Q3 2022 Chipotle Mexican Grill Inc Earnings Call
Good afternoon, and welcome to the Chipotle Mexican Grill third quarter 2022 results conference call.
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Now I'd like to turn the conference over to Cindy Olson head of Investor Relations and strategy. Please go ahead.
Hello, everyone and welcome to our third 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 Dot com I will begin by reminding you that certain statements and projections made in this presentation about our future business and financial results call.
Institute forward looking statements. These statements are based on management's current business and market expectations and our actual results could differ materially from those 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 results to vary from these forward looking statements.
Our discussion today will include non-GAAP financial measures a reconciliation to GAAP measures can be found via the link included on the presentation page within the Investor Relations section of our website. We will start today's call with prepared remarks from Brian Nickel, Chairman and Chief Executive Officer, and Jack Hartung, Chief financial and administrative officer afterwards.
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. Our third quarter results demonstrated the resiliency of the brand and strength of our organization and managing through a difficult consumer environment, along with the inflationary headwinds we've experienced over the past 18 months.
For the quarter sales grew 14% to reach $2.2 billion driven by a seven 6% comp in store sales grew by 22% over last year digital sales represented 37% of sales restaurant level margin was 25, 3% an increase of 180 basis points year over year.
Adjusted diluted EPS was $9.51, representing 35% growth over last year, and we opened 43, new restaurants, including 38 Chipotle ins.
In the third quarter, we continue to see a widening of trends by income level with the lower income consumer further reducing frequency. Fortunately for chipotle. The majority of customers are from higher income households, which continued to increase purchase frequency. While it is difficult to predict the macro impact on future spending trends, we know our value proposition remains strong and we.
Minimal resistance to our price increase in the quarter.
To put it into perspective, our average chicken burrito or bowl, which makes up about 50% of our orders across the U S is below $9 in our restaurants. This is a tremendous value when you consider the quality of our food, including our food with integrity standards, the fresh preparation utilizing classic cooking techniques the customization generous portions.
And of course, the convenience and speed.
Our fresh preparation is particularly unique when comparing chipotle to other restaurants, they're not many restaurant options that prepare their food fresh daily and we do it in all 3000, plus restaurants or restaurant teams begin preparation at 730 in the morning to be able to serve our delicious food by the time, we open.
We only use 53 real ingredients all of which you can pronounce and our dedicated employees prepare the food in our open kitchens using classic cooking techniques. This includes drilling fajita veggies and Adobe chicken on the plot, you and mashing avocados to make our signature guacamole and making our chips fresh everyday.
So again when you combine all these elements you're going to an industry, leading brand with a tremendous value offerings in our five key strategies will continue to help us win today, while we create the future.
Now let me provide an 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.
Number two amplifying technology, and innovation to drive growth and productivity at our restaurants and support centers.
Theme, making the brand visible relevant and loved to improve overall guest engagement.
Number four expanding access in being inch by accelerating new restaurant openings and number five sustaining world class people leadership by developing and retaining diverse talent at every level.
First starting with our restaurants, we remain focused on being brilliant at the basics, including staffing our restaurants with talented team members focused on the foundations of the business. These include having great culinary prepared and ready to serve open to close in a food safe environment, improving order accuracy and timing for the digital business.
And increasing throughput and hospitality for the in restaurant business.
At the end of last quarter, we rolled out an updated training program called project Square, one which includes training around throughput digital execution food quality and hospitality to deliver an exceptional customer experience. We've made some progress during the quarter, but we were not where we need to be the capabilities of our teams needs to and will improve.
Chipotle is a restaurant business with high standards, and we need to train and develop our teams. So that these standards are met.
Additionally, in these uncertain times. It is critical that we treasure the guest and this will be a primary focus of everyone in operations and across our company with so much change over the past couple of years brought on by the pandemic. It had been refreshing to focus on the foundation, which chipotle was built.
We do see that our highest volume restaurants are meaningfully outperforming lower volume restaurants in terms of throughput. What these restaurants have in common is experienced managers and crew that understand the importance of the foundations.
As our newer restaurant employees go through the training and get more real time reps. We believe we will see consistent improvement over time.
As we discussed last quarter, we continue to look for ways to enhance our tools and systems to support in restaurant execution and improve the overall experience for our employees and guests I am excited to share a pilot that we recently announced as well as an update on chippy.
We are piloting advanced location based technology to enhance our app functionality and provide a seamless convenient experience for our guests.
For guests, who opt in the program can engage with Chipotle app users upon arrival to our restaurants and utilize real time data to enhance their experience with our order readiness messaging wrong pick up location detection reminders to scan the chipotle rewards QR code at checkout and much more.
And I'm happy to share the chip. He is now in one of our restaurants and we're excited to test and learn from the autonomous robot that helps our teams make tortilla chips, bringing up their time to serve and support our guests chip. He is trained to replicate chipotle is exact recipe to cook the chips to perfection, finishing with a hint of lime juice, Andy dusting of Salt. Additionally, chip you can make chips.
Throughout the day, which results in fewer outages and improves fresh us.
Moving to our branding.
Our real food for real athletes platform continues to expand as we rolled it out to football America's most watched sport the campaign focusing on athletes that love to eat at Chipotle as part of their training and lifestyle as it helps them to perform their best by providing proper nutrition through real ingredients.
Pro level, we brought together the 88 club for the first time Internet with Dallas football grades who wore the number 88 C. D Lam, Michael Urban does Brian and drew Pearson.
The 88 club T V at Premier during Sunday football and all of the athletes go to Chipotle orders were featured in her at Chipotle is 88 club content achieved great engagement with millions of views across channels. Additionally, at the college level, we took a local approach with our real food for real athletes campaign in Ohio, which is one of our biggest markets and where we have our largest restaurants.
Port Center, we partnered with Ohio State offensive linemen and running back trivial Henderson.
On an AD narrated by former Buckeye running back rate Archie Griffin.
Tapping into the passion of the fans out for their favorite teams and game day excitement the AD showcase trivia ons journey before he runs onto the field and what was amongst our highest engage videos and social media channels.
Shifting to LTE OS we remain comfortable with our cadence of one to two L. P. O S. A year is it excites our guests and is driving both higher frequency and spend as you may have seen we launched garlic, we owe stake in mid September which is an entirely new flavor profile featuring tender cuts are freshly grilled steak with the bold flavor of garlic in Guizhou peppers.
And finished with fresh lime and cilantro and maintaining our relevance in the meta birds. We premiered the garlic, we heal staked our community on roadblocks, where users can grill season cut and virtually taste. The stake. The first 100000 users who successfully completed the Chipotle Grill simulator received a promotional code that can be redeemed in our restaurants.
Again, showing our ability to blend the meta burst with real life complementing the roadblocks experience. We also provided early access to our 30 million rewards members as we continue to provide rewards members with added value.
While still early days garlic, we heal stake is getting excellent customer feedback and is driving a higher check as a premium protein experience. However, it is faced with the challenge of rolling over our highly successful brisket program last year.
As a reminder, brisket ended in mid November and the garlic with you a state program will go through the end of the year.
Additionally, following the success of polio is Sato, we began testing chicken ALP hat store in Denver, and Indianapolis Chicken, our pet store as an exciting level of spice to guests go to orders and if successful in the stage gate process. It could be available for rollout in 2023.
Our next strategic pillar is expanding access which is still a top request from consumers. We remain on track to open 235 to 250, new restaurants in 2022 and anticipate opening between 255 to 285 restaurants in 2023, barring any further delays in construction or equipment availability.
Our pipeline remains strong and as these challenges east we're confident that we can get to the top end of our target 8% to 10% range in.
In addition to expanding in our core markets, we remain excited about new opportunities, including Alberta, Canada and small towns in the U S.
We plan to enter Alberta, Canada in 2023, with our first location in Calgary.
Alberta makes most sense is our next market to open in Canada. So that's two of the main cities, including Edmonton and Calgary, each with relatively large populations. Additionally, there's brand recognition as people from Alberta have visited Chipotle restaurants in British Columbia and Ontario.
In the U S. Our small town strategy is also performing very well overall small town restaurants have comparable margins and returns to the company average and we were excited about the growth opportunity, which is included in our 7000 long term restaurant target I'm also proud to share that opening day sales for a restaurant in a small town in Texas was a new company record I would like to express my.
Relations and gratitude to the restaurant and development teams for making that happen.
And speaking of teams our purpose of cultivating a better world starts with our people.
The importance of developing our people is paramount to running great restaurants, as well as developing future talent to grow I'm delighted that over 90% of our promotions are internal and I believe we will continue to see that percentage go up there are many examples of senior leadership roles that started out as crew members. In fact, one story that particularly moved me it was about our team in the mid Atlantic region.
We're a regional vice President team director and field leader will all promoted from within the organization in March.
Our RVP immigrated to the U S from Egypt, and his first job was as a crew member in 2009.
He has another person that has worked his way up from crew member to regional Vice President overseeing $1 billion in sales for perspective that would be the fourth largest company in Egypt. His successor as team director immigrated to the U S from Palestine in 2017 with his first job as a crew member and now oversees a 200 million dollar business and finally his successors.
Our field leaders, a woman who immigrated to the U S from Ethiopia in 2015, who also started as a crew member and now oversees seven locations totaling $20 million in sales.
Their perseverance is inspiring to many and a great example of how our growth and brand changes lives and communities for the better each of these individuals is also developing terrific talent that has the ability to become future leaders for perspective, each year, just in the United States and Canada, we have the opportunity to promote more than 1500 managers to open our new.
Franz in.
In addition to career opportunities and industry, leading benefits. We also believe that communication between leadership and our restaurant teams is critical we do this through several ways, including chipsets, where members of our executive leadership team meet with our restaurant teams to listen to their feedback.
Through this feedback loop, we were able to identify that our teams wanted more educational benefits, which is why we implemented debt free degrees and career certificates.
And team members, who have participated in our educational programs are two times more likely to be retained and six times more likely to be promoted supporting developing and growing our people will remain a core focus for chipotle and is key to growing to 7000 restaurants.
In closing I want to thank our employees for another great quarter, we remain committed to getting back to the basics and running great restaurants. I believe these actions will position us for strong performance in any environment and more importantly is key to delivering an excellent customer and employee experience I'm excited to see everyone back in our restaurants next week for our 'twenty second year of food.
And with that I'll turn it over to Jack.
Thanks, Brian and good afternoon, everyone I want to start by reiterating Brian commentary about Treasury, Rguest and earning every single transaction during past periods of economic talented focusing on our cat getting the details in the restaurants, right and providing a great dining experience has served as well as Brian mentioned this will be the primary focus of our organization and what we do.
Believe will lead to building, an even stronger brand for the future.
Now moving to our third quarter results sales in the third quarter grew 14% year over year to reach $2 $2 billion at comp sales grew seven 6%.
Restaurant level margin of 25, 3% increase about 180 basis points compared to last year and earnings per share adjusted for unusual items was $9.51 representing over 35% year over year growth. The third quarter had unusual expenses related to one time employee separation expenses corporate and restaurant asset impairment corporate <unk>.
Structuring and our previously disclosed 2018 performance here a modification.
Looking ahead to Q4, our current comparable sales trends are choppy as we lap our brisket L. T O from last year, and we expect our October comps will likely end in the mid single digit range. Assuming current sales trends continue we expect our comp to be in the mid to high single digit range for the full fourth quarter as garlic whitehill stake will be in restaurant through the end of the quarter compared to <unk>.
Brisket, which ended in mid November of last year.
Earlier. This month, we took a price increase and around 700 restaurants to address pockets of outsized wage inflation menu pricing in each restaurant increase between 2% and 3%, which had a company wide impact of about <unk>, 5% overall.
And I'll go through the key P&L line items, beginning with cost of sales cost of sales in the quarter were 29, 8% a decrease of about 50 basis points from last year, the benefit of menu price increases offset elevated costs across the board, most notably and dairy packaging and tortillas.
In Q4, we expect our cost of sales to remain at about the same level as the benefit from the menu price increases will be offset by higher beef chicken dairy and tortilla.
Labor costs for the quarter was 25, 1% a decrease of about 70 basis points from last year. The decrease was driven by sales leverage and somewhat offset by wage inflation as well as lapping the employee retention credit that we received in Q3 of last year and Q4, we expect our labor cost to be in the mid 24% range due to leverage from our menu price increases.
Well as our premium priced garlic Guayaquil stake.
Other operating costs for the quarter were 14, 5% a decrease of about 60 basis points from last year. This decrease was driven by sales leverage as well as the decline in delivery expenses due to lower delivery sales, partially offset by higher costs across several expense categories, most notably utilities, including natural gas.
Marketing and promo costs for the quarter were two 2% or 20 basis points below last year and in Q4, we expect marketing cost will be in the mid 3% range with the full year to come in right around 3% in.
In Q4, other operating costs are expected to be around 15%.
G&A for the quarter was $141 million on a GAAP basis or $136 million on a non-GAAP basis, excluding about $4 million and employee separation and corporate restructuring costs and $1 million related to the previously disclosed modification to our 2018 performance shares DNA.
G&A also includes $115 million and underlying G&A $21 million related to noncash stock compensation of.
The $1 million benefit related to the reversal and lower performance based bonus accruals, mostly offset by payroll taxes on equity vesting and exercises.
We expect our underlying G&A to be around $120 million in Q4 and continue to grow slightly thereafter, as we make investments in technology and people to support our ongoing growth, we anticipate stock comp will be around $25 million in Q4, although this amount could move up or down based on our performance and $1 million for costs associated with our field leader conference in early <unk>.
23 <unk>.
Our anticipated total G&A in Q4 at around $146 million.
Depreciation was $71 million in Q4, we expect it to increase slightly to $73 million, our effective tax rate for Q3 was 24, 4% for GAAP and 23, 4% for non-GAAP and both rates benefited from option exercises and share vesting at elevated stock prices for Q4, we continue to estimate our underlying effective tax rate will be in that 25%.
The 27% range, though it may vary based on discrete items.
Our balance sheet remains strong as we ended the quarter with over $1 2 billion in cash restricted cash and investments with no debt along with a $500 million untapped revolver during the quarter, we repurchased $107 million of our stock at an average price of $1438 and we've repurchased a total of $628 million a year to date, so far we.
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 $200 million to our share authorization program and at the end of the quarter, we had $413 million remaining.
We opened 43, new restaurants in the third quarter of which 38 had at Chipotle and we remain on track to open between $235 and 250, new restaurants in 2022 with at least 80% including at Chipotle. It's.
As Brian mentioned, we anticipate opening between 255 and 285 restaurants in 2023 with at least 80%, including a chipotle development.
Development delays remain a headwind, including equipment and construction material shortages construction labor challenges as well as permitting utilities and inspection delays, while we expect these challenges to persist into 2023, our pipeline remains strong and we expect to move toward the high end of our targeted 8% to 10% openings range. Once these headwinds subside.
To conclude we believe we have a tremendous growth opportunity ahead of us with room to more than double our current presence in the U S and Canada over the long term, we will remain focused on what makes our brand special and that is our purpose of cultivating a better world our food integrity standards, a strong unit economic model and of course, our talented and dedicated teams with that we're happy to take your.
Yes.
We will now begin the question and answer session.
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Okay.
Okay.
Yeah.
And our first question will come from David Tarantino of Baird. Please go ahead.
Hi, good afternoon.
A two part question related to your pricing and traffic trends. So first I was wondering if you could share what your transaction trends were in the third quarter and what the guidance implies for the fourth quarter and then I have a follow up related to that.
Yeah sure so.
In the third quarter think of transactions were down roughly 1%.
A lot of the <unk>.
Additional headwinds we've had with kind of the mix shifting as people return to their kind of normal course behavior has resulted in smaller group sizes.
So that's kind of consistent with what we've seen and then in the <unk>.
Current quarter, obviously, we've got garlic with your stake.
Launching right now going over top of.
The brisket and then you know I think as we mentioned, we're continuing to see some pressure on the low income consumer.
We're still seeing transactions being pushed.
Negative range.
And obviously, we will continue to keep an eye on it as we go forward check on us want to add anything to that yes, yes.
Pricing during the quarter.
They were running right around 13, and now moved up.
A bit in the fourth quarter. So that's part of our guidance as well I think the big thing in the fourth quarter to note is just brisket was very successful last year and we ran out of inventory in the middle of November and so the comparison actually gets easier in the second half of the quarter.
Great. That's helpful. And then my follow up Brian as you know I think.
Youre aware theres been a lot of concern about the pricing strategy hurting the traffic and I think you mentioned in your prepared remarks that you're not seeing resistance to the price increases yes, sorry, I was just wondering if you could comment on.
I guess, how you're thinking about your price position now and how you think.
Think about the traffic trends, you're seeing and whether or not you think that you've.
You've seen any any resistance. It doesn't sound like you think you are but I guess you know the.
Traffic being slightly negative.
Just running wanting you to have a chance to address that.
Yes sure.
Well I mean look the simple fact is the absolute price point and the business is still very competitive and frankly.
Very attractive relative to.
When you look at regional players.
But when you look at the fast casual competitors, we're anywhere from 10 20.
20%, 30% less than what you see on their menu.
So yeah.
<unk> seen Unfortunately, you had all this inflationary environment everybody is taking price. So our costs I think are up over 20% over the last two years not surprising other people are experiencing something similar and they've taken pricing accordingly, so our relative position to our competitors or the alternatives for what you can get when you eat out really when you stayed in a really.
Strong position so that.
That value proposition remains strong and then when you look into the business, we're not seeing people all of a sudden not buying guacamole or.
All of sudden changing would be typically add to their order or switching between proteins prey stayed pretty consistent.
And then the last piece I would add to that is no.
If you go to the grocery store, there's a lot of inflation there too. So if you think about all the places where you can get food.
There are way up and our relative performance in that environment is one where we're still a great cost opportunity I guess for the consumers and the way I would describe it.
So getting a chicken burrito exactly how you want.
At the speed at which we can provided with the culinary and the ingredients that we provide for roughly nine bucks or less.
That's tremendous value.
Great. Thank you very much.
Yeah.
The next question comes from Nicole Miller of Piper Sandler. Please go ahead.
Thank you.
Point of of price components of mix and traffic can you just talk about the price P. So what is the art and science that you blend for the here and now and how do you think about using that tool to protect margin. But then also long term, how do you exercise that pricing power or not against the long term.
I'm like unit opportunity, which I imagine you know really requires.
It requires affordability right appealing to the masses. So if you could talk about that a little bit that'd be great. Thank you.
Yeah sure. So I mean, that's exactly right Nicole the the way we're trying to balance. This is really only used price as the last lever to pull.
And I think that's what we've done throughout the course of the last call. It two years.
Because we like having the strong value proposition.
Frankly.
I like being in the position, where we have the best culinary with the best ingredients at arguably the best price.
And so it's a position of strength and it is a position we want to hang onto as we go forward.
The reality is in an inflationary environment youre going to have to pull that lever and thats why I think it's really important to look at how your how your pricing stacks up relative to People's alternatives. Those alternatives are either the grocery store or other restaurants, and when you look at those our value proposition remains in a really strong place. So we are delighted to continue to senior.
Its opening.
<unk> had a terrific opening rate.
Theres still achieving 80%, 85% of what our typical restaurants do our chipotle and continue to outperform and then frankly, even our small towns. We're continuing to see just tremendous openings. So I think that tells me, we're getting signals and all different fronts that our value proposition remains really strong whether it's a new restaurant coming.
Through an area or an existing restaurant competing in an area that we've been competing in for a while so that.
That's the needle we're trying to thread.
And as that applies to the fourth quarter commentary then is that just price that's flowing from August into <unk> or could you speak to incremental price in the fourth quarter to get above that 13% is that essentially being used to protect margin, even though I guess, you're really hitting that 25%.
Profile, our algorithm margin you'd be looking for.
Yeah, Nicole there's actually three things that are going on when you move from the third quarter to the fourth quarter first we took our last price increase around August 1st so that hit part of the third quarter. So.
So the rest of it.
Fourth quarter is going to get a get a bull hit we also on a very targeted basis, we identified pockets throughout the country and there were several hundred restaurants that had <unk>.
Accelerating wage pressures. So if you look at what our typical wages are across the country and we took that very large 15% increase we got everybody up to $15 or more in the second quarter of 2021, we have individual pockets in these restaurants that we identified that we're going one two and $3 above what.
The rest of the country was going with what we're doing and that's just because the labor market was so tight there. So what we did we just try to to up the menu prices just to cover some of that not to get our margin back, but just to try to cover some of that then ended up being somewhere between 2% and 3% in those 700 restaurants out another 50 basis points.
So over overall too to the company and a third piece Nicole is we took our price increase in the fourth quarter of last year around that December 17th December eight something like that and that rolls off. So those are the pieces. So youll actually see for the quarter, the pricing will bounce up a little bit before it.
Drops back down to the first quarter sold them from 13 up closer to call. It a fortunate half or approaching 15 before it drops down to 11% in the first quarter of next year.
Thank you.
The next question comes from David Palmer of Evercore ISI. Please go ahead.
Thanks, a question two questions. The first one is that a question on food costs that those costs are down under 30% and obviously, that's well off where they used to be I'm wondering if that's just all pricing net of commodity inflation or is there something else going on in there for example.
The fact that more is being made up the digital make line, that's helping your portion sizes or portion control, where the rebound in beverages or something like that I'm wondering if there's more than just price net of commodities and I have a quick follow up.
Yes, David there is really there are two other things.
One is remember we're pricing.
We've got higher menu prices for our delivery business, our delivery business is about 17, 18% of our business and so we actually rather than charging fees, we charge virtually no fee. We charge. The dollar fee then plus a small commission. So our menu prices are much higher there. So that gives you what appears to be much lower food cost alright, So you get a benefit on the <unk>.
The other thing we talked about inflation over the last two years food inflation has been about 20% of labor inflation has been more like 24%. So anytime we take price increases to cover labor when labor is.
Inflating at a higher rate than food cost again, you get some of that benefit in the food cost. So that's why it's under 30% Youre right. Historically, we generally not seen our food costs, 130%.
Yeah, and just a follow up.
Whether the weakness and the low end is.
Retains to your pricing or the fact that certain customers are getting priced out or not I'm wondering what actions. You think you have in your in your stable of potential tactics.
That you can deploy.
Two to correct that are there is this a is this something where you really dial up the CRM and then start doing.
Taxes to keep people sort of in the tens and keep there.
Get people back in the flow again, how do you think youll address that weakness if at all.
Yes, I mean look one of the things we're definitely evaluating is how do we separate these groups into understanding their current situation.
And then what do we need to do to ensure that they can still have access to the chipotle experience in.
The team is hard at work at figuring out how best.
To use our CRM slash rewards program to be very targeted with the different cohorts that we have.
Some of it is obviously the low income consumer or some of it is also what they are interested in whether it's having more access.
Digitally or having a different experience when it comes in it comes too coming into a restaurant. So that's one of our key tools that I think that's one of the big advantages that we have frankly going forward is we've got this tremendous database that.
That we can then.
Smartly communicate with customers, so that we're giving them relevant messaging that keeps them engaged with chipotle.
Thank you.
The next question comes from John <unk> of Jpmorgan. Please go ahead hi. Thank you I think the question was on a project square and Brian you specifically mentioned in your prepared remarks that there is still more to do there and I just wanted to get a sense or.
Or improvements that you could still make relative.
You know to how you're currently executing I wanted to get a sense of how much of that is.
Just giving the employees and the managers more time to work with the current system. I mean is it just muscle memory that needs to increase or are there changes that you can make or would consider things like increasing staffing levels increase pay technology. What have you anything that you can do on your end.
You know that came in in the near term improve some of the customer metrics that you were striving to achieve.
Thanks for the question obviously.
One of the things that has been I guess, a breath of fresh air is we've now had the ability to get back to focusing on the basics of Chipotle and obviously it starts with great culinary and then it starts with great teams being trained and developing each other and look I think the other hand, we're now surrounding these teams with us.
Technology to have more real time information on the performance of the restaurants, so that our field leader, our general manager and our team knows either where theres, an opportunity to be better or where there is <unk>.
Success, let's put more energy to where that successes.
The fact remains since January we've got roughly 50% of our field leaders are new to the company.
And I'm, sorry, not new to new enroll rate so 90% of them promoted internally, but we've got a lot of new people in the chipotle business at new levels of responsibility and so that's what project square one is all about making sure if youre a newly promoted field leader you know how to do the job youre newly promote.
General manager you know how to do the job maybe are new to our company altogether at the crew level you know how to do the job and you know over the last two or three years, we've had to flex.
Based on different regulations coming at us for how we wanted to run the restaurants now we're getting back to what we believe is the right way to run a chipotle.
In an environment that allows us to execute our standards, our processes and our culinary and so.
There is still opportunity for us to get better at it because the teams need more reps, but I think we're also surrounding them now with I think clarity on what the standards are as well as tools to give them clarity on how they are performing real time.
And have you actually noticed any changes in your guest satisfaction guest satisfaction scores where is that something that you're just trying to achieve internally.
Yeah, No I mean, we've seen improvement is definitely in our in store.
Experiences and I think Thats, a testament to the folks getting back to the business of running the frontline, we still have opportunities to get better on that digital business when it comes to accuracy specifically.
And it's really that accuracy shows itself more in a delivery occasion, but we're seeing evidence where we're continuing to make great progress I think.
I mentioned this earlier and our higher volume restaurants, where you have a more tenured field leader of more tenured general manager more tenured crew theyre really outperforming on all of these metrics and their satisfaction scores are higher and their volumes are higher the turnover is lower.
We know when we get teams.
Stabilize have high levels of capability, we get great results and that's what projects square. One is all about is just reestablishing those processes. Those standards and then ensuring that people have the capability to deliver on those processes and standards.
Very helpful. Thank you.
Our next question comes from John Glass of Morgan Stanley . Please go ahead.
Thanks, Good afternoon, Brian can you talk about the efficacy of the L. T O as youre running today versus a year or two or three ago is this driving incremental traffic or was this just like a check benefit right as people sort of purchase these new but youre not really driving as much in terms of new customers I guess, where I'm going with this is you run kind of a <unk>.
Red Mill now of sorts right, where you have to continue to innovate to make sure that you are covering last year's promo is there an off ramp to that do you think about ways to broaden or differentiate promotions beyond just protein differentiation into other things that might help you.
As you started eventually you're going to have a protein that doesn't do as well as the year ago and then what.
Yes sure. This is something that obviously reevaluate, but I don't think of our business is relying on one thing.
When we are executing.
Right now we're doing garlic with Ya stake I think there is incremental business to be had because we have better throughput better execution in the restaurant there is incremental business to be had because we have better digital execution.
And then there is business to be had because we give people some menu variety.
And then frankly in this environment youre dealing with some macro headwinds on a lower income consumer so I never really think of this as it is just one thing to lap the prior year I think of it as like how are we growing our brand every month every year every day and that's why I think one of the advantages Chipotle has us.
We have these layers of business that continue to grow with us.
Obviously, we've got some macro issues that we're dealing with between inflation and the challenge from the lower income consumer.
I think our strategy is still a lot of growth in them and it's not one is overwhelming the other.
Thanks for that can I just clarify it.
You made the comment about traffic and the dynamic between mix and more people are coming back to the restaurants.
Shouldn't that benefit traffic and maybe to the detriment of mix I think you made the comment that that was impacting traffic, but I would've thought that would've been a positive do order counts even if it was was hurting mix do you see it that way or do I have that wrong.
Go ahead Eric.
Mix, we're seeing John is group sizes. So as we're seeing customers kind of returned to more normal habit. So it's less digital.
More in restaurant and even in the in restaurant channel. There is a slight decline in the group side. So what's happening what seems to be happening is people rather than working from home and going with like family for example, bringing dinner.
Dinner home for their family their kind of back to eating more on their own as an individual that they might be out with a group of four people, but they're all paying for their own lunch. So the group size across all the channels and then because theres still a shift moving from digital to in store. The group size is the biggest mix thing that we're seeing in that that ends up being.
We are selling less burritos per transaction. So it's got a negative mix impact.
But a positive traffic impact it does have a positive traffic impact that's right. Okay. Thank you.
Yeah.
Our next question comes from Dan Cartwheel of Bernstein. Please go ahead.
Hi, good afternoon, so I would like to understand a bit more whether the demand and the comp is coming from mostly new customer acquisition versus.
Essentially like improving on the throughput in your high volume stores.
Well, so we definitely have.
As we look at our data at least in the digital space, we have an understanding of.
New customers versus and as we define a new customer that hasnt.
Canada Chipotle in the last year.
And we continue to see that group.
<unk> be highly represented.
Where we're seeing the most change in frequency is with not surprisingly are more.
Heavy user.
And so that continues to be the case.
It's one of the things I think that the digital business did for US. If you go back three or four years ago, one of the big surprises for US is it really attracted a lot of new users and then obviously during COVID-19.
Ramped up quite a bit because of our digital business growing.
So we continue to stay focused on bringing in the new user, but we also have a equal effort on how do we get more frequency out of our medium and heavy users.
Got it and then one more question I know you mentioned there is a comparable level of margin between the kind of small town score versus the kind of people have been store I Wonder. If you can also like decomposed score us kind of the high level economics, and if we were to talk about pricing versus.
As traffic are you seeing any major differences between the urban stores versus the small town stores.
Yeah.
Yeah, I mean, just set a very high level. The small time restaurants on average I mean, we've had some barnburner that are breaking records in terms of sales, but in terms of as a group all of our small town restaurant or a little bit below what our average restaurant would be so maybe about 150000.
Or so but the cost structure is more favorable in these small towns. So our margin actually even though it's on a smaller volume is actually higher investment costs tend to be lower as well. So the cash on cash returns in a small town.
Our are stronger than what you are seeing any typical average chipotle now if you go back to urban urban is still if you are talking about real central business district, those restaurants are still not all the way back there are much better and they're they're out comping the non urban locations, but if you go all those out to 2019, they still have not quite kept pace and so the <unk>.
<unk> urban restaurants, they tend to have higher cost of doing business. They tend to have higher rents and because the volumes arent keeping pace with the non urban locations those are under a little bit more pressure, but again they are all comping their non urban cohort. So we think given enough time that hopefully will come all the way back.
Thank you.
Our next question comes from Dennis Geiger of UBS. Please go ahead.
Great. Thanks for the question, Brian I'm wondering if you could highlight the the biggest opportunities a bit more from a transaction perspective.
You mentioned kind of running slightly negative in the quarter I mean quite frankly, all most all brands are running negative transactions right now and so you guys actually look fairly solid relative to the industry, but I guess in looking ahead curious if you could just highlight some of the bigger levers that support transaction growth rest of the year and into 'twenty. Three I know you just commented that it's not one.
Thing, but just in thinking about the throughput the innovation dining room traffic and can still improve.
Thinking about the macro improvement just wondering if theres any more detail on kind of unpacking that and kind of how you think about transactions.
Improving again from from here. Thank you.
Sure.
Look obviously one of the biggest opportunities for us is to make sure. Our restaurants are staffed and trained and I think Jack mentioned this we still have pockets of areas, where we're still battling that that very challenge and.
I think as long as we have the ability to attract people.
And use obviously.
All of our benefits and purpose of the brand, but at the end of the day, you've got to make sure the wages.
Attract and retain people so.
The ability to keep these restaurants staffed have the team is fully trained and then executing against our standards. I think there is a lot of transaction opportunity in that both on the frontline as well as in the digital business and doing both of those things really well.
I know there is upside in the business going forward.
I think we've made tremendous progress coming out of kind of the COVID-19 challenges.
Challenges and then coupled with the labor challenges in the inflationary environment. So we're in we're in a position of strength, but I think we can be a lot stronger and better going forward and that will manifest itself I think in some additional transactions in a tough environment. That's why you hear us talking about Hey look we've got a treasured every guest because we got to.
Get it right.
Because you know, it's going to be a tougher environment for the consumer going forward. So.
That's a big opportunity without a doubt and then obviously we will continue to.
To take advantage of our CRM tools, our marketing capabilities to continue to keep people engaged in.
Hopefully loving the brand so that they want to come as well.
The other thing I should mention too is we're going to open a lot of restaurants in the fourth quarter. Just the fact that we're going to be opening more restaurants gets us more new users and gets people to have more experiences with chipotle, which continues to build on itself.
A positive.
Kind of vibe for a growing vibrant brand and people like to work there people like to either so.
So we're going to keep pushing that path forward too.
Thank you very much.
The next question comes from Sara Senatore of Bank of America. Please go ahead.
Hi, Thanks, I wanted to just ask a little bit about your customer base.
It's kind of a two part question. The first is you know.
That among in smaller towns Youre talking about kind of lower volumes typically I think it does it slightly lower income cohort.
Spend a lot of time talking about low income consumers. So I just wanted to see if you could kind of reconcile those and whether this means something different about your value proposition in small towns and then the other piece is just you know thinking about your marketing campaigns and emphasizing athlete in gaming you know could you talk a little bit about who you are.
Your customer is seeing.
Seems like it's mostly targeting younger men, although I'm, neither young nor man, so I can't speak to that from personal experience, but maybe just talk about.
Those two components.
Yes.
First piece just on the consumer.
We continue to over index with young people, it's pretty evenly split between males and females.
We do have a little bit of a skew towards higher income, but when we talk about that SKU, we're really talking about north of $75000.
And.
We want to be showing up in the places that are a part of the culture. So.
I mentioned roadblocks.
Which is obviously a met averse type.
Initiative I mentioned athletes, which is I think just another way of talking about <unk>.
Selecting the right nutrition for the performance you want to achieve.
So.
You got to think about these things is like how do you make sure you're staying relevant in culture and how do you. Both follow culture and then at times lead culture, and that's we want to be doing.
There's a lot of power and being with young people.
And we're always going to be figuring out ways to stay young.
That's not to say that we don't have all age groups eating at Chipotle, we do.
But we like the idea of having a position of strength with call. It the team to <unk> and then also a position of strength with the higher income.
Cohorts so.
That serves us really well that's going to be some of those continue to be a position of strength as far as small towns go.
I mean, we're seeing tremendous success in these small towns and that's why I think it's important to remind ourselves we're talking about higher income, we're talking about $75000 or higher as an over indexing. It's not to say that we don't have people that are in less than $75000 coming to chipotle as well.
And I think when you demonstrate.
Great culinary great ingredients, great speed, greater customization and people decide how am I going to spend my 10 Bucks, it's hard to be chipotle in that equation. So I think thats why we continue to add units opened very successfully.
Small town urban suburban.
We're having a lot of success as we opened new units and.
We're continuing to have a lot of success within the four walls of the units that we currently have opened so.
We like the composition of our customer and we like.
The economics that come with it.
Thank you.
Yeah.
The next question comes from Andrew Charles of Cowen. Please go ahead.
Okay.
Great. Thanks, Brian I wanted to come back to your comment on the layers of business Youre evaluating and I know you noted continued confidence in chipotle strong value offering, but with greater concerned around the lower income consumer and your concerns on the consumer in the coming months.
From a macro perspective could we see this manifest and focusing more on the snacking occasions, or perhaps offering more value during shoulder periods. When restaurants are under utilized and then I have a follow up question.
Yeah look I mean, what we've really spent a bunch of time on is looking at what happened in the last.
Kind of recession or slowdowns and.
The good news for US is yes, you had some low income consumers step away, but we also had.
Higher income consumers trade into our business.
And then as economics improved.
All cohorts came back the business in a big way. So we didn't lose those that came in and we regain those that unfortunately got hit by some tough economic headwinds.
So we're not going to be chasing.
With discounting.
In the traditional sense, we are going to use targeted CR.
RM initiatives that we now get a great return.
And also play a meaningful role in the consumer that receives that message.
No.
We've seen it work in the past we believe it will work going forward and I think the key thing for us to do through this whole period is execute our basics really well that's our strongest point of differentiation, our strongest point of differentiation without a doubt is our culinary our ingredients, our customization and our speed.
We do those things really well wont be rewarded with People's business.
That's very helpful.
Jack just with October disclosed through running around mid single digit comps can you talk about the scenario, where you would hit the high end of <unk> same store sales you know its the entirety of that driven if transactions were to accelerate or is there a scenario where you'd look to take pricing in December in December similar to past years practices.
No.
Andrew.
When we provided that guidance when we did the.
Uh huh.
Really the analysis in the forecast.
It's really all about brisket the idea here is that.
We've got.
Like why he'll stay through the entire.
Quarter, and Bristow was very very successful, but then we ran out we ran out in mid November so when we look at what's going to happen in the second half of November and then as we move into December those comparisons alone getting easier gives us the confidence that we can get to we think will move up that's why we kind of <unk>.
Range bounded the guidance from the current trend we are running today, which is mid single digits up to high single digits. Because we do think that easing up comparison, it's going to it's going to lift our comp, but we don't have any incremental pricing into that into that guidance.
That's helpful. Thanks, guys.
The next question comes from Jon Tower of Citi. Please go ahead.
Two questions. If I may 1st Jack I was wondering if you could talk about.
The total cost basket or buckets that youre looking at for 2023, obviously right now we're seeing some commodities come off the boil.
And food prices are more favorable than where they were just a few months ago. So I'm curious how you see those persisting into 2023, and then more importantly on the labor side of the equation, how you see that playing out.
23 versus 2022.
Yeah.
It's tough to predict I mean in the last year.
If you if you took a look at anybody's crystal ball and nobody really had this figured out in a place just kept coming and coming and coming it does seem like things are.
Getting closer to stable right now.
Areas that I would say there is more upward pressure would be in terms of beef in terms of our cooking oil I mean, thats still significantly affected by.
The situation going on in Ukraine, and Russia, because so much of the.
The oil that we use comes from that area.
And then tortillas as well as another area that work that we're concerned about.
Chicken, we feel pretty good about we do have contracts for chicken and so we feel good about that paper and packaging.
That's driven significantly by the cost of freight because most of the packaging comes from overseas from from Asia, and it looks like some of the crazy freight costs that we've been paying in the past are easing.
Jerry.
It has been elevated and so we're optimistic that there'll be some additional supply into next year. So there's kind of some pluses and some minuses.
Overall, what we're hoping is for mostly stabilization. So if some of the softening in commodity costs and offset some of the pressure we are seeing especially in beef and cooking oil and if we could breakeven for a while and not have to see either margin margins degrade or have to consider another price increase that would be fantastic to be in that position for a while.
<unk>.
And then just on labor.
Labor is unpredictable because we thought it was settling into this normal kind of mid single digit range and that's what I'd like to say and yet as we did analysis. We found these 700 restaurants, so it's about a quarter a little more than <unk>.
Little more than a quarter, a little less than a quarter of a restaurant.
That we're having to take the $1 $2 $3.
Increase in starting wages just to make sure that the restaurants, where SaaS. So with what the fed is doing you think that the higher interest rates is going to have an impact on the labor market and so that would be.
Good news in terms of access to labor, but it is a bit of a wildcard right now if I if I had to put a stake in the ground I would say the inflation expectations would be kind of a mid single digit, but theres going to be a caveat to certain pockets throughout the country that we're going to have to do we have to do to Brian's point to make sure. Those restaurants are staffed we can train people have been holding on to them.
We get them onboard.
Great and then just on the comment regarding return to our chance to get to 10% unit growth at the time I know in the past that our big Governor of growth has been.
Human capital it doesn't sound like that's necessarily but the problem any longer it sounds like it's more related to.
Development headwinds on equipment construction material et cetera.
Construction labor challenges, so what sort of lead time do you have on on that potentially improving meaning how quickly could you ramp that growth.
If you started seeing say all of those things improve.
Yes, I mean, the inventory there. So we've got inventory right now that could get us close to if not all the way to that 10%, but what's happened is.
Two two and a half years like before the pandemic, we can open up a restaurant from the time that we go see a restaurant a site we like the site we start serious negotiation to when we get that restaurant open it could be a 14 or 15 months period. We're now looking at 2021 'twenty two months. So I mean, it's a significant increase.
And it's because of all the factors that I mentioned in my prepared comments so.
The biggest challenge we've had is frankly supply I mean, if its components for example for walking cooler or the HBC.
You can't get the restaurant open there is just no chance of doing that so.
If we see some easing in the supply chain for the materials and the components that we need for the restaurant that all by itself could knock off a couple of months, but then there's also construction labor.
Theres also permitting and so we really need kind of all of those things resolve themselves, but our ability to get the restaurants open on more of the timeline. We saw a few years ago is there as long as the rest of the pieces fall into place.
Thanks for taking the question.
The next question comes from Jared Garber of Goldman Sachs. Please go ahead.
Great. Thank you for the question.
Brian or Jack I wanted to just get an update maybe on some of the labor and efficiency tools I know you talked about them a little bit earlier, but I think on the last call you had given some more specific.
<unk> on the throughput where you are today versus where you were maybe historically during your peak throughput years.
So if you could give us an update maybe on where you are on that and how you see that going forward and maybe the timeframe of how you expect or when do you expect maybe to get back.
Back towards those pre.
Pre food safety levels.
Yes, sure. So right now we're running in kind of the low twenty's on that Max 15 measure that we've been talking about.
It's nice to see those in our higher volume restaurants those.
Those guys are running down the high Twenty's. So if you go back to like 2019.
We think there's a real possibility.
For us to get the entire system in the mid to high <unk> and then obviously.
As we've talked about this many times when that starts happening everything around it starts going up too and.
So that's what we're after.
That's why we're making sure that we've got these restaurants staffed theyre getting trained and that the cultures focused on the standards and the processes that we know result in great throughput, which ultimately means great experiences for our guests.
Thanks, and if I guess, if I can.
Just follow up is there a way to maybe frame how what the what the traffic trends look like in some of those higher volume stores, where youre seeing better throughput versus those lower volume stores just to contextualize it a little bit better.
Checkpoint we've said.
Every like.
Four five every five transactions.
A point of comp every five transactions as a point of comp. So that's the way to think about it Jerry yeah.
And Jared the higher volume restaurants.
Have not just higher volume they tend to out comp.
And they tend to be much more predictable, but to Brian's point they tend to also have more.
Tenured management teams more tenured crew so they they don't just have the reps and a few of the team. The entire team has been attacked urban with Chipotle for quite some time. So that's why we're pretty confident that if we can get all of our new folks from field leader through the management ranks and into the CRU just get them more reps and more experienced they gain a lot of confidence.
They gain skill.
And we know the throughput numbers are going to go up.
Thank you.
Concludes our question and answer session I would like to turn the conference back over to the chairman and CEO , Brian Nichols for any closing remarks.
Okay, Yes, thank you and thanks for all the questions.
I appreciate all the conversation on pricing and value, obviously, it's front and center for us as we navigate.
The most recent challenges the one thing I just want to reiterate is.
The proposition as it relates to value for Chipotle remains very strong.
No matter, how you look at it whether you look at it on a relative basis to what's competitive pricing look like when you look at it two alternatives like with the grocery store, whether you look at at how new units are opening and how we're performing on that front. We continued to demonstrate in all areas that the Chipotle brand is strong.
And we continue to have a really strong value proposition.
Just wanted to emphasize is the focus on having a restaurants staffed trained and executing against the standards that.
To provide a great experience for our customers and our employees is what projects quarter. One is all about and the teams are focused on achieving it which we know them will result in better throughput better experiences for everybody involved. So the combination of I think these five strategies, we've talked about with the focus on project square.
One and keeping a close eye on our value proposition I think sets us up for.
A very long runway of growth and we couldnt be more excited about where our future is headed and obviously, we will deal with the headwinds accordingly. So thanks for everybody taking the time and we'll talk to you next quarter.
Yes.
Okay.
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