Q1 2023 Chipotle Mexican Grill Inc Earnings Call
Hello, and welcome to the Chipotle Mexican Grill first quarter 'twenty two 'twenty three results conference call all participants will be in listen only mode.
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I'd now like to turn the conference over to head of Investor Relations and strategy Cindy Olson.
Please go ahead.
Hello, everyone and welcome to our first quarter fiscal 2023 call earnings call by now you should have access to our earnings press release, if not it may be found on our Investor Relations website, IR got Chipotle Dot com.
I'll begin by reminding you that certain statements and projections made in this presentation about our future business and financial results constitute forward looking statements.
These statements are based on management's current business and market expectations.
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-Q 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 after we.
We will take your questions our entire executive leadership team is available during the Q&A session and with that I'll turn the call over to Brian .
Thanks, Cindy and good afternoon, everyone 2023 is off to a great start with first quarter sales and margins ahead of our expectations.
For the quarter.
Sales grew 17% to reach $2.4 billion, driven by a 10, 9% comp in store sales grew by 23% over last year digital sales represented 39% of sales restaurant level margin was 25, 6% an increase of 490 basis points year over year diluted EPS.
<unk> was $10 50, representing 84% growth over last year, and we opened 41, new restaurants, including 34 Chipotle.
These results demonstrate that our focus on running great restaurants, with exceptional food and exceptional people who's driving performance. Additionally, we benefited from exciting new menu innovations, including fajita, Quesadilla and chicken ALP at store.
Transaction trends were positive throughout the quarter and the strength has continued into April .
I would like to note that beginning this quarter, we are returning to our pre COVID-19 practice of providing annual comp guidance and anticipate comparable sales to be in the mid to high single digit range for the full year.
We will also continue to provide quarterly comp guidance for the remainder of this year and anticipate second quarter comps in the mid to high single digit range.
Now I would like to provide an update on our five key strategies that will position us to win today, while we create the future 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 making the brand visible relevant and loved to improve overall guest engagement.
Three amplifying technology, and innovation to drive growth and productivity of our restaurants and support centers.
Number four expanding access and convenience 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 recently held our field leader conference, which included all field leaders team directors and regional Vice presidents as well as leaders from our restaurant support center message was clear we were focused on developing exceptional people and preparing exceptional food. It was truly inspiring to see over 600 highly motivated.
It is aligned to deliver chipotle standards of excellence and I'm proud of the progress our restaurant teams are making.
We had another outstanding quarter for turnover with both hourly and salary metrics being some of the best I've seen in five years, the stability of crew and managers and he returned to shoulder to shoulder training is helping to translate project square one into results.
As our teams are getting more experience, we were continuing to see improvements in each of the projects square one focus areas, including throughput on the frontline on time and accuracy on the digital make line being prepped and ready with our delicious food and the overall customer experience.
Specifically on throughput, while we're making progress we see opportunities to do better one area. We're focused on is deployment on the front make line and the digital make line during peak periods. We have noticed that when the digital make line gets busy our managers tend to pull a crew member from the frontline to help which is impacting throughput. We are currently testing changes to this.
Smart pickup times logic based on different sales and deployment levels in several markets and early results show that we are increasing throughput on the frontline and increasing on time on the digital make line without impacting sales.
Leveraging our stage gate process, we will continue to fine tune our testing before rolling it out in phases across our restaurants.
We have also added an additional incentive for our teams as we recently rolled out digital tipping across our restaurants as part of our ongoing effort to enhance our crew member benefits. This will enable our teams to be rewarded for their efforts and preparing delicious food and providing a great experience for our guests.
Overall, our focus on being brilliant at the basics and reestablishing our standards of excellence is resonating well our teams loved to be held to a high standard because when you achieve it you feel like you were part of a winning team with the ability to be rewarded through bonuses and growth within the organization.
We are starting to feel this again in our culture and in our people.
When operations are running better it helps all other drivers of sales to perform better such as menu innovation, which brings me to our brand as we often discussed we continue to look for ways for the Chipotle brand to be more visible more relevant and more loved and we've got a couple of very exciting new menu innovations that did just that we responded to a real time opportunity to support our passionate.
Tick tock fans, who wanted to heater veggies and Chipotle honey vinegarette as options for our digital exclusive quesadilla.
We worked with two popular tick tock food reviewers who made the idea of go viral at the start of the year and leveraged our strength in digital marketing and culinary to creating exciting new menu item utilizing all existing ingredients.
The results have been outstanding.
During lunch, we nearly doubled our cases to your business and had two of our top digital sales days of all time, we have decided to make this a permanent menu item as the addition of fajitas torque hasty along with dipping getting a combination of our honeymoon of grit and sour cream is really delicious. The best part is that is made up of all existing ingredients, which limits additional complexity in our restaurants.
And we continue to see incremental cases these sales because of this launch we also launched chicken out past stores limited time offer our pet store has been gaining mass appeal in recent years and we tapped into these consumer trends to offer one spicy spin on L passed or with our freshly grilled chicken as.
As we mentioned last quarter. This is also operationally simple to execute as it is our existing Adobe chicken cooked on the plant and then mixed in Enel Pet store Marinade. This has allowed for an exciting new menu items, while still maintaining our focus on project square one.
This is the first time, we've launched a new menu innovation globally as it was rolled out in the U S, Canada and Europe . The launch has been a success and early indications show that it is outperforming polio asato, which was our most successful protein L. T O ever.
Turning to rewards, we now have 33 million rewards members and we saw a nice pickup in enrollments as we rolled out free Potently, which was designed to deliver a strong value proposition and attract new members to our transaction driving a rewards program.
Throughout the year members will receive 10 personalized free rewards ranging from our side of block two a bag of chips to a free fountain drink. In addition to driving enrollments. We also saw an increase in member engagement is reportedly gained traction throughout the quarter.
Shifting to amplifying technology and innovation, we continue to leverage technology to improve our in restaurant and digital experiences as we mentioned last quarter, we began testing a new grille to improve the overall cooking process for a chicken steak. The grille is much faster allows for more consistent execution and maintains our high culinary standards as it cooks, the chicken and steak to perfection.
With the same seer and chart the.
The feedback from our teams Energas has been tremendous and we are currently in the process of rolling out the grille to 10 additional restaurants as a part of further validation through our stage gate process.
During the quarter, we also rolled out our advanced location based technology for our App, which allows for a more seamless process for skinny rewards as a price reward members to scan while they are waiting in line. This has resulted in more rewards members scanning for points in our restaurants would drives further engagement in our rewards program.
For digital orders had also alerts app users when it appears they are ordering from we're heading to the wrong location as one of our most frequent refund request is due to guests arriving at the wrong restaurant.
Since rolling out this feature we have seen a meaningful reduction in those refunds.
We're also investing in technology and innovation through our cultivate next one to help us scale and advanced our food with integrity mission, We recently announced two new investments, including local line and zero acre farms local line as a leading local food sourcing platform connecting local producers with buyers and helping them digitize their operations and sell products.
We believe local line will help chipotle increase the amount of local food for our 3200 restaurants and zero acre farms as a food company that is focused on healthy sustainable cooking oils made by fermentation that are more environmentally friendly.
Additionally, we recently announced our new responsible restaurant design, which includes features like rooftop solar panels, all electrical equipment and systems OLED lighting cactus leather chairs in electrical vehicle charging stations at select locations. While the pilot will go through the normal stage gate process. We believe it will enable us to take successful elements and incorporate.
Them into future restaurant formats.
These investments and initiatives will help to further our purpose of cultivating a better world and reflects our commitment to inspire real sustainable change with a potential impact far beyond our company.
And this brings me to expanding access convenience with a long term target of 7000 restaurants in North America.
We remain on track to grow new restaurants, 8% to 10% per year for the foreseeable future with at least 80%, including a chipotle.
The expansion of Chipotle and adds additional convenience by adding our unique order pickup channel, which comes with a larger digital penetration driven by the order ahead business.
In Canada, we opened our first Chipotle in Ontario, and we also expanded access and convenience with our recently announced partnership with skip the dishes.
As Canada's largest food delivery network finally, new openings in small towns continues to be a success with the recent opening of a restaurant in a small town in California that had the second highest opening day sales ever in fact within the last year, we had our top five openings in the company's history of which four were in small towns.
I'll turn now to sustaining world class people leadership by developing and retaining diverse talent at every level are.
Our recent field leader conference was a time to celebrate their achievements and career progression of our teams and I'm always amazed by all the inspiring stories of our leaders.
In fact, one of our field leaders from the Arizona Sub region, who won the award for best throughput has been with Chipotle for 20 years, She's clearly doing a terrific job leading your patch of restaurants. However, what is even more incredible is that she has two sisters wanted team director, who has been with Chipotle for 24 years and is consistently a top performer in our region and the other is our recently promoted feel.
[noise] leader Who's been with Chipotle for 18 years, each has a unique story, but all three sisters started as crew members instead, the chipotle changed their lives for the better and gave them the ability to develop and grow others within the organization when.
When you combine our industry, leading benefits with our tremendous growth performance culture, and then layer on top of exceptional leaders, who will help to grow and develop our future leaders Chipotle really is a special company.
So in closing I want to thank our restaurant support center teams for all their hard work in delivering a great quarter, our focus on getting back to the basics and reestablishing Chipotle standard of excellence is beginning to drive strong results. We will continue to develop exceptional people and prepare exceptional food and of course treasurer, our guests and doing this I strongly believe we.
Can make chipotle better than ever with that I will turn it over to Jack.
Thanks, Brian and good afternoon, everyone sales in the first quarter grew 17% year over year to reach $2 $4 billion as comp sales grew 10, 9% restaurant level margin of 25, 6% increased about 490 basis points compared to last year relative to our guidance for restaurant level margin benefited from leverage from higher sales labor.
Ts and lower avocado prices.
Earnings per share was $10.50, representing 84% year over year growth there.
The first quarter did not have any material unusual expenses, so our GAAP earnings and non cat earnings are the same.
Brian mentioned, we're going back to our pre COVID-19 practice of providing annual comp guidance, we anticipate comps in the mid to high single digit range for the full year, assuming we did not see further deterioration in the macro environment.
As a reminder, for Q2 and the full year, our comp stepped down when we lap the menu price increase we took in late March of last year, and we anticipate comps will step down again, when we lap the menu price increase we took in early August of last year.
We'll continue to buy quarterly comp guidance for the remainder of this year and we anticipate comps in the second quarter in the mid to high single digit range as the transaction trend for the first quarter is continued into April .
I'll now go through the key P&L line items, beginning with cost of sales.
Cost of sales in the quarter with 29, 2% a decrease of about 180 basis points from last year, the benefit from last year's menu price increases and lower avocado prices more than offset a mixed headwind from the garlock, what he'll stake limited time offer which ended in mid February as well as higher prices across several items, including queso beans, rice salsa and.
Car T is.
For Q2, we expect our cost of sales to remain in the low 29% range the mix benefit from the chicken al pest or limited time offer and lower dairy costs will be offset by higher costs in other areas, most notably avocados winter.
We anticipate avocado to increase from the current favorable levels, which are some of the seasonally lowest we have seen in the past few years.
Labor costs for the quarter were 24, 6% a decrease of about 170 basis points from last year. The benefit from sales leverage was partially offset by wage inflation.
For Q2, we expect our labor cost to remain in the mid 24% range as continued labor inflation will be offset by leverage from seasonally higher sales.
Other operating costs for the quarter were 15, 3% a decrease of about 110 basis points from last year. This decrease was driven by sales leverage and a decline in delivery expenses due to lower delivery sales, partially offset by a hard cost across several expenses, including natural gas and maintenance and repairs.
Marketing and promo costs for the quarter were three 2% in Q2, we expect marketing cost to step down to the mid 2% range with a full year to come in right around 3% in Q2 other operating costs are expected to be in the low 14% range.
G&A for the quarter was $148 million, which includes $119 million in underlying G&A.
$19 million related to non cash stock compensation and $10 million, primarily related to payroll taxes and equity vesting and exercises higher performance based accruals and costs associated with our field later conference.
We expect our underlying G&A to be around $122 million in Q2 and continue to grow slightly thereafter, we should as we make investments in technology and people to support ongoing growth.
Anticipating stock comp will be around $22 million in Q2, although this amount could move up or down based on our performance.
We also expect to recognize about $4 million related to performance based bonus accruals and payroll taxes and equity vesting exercises, bringing our anticipated total G&A in Q2 to around $148 million.
Depreciation for the quarter was $77 million or three 2% of sales and we expect depreciation to increase slightly each quarter as we continue to open more restaurants.
Asset retirement stepped up to $8 $4 million in the quarter. This includes charges related to the replacement of equipment, such as friars grills Rice cookers and other restaurant equipment as we have been more proactive under project square one in preventing ingredient outages.
In the near term, we expect asset retirements to remain around this level as we continue to prioritize the guest experience and focus on great ops.
Effective tax rate for Q1 was 22, 5%, which benefited from option exercises and share vesting and stock prices above the grant values we.
We continue to estimate our underlying effective tax rate will be in the 25% to 27% range, though it may vary each quarter based on discrete items.
Our balance sheet remains strong as we ended the quarter with nearly $1 $5 billion in cash restricted cash and investments with no debt along with a $500 million untapped revolver.
The first quarter, we repurchased $132 million of our stock at an average price of $1553, we increase our level of stock repurchases during the quarter when our share price about what the overall market and we will continue to opportunistically repurchase our stock at the end of the quarter, we had $282 million remaining under our share authorization program.
We opened 41, new restaurants in the quarter of which 34 had a chipotle and we remain on track to open between 255 and 285, new restaurants. This year with at least 80%, including a chipotle, we continued to experience challenges, including utility installation component in its raw material shortages and permitting and inspection delays which are excited.
Our development timeline and while we anticipate these challenges to persist throughout the year, our pipeline remains strong and we expect to move towards the high end of the 8% to 10% of openings range once he timeline challenges subside.
In closing 2023 is off to a great start as our focus on strong operations and treasury, our guests driving an improvement in sales and margin trends. While we are proud of the progress. Our teams have made in a short period of time, we recognize there is still opportunity for us to be even better. We believe that these efforts will position us to successfully navigate through macro uncertainty and more importantly.
Strengthen our foundation for sustained long term growth with that we're happy to take your questions.
We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad, if youre using a speakerphone. Please pick up your handset before pressing the keys.
To withdraw from the question queue. Please press Star then two.
So that all may have a turn please limit yourself to one question and one follow up.
At this time, we will pause momentarily to assemble our roster.
Yeah.
Today's first question comes from Dennis Geiger with UBS.
Please go ahead.
Great. Thank you and congrats on the strong results, Brian I wanted to ask a little bit more about throughput and the operations opportunity could you help frame up a little bit more some of the gains that maybe you're starting to see a well over this past quarter from project square one and in some of the other initiatives that you spoke to and then kind of more importantly, just thinking about the opportunity from here.
Based on the initiatives currently in place and maybe even some of the technology you guys have highlighted in our in recent months. Thank you.
Yeah, so yeah.
Yeah look project square one has been something we've been.
Working very aggressively for probably I guess now going on almost nine months.
And our operators have done a terrific job Scott and the team have really I think retrenched on getting back to the basics.
One of things, where we made great progress on or just being you.
In stock with great culinary.
We're experiencing too many times, where we were out of guac, we were out of chips, we were out of chicken.
So we've made tremendous progress on that front. We also made a lot of progress on keeping both lines open from open to close and.
Both of those reasons that we've improved dramatically are driven by I think more stability in the restaurant with better training and then holding people accountable to those standards on the throughput side of things.
You know we've made some progress on the frontline.
We made some progress as it relates to being on time and accurate digitally but we still believe there's a lot of room for improvement I think you heard in our prepared remarks, we're still working through I would call a better deployment and managing during peaks. So that we service the D M L business effectively without jeopardizing the service.
The people that are right in front of us in the restaurants. So we still believe there's a lot of runway in front of us on great throughput, we won't get the grade throughput, though if we don't have great stability, great culinary having both lines open from open to close and we've made tremendous progress on those foundational elements. So really proud of where the team has moved.
The organization, but I'm really optimistic about where they can get to.
I appreciate that Brian and then just a quick follow up on that just you just comment that the tech stuff that maybe it's still a little bit early days, how exciting. It is that for you on what that can do either for throughput as well as maybe some cost efficiencies as we think about the potential there.
Yeah, no. Thanks for the I forgot to answer that part of your question. So thanks for the reminder, yes look tremendously excited that's why we're investing in it right. These clamshell grills.
We're rolling into 10 restaurants, now make the job easier make the culinary better and make the culinary more consistently better. So that's a huge win for our customers and our employees.
I think I've talked about this it makes the cooking time dramatically go down so chicken goes from 12 to 13 minutes.
Two or three minutes and you get perfect perfect.
Perfect Char, just really delicious culinary.
So that's a big unlock for us because the grille positions one of the hardest positions to train.
So if we can make that job easier and then we also free up more space on the plunger. It just eliminates any potential bottleneck for our future growth. The other thing Thats a huge exciting one for us it's a little further out as hyphen, we've talked about this quite a bit which is automating the digital make line.
That will enable us to be the more accurate I think probably go a little bit faster and I think give people more consistent experiences. So all these things are driving towards hopefully better guest experiences, but also a better work environment for employees and then obviously with that I think will be more efficient in both cases, so really excited about both initiatives.
Obviously the claim show girls are a little bit closer in how you think a little further out and then we've got some other exciting initiatives on making our prep easier right, Bryan chips or cutting and coring avocados.
So we're making a lot of investment and we're going to continue to experiment not all of it will work, but I'm confident.
Having innovation in this space is a big unlock for our brand in the long run.
That's great. Thank you Brian .
The next question comes from David Tarantino with Baird. Please go ahead.
Hi, good afternoon.
Jack I have a question on the margin outlook I think based on your guidance.
For the second quarter, and what you delivered in the first quarter. It looks like maybe the business is doing about a 26% restaurant margin for the first half of the year or at least that's what you expect is that the right run rate to think about for the year at the current sales levels or is there anything you know maybe on the.
Horizon in the back half that that my I guess surprised one way or another.
Yeah, David in the first half as we're thinking about it right. We definitely expect our margins to step up from here Q2 from a seasonal sales standpoint is a stronger quarter for us we typically see.
Higher margins in the second quarter, we also have a relatively lower marketing in the second quarter.
And there are some offsets like a little bit of inflation in the labor line, but still you are thinking about it right for the first.
Half of the year, what's unknown in second half of the year is inflation, we're still thinking theres going to be continued labor inflation in the mid single digit and even though our commodity spend largely pain or we've had some some pluses and minuses that have largely offset each other.
In the second half of the year Theres still the possibility of inflation. For example, we don't necessarily expect we'd love avocados to remain at this level for the rest of the year, but we're being realistic and thinking that may not happen.
And there may still be inflation on beef, we haven't seen it really yet.
And what we buy.
But there is that possibility as well.
So it's really a wildcard about inflation up inflation his team in the second half of the year that will obviously lead to even better margins in the second half of the year, but I think youre thinking about it right.
Great and then the follow up is about your pricing philosophy, and I don't know if Brian or Jack do you want to take this one but I guess how are you currently thinking about your pricing.
Think about the inflation you just reference and I think you know now that you've rolled over the pricing in April you're running one of the lowest year over year price increases in the industry. So just wondering how you're thinking about.
When you pull the lever on pricing again.
Yeah, Hey, David This is Bryan.
We're staying the course on our approach to pricing, which is <unk>.
We see inflation that warrants us needing to take additional pricing will taken I think we've now demonstrated we.
We do have pricing power, we have a really strong brand.
You know, we don't want to be in front of.
The inflationary environment, but we also don't want to fall behind so.
The good news is we're in a really strong position that when we're ready and we believe it's necessary to hold that pricing lever, we can and we continue to have a really strong brand.
To do it with so we have not made any definitive plans on pricing for the balance of the year, but we're going to stay the course on the approach we've taken over the last I'd say 18 to 24 months.
Great. Thank you very much.
The next question is from Sara Senatore with Bank of America. Please go ahead.
Thank you a question on on Libra, and then and then.
A follow up on loyalty.
Maybe talk a little bit labor was I think better than you had expected it or are we anticipated certainly I was wondering if you could just talk is that just because transaction growth was better and I don't know who can be compared to the same store sales trends is at the lower turnover I'm, just trying to understand where where the improvement came from.
And then and then a question on loyalty as you mentioned kind.
Kind of improves a you know a sign ups I guess when I look at loyalty membership growth year over year. It looks like it's still kind of in that 20% range do you have any thoughts about you know how big that could be or what share of your unique customers youre seeing our members and loyalty. It just I'm trying to understand sort of the run rate for that as a comp.
Thank you.
Yeah, Yeah, I'll take the the labor piece first era.
First of all it was most of the benefit that we saw was sales driven in the quarter. We saw our transaction turned positive we're still running.
Menu price increased compared to last year and about a 10% range. So when you have that kind of a flow through of where transactions are flowing in menu prices are flowing as well that was a significant benefit in the quarter. We did have some labor inflation. So that was an offset to it and then we did see some efficiencies. So we did see really.
For the first time, the labor scheduling tool, we put into place last year.
It was really starting to pay off and then the fourth thing I would just say is normally this time of year as our sales begin to increase seasonally that is a time, where our labor tends to be more efficient it tends to to happen where the weather starts to get warmer our sales start to grow.
And our managers are trying to keep up on the schedule, but they end up you know base.
Basically driving a little bit efficiency, it's a they always seem to be maybe a separate two behind the.
The good news is as Brian mentioned operationally, we feel like the restaurant front ran really well and we drove that additional labor efficiency.
Thank you.
And then just kind of like yes, you can say on the loyalty your question there.
Well, we're definitely seeing as we see people higher enrollments when we make it easier to be engaged in the digital system. So a couple of things happened right I mentioned this in my earlier remarks.
The team improved your ability to redeem rewards by alerting you. So that you don't forget to scan for them. We also improved.
Your ability to end up going to the right restaurant for your order, which.
It was a big deal that's one of the biggest misses we seem to have with customers, where they didn't realize they're ordering from a different restaurant than where they were intending to go.
So those types of things make the engagement easier for people, which then they stay in the program and they're doing things like free poll, a case of the digital only.
Attracts new people to come into that space and.
That is what we want to do we want to continue to have acquisition and then we want to dial up the personalization and make it super easy to stay active and engaged because we know the more engaged you are it plays out in more purchase frequency and higher ticket. So.
We'd love to get 33 million to $40 million I don't know where the ceiling is on this thing, but we're going to continue to push towards getting as many people involved and then work very hard to turn it into a very personalized program that keeps them engaged.
Okay. Thank you very much.
The next question comes from David Palmer with Evercore ISI. Please go ahead.
Thanks, and wanted to double click on that labor productivity stuff in the past you've talked about.
The number of orders you could do in 15 minute block during those peak hours in the front make line could you give us a sense of where you are now and where do you think that can go realistically over the next one or two years and then what that would mean to your sales if you're if you got there.
Yeah, I mean I'll cover a couple of stats and then and then Brian you can add on as needed.
First of all in terms of the first quarter, we did push past our 15 minute.
Max.
Compared to last year. So it was it was nice to see as our transactions turned positive during the quarter that we did push past last year, we actually at the end of the quarter and as we moved into April .
Actually pushed past, where we were in the second quarter of last year as well. So we're seeing nice progress, but we're still in that low twenties.
And our range, David we think we can get into the mid twenties.
Mid Twenty's is comparable to what we were doing in 2019 before the pandemic. If you adjust for the shift in our digital business, but beyond that if you go back even a few years before that.
We don't think there's any reason why we can't put can't get back into at least the high twenty's or maybe even into the low thirties as well now that will take a few years, but we think this one project that Brian mentioned this idea of of experimenting with how can we make sure that we've got.
Basically the labor deployment and we've got the cadence of orders coming through to the to the D. M. L to be set such that our teams can with confidence they can run both line without feeling this pressure to pull from one line to the other and typically what happens is the <unk> of the orders are coming through pretty hot on the BMO theres a tendency to pull somebody from there.
Outlined and I think we are.
Basically seeing some good early results.
Tell us that we think theres going to be a way to breakthrough and allow our teams to really execute it at a really high level on both line. So I think that's potentially on and a lot to get to some of these higher number 50 minutes.
Throughput figures.
And.
You know if I look back a decade your your labor as a percentage of sales was in the 23% area I know a lot's changed in the labor market. Since then but you're working on a lot of stuff not just a focus on the training, but but also the double sided grills and hopefully some breakthroughs with hyphen.
Do you think you can get back there is is that is that the sort of you know labor productivity. That's possible you can imagine over the next few years.
Yeah.
Theoretically possible I think the one thing David that is different now is labor rates are much much much higher.
Our menu pricing Hasnt really.
Stay caught up all the way.
With the labor over the last few years and in fact, the biggest move.
Move that we made in the second quarter of 2021.
We basically raised wages by 15% and I'll only raised prices by 4%. So we basically offset the dollar value of that we didn't try to protect the margins and certainly didn't try to protect the labor line at all so I think theres been a bit of a dislocation there having said that we do have a very efficient labor model, we do have a lot of investments.
In technology, we do have a lot of things that.
You know I could see over time, as we grow to 3 million volumes in that $3 $5 million volumes and as we.
Really create solutions, so that our teams can be more efficient.
It's certainly possible, it's not necessarily a goal.
All of ours, but we could we could land there someday.
Thank you.
The next question comes from Lauren Silberman with Credit Suisse. Please go ahead.
Thank you very much.
Sudan transactions, great to see the positive transactions in the quarter within the mid single to high single digit comp guide for the year. What are you embedding for transactions and what do you see isn't as meaningful drivers and positive traffic growth through the rest of the year.
Yeah look I think the drivers for traffic growth are going to start with private square one we have to have great operational execution.
Staff train deployed lines open.
From open to close and giving people great experiences.
Initiative number one to keep the traffic moving in the right direction obviously.
Doing things with.
Our loyalty program, our CRM database, we continue to talk about how we're on that journey of continuing to engage with our customers at another level.
And we will continue to invest in there continue to experiment and continue to execute.
As I've talked about these in our strategies, having the brand visible.
For what makes chipotle truly unique its purpose around food with integrity that resonates with our customers that resonates with our team members because it's.
Our employees feel great about the food, they're serving and our customers. This is the food they want to be eating.
And are great. Examples of that are just some menu innovation things that we've added raised the fajita case, India right now we're doing chicken I'll pass store. We've made the case of D. A program permanent and we will continue to do menu news I think we've talked about this one or two a year.
So.
It's the combination of all those things that will continue I think drive great traffic and I don't want to walk past. The fact that we continue to add tremendous value scores when you look at.
What you get from Chipotle for what you pay relative to your alternatives.
We continue to get feedback that we're one of the best and whether youre comparing to other restaurants in our space or even the grocery store so.
We love our value position and then we love the initiatives that we've got in place.
Great.
A bunch of traffic where is it coming from is it primarily you are existing customers, new or lapsed customers anything notable to share in terms of what you're seeing across income cohorts. Thank you very much.
Yes, I mean, unfortunately, it's broad based so we're seeing new customers come in and we're also seeing existing customers increase their frequency. So.
The operational focus combined with kind of the marketing and menu innovation is doing exactly what we would want it to do.
Yeah.
Thank you very much.
The next question comes from Andrew Charles with T. D. Cohen. Please go ahead.
Great. Thanks, Brian would you be able to talk a little more about what you attribute the sales strength in March and April to that exceed your guidance at a time when the fast casual industry slowed.
To tease it out or just you know not looking for specific numbers of course, but just my direction of magnitude is it being.
Prove staffing you know what the chicken out past or something else that perhaps externally we may not be appreciating.
Got it.
Just kind of repeat myself, but I'm going to repeat myself here, which is project square, one and getting the foundational elements of <unk>.
A poll ways execution back to Chipotle standard of excellence.
Besides enough how important that is.
Our digital make line open from open to close to have ingredients on that line from open to close to being staffed and trained on the frontline so that should give people down the line really fast with exactly what they want.
I can't emphasize enough how important that is because everything then builds from there right.
It'll personalization program builds on that our menu innovation builds on that talking about a brand with purpose builds on that and.
Yeah.
I just think.
A myriad of things worked really well the communication via program was received really well the chicken out that store program was received really well, but I know they wouldn't be as powerful if we didn't have project square one driving behind it so.
I think we've talked about this a lot Andrew.
One of the things to make Chipotle really special is its operational ability to achieve tremendous throughput with unbelievable culinary and unbelievable customization.
We got to nail that and we have to mail it both on the frontline and in the digital experience.
That's helpful and one thing I want to revisit as well as just the international opportunity.
Obviously, a lot of the focus of the last five years has been domestically and recognizing how much strength you guys have domestically as well as opportunities to further.
Spread the domestic momentum and further enhance the debenture momentum what do you need to see to lean in more on international whether its accelerated development entering new markets potentially testing out franchising, but love your thoughts as we think broader beyond Canada.
Yeah, sure well I don't want to just walk by Canada, we're getting ready to expand into Alberta.
And probably 10, plus restaurants up there, which is like a 50% increase so.
And the team in Canada is doing a fabulous job, we're going to continue to drive that market.
Specifically on Europe .
Jim and the team have done a great job.
Our U K business has got great momentum.
Not surprising there's a lot of inflation in the P&L, there and we have not priced for it because.
Because we think a lot of it is temporary and we're still establishing ourselves in.
Those markets and.
I'm optimistic because if you can get the top line.
Usually the rest worked itself out and we're putting into place the digital system the operational excellence the great culinary.
So I'm.
I'm optimistic we're going to get there where we.
We'll move this thing out of the stage gate process, but we're going to take our time because you know what.
We want to get it right, we don't want to just be fast and.
That's what the teams after and they're making great progress.
I appreciate it thanks for the help.
The next question comes from John <unk> with J P. Morgan. Please go ahead.
Hi, Thank you I was hoping that you.
If you could give a little bit more transparency in terms of especially the month of April .
What's happening in our customer cohort level and there are you seeing more higher income customers Com are you seeing some lower income customers, maybe coming a little bit less or changing their.
Their order pattern. Some people would say you know maybe attaches a little bit lower than it used to be or the consumers, becoming a little bit more price sensitive price sensitive, but clearly that wouldn't be the case in the traffic numbers you know that you've talked about in April similar to the first quarter. So just wanted to just get a sense, if there's anything kind of happening beneath the surface that you.
You can talk about what may be some shifting customer behaviors that actually might be positive for you longer term.
Yeah.
Actually two things have before is one the higher income consumer continue to come and hardly came in a little bit faster pace.
From a frequency standpoint, and then we did see some I would call a recovery in the lower income consumer is still not all the way back to where it was call. It a year ago, but an improvement from where it was over the last six months. So.
We've seen nice improvements across all of our income cohorts and we continue to see great strength in the higher income.
Interesting and secondly, if I may you know in terms of personalization on Chipotle rewards you where are we in that journey I mean, how how do you feel that youre doing is are there any near term opportunities for some near term functionalities that you're going to add as the system continues to learn and get better on in India.
The dual customer basis.
Yeah. Thanks for the question.
I think it's a big opportunity for us because we are still very much in the early days on this.
I think the teams have done a great job of turning that data into action.
Through call it like CRM programs, and we're just starting to tip our toe into the.
The personalization.
Opportunity and I think youre going to see really kind of CRM evolve into personalization.
At meaningful scale so.
I think theres a lot of opportunity to be had in this space.
Out of the work that's been done to date and where we currently are but.
I just think there is tremendous opportunity going forward, assuming we can get this personalization program right.
Thank you.
The next question comes from Brian <unk> with Morgan Stanley . Please go ahead.
Yeah. Thank you good afternoon.
In the past you've commented just on kind of delivery sales and what that looks like for the quarter and then maybe also just kind of what the mix component of your your same store sales for the quarter was would you be able to provide some color on that.
Deliberate we still right around 20% right like high teens high teens.
You know.
Yeah.
And we saw a nice strength in our digital business, a little bit of a rebound in the delivery business more so probably in the marketplace, but.
We're feeling really good about how we're positioned in all of those access channels order ahead delivery and coming into the restaurant.
Okay. Thank you.
And then.
Seeing how the you know the.
He had a case of D. I did quite well or are there kind of other opportunities like that where you lean into just existing menu items.
And do something akin to that you've obviously done very well I was kind of protein L. T OS, but you know what else could it could be further a field that kind of continues on that success.
Yes.
No, we're really delighted by how well the communication here performed for the very reason you just mentioned right. It's all existing ingredients.
Required some work on the digital side of things, but for the most part.
This was a really easy one for operators to execute so the team is doing some work to figure out are there other opportunities like that within our menu.
And then maybe you could apply for both the frontline and the digital line.
Yeah.
I do believe there is still a lot of hidden gems within the chipotle.
Menu.
And I think we have the opportunity to talk about them in a more visible way.
So more to come I know, Chris and the team are working through.
Can we find something that can perform as well as the <unk>.
Following those kind of requirements.
Thank you.
The next question comes from Sharon Zackfia with William Blair. Please go ahead.
Hey, good afternoon, I was hoping to get an update on Chipotle ends I think around this time last year, you gave us some metrics on chipotle versus non Chipotle, and then kind of a sales lift in digital mix component I'm. Just curious now that we're a year later, how those compare that chipotle has versus the amount you put land.
Then Jack did you actually give us kind of what makes some traffic where in the quarter that would be helpful.
Thank you.
Well I'll do the first one or the second one first.
And I'm surprised it didn't get asked before so no we didn't.
Everybody yet I just thought I spent almost a jacket, we almost rocking chair.
So yes listen transactions were in kind of that four is kind of mid to mid <unk>.
Low single digit so a nice turnaround from what we saw in the fourth quarter that we saw it checks. The net check was 7%. So that gets you to that kind of 10, 9% and up the check it was about a 10%.
Pricing and then a 3% mix and just as a further clarification the 10% pricing. It's about eight 5% is in our in store and our order ahead business.
And then on top of that there is a one 5% for delivery.
And then on Chipotle in largely the same I mean, chipotle and still perform.
Higher from a sales standpoint, higher from a margin standpoint, and it higher from a return standpoint.
I think we have mentioned in the past it.
The comparisons aren't as great anymore. So in other words, a few years ago, we would open up restaurants that could have a chipotle, but didn't as we were kind of executing the strategy and today when we have 80% to 85% of our restaurants have at chipotle that 15% or 20% that don't can't have one meaning it's an urban location it's in inline locations.
So it's really a different trade area. So we're starting to see that some of the sales comparisons are getting.
A little bit.
Not necessarily relevant we're still seeing the chipotle to perform at a higher level, but it's a little bit like comparing an apple to an orange, but still margin return answer that from a sales standpoint, theres still great.
Still does generate higher digital mix.
By several hundred basis points and there still is a shift where delivery takes a step down from something in the high teens into the mid or low teen and order ahead steps up quite a bit from something in the low 20% up to the high twenty's or even at 30%. So all of the same kind of directional things that we've seen all the benefits that we've seen with chipotle are continuing to show up.
Yeah.
Thank you.
The next question comes from Jon Tower with Citigroup. Please go ahead.
Great. Thanks for taking the question I'm curious, Brian you mentioned earlier in the call that your smaller market stores are coming in strong, perhaps even better than you had anticipated. So I'm curious I know you've recently offered.
The 7000 store Tam for North America, but you know given the success, you're seeing as well as some of the new technology like the clamshell grills that you're still testing or even heightened on the horizon does that maybe altered that opportunity for new stores over time.
I mean look obviously as we get closer.
To that 7000 number will have a much better idea of whether or not we can grow beyond the 7000.
The good news is we've not seen any slowdown in our performance. So all the restaurants, we're opening.
They are opening with strength and.
Obviously, we look at this every year as we kind of take another look at our market planning and the good news is we're opening restaurants and for Chipotle I would say you know.
Somewhat penetrated markets.
And they continue to perform really well and that gives us confidence. Because then we can kind of start thinking through like well, let me start extrapolating that across the country. You can see how you can get beyond 7000, but not ready to take the number up just yet.
Aye.
I Love seeing great performance. It is great to see the small towns do really well and it's great to see frankly, the restaurants do really well in urban than our more penetrated markets. So.
So lots of opportunity in front of us on the new restaurant opening frontier.
Alright, Thanks, and just one more follow up do you have any more planned L. P. O is for 2023.
We always think through kind of something in the front half and something in the back half.
We haven't definitively made a decision on what we're going to do in the back half yet.
Good news is our pipeline is really strong.
Got some flexibility, but we want to see where the consumer is the strength of project square, one and that will inform.
What we choose to do in the back half of the year.
Got it thank you.
The next question comes from Peter Saleh with B T. I G. Please go ahead.
Great. Thanks for taking the question.
Brian I want to ask about the hyphen automation I think he mentioned that's for the digital make line.
You're thinking about this and I know it's still early is this more for new restaurants or can you fit this into your existing footprint in some of your existing locations.
Yeah, No I think what's great about this is it would fit in our existing locations.
It's almost.
Pull up the current line put in the new line kind of idea, which is really exciting.
Probably the first place you would see us do it it will be with new units.
Just because it's easier to implement.
But.
The good news is current and the team are designing this so that it will work with our existing restaurants.
Okay.
Great and then just one question on the chicken Althaus store L. T O. It sounds like it's performed exceptionally well is it bringing in new guests to the brand in a previously haven't come to Chipotle and is there a level at which an L. T O.
So much success that it becomes a permanent item or do you always consider it as an L. T O.
Yeah.
News is chicken out pet stores been broadly appealing so both to new users and existing customers.
The decision to make it permanent.
Would be something we would do after we finish this LTM run.
So.
We haven't come to the.
<unk> that we would make this permanent but your statement is correct, it's definitely performing really well.
Crew member feedback as this is an easy one for them to make and customer feedback has been really positive as well so.
We did decided to make the <unk> the case of the permanent.
And our digital platform.
That's a little different than making chicken out that store permanent so.
For this one it's definitely plan to be an LTR will executed as <unk> and then we can always revisit whether we make it a permanent menu item down the road.
Thank you.
The next question comes from Jeffrey Bernstein with Barclays. Please go ahead.
Great. Thank you very much to.
Two questions. The first one is on the comp guidance. The fact that you're resuming guidance for full year I would assume that's an indication of stabilization that you're seeing maybe more week to week or month to month or visibility I'm. Just wondering if you can share why that has returned and maybe.
What are the components you are assuming in that mid to high single digit in the two Q in full year, just trying to gauge what the pricing would be if you took no further and with the traffic assumption is and then I just had one follow up.
Yes on the guidance.
It is it assumes we don't take any additional pricing.
Similar to the comment that Brian made before right now we're staying the course, so what it assumes as we continue the same.
Transaction trends that we've seen in the first quarter continue into <unk>.
The second order at.
It recognizes that we took some menu price action last year and those will roll off.
And so that's in essence, what we put together for the full year guidance and the idea here Jeff is that.
We don't know if we're going to continue like beyond the next few quarters and give quarterly guidance all the time you might remember.
A few years ago, we used to give just the annual and then not talked about what the quarterly guidance is and so what we're doing right now is.
We're kind of doing both for a while and then we'll see how the trend unfolds, we'll see what happens to the macro and then we'll make the decision in terms of what our guidance is going to be but we actually think about our business.
In terms of a longer term approach that quarter to quarter and so we think the guidance auto match that as well. So that's the reason for the change.
Understood and then just on the marketing front I think you said the mid 2% range for the second quarter I know it was in the threes in the first quarter I'm. Just wondering if you just talk about the thought process around marketing whether this is a conscious pullback for any particular reason or how you measure the returns kind of your your.
I'm happy have you been with the marketing you've had thus far and the outlook going forward. Thank you.
Yes.
Well, we've been really happy with how the brand has shown up in the initiatives that we've rolled out.
On the percentages.
I think that has more to do with just timing than anything else.
The timing, it's been planned and.
And we tend we tend to see.
And then more in the first quarter.
The first part of the year and that in the back half of the year and typically to support these <unk>.
Well I think it's Christopher here you would also say too like the summer months arent. The best time for broad based media right. So I think thats part of the timing.
Right.
Thank you.
Today's last question comes from Jake Bartlett choose Securities. Please go ahead.
Great. Thank you so much for taking the question Jack I had a question on commodity inflation I was wondering whether you could kind of handicap the likelihood of deflation in the back half.
It feels like there's some big chunks poultry dairy seem to be likely totally deflationary.
Kind of wondering what the moving pieces are in your mind, how much visibility you have and just what you think the chances of deflation or in the back half.
It's not our it's a good question, it's not our base case, our base case is to see modest inflation in the back half of the year, we're predicting somewhere in the low to mid single digit we've been really.
Surprised by what's happened so far we have had a number of miscellaneous items, where we've seen inflation like some of our oil.
Tortilla some of our sources and things like that but even offset by lower than expected avocado cost. So that's why our food cost has been steady for two quarters in a row and it's been a number of quarters that that's happened, where we haven't seen any net inflation. So.
I do think it is a possibility.
It depends on what the fed does it depends on what happens to inflation broadly.
The wildcard there is is if inflation disappears you have to also then wonder okay. What's happened with the macro economy, what's happening with unemployment and consumer demand as well so.
Now, we kind of like the environment, we're in right now where consumers have jobs they have money, they're visiting restaurants.
And in place and that we're seeing is pretty modest so that base case that we put together and how we plan. The rest of the rest of the year feels pretty good to us we would mind inflation going down, but we'd love. It if it didn't also be accompanied with a softness in demand.
Great.
That answered flows into my next question, which was I think as you talked about the annual guidance for same store sales you talked about the macro environment staying as it is now so I just wanted to make sure I understood. What your kind of base case is for the macro environment in the back half of the year.
Should we think of the range kind of.
Slight recession on the low end.
How should we think about the macro outlook in your guidance and maybe.
How do you think you're positioned if we do see a deceleration in the consumer.
So first of all on in our prepared comments, we did say our guidance assumes that there is not a meaningful change in the macro environment. Okay. Because obviously all bets are off but that happens.
In terms of our outlook.
Our outlook does not our base case does not include a recession or certainly not a meaningful recession again, it looks like unemployment is holding up really well it looks like consumer spending is.
Is strong right now I mean, Brian mentioned are we saw softness in the second half of last year, especially the fourth quarter, a lower income consumer we saw those consumers come back almost at the same rate as our higher income consumers and so we see that as a positive sign of a positive macro signs so.
We're cautiously optimistic about what's going to happen in the second half of the year now if there is a recession, we feel like we're really well prepared.
We own all of our restaurants, we don't have any debt. So we don't have the possibility of franchisees under pressure if they have that payment and that there is a softening of demand and we don't feel like we have to run the business based on a quarter by quarter mentality. So if we need to write a couple of tough quarters here or there. We certainly think we have the financial wherewithal.
All in we have the long term view to do that but again, we're constantly optimistic that the economy a holdup.
Great I appreciate it.
Thank you.
This concludes our question and answer session I would like to turn the call back to Brian nickel for any closing remarks.
Okay. Thanks, and thanks, everybody for joining the call and all the questions obviously.
We're very proud of.
Work that has gone into achieving these results.
I think I've mentioned this before.
Chipotle has got one of those special.
Brands streams, when you look out there there aren't many companies I think that are growing top line expanding margins and building new units to the tune of 8% to 10%.
And then when you combine that with the strength of the balance sheet the strength of our economics.
We're very confident in the strategies that we're continuing to execute.
We are not slowing down though on project square, one and we're not slowing down on providing digital access and we're not going to slow down and making the brand visible and loved.
And at the foundation of all of this is when we have great people with great culinary.
We usually end up with great experiences for our guests. So we're staying the course and we believe the strategies in these focus areas are going to deliver results for the long term.
We're optimistic about our long term future of getting to the 7000 restaurants, and <unk> will be on $3 million. So thanks again for taking the time and we'll talk to you in a couple of months if not sooner.
Sure.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
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