even more labor investment necessary in the future our site outside of just normalized inflationary spend.

Yeah look I think the one thing I want to emphasize on.

Labor is what we've heard from people that are with our company. So you know.

They've been with US 567 years would they get excited about is all the growth.

Because they can go from being an apprentice to a general manager to a field leader to team director Regional Vice President and.

And it's a reality because we're building to 300 restaurants a year.

They know they have to be developing themselves and others. So that they can step into the next opportunity that's where they get the greatest change in both I would say professional satisfaction as well as the wages that come with it.

We do know we got a very competitive starting wage, but when people get really excited about is where that starting wage can take them and in our company you can take them really far and also really quick. So it's great that we have all the other benefits that I think separate us and continue to.

Consistent with our purpose of cultivating a better world but.

I've had the opportunity to get out in the field and talk to people, but they are really excited about is the fact that they're part of a company that's committed to its purpose and committed to growth and that growth is both for them as an individual as well as those that work around them and you know.

That's where we're going to keep investing in them.

You know, we haven't seen a whole lot of pressure on the starting wage.

Where we are putting a lot of pressure is on making sure that we are developing our people. So they are ready for the growth.

Got it.

And just delivery mix and then the second piece in terms of.

Alright.

Low twenties, 20% to 21%.

Okay.

Just thinking about sorry.

Sorry about that.

No go ahead I was just.

Can I ask about pricing expectations for the balance of 'twenty. Two obviously you just took a chunk recently curious if all else holds for the balance of the year based upon your expectations for wage rate inflation, and obviously commodities appear to be all over the map, but at this moment are you anticipating future pricing action in the balance of 'twenty two.

Gosh I really hope.

We don't have to take more pricing, but I'm going to kind of give you. The same answer I've given you for the last you know.

Call. It 12 months, which is if it moves and we can't find efficiencies to offset it. The good news is we've got the pricing power to make them move.

I really don't want to be ahead of it.

So I think a great example is probably what you saw over this last quarter.

Inflation continued to move in a big way, we saw it wasn't going away. So we have to take the pricing action that we did in <unk>.

Hopefully that won't continue to be the case, but if it has to be the case, we have I think the organization and the people and the pricing power to do it.

It really is the last thing I'd like to do.

Got it thanks for taking the questions.

Thank you and the next question will be from John Vanco with J P. Morgan. Please go ahead.

Hi, Thank you I wanted to revisit some of the numbers that were in the ESG report that you guys published because it did look like some of the general manager and field lever level turnover was actually up 'twenty one versus 'twenty was that something that just happened maybe in the middle of the year as part of kind of the great resignation and we've seen a significant.

Improvement in trends I guess did that surprise you in any way and I guess, how has some of that normally maybe slightly more stable your employee base changed as we've come into 'twenty two.

Yeah sure. So obviously, that's looking back at 2021.

And yes. There was look there were a lot of ups and downs with omicron, there were a lot of ups and downs with wages.

And you know obviously that was a tough time to be running restaurants, and you know there was a lot of situations where you're understaffed.

And then it was very hard to get people too.

Sign up to work and the good news is we've made tremendous progress obviously, we've increased our starting wage I think we've done a much better job of explaining the growth path at our company and then illustrating that growth path by having you know 90% of our promotions come from internal promote internal.

Employees. So that's why when you fast forward to 2022 were in just such a better place with stability.

Definitely at the manager level, and then I think that will follow into the CRU. So.

Yeah.

You know what the challenges were in 'twenty, one I think we're done.

And we're leaning into our purpose values and growth platforms.

You keep people excited about being at Chipotle.

And hopefully this is an appropriate follow up but obviously you know in the last six months or so labor unions have really become a very topical subject for companies that didn't quite frankly, they mention them you know for years of discussion of covering some of these names both in the retail and the restaurant side. It's obviously, great that you guys.

You recently had an all manager conference. It was just in you know in March Yeah, I guess, what what can you do you know I guess, you kind of always stay in front of that issue and maybe derisk that from at Chipotle perspective, again, hopefully that's the appropriate question to ask on a public call.

Yeah look I mean.

We're committed to is developing our people.

Growing people that want to be a chipotle and the best thing. We can do is make sure that they're trained so that they are successful in their job and then that we had to give them a culture and a leader at develops them. So they realize that the growth opportunities at chipotle.

And Thats why I look at I can't remember, who asked the question, but its kind of hopefully youre not surprised by my answer when you ask like well what's next after chipping well. The answer is we talked to our employees to find out what would be the task.

That would make sense for us to automating the restaurants to make the employee experience better because we know if the employee experience improves well have better retention and also we'll have better execution and for our customers and so you know, we really spend a lot of time communicating and taking action on <unk>.

How we can improve the employee experience and then we spend the time developing our people and you mentioned, we just had this all manager conference right. I mean, it was electric man. It was so great to have all our leaders in one place.

Understanding the future of Chipotle and how they play such a critical role in.

We had the opportunity to have everybody in the room stand up that's been promoted over the last four years.

Almost every person in the room was standing up.

I think there are many places where that happens.

So we have to continue to stay committed to our purpose our culture and the development of our people. So that when you ended up at all major conferences, you got just about everybody in the room stand it up because they've been promoted where they've developed others that have gotten promoted so you know that's.

That's what we're focused on that's our proposition that's who we are if you want to be a part of that we're gonna be doing lots of restaurants are presented opportunity for you to be a part of it.

That's great. Thank you.

The next question is from Dennis Geiger with UBS. Please go ahead.

Great. Thank you Jack I wanted to ask another one on margins and thinking about cost pressures over the balance of the year great.

Great insights on the <unk> and kind of getting back to that mid twenty's level already and recognizing there's a lot of moving pieces through the year, but is there any additional color that you can share even at a high level and thinking about back half restaurant margins with respect to food inflation, I guess, particularly in light of how Brian just spoke to pricing for.

Losses, if there's anything you can you can add at a high level there.

Yeah.

Again, we just had at our leadership meeting.

My group, we talked to Carlos our head of supply chain and there's nothing we can see on the horizon that says things are going to retreat that things are going to go down but things have at least for the time being stabilized. So that's what right now we can afford in a stable environment. We do expect there's going to be an inflection point at some point the <unk>.

Pressures of getting some of our like packaging for example in from overseas the pressure that some of the suppliers are having whether it's from a labor standpoint, or just from a cost standpoint for their input costs.

Well, we can hope for is that they don't step up from here or are they stabilized and at some point, they just kind of normalize in the future but right.

Right now if I was going to build a model I would not build in a reduction in food costs for the fourth quarter. It looks like it's more going to be something in 2023 before we see that.

Yeah.

Great. Thank you and then just one quick one and I apologize if I missed it but.

Could you just speak to kind of be the percent of the dine in sales or traffic that have recovered at this point I don't know if you can touch on kind of that overlap with digital the digital dining customer.

And then related to that just how exciting the further dining recovery can be here as it relates to how low that overlap is if there's any commentary there. Thank you.

Yes look I think one of the things we mentioned was our in restaurant sales increased by 33%.

While digital remains roughly 40% of our business right.

And one thing that I mentioned earlier in the call as we continue to see people increase their mobility I think we will continue to see gains in the in restaurant experience.

And I don't see the digital occasions, just disappearing.

I think theyre going to continue to play that role and we're working hard on keeping digital to be frictionless.

And just completely intuitive.

And then at the same token we're working hard on having great throughput with great culinary and the good news is there's a lot of room to grow in both of these things yeah. That's why we're optimistic we will get to $3 million in movies.

And you know, while we do that we're going to do a lot of restaurants. So.

I think we're in a really good spot and you know obviously I'm excited for hopefully COVID-19 staying behind us.

<unk> inflation stabilizing and you know.

Hopefully 2023, maybe you can see some improvement on that front, but regardless I think we've demonstrated we've got a business our brand and our organization.

Can handle it all.

Great. Thank you very much.

The next question is from Lauren Silberman.

Credit Suisse. Please go ahead.

Thank you for the question Jack I think you had mentioned new store productivity is at record levels can you just provide an update on where new unit productivity and cash on cash returns are running today.

Yes, the productivity has been in that kind of mid eighties to high eighties, depending on the quarter. It may have touched it like 90% from time to time and when I mean by that is that's the percentage of mature restaurants of our comp restaurant.

When we deliver those kind of openings.

Sale when most of them are chipotle, which is more efficient than a non chipotle or cash on cash returns are in the 40% to 45% range out of the box. When you put a couple of years a compound that as they basically close the gap and and and get very close to our average volumes are comp restaurants, we're talking about returns into 60 65.

5% returns within just a few years.

Great. Thank you for that and just some menu innovation can you talk about how you are thinking about menu innovation to the rest of this 22, and specifically just how youre thinking about opportunities for innovation around proteins versus other parts of the menu.

Sure.

I think we've kind of established a pretty good cadence here, where we do call. It two to three mm menu.

Menu initiatives a year.

And you know.

We have a few protein initiatives in place.

But you know I'm sure you will see in test.

And then we're continuing to work hard on trying to figure out a dessert proposition or another call. It add on item right. So to complement how we have guac on.

50% of our transactions on in case those on like what is it 20, some odd percent of our transact. So it's like if we could find another add on like that whether it comes as a dessert or in that space like a case on block.

You'll see us continue innovating in that in those areas, but.

Now we think we've got a lot of room to still.

I think excite and engage customers with.

The chicken steak plant based.

Solutions and at the same time look at these other add on opportunities.

Great. Thank you guys.

Sure.

The next question is from Brian Vaccaro from Raymond James. Please go ahead.

Hi, Thanks, and good afternoon.

<unk> was on the commodity inflation backdrop, and sorry, if I missed it but what was inflation on the basket in the first quarter.

Yes within that like 12% to 13% range again, it's the highest inflation I've I've ever seen.

Yep Yep.

Great.

Yeah.

Hopefully we've seen the last of it you know.

Like I said, a few comments ago.

Things have stabilized for now.

One month in a row that stabilized you know that's a start but let's see what happens the next two or three months to see if we see stable stable cost right and if you did see that stabilization sort of hold would would you start to see that year on year inflation moderate.

Into Q4 or at this point or are you just thinking will be in the low teens for now until that dynamic changes.

I mean listen as you go throughout the year, if its stabilized completely that 13 is going to tick down as we compared to some of the inflation, we saw last year, but.

Most of that 13 is going to be with us for the rest of the year I think importantly, as the food costs that we talked about being in kind of that 31% range. If commodity costs say stable, we should stay in that range for the rest of the year and we know that our margin.

We have.

Our full margin potential.

Ahead of us if we keep our food cost in that like 31% range. So knock on wood that things stabilize the net price increases we've taken so far will give us that margin potential that we know is possible.

All right Great. That's helpful. And then on the comps could you just level set if you don't take additional pricing where would effective pricing be over the next couple of quarters and then on mix specifically does that start to normalize now on a year over year basis I know.

Theres been some funky comparisons on the mix front the last four quarters now it seems that does that sort of flattened out the next several quarters, yes.

Yes.

And your prices they'll they'll step up a bit in the second quarter. So we will move from like call. It a 10 10 and a half to like a call. It 12, and a half something like that kind of stuff.

It's down to a little under 10 minutes that I'll step down in the fourth quarter to like an eight and a half.

Mix it just depends on the mobility that we talked about before mix.

Mix for the foreseeable future is going to be at this lower check size, because we're comparing to last year, where most of the year a good part of the year still had very heavy digital I mean, we did start stepping down near the end of the year. So I think youre still going to see like year over year. The group size is going to be lower there's going to be relatively you know in terms of.

Percentage growth like we saw at 33% growth in in restaurant versus digital.

I think youll see some numbers like that so I still think you're going to see some distortion.

Where the group size is getting smaller and youre going to see transactions grow while the average check.

Menu price increases is going to decline a bit but we'll keep you guys updated each quarter on what those components are.

Alright, that's very helpful. Thank you I'll pass it along.

Yes.

Okay.

Okay.

Yes.

Yes.

Yeah.

Operator is there one more question.

Okay.

Hello.

Yeah.

Well I don't know if were having technical as trouble, we can't hear the operator or anyone else. We're about at the end of the time, So Brian I don't I don't want to make a closing comment sure.

I'll just close this real quick thanks for taking the time. Thanks for the questions. Obviously very proud of our results in the quarter I'm very proud of the work that's been done to date I think the one thing it's worth reminding people. There is a few things that haven't changed right. We have a great brands. We've got a great culture, we've got a <unk>.

<unk> purpose around cultivating a better world.

And we've got tremendous growth in front of us both within the existing restaurant between the combination of our in restaurant opportunity in our digital business as well as adding additional restaurants across the country and one.

One thing that I am confident about is our culture, our people will capture the upside for this business and to continue to drive growth going forward. So thank you for taking the time and I look forward to talking to you next quarter take care.

Yes.

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