Q2 2022 Chipotle Mexican Grill Inc Earnings Call
Good day and welcome to the Chipotle Mexican.
Mexican Grill second quarter fiscal 2022 earnings conference call all participants will be in a listen only mode should you need assistance. Please signal conference specialist by pressing the star key 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 two.
Please note this event is being recorded.
I would now like to turn the conference over to Cindy Olson with Investor Relations. Please go ahead.
Hello, everyone and welcome to our second quarter fiscal 2022 earnings call by now you should have access to our earnings press release, if not and may be found on our Investor Relations website at IR Chipotle Dot Com I will begin by reminding you that certain statements and projections made in this presentation about our future business and financial result.
Constitute forward looking statements. These statements are based on management's current business and market expectations, and our outlook and our actual results could differ materially from the projections in the forward looking statements. Please see the risk factors contained in our annual report on Form 10-K, and in our Form 10-Qs for a discussion of risks that may cause our actual Roe.
Oh, it's to vary from these forward looking statements.
Our discussion today will include non-GAAP financial measures a reconciliation to GAAP measures can be found via the link included on the presentation page within the Investor Relations section of our website.
We will start today's call with prepared remarks from Brian Nickel, Chairman and Chief Executive Officer, and Jack Hartung, Chief Financial Officer, After which we will take your questions. Our entire executive leadership team is available during the Q&A session and with that I will turn the call over to Brian .
Thanks, Cindy and good afternoon, everyone. We are pleased with our second quarter performance during a period of inflation and consumer uncertainty.
For the quarter sales grew 17% to reach $2 $2 billion driven by a 10, 1% comp in store sales grew by 36% over last year digital sales represented 39% of total sales restaurant level margin was 25, 2% an increase of 70 basis points year over year.
Adjusted diluted EPS was $9 30.
Representing 25% growth over last year, and we opened 42, new restaurants, including 30 to Chipotle.
I would like to spend a couple minutes, providing insight into current trends and our outlook regarding Q2 through mid may comparable sales were on track to reach the top end of our guidance range. Since then the underlying trend has decelerated and we anticipate mid to high single digit comps for Q3 with planned pricing in August .
There are a couple key things we have learned during the quarter our pricing power is strong and the brand is resilient, our culinary and food with integrity commitment is a key point of difference our restaurants are staffed with terrific people, despite a difficult hiring and retention environment and our people are still getting up to speed on running a growing multibillion dollar digital biz.
As well as a growing multibillion dollar in restaurant business to accelerate this learning curve. We are instituting an ops initiatives focused on being brilliant at the basics. We did this in 2019 and saw a positive impact on the business right up to the pandemic in 2020.
I will discuss this in more detail later.
And finally, we are focused on the right strategies.
It is as important as ever that we remain focused on our five strategies that help us to win today, while we create the future now let me provide a brief update on each of these strategies, which 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.
With two amplifying technology, and innovation to drive growth and productivity at our restaurants and support centers.
Number three sustaining world class people leadership by developing and retaining diverse talent at every level.
For expanding access and convenience.
Accelerating new restaurant openings and number five making the brand visible relevant and loved to improve overall guest engagement, let's start with discussing running successful restaurants, I'm happy to say that I've seen lines out the door and mobile pickup shelves full in Boston, Philadelphia, Denver, Austin, Ann Arbor, Dallas, Cincinnati, London, Paris, and Los Angeles.
I think everybody gets the point Fortunately, we were staffed with terrific employees and they were working hard with smiles on their faces and great attitudes I'm very proud to say that our restaurant teams have successfully grown average unit volumes to about $2 $8 million with 39% being digital our general managers and teams have adapted well to our growing digital.
And growing in restaurant business, however, customers were waiting on digital orders in the frontline was moving but it could've been quicker.
I know we can be better. This is why we have launched an ops initiative focused on retraining. Our crew members on the fundamentals of our business. These fundamentals include having great culinary prepared and ready to serve open to close in a food safe environment, ensuring that restaurants are staffed appropriately deployed across both the digital make line in front of me client.
Proving order accuracy and timing for the digital business and increasing throughput in hospitality for the in store business.
Additionally, we completed the rollout of our new Labor management tool that helps put the right people in the right place at the right time.
We believe the combination being brilliant at the basics with the new Labor management tool will drive meaningful productivity in our restaurants.
Along with our Labor management tool our technology roadmap remains robust I think it is worth highlighting how we are investing in technology to support strong execution of the basics, we just installed new customer facing pin pads that offer faster in contact free payment options.
We've deployed a new learning management system that enables immersive ways for employees to experience training and provides digitally enhanced E learning courses videos and resource materials.
We also are in the process of updating our P O S hardware across the system.
Should be completed by this year and we have made the email enhancements that aid accuracy and throughput.
These recently completed or in flight programs will all be positive for our restaurant teams and guest experience.
Additionally, we will continue to invest in possible technology for the future like chippy. The autonomous robot, we were testing that in grades culinary traditions with artificial intelligence to help our teams make tortilla chips.
Freeing up their time to serve and support our guests and we are exploring an automated real time kitchen production system that ensures high quality food is always available to meet the needs of our guests.
This brings me to our cultivate next venture fund, which is off to a great start and it's giving US a front row view of emerging food technologies.
We are interested in a breath of innovations, including sustainable farming supply chain advancements restaurant operating efficiencies and ways to elevate the employee and guest experience. We've received a lot of interest with over 200 inquiries for investments and as you may have heard last week, we announced our first investments in hyphen enmity.
As soon as our foodservice platform that automates the assembly of meals on a make line it could help fulfill our promise to deliver on time accurate orders for our digital guest we look forward to sharing more investments in the future that will help us drive meaningful change at scale I do want to take a moment to discuss our people. Despite a challenging labor market I am proud to say our staffs.
Levels remain above 2019 levels, our purpose of cultivate cultivating a better world with food with integrity has created a brand that people are proud to represent and be part of.
We continue to 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 career advancement opportunities.
We believe these efforts along with our growth and purpose are helping to attract and retain great employees.
And our people development program is important in order to accelerate our new restaurant openings and the real estate pipeline remains strong and supports our target of 8% to 10% new restaurants per year with more than 80%, including a chipotle.
We now have 430, Chipotle and results continue to exceed our expectations with Chipotle and generating higher average unit volumes and higher restaurant level margins. In fact, a recent opening of a chipotle in a small town in California had one of the highest opening day sales in the company's history.
In addition to the U S. We are also excited about our progress in both Canada and Europe candidate has hit its stride with Suvs and returns that are at the same level as the U S and Canadian comparable sales trends remained strong.
We currently have 29 locations in Canada and longer term, we see room for several several hundred which is included in our target of 7000 restaurants in North America.
And Europe continue to move through the stage gate process.
We have made significant progress in improving the economics in Europe , driven by operational efficiencies, adding our digital systems and opening smaller formats that resemble the U S. Restaurants, we have opened five new restaurants in the U K over the last 18 months and results have been strong we are gaining confidence that Europe could be another layer to our growth story in the.
Future.
This brings me to making the brand visible relevant and loved everywhere we operate are.
Our real food for real athletes campaign focuses on helping athletes across all levels perform their best by providing proper nutrition through real food and real ingredients.
As an official sponsor of the NHL, we activated this relationship through traditional media and creative promotions to highlight chipotle, including having our logo in the ice for every game of the Stanley Cup playoffs.
Additionally, we are partner with U S soccer to create behind the scenes content that showcases how Roes Labelle and Sofia Smith overcame the challenges of competing at the highest level of women's soccer and later this year, we will file the U S men's national team via our sponsorship and with advertising during the World Cup.
We also continue to appear in non traditional channels to drive difference culture and ultimately a purchase we recently launched a burrito builder on roadblocks on National Burrito day. The first 100000 players to successfully roll a virtual burrito at a virtual Chipotle earned a free entre owner at this led to one of our best digital sales days.
Mark the first time, a brand enabled roadblocks player to earn an exchange virtual roadblocks currency for real world items.
Okay moving onto the menu our pipeline remains robust building upon the brand's recent success with menu innovations, including smoked brisket and Poe Yosano, we have tested and successfully validated garlic cohere stake.
Mistake is ready for rollout in the future.
Shifting to our digital experience, we now have a digital business tracking toward three and a half a billion dollars in sales and we currently have over 29 million rewards members. We are mining the data everyday for insights while leveraging the information to influence behavior and drive greater frequency. We're also working aggressively on greater personalization across the customer journey and it.
Gained valuable insights on which incentives provide the greatest ROI.
Additionally, we're excited about the recent launch of the rewards program in Canada, which will provide another way for Canadian guests to engage with the brand and provide chipotle with the ability to further delight its Canadian rewards members.
Finally, our digital ecosystem is rolling out in the U K and France will follow shortly thereafter.
To conclude there is much uncertainty we are all dealing with but what I am certain about is chipotle and its people will remain committed to leading growing I'm certain that over time, we have the ability to grow our average unit volumes and achieve at least 7000 restaurants across the U S and Canada.
I'm certain that we will move our purpose of cultivating a better world forward in a meaningful way I'm certain that Chipotle provides one of the best value propositions in the industry I'm certain that we have the right teams with the right focus to navigate whatever comes our way and that our culture will continue to offer our crews terrific career opportunities.
Finally, I am certain that we are well positioned for long term growth.
Lastly, and very importantly, I want to thank our restaurant teams for their hard work and contributions to making Chipotle one of the best restaurant brands in the world.
With that here's Jack to walk you through the financials.
Thanks, Brian .
Sales in the second quarter grew 17% year over year to reach $2 $2 billion as comp sales grew 10, 1%.
Restaurant level margin of 25, 2% increased about 70 basis points compared to last year and earnings per share adjusted for unusual items was $9 30, representing nearly 25% year over year growth second quarter had unusual expenses related to certain legal proceedings. Our previously disclosed 2018 performance here modification transformation costs as.
Well as a restaurant asset impairment and closure costs, mostly offset by an unrealized gain on investments, which negatively impacted our earnings per share by five leading to GAAP earnings per share of $9 25.
Regarding our sales trends as Brian mentioned, we were on track for a comparable sales to reach the upper end of our guidance range for the first half of the quarter. Since then we've experienced a step down due to a combination of macro pressures our ability to handle the growth with relatively new workforce and a return to normal summer seasonality for college based restaurants for perspective about 15% of our restaurants are in call.
<unk> town and we've not seen normal seasonality in three years.
Looking ahead to Q.
Q3 with pricing from last year Rolling off our current trends in July are running in the mid single digit range. So any current sales trends continue we expect our comp to be in the mid to high single digit range, which includes our planned August pricing increased about 4% to help offset incremental inflation pressures, especially in dairy tortillas and packaging as well.
Pockets of wage pressure throughout the country.
I'll now go through the key P&L line items, beginning with cost of sales.
Cost of sales in the quarter were 34% about flat to last year the benefit of menu price increases offset elevated costs across the board most notably in avocados packaging dairy beef and chicken in Q3, we expect our cost of sales to be about 30% of sales as the benefit from the menu price increase will be partially offset by the higher cost of dairy.
Tortillas and packaging.
Labor costs for the quarter was 24, 8% an increase of about 30 basis points from last year. This increase was driven by our decision to take a meaningful step up in wages last night, which is partially offset by menu price increases.
Q3, we expect our labor costs to be about 25% due to leverage from our menu price increases offsetting pockets of wage pressures across the country.
As Brian also mentioned, we have now completed the rollout of our labor management tool. While our teams are still learning how to use the tool. We believe it has the potential to lead to better deployment to both make lines during peaks, which we think will eventually lead to better throughput on our front third line and better on time results for the D. M L.
Other operating costs for the quarter was 14, 3% a decrease of about 90 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 with 2.5% 10 basis points above last year in Q3, we expect marketing cost to remain in the mid 2% range with the full year to average right around 3% in.
In Q3 other operating costs are expected to be in the mid 14% range.
G&A for the quarter was $141 million on a GAAP basis or $130 million on a non-GAAP basis, excluding $7 million due to the settlement of certain legal matters 3 million related to the previously disclosed modification to our 2018 performance shares and $1 million related to transformation expenses. G&A also includes $106 million in <unk>.
Your line G&A.
$25 million related to noncash stock comp and a $1 million benefit related to lower performance based bonus accruals, partially offset by payroll taxes and equity vesting and exercises.
We expect our underlying G&A to be around $111 million in Q3 and continue to grow slightly thereafter, as we make investments in technology and people to support ongoing growth, we anticipate stock comp will be around $25 million in Q3, although this amount could move up or down based on our performance, bringing our anticipated total G&A in Q.
Three to around $136 million free.
Depreciation was $70 million and we expect it to remain at this level for the rest of the year.
Our effective tax rate for Q2 was 25, 3% for GAAP and 25, 1% for non-GAAP for fiscal 2022, we 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 the quarter with $1 $2 billion in cash restricted cash and investments with no debt along with a $500 million untapped revolver during.
During the second quarter, we repurchased $261 million of our stock at an average price of $1350. We increased our level of stock repurchases during the quarter when our share price fell with the market overall, and we will continue to opportunistically repurchase our stock.
During the quarter the board authorized an additional $300 million to our share authorization program at the end of the quarter, we had $320 million remaining.
We opened 42, new restaurants in the quarter of which 32 had a chipotle.
The performance of our Chipotle is continues to be strong maintaining record high new store productivity.
In terms of development, we continue to navigate various challenges, including construction and permitting delays and material shortages. However, our team has done an outstanding job of anticipating these challenges and mitigating delays where possible and we still anticipate opening between 235 and 250, new restaurants in 2022 with at least 80%, including a chipotle.
As I mentioned last quarter once we move beyond these development challenges, we expect to be able to accelerate openings and get closer to the high end of the 8% to 10% opening range.
In closing I've experienced chipotle resiliency over the past 20 years through both great times, and challenging times and I share Brian's confidence in our ability to navigate the current environment looking forward I'm excited about the growth opportunity ahead of us with a runway to more than double our restaurant base and grow <unk> beyond $3 million with a 40% flow through.
Our 100000 employees in our restaurants and in support roles for their continued effort and commitment to chipotle 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 you touched on.
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 the roster.
And the first question will be from Nicole Miller with Piper Sandler. Please go ahead.
Thank you good afternoon.
Hoping you could talk a little bit more about labor in terms of staffing in the context of au. These you know being up versus 2019, well more than 20%.
Just because you had mentioned that in regards staffing levels in regards to 2019 today.
Are you, suggesting that you know it needs to be more efficient in terms of labor that you need more bodies in terms of staffing like how does it compare to the context of the <unk> increase if that's applicable.
Yes, Hi, Nicole the way to think about it is obviously, our labor model reflects our increase in transactions and sales.
So we look at it as is the restaurants staffed at model given the volume and transactions that the restaurant has and what we're referring to as the percentage of restaurants that are staffed correctly.
Then what we where we were in 2019 so.
That's what we're referring to and then when we're talking about is obviously a lot of the people that have joined our company over the last two years, they really haven't experienced the frontline.
And what it means to grow that in restaurant business, while also growing the digital business and that's why Scott and the operators are focused on ensuring that everybody is brilliant at the basics to execute our growing two lines of business.
Okay and then just can you briefly discuss in terms of last year's 15% comp how things tracked in July August and September . So we can understand a little bit about what to think about compares from the prior year period.
Yeah, Nicole this is Jack.
Youll remember that in the second quarter of last year, we did have a staffing challenge and Thats. When we took the significant increase.
So we did compare during part of the quarter to a little bit of a softer comparison, but as soon as we announced in May I think it was like around mid may that that we were increasing wages and and right at that moment, we started paying higher rates as new people are coming in and the announcement that we.
We made at that time was also a signal to our existing teams that youre going to get a raise in early June . So we saw staffing stabilize and then we saw our sales recover so we didn't have a.
A several week period during the quarter, we did have a little bit softer on a comparison.
Okay, and how about July August and September of last year.
The accomplice, 15% last year right in the third quarter is that the only thing.
Those were I would call those normal comparisons by then our staffing had stabilized and so those are those are.
Those are tougher comparisons.
Okay. So each month was kind of 15% there was no notable difference between the months.
Yes.
Listen they vary vary month to month, but there was nothing during the quarter that I would tell you.
It makes that comparison.
I would say if anything Nicole just compared to Q2, it's just a little tougher.
The comparison.
But each month was fairly.
And then a bounce all over the place.
It's all over the place now okay.
Okay.
Thank you.
Yeah.
And the next question is from David Tarantino from Baird. Please go ahead.
Hi, Good afternoon, I wanted to ask a couple of questions about the comp trend I guess I first wanted to understand.
How you're thinking about the slowdown you saw towards the end of the quarter and I know you rolled over some pricing. So maybe you had too much lots of pricing contribution, but you seem to be also pointing out some operational challenges that may have caused that.
I guess you know.
How do you determine whether it's that versus maybe just a general slowdown in consumer spending.
If you will.
Yeah, Hey, David.
Obviously, it's hard to tease out some of the macro pressures versus what we're seeing as far as people, killing off the line four potentially.
Not being happy with the.
The digital order time, but we've definitely seen.
As I've been out visiting Scott's been out visiting restaurants, and when we talk to our leaders in the field is we've got a lot of new people that are still getting trained up on frankly, the basics of great throughput and I know I feel like this is rinse and repeat but that's what our business is a little bit which is we got to have our <unk> and <unk>.
<unk> you got to have the Expediter you got to have the linebacker you can't.
Work around those things to try and service the business and we just have a lot of new people that don't understand how important some of those roles are as well as general managers do a you know a lot of these managers have gotten promoted over the last 18 months to 24 months. So.
We know there is upside in taking the combination of this new labor tool deploying people correctly, and then ensuring that those people are trained and actually experienced with great throughput looks like.
The other biggest thing.
A lot of these folks have an experienced what how fast the line can move so I think in some cases.
I think they're moving pretty quick when in fact, we could be moving a lot faster.
Okay.
Got it and and Jack could you help us understand.
What's your transaction level or growth was in the in the second quarter and what your what your third quarter guidance implies on that metric yes.
Yeah, David the transactions were up in the quarter between three and a half and 4%.
Also had a mix shift we didn't talk about that for a number of quarters now as our business has moved more towards in restaurant the average group size.
The mix shift towards about a negative 6%. The average group size dropped by about four 5% and that drop is mostly a drop from.
The digits moving from digital into in restaurants. So.
As we move to Q3, we do expect that because of the.
The downturn that we saw the macro effects in the second quarter, we do think that transaction comp will ease a bit but we also think that the negative mix shift should ease a bit.
As well.
And Jack.
One clarification. When you say is do you think do you think it will stay positive I guess, what does your guidance assume its positive or do you think it's.
David it's going to be right around slightly positive we're right around flattish right around in that in that range.
Okay. Thank you very much.
Thanks, Dan.
Yeah.
The next question comes from John Glass from Morgan Stanley . Please go ahead.
Thanks very much. My first question is just maybe clarify a little bit more why seek more pricing now it seems like your margins are where you thought they should be.
You're sort of balancing the inflationary impact versus pricing and you're also now confronting a weaker consumer so why why why now versus maybe letting some pricing labs and it may be it may be waiting longer and just out of the abundance of caution maybe your thoughts on that please.
Yes, what we've seen is unfortunately, a lot of things have stuck versus.
Gone away as far as inflation and then we've got some key items that.
And frankly continue to be inflationary and.
I think Jack highlighted right. We've got avocados, we've got dairy tortillas and packaging. So unfortunately, we were hoping we'd see some of the stuff pullback, we haven't seen that but there are other parts of the business that we have seen plateau.
It gives us optimism that hopefully.
We won't have to continue to pull the pricing lever.
And I think you've seen this with US we really do try to wait until we truly understand what feels like is something thats, an ongoing cost that we need to handle with pricing.
Versus hey, we're going to wait this one out and see if it pulls back so.
We figured best to share, where we're where our heads are on this one now.
I appreciate that.
On.
Thinking about your softness that you experienced post may was there any particular part of the business that it showed up in first I'm thinking did the delivery channel for example exhibit weakness.
What piece of the business decelerated more than others and was there any signal in that in terms of the behavioral change with the consumer.
Yes.
I think what we saw was probably not all that different from what people have been saying the low income consumer definitely has pulled back their purchase frequency Fortunately for chipotle.
So that is not the majority of our customers. The majority of our customers are a higher household income consumer and we've actually seen.
Their frequency increase and potentially not.
Experience I'm guessing some trade down from other areas, where they were choosing to get their eating occasion.
So probably the.
The first indicator was in our I'll call it our rewards data.
Where we saw some of these low income consumers starting to slow down on purchase frequency.
And not necessarily impacting the delivery channel, specifically, which one might think of as being an expense yes.
No actually that's been pretty stable.
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Throughout.
Okay.
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Yeah.
And the next question is from David Palmer with Evercore ISI. Please go ahead.
Thanks.
A question a follow up question on the topic of mix and the that the impact of essentially the number of people per order.
One casual dining company out there said that family seem to be getting back to pre COVID-19 summer behaviors. So perhaps that family orders that happened last summer are going away as they get back to doing some of those other activities.
Do you think is it I don't know if possible for you to see that in the numbers or in any of your insights data that perhaps theres almost a seasonal headwind that's gonna be particularly bad here over the summer and that coincided with that not just economics.
I mean, David there is the other thing that we saw was even a group size in restaurant did decline a little bit it didn't decline as much overall decline was in that four 5%.
And it was it was bigger.
Bigger piece of that is a shift from digital to in restaurant, but even within the in restaurant customers. The group size did shrink a little bit. So I don't know if I'd connect those dots, but if youre seeing other evidenced that families are returning to the way that they were dying three years ago, where theyre not all getting together and dining together that could.
B I play we also for the first time in three years kind of normalcy.
Seasonality, meaning the college restaurants really performed exceptionally well during the school year because they were all in person and then we saw a normal kind of seasonality that we haven't seen in three years, where the college students go back home and they tend to eat less.
Don't know if thats more moms home cooking, but date, when we track the individual customers they tend to visit Chipotle.
To a lesser degree when they're away from college than accounts. So we are definitely seeing some normalization under the overall trends.
And you know in the past you've talked about an incremental margin framework, maybe something like 35% to 40% would be normal obviously, the first half has been below that.
Particularly in the first quarter, maybe catching up to it a bit here in the second quarter with the with the four points of price you're talking about do you feel like youre going to be getting back to that sort of incremental margin from from here on out.
That's right David.
That's exactly why we did what we did we we still have some additional inflation that we're going to see carry into Q3 for tortillas dairy packaging and some known increases related to beef that we've known for a while all of those roll into Q3 and really what this allows us to do is when we get up to this week.
About $3 million average volume and then our margin should be somewhere in the 27% range that gets us back to that kind of a situation and the pass through for every incremental sales dollar we get in to be right back to that 40% ish flow through that we've talked about in the past.
Thank you.
Okay.
The next question will be from Sarah Senatore with Bank of America. Please go ahead.
Thank you I wanted to ask about throughput and I know a lot has changed since we think about.
Transaction.
<unk>.
You know historically, you've given them some estimates about peak hour throughput and I just wanted to see if you could give some context around where you are now, especially now that you have a second make line, whereas previous peak would've been mostly to the front line and is there any way to kind of quantify what improving throughput could do for transact.
Now to your point about not losing people off the end of the line. You know is there sort of a framework. We can think about that says one one transaction per hour is equal to a point of comp or something like that and just trying to understand if you know as.
As we think going forward there.
Guidance for transaction contemplates any improvement in throughput.
Yes.
So here is one of the things that we have done because.
Point out that we've now got this multi billion dollar digital business multibillion dollars in restaurant business, we've separated out the metrics for the frontline and the and the digital make line and we've got very specific on the digital make line is about being on time and accurate on the frontline it's about.
Throughput and.
We believe on their frontline, we can get back to where we were below what's Jack late 2014, 13, where we were in the high <unk> low thirties.
15 minutes.
<unk> 15 minute basis.
That's what we're going back after and that's why it's so important.
We really kind of did this exercise back in 2019, and we were starting to see it pay dividends in kind of early 2020, and then unfortunately COVID-19 hit.
And so.
We're confident that if we can get.
Our team members to understand what it means to be called rush ready.
In their places and ready to go there is no reason why we can't get back to those high <unk> low <unk> on a per 15 minute basis.
I don't know if we talked about exactly how the transactions translate into sales.
Well, here's what I would say about that sir.
It's hard to tease through and find out when you increase let's say you move you move from like 22% to 27, Okay. That's a that's a five entree increased ASIC perspective each.
Each five trend every time, you add five transaction as a percent of comp okay for that day, we're measuring the fastest 15 minute period.
So what we believe is that when you go faster and $1 15 minute period Youre going to go faster and multiple 15 minute period, so the opportunity to add.
Quite a bit of comp is there but to Brian's point, we just need to get more reps. We have a lot of folks that really haven't been on the frontline they haven't even manage the restaurant when we had.
The in store business coming back the way it is today, so but we believe that there is definitely the opportunity to add some meaningful comp here.
That's super helpful. Thank you sorry, just one follow up on mix was there any sort of.
Lower attachment or anything like that its strictly the start lapping.
Lapping that order aggregation.
No I mean, the only thing I would clarify an answer is there is a higher attachment rate to digital and so when you see people move from digital to an in restaurant.
But then you also see a return to less less attachment wells by the way we are seeing higher drinks. The fact that we've got more people coming into the restaurant, we are seeing more more drinks and just to give you a perspective about 40% of our transactions in restaurant included included a drink only about 20% or slightly.
Less than that of a digital transactions. So as we've seen a shift there has been a positive shift as well, but not enough to offset the.
A lower group size.
Thank you so much.
The next question is from Jared Garber from Goldman Sachs. Please go ahead.
Thanks for thanks for the question I wanted to just ask about menu innovation, Brian I know you mentioned that the guajira stake has sort of passed that stage gate process and ready for launch whenever that may that may be.
But wanted to also get a sense if you could update us on the other.
Other item that's in test, which is the Mexican cauliflower rice and how you think about.
Maybe more permanent menu item.
Plant based base for for consumers over time.
Yes, obviously, we're very interested in that.
New way of eating.
I think we mentioned this in our.
Our earlier comments, we've invested in our <unk>.
<unk> based company called <unk> and the idea is how can we continue to fine.
Plant based items that are consistent with our food ethos.
Also our delicious and from a culinary standpoint so.
We've obviously done the cauliflower races, we have missile fritos thats under menu all the time I'm optimistic that hopefully we can find another center of plate.
Called Central.
<unk> solution, that's plant based which we haven't done to date, it's really been the plant based REIT. So the cauliflower. These things have been more perceived as I would say a piece of your bowl versus the centerpiece of your bowl and so that's what we're working towards and I'm excited to see what we learn as we partner up with median obviously our culinary team continues to.
Aggressively in this space.
Yeah.
Thanks, That's helpful. And then just one follow up on the throughput, which seems to be a little bit on the topic of the day.
Is there anything similar across maybe geography, either geographies or store bases.
That youre seeing throughput as more of a challenge maybe that's an urban thing or a suburban thing just just curious what you guys are seeing in terms of.
Any read across or tie ins across the geography.
Yes, no really youre, not seeing that I'd say probably.
The experience is.
Where we see the biggest difference that we have restaurants that are doing $6 $7 million that that team has been together for years.
Yes.
When as soon as kind of all the Covid restrictions went away they went right back.
So running Chipotle is really successfully and that's why that's why we're so confident and so much opportunity and just getting people the reps getting them trained up on the basics and then frankly just for them to experience the success at the half by following these basics so.
Ultimately what we're really after is the better throughput actually results in a better employee experience as well.
We probably should talk about that a little bit more because our employees that are more successful and then obviously they give a great experience to our guests but.
Yes, I would say the biggest thing Unfortunately, we have experienced managers all over the country. So we don't see.
Any variability from what region or suburban and urban.
It's more along the lines, we just got to get more people trained up.
Great. Thanks for the color.
The next question is from Andrew Charles with Cowen. Please go ahead.
Great. Thanks, Brian can you talk a little bit more about how chipotle plans to flex value in the menu in the current consumer backdrop as you run double digit pricing, while lapping what looks like about 10% price in the back half of 2021.
No early in your career snacking and looking at the shoulder periods between 2% and five P. M was an opportunity is that something that you think applies to chipotle just given the background for lower income consumers.
Yeah.
I really believe the value proposition and what we sell today is our strongest proposition.
We look really hard at this when you look at a chicken burrito steak burrito and you compare that to your alternatives.
The value is there.
So if I think we execute great accuracy and being on time, and we execute great throughput.
That's our that's our winning formula that is the value proposition that wins and.
That's why we're very much focused on executing our basics.
The basics drive our value.
Great culinary.
Customized.
And then with food with integrity is a winning value proposition for all income levels.
And my follow up question is just on another one in culinary.
Just talking a little bit more just around pollo Sato and the ability to keep that on the menu I know, it's a higher margin, obviously tested very well and has done very well for you guys is the plan to keep that permanently it's gone a little bit longer than a typical time offer would run.
No. The plan is not to keep it permanently.
I think we've talked about this ideally we like having menu news.
Two to three times a year and.
If we get some that can carry longer we stay with them longer.
But.
That will eventually be coming out here in the next couple of months and.
Hopefully we'll have some other menu news that gives people equally as excited.
We look forward to it thank you.
The next question is from Lauren Silberman from Credit Suisse. Please go ahead.
Thank you for the question.
On unit growth so on track to accelerate unit growth to 8% to 10% can you talk about what you expect with respect to cannibalization just the tradeoff between unit growth and comp.
Yes, yes Lauren.
We measure the impact and we don't see we've never seen impact go above a 1% comp impact.
We've seen it kept.
Seven eight something like that so it's still very very manageable and so every time, we do a deal.
Go through a routine where we have an algorithm where we measure what we think the impacts going to be our team does a really good job.
Measuring that it's still an estimated part art part science, but we look to do deals that are going to give us a.
A superior after impact return so we're not looking to put restaurants right on top of each other and cause excessive impact.
But theres just a lot of white space out there is still weak with this idea of getting from 3000 to 7000 restaurants, we've modeled that after our three or four or five most dense market and those are markets that we already have the density that represents what we would be on a national basis at 7000 restaurants. Those restaurants are very high volume a very high.
Return restaurants.
Great. Thank you for that and then just on potential UV is there a these are now running at $2 8 million high end restaurants here, you've talked about the opportunity for increased throughput you know 40% of sales going to the secondary digital make line. How are you thinking about peak <unk> levels, and where that can go is there a level where it makes.
More sense to open another restaurant.
Yes look I think one of the things Thats.
Truly.
Special about Chipotle is we're not capacity constrained with our frontline or our digital make line.
So I mentioned right Theres restaurants doing five six.
$7 million and.
Yeah.
Obviously, it presents an opportunity for us to build a lot more restaurants without having really any meaningful impact, but I think it also demonstrates the four walls that were already running chipotle has tremendous upside as well so.
Im feeling really confident we're going to get passed $3 million and I'm sure, we'll probably be talking about how we get to $4 million at some point, but.
Firstly to get passed the milestone of $3 million.
We can celebrate that milestone and the good news is I don't see any capacity constraint that would prevent us from saying four millions next time.
Okay.
Great. Thank you so much.
And the next question is from Dennis Geiger from UBS. Please go ahead.
Thank you Brian .
A quick follow up on throughput question again is there anything else to share on sort of that opportunity to get back.
30, and throughput for 15 minutes can.
Can you do that right staffing.
Staffing environment or is it really more about training the ops initiative that you mentioned as well as the experience I think of the team's work there just trying to get a sense for how generally quickly gains can happen across the large system as we think about <unk>, they would kind of frame that up for us.
Yes look I think.
The good news is we have lots of opportunity to execute what we know are the basics of great throughput right. Unfortunately, I've gone into a lot of restaurants, and we don't have our expediter in place.
Yes that is a key piece of the puzzle.
And.
The good news is our operation leadership is very much focused on explaining to people how important that expedite our whole lives.
As you know if you're new you can see why you would think Oh, maybe I can flex that person when in fact, that's the last person I want to be flexing. If you want to really achieve great great throughput. So look the good news is staffing is not a barrier.
Frankly, the barrier we have to get.
To overcome is getting people to experience what it's like to run a restaurant with everybody in the right place doing the right role through a peak and.
Obviously, it will take a little bit of time, but.
That's something that we can train people can experience and like I mentioned, we saw a lot of progress on this when we did this back in 2019.
So I'm confident we can.
Get focused and get the reps and then get the execution that then results in the comp growth.
That's great and then you spoke to this some but I just wanted to ask a little bit more on resiliency sort of your expectations for resiliency increases.
Increasingly difficult macro environment the brand meaningfully outperformed.
Obviously, you've been extremely resilient and brand.
Brand strength over the last several years, but anything you could kind of highlight the differences or similarities now.
Prior top economic periods, where the brand has outperformed and just broadly anything additional that you could add on sort of resilience for the brand from here. Thank you.
Yes, sure well look I think probably the thing that is common when you look back.
To what we're seeing right now is the strength of our higher income consumer.
That's a common factor.
So even though the lower income consumer is slowing down.
We've not seen that happen with our hiring.
Fortunately for Chipotle, we over index with higher income consumers.
And then I think the other piece of the puzzle to US now we've got a database of call. It 29 30 million people, where we can hopefully be.
On the front end of what is happening out there so that we can.
Hopefully pivot and communicate correctly.
With our customers and what we've heard over and over again is our value proposition is probably our greatest strength.
Meaning terrific food are terrific culinary.
Believable customization, if you wanted a digitally it's on time right and it's accurate and if you come into a restaurant you love the customization and the speed at which you can get it so.
Good news is it's a lot of similarities of what we've seen in the past.
The only thing I know for sure is something will be different so.
That's why I think it's important to talk about just how resilient. The organization is to also handle whatever unexpected headwinds to deal with.
Thank you very much.
The next question is from John <unk> from Jpmorgan. Please go ahead.
Hi, Thank you hopefully a slightly different take on the on the throughput question.
Is your throughput is it constrained at the 12 to one and 6% to seven you know kind of a classic times.
That you used to be busy or are there kind of pockets throughout the day I guess is kind of the first main question and then secondly.
If there are just certain hours, where your throughput constrained because of staffing.
Guess, what does the store manager what does the system do I mean people, obviously don't want to come in and work for an hour shift or even a two hour shift it does it.
Does the brand how the flexibility that's the model having flexibility.
To bring people in for four to eight hours to maybe cover a couple of busy hours. So just kind of walk us through I guess, the practicalities of actually staffing that store that you know that front make line or the second make line. During those 15 minute windows are those our.
Windows as it were where you really are capacity constrained.
Yes, well first just so you know we're not capacity.
Capacity constrained at 12 to one or six to seven or.
One to $1 30.
The good news is we've got capacity and every 15 minute.
Increment.
Now your question about how do you best deploy so that you have the right amount of people in place ready to go that's really the reason why we have implemented this new labor tool.
It's going to do just that right. So it's going to go ahead and take a look at like this restaurant is slammed from 11% to 145. This restaurant. This land from 12 to 12 30. This restaurant has a really big dinner business. So it takes into that account so that we deploy the right amount of people against those peaks.
We're not capacity constrained so if we can get the people at the right time in the right position our throughput is going to go up.
For a second there John I thought you worked for Kronos.
Okay.
But.
Yeah.
And just by capacity constraint, it's a capacity constraint for the given number of employees on that.
Kevin kept not for the overall box itself I get that okay. Okay, yes, that's exactly what they're supposed to help us address and so that you don't end up with.
You're under <unk>.
Under staff from 11 to $1 45 in your older staff from 12 to 45 to 130 the ideas, we get our people in the right places at the right time, so and Thats. The tool that we just rolled out and now we're training against the tool to ensure people are in their place so that we execute.
The maximum throughput we can in each of those containers.
Bryan the two also recognizes.
As the business like how much is digital how mitel from mine to our old tool wasn't as sophisticated and so one restaurant and had a 20% digital another has.
Our chipotle at 55% to 6% digitally the staffing model is very different for those two things so our ability to really put exactly the right people with the right skills at the right time throughout the day to drive throughput.
Ever been better now this is a brand new tool, it's like learning how to drive a Ferrari.
Yeah.
When you first get in a car there is.
It's a very very.
Highly sophisticated tool and so we're learning how to use that but the capabilities are much higher than what our previous tool out.
And no.
Thank you for that and and if I can you know obviously this wouldn't be rolled out in the system unless it obviously went to the extensive operational stage gate system I mean, how big of a pilot did you do for this system before you decided on the system wide rollout and how effective was it and that.
Collection of pilot stores, yes, so look we've been piloting this for over two years and we did really the bulk of the rollout for the last call. It six months.
Across our restaurants so.
It's a new tool for our teams. The good news is it's not a new tool for our organization.
To manage train against and get people to use it to its best ability.
Look there is a change management process, though in anything no matter how good it is.
Sometimes people really like the old the old approach better even though the new approach is going to help them perform better. So we're going through the change management processes any organization would but the good news is we've done the due diligence on the front end so that as we learn things.
And we're dealing with 100000 people. So I'm sure we will learn some things even beyond our pilot we have the knowhow, though to pivot accordingly, and maximize the tool.
Thank you.
And the next question will be from Chris <unk> from Stifel. Please go ahead.
Thanks, Good afternoon guys.
I had a follow up on the value question that was raised earlier it seems like a potential scenario could be where commodity prices start to ease traffic continues to soften for the industry and that would cause some change to be more aggressive with either price led value promotions are or even maybe new value menus to kind of reset their pricing I'm just wondering how are you.
Totally might respond if discounting or menu resets like that were to start to impact that value gap. It has with the competitive set.
Yes look obviously, if our value proposition.
Changes dramatically, we would have to reevaluate how we are providing.
Our customers value I haven't seen it happen yet.
And when you go back and look.
The 20 plus years of the company the thing that drives the best value with our customers is this commitment to food with integrity.
As his commitment to culinary and then is this commitment to giving you exactly what you want.
So it's I.
It'd be hard pressed to believe we would want to abandon what makes us chipotle.
And.
My experience as well as what I've seen in the company as our value proposition is very strong. So so long as that is the case, we're going to keep doing what we know drives value with our customers.
Yeah.
Fair point.
Jack I apologize if I missed this in the presentation, but can you speak to the level of inflation youre seeing in construction costs and maybe describe some of the most common challenges you are seeing with hitting project timelines.
Yes.
Timeline.
<unk> challenges, sometimes it's permitting sometimes it's.
Contractor labor like if somebody hasnt callouts or exclusions because of Covid exposures that will slow down.
A deal as well and then materials as well I mean, some of the electronics like for some of our <unk> walk in coolers things like that have been a real challenge. So it's been a myriad of challenges. The pipeline is really really strong and that's what gives me great confidence that not not only will we hit.
Between the range this year, but when these things eased our pipeline is still there and we will be able to accelerate from there in terms of the inflation.
At least into several percent range, maybe even more than that.
<unk> had varied throughout the country, but definitely our investment costs. This year are much much higher than they have been in the past and higher than we expected them to be.
Great. Thanks, guys.
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 alright.
Alright, Thank you and thanks, everybody for joining and all the questions. Obviously, we're very proud of our results I think it speaks again to the resiliency of both the Chipotle brands all of our <unk>.
Employees out in every restaurant their ability to execute.
Great culinary grade throughput and I also think it speaks to the strength of our value proposition. So.
I know theres a lot of uncertainty out there I said this in my earlier remarks.
The thing we spend our time on are the things that we can control the things that we're certain about and what I am certain about is chipotle has got great people running restaurants that do food in a different way and we continue to give people great access through digital and great throughput on the frontline with good hospitality I think.
Continue to be rewarded with more business and.
We're proud of where we are and we're really excited about where we're going so.
Obviously, we will see what comes next but I think were ready and we will continue to do what we knew how to do best which is make great burritos cripples.
Hopefully we continue to delight our customers so that they come back over and over again. So thank you for taking the time and we will talk to you on three months.
Thank you Sir the conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Yeah.
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Thanks.
Yes.
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