Q2 2023 Chipotle Mexican Grill Inc Earnings Call
Good afternoon, and welcome to the Chipotle Mexican Grill second quarter 2023 results call all participants will be in listen only mode.
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After todays presentation, there will be an opportunity to ask questions. Please note. This event is being recorded.
I'd now like to turn the conference over to Cindy Olson head of Investor Relations and strategy. Please go ahead.
Hello, everyone and welcome to our second quarter fiscal 2023 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 Chipotle dotcom.
I will begin by reminding you that certain statements and projections made in this presentation about our future business and financial results constitute forward looking statements. These statements are based on management's current business and market expectations and our actual results could differ materially from those projected in the forward looking statements. Please see the risk factors contained in our.
Annual report on Form 10-K, and in our Form 10-Qs for a discussion of the 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 measure 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 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. The strengthen our business continued into the second quarter driven by our focus on exceptional food and exceptional people as well as the success of chicken ALP has store for the quarter sales grew 14% to reach two and a half billion dollars driven by a seven 4% comp in restaurant sales.
<unk>, 16% digital sales represented 38% of sales restaurant level margin was 27, 5% an increase of 230 basis points year over year adjusted diluted EPS was $12 and 65.
Representing 36% growth over last year, and we opened 47, new restaurants, including 40 Chipotle.
For the third quarter, we anticipate comps in the low to mid single digit range driven by transaction growth as we are rolling off of pricing for the full year, we continue to anticipate mid to high single digit comps.
Before reviewing our strategic priorities I want to share a few organizational updates.
A way of maintaining a healthy growth mindset, we proactively conducted an in depth review of our business needs and organizational structure to ensure we can deliver on our aggressive growth goals for future growth.
This resulted in investments in areas like development digital marketing and international expansion at the same time, we also identified areas, where we can better optimize our organizational structure such as putting our end to end digital experience, including product design analytics and the customer journey under per garner, our chief customer and technology officer.
Additionally, we streamlined our strategic project management process to focus on key projects and to enable faster and more efficient decision making.
These changes will further support our five key strategies that will position us to win today, while we grow our 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.
Two sustaining world class people leadership by developing and retaining diverse talent at every level.
Number three making the brand visible relevant and loved to improve overall guest engagement number for amplifying technology and innovation to drive growth and productivity of our restaurants and support centers.
And number five expanding access and convenience by accelerating new restaurant openings and laying the foundation for international expansion.
Starting with our restaurants, while project square one is wrapping up we have made the decision to permanently embed the program within our training DNA on a quarterly basis. Our crew members will be retrained on key components, ensuring we are always focused on being brilliant at the basics and that we never lose sight of training and developing exceptional people and preparing and serving X.
Sectional food.
Next quarter, we will reemphasize throughput and elevate our focus on proper deployment standards during peak periods, where we often only have three crew members on the front make line versus our minimum deployment of four.
The fourth person, which is often the expedite or may leave the frontline to help the digital make line our focus will be on coaching the X better to stay on the frontline and to bring together the items in an order and communicate them to the cashier as alleviating. This bottleneck is critical for delivering great throughput.
Additionally, we believe we have an opportunity to better optimize our smarter pickup times and deployment of labor on the digital make line during peak periods. As you May remember, we began testing changes to the cadence of orders on the digital make line in several markets to see if we could improve throughput by eliminating the need to pool. Our crew member from frontline to help the digital make line.
The good news is that in these restaurants, we are seeing an improvement in throughput on the frontline and an improvement in on time on the digital make line. We will continue to test adjusting the cadence of orders on the digital make line at certain restaurants, and rollout, where we see the opportunity to improve the overall experience.
We remain confident that balancing the deployment between the front end digital make lines, along with continuous training and reps will further drive improvements in throughput and in fact, we've seen evidenced this in certain restaurants.
I was recently in New York at our Chipotle on 15th in Park and it was a great experience with delicious food and fast throughput on the frontline compared to my experience at the same restaurant exactly a year ago. The improvement in throughput was certainly noticeable as the point of labor between the front make line and the digital make line was more balanced.
Over the last year the field leader responsible for this patch of restaurants in New York City worked with the Gms and crew members shoulder to shoulder on throughput fundamentals. During his regular restaurant visits. He also followed up with consistent feedback like reminding us restaurants to have an excellent position during peak periods by having the proper deployment with an expo in place.
And the right balance between the front make line in the digital make line throughput and his patch of restaurants improved by nearly five entrees in the peak 15 minutes as compared to the prior year.
As restaurants are also all copying us region and the company average demonstrating throughput drives performance. This is the type of leader we want to develop one that builds a strong team runs world class restaurants ensures we serve exceptional food everyday and inspires our teams to achieve great results and this brings me to our world class people leadership.
As part of our focus on developing our teams we relaunched cultivate university for our newly promoted field leaders.
Which is a three day training program on the skills they need to truly excel in managing their patch of restaurants. This includes developing future leaders the foundations of exceptional throughput and culinary why it's critical to protect our economic model and a culture of accountability.
One of the most challenging transition just from general manager managing one restaurant to field leader and managing around eight restaurants cultivate University is a program that will be offered each year to support our new field leaders as they make this transition to managing a 20 million dollar business.
We remain committed to hiring and developing the best people to work at Chipotle through our competitive wages industry, leading benefits and tremendous growth opportunity. In fact, we are on track to surpass our 22000 promotions from last year and create over 7000, new jobs with our restaurants are anticipated to open in 2023.
We're also relaunching, our successful and long running behind the foil AD campaign.
Campaign provides unfiltered an emotional testimonials from our team members about the impact Chipotle has had on their lives as well as a glimpse into our daily preparation using our real ingredients and classic culinary techniques the key differentiator for Chipotle.
What better way to make the brand more visible and more relevant and more loved been to feature our talented restaurant team members preparing exceptional food.
And speaking of exceptional food our menu innovation has been outstanding this year chicken I'll pass store has proven to be a popular L. T O with one in five transactions, including the new protein.
As boosting transactions with a strong repeat and is attracting new customers to chipotle, but also delivered the highest positive social sentiment of any new menu introduction and importantly, with simple for our teams to execute which resulted in a win all around.
Check it out past store wraps up in late August we have a planned new menu item for later in the quarter.
Our rewards program is another way, we aim to drive frequency within our existing customer base as a reward members come more often and spend more than non rewards members. We launched rappolt, let freeport Les earlier this year, which was designed to deliver a strong value proposition and attract new members with 10th free rewards dropped into our members' accounts throughout the year.
Yeah.
Rappolt way has been successful in driving enrollments in the first half of the year as we surpassed $35 million reward members with each strategic reportedly dropped we're learning more about our customers behaviors and utilizing those learnings to personalize future offers we will continue to look for creative ways to drive enrollment and improve engagement in our rewards program in traditional media.
We remain top of mind at sporting events as we leverage the basketball playoffs is a high profile opportunity to spotlight, the chipotle brand and through our NHL partnership. Our Chipotle logo was featured on the ice during the Stanley Cup playoffs. Additionally, the return of the popular Chipotle Hockey Jersey, Bogo day had the highest participation in the history of the program.
Chipotle is ingredients continue to power many of the top male and female athletes on and off the field. So our real food for real athletes campaign, we have showcase the inspiring journeys of athletes across all levels of sports and how chipotle can help them perform their best by providing proper nutrition partnering with athletes and teams along with traditional media around big Sporting events has been at all.
Fintech and successful way to connect the brand to some of our biggest fans shifting.
Shifting to technology and innovation in our restaurants.
First I wanted to provide an update on the benefits we've seen from the dual sided grill, which we discussed last quarter. The new girls can cook the chicken in under four minutes versus 12 minutes on the plot you can cook the stake in under one minute versus four minutes on the Plaza. This allows for a faster recovery of freshly grilled chicken and steak, resulting in more opportunity to remain in stock during peak peer.
<unk> as well as the ability to cook smaller batches, ensuring superior culinary. Additionally.
Additionally, the grille allows for more consistent execution with the same sphere, and Shar and maintains better moisture, resulting in juice, your chicken and steak with less waste.
Finally, it takes one of the most complex positions in our restaurants and significantly improves learning curve, making it a more desirable role for our teams the feedback from our guests and our teams continues to be very positive and we recently completed the rollout of the dual sided grill into 10 high volume locations as the next step in the stage gate process.
We also began to do a broader rollout of our new third Pan Rice, cookers, which eliminates our large race parts and cooks in the Cook the rice and our third pans that you see on the line.
This streamlines the race cooking process, while delivering fresh high quality rice, that's could perfectly to our standards. It can also make single batches, allowing for faster recovery time less waste during non peak periods and the ability to make white and brown rice at the same time, we have rolled this out to our new restaurants with plans to add it to another 200 existing restaurants this year.
And as part of our culture being next one we recently invested in vivo.
And together, we are exploring collaborative robotics that will drive efficiencies in east pain points for our employees. One device that we are in the process of developing cuts cores appeals and avocado, it's called the Autocar, though this co biotic prototypes saves time and eliminates the less favorable task, but still allows our teams to hand mash our signature guac.
As you can see all of these initiatives have a common goal, which is to improve the in restaurant experience of our teams and our guests, while maintaining or improving upon our high culinary standards.
I'm really proud of the work the teams are doing to leverage automation technology and artificial intelligence and it was nice to be recognized as one of time magazine's most innovative companies last month.
Our final key strategy is to expand access and convenience I'm thrilled. This year. The addition of Stephen Piacentini as our new Chief Development Officer, Stephen has extensive experience with some of the largest restaurant brands and will lead our very talented and tenured development team as we look to reach 7000 restaurants over time in North America.
This year, we continue to target 255 to 285, new restaurants with over 80%, including a chipotle and in fact this quarter, we opened our 600 chipotle.
And Canada performance remained strong with 34 locations and we were on track to add about 10, new restaurants. This year, we had our highest opening day ever in Canada. This past quarter, which is a testament to the increasing excitement around the brand and our growth opportunity in the country. We also believe there's even more opportunity beyond the 7000 restaurants, we are targeting longer term in north.
America, and we're laying the foundation for further international growth through.
Through our recent reorganization, we added resources to our European operations, including bringing over one of our top U S operators to Europe to drive productivity and better align our operations with the U S. We look forward to continued progress in Europe over the coming quarters as we aim to set up the region for long term growth.
And finally, we recently announced our first ever development agreement with with Y'all shy group to open restaurants in the Middle East, which will further accelerate our international efforts.
<unk> group has successfully expanded many of the largest global brands into the Middle East North Africa, and Europe , and they plan to open our first restaurants in Kuwait and United Arab Emirates. In 2024, we're excited to offer guests in the middle East are responsibly sourced classically cooked real food and look forward to furthering our purpose to cultivate a better world in this new territory.
In closing I want to thank our 114000 employees for all their hard work to reestablish Chipotle standards of excellence and culture of Accountability earlier. This month Chipotle celebrated its 30th anniversary of the opening of the first Chipotle restaurant in Denver, Colorado.
What makes chipotle special and has driven our success over the last 30 years is our people our purpose of cultivating a better world and our focus on delivering exceptional food our culinary using the highest quality ingredients and classic cooking techniques makes our food delicious, our customization convenience and speed are differentiators and our value is simply tremendous there.
It has resulted in an industry, leading brand with industry, leading economics, and we still have a long runway for growth, we're well positioned to win today, while we grow our future over the next 30 years and with that I will turn it over to Jack.
Thanks, Brian and good afternoon, everyone.
Sales in the second quarter grew 14% year over year to reach $2 $5 billion as comp sales grew seven 4% with over 4% transaction growth for the third quarter, we anticipate comps in the low to mid single digit range driven by transaction growth as we roll off nearly 500 basis points of pricing in early August we.
We continue to forecast full year comps in the mid to high single digit range rests.
Our restaurant level margin of 27.5% increased about 230 basis points compared to last year and earnings per share adjusted for unusual items was $12.65, representing 36% year over year growth. The second quarter had unusual expenses related to corporate restructuring and corporate and restaurant asset impairment, including the closure of pizza right Pizzeria locale.
I'll now go through the key P&L line items, beginning with cost of sales.
Cost of sales in the quarter with 29, 4% a decrease of about 100 basis points from last year.
The benefit from last year's menu price increases and lower avocado prices were partially offset by elevated costs across the board most notably in beef tortillas dairy salsa beans, and rice for Q3, we expect our cost of sales to be around 30% due to higher beef and avocado prices.
Our supply chain team has done a fantastic job of diversifying our avocado exposure and in the third quarter. The majority of our avocados will come from Peru, while prices are higher than the very favorable levels in the second quarter, we are less impacted from the volatility in our Mexican avocado market.
Labor costs for the quarter was 24, 3% a decrease of about 50 basis points from last year.
The benefit from sales leverage was partially offset by wage inflation and for Q3, we expect our labor costs to be around 25%, reflecting continued labor inflation and seasonally lower sales.
Other operating costs for the quarter were 13, 9% a decrease of about 40 basis points from last year. This decrease was driven by sales leverage marketing and promo costs for the quarter were two 4% and in Q3, we expect marketing cost to step down to the low 2% range before stepping up in Q4 with the full year to come in right around 3%.
Q3, other operating costs are expected to be in the mid 14% range.
G&A for the quarter was $157 million on a GAAP basis of $153 million on a non-GAAP basis, excluding $3 $5 million related to corporate restructuring expenses.
I mentioned, we recently went through a review our organization need to sure we're well positioned to meet our long term growth goals.
They also include $119 million in underlying G&A.
29, $29 million related to noncash stock compensation and $5 million related to higher bonus accruals and payroll taxes and equity vesting and exercises.
For Q3, we expect our underlying G&A to be around $125 million and to grow slightly thereafter, as we make investments in technology and people to support ongoing growth, we anticipate stock comp will be around $31 million in Q3, although this amount could move up or down based on our performance we.
We also expect to recognize about $4 million related to performance based bonus accruals and payroll taxes that equity vesting exercises, bringing our anticipated total G&A in Q3 to around $160 million.
Depreciation for the quarter was $79 million or three 1% of sales and we expect depreciation to increase slightly each quarter as we continue to open more restaurants.
Asset retirement stepped up to $16 $2 million, which includes $8 $5 million related to corporate and restaurant asset impairment, including the closure of pizzeria locale in the near term, we expect asset retirement to be around $8 million per quarter. As we continue to prioritize the guest experience and focus on great ops.
Our effective tax rate for Q2 was 23, 8% due to an increase in tax benefits related to option exercises and equity vesting. 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 remained strong as we ended the quarter with over $1 $8 billion in cash restricted cash and investments with no debt during the second quarter, we repurchased $88 million of our stock at an average price of $1937.
At the end of the quarter, we had $295 million remaining under our share authorization program.
We opened 47, new restaurants in the second quarter of which 40 had a chipotle.
We remain on track to open between 255, and 285, new restaurants, this year with at least 80%, including a chipotle our development timeline remains extended but our pipeline remains strong and we expect to move towards the high end of the 8% to 10% openings range. Once these timeline challenges subside.
In closing when I joined Chipotle, we were approaching our 10th anniversary with just over 200 restaurants, we were determined to change the way people think about any fast food by preparing delicious fresh food using classic cooking techniques sustainably raised wholesome ingredients and serving it quickly.
Brian mentioned Chipotle celebrated its 30th anniversary early this month and those fundamental values that made chipotle successful are still deeply ingrained interbrand.
Along the way we've invested in food with integrity expanded access and convenience through our digital channel Chipotle into an international expansion and continue to innovate within our restaurants to improve the overall experience. We still have a long growth runway ahead and a talented team excited to continue to build expand and evolve our brand and our purpose of cultivating a better world.
Over the next 30 years with.
With that we're happy to take your questions.
We will now begin the question and answer session. That's asking a question you May Press Star then one on your Touchtone phone.
If youre using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then two in the interest of time, please limit yourself to one question and one follow up.
At this time, we'll pause momentarily to assemble our roster.
And our first question comes from Andrew Charles from T. D. Cowen. Please go ahead.
Great. Thanks wanted to talk about pricing plans and second half just given inflation in beef and all the product categories and what I'm looking to better understand is that it is a price increase on the table for December when you historically took price in 2018 through 21 or does the resumption of student payments on September 1st that could weigh on restaurant industry spending leads you to.
There are potentially wait on that and see how that plays out.
Yeah, Andrew this is Brian .
Our approach on pricing has been obviously.
It's a lever that we will pool.
You know kind of the last thing we liked pool, but.
But I think we've proven time and time again that the brand is very strong and the value proposition is very strong and we have that pricing power to us obviously.
You heard in Jack's comments, we are seeing some inflationary pressure both on the labor line and some.
Some of the food areas when you pull on avocados. So it's something that we're looking hard at and you know as we get closer to that fourth quarter.
We'll make a decision on exactly what we wanted to do on the pricing front I don't know if you want to add anything there Jack.
I mean, I think Brian summarized it well, but you know we've had underlying inflation in the last few quarters, but we've had benefits from lower cost avocados, that's offset that and then also we got a benefit because chicken el passed or is it really shifted some of our customers from the more expensive beef into the less expensive chicken that's been a benefit as well as those benefits subside.
That's when the inflation will flow through and that's where it will happen.
Their view of the inflation impact we will as you suggest to look at our customer demand transaction patterns as well before we make any final decisions on pricing.
Okay. That's helpful. And then just under three Q guidance, you know I know that you guys called out that you're seeing about 500 basis points of price that rolls off in August can you just comment as well about the lower income consumer I know last quarter. You guys were talking about sequentially. They were seeing some strength in that consumer I. Just wanted to know what you guys have seen in recent months relates to that consumer.
Yes, I mean.
This is one of the elements that I guess, the consumer demonstrating how resilient they are.
Both the lower income consumer in kind of a higher income consumer are showing really good strength.
I think that's why we had such a strong traffic performance in the quarter and we continue to exit that quarter with really healthy track.
Traffic or transaction trends, so we're not seeing any weakness in the lower income consumer if anything they've continued to improve and we're feeling really good about the value proposition were providing all income levels.
Very helpful. Thanks, guys.
The next question comes from David Tarantino from Baird. Please go ahead.
Hi.
Good afternoon first question I was just trying to clarify how you're thinking about the third quarter from a cost perspective, and maybe Jack if you can just talk about the underlying traffic trend you're assuming in the third quarter relative to what you saw in the second quarter and whether that would imply any slowdown.
What you've been running.
Yeah, David the components of our guidance just to give you know kind of general general ranges.
The menu price increase remaining after the August <unk>.
Last year rolls off will be call. It in that 2.5% to 6% range, we're still expecting positive transactions throughout the quarter. In fact, we expect that transactions will probably be end up plus three to plus three 5% range somewhere in that range.
We're still seeing a little bit of a mixed impact our group size continues to normalize as people are returning to work.
And so there's less of a channel shift between digital and in restaurant ordering but we are seeing that the group size is lowering so.
This is the hardest part to predict where we're assuming that's somewhere in that two ish range you will see a negative mixed because of group size somewhere in that 2% range. So those are those are the general components, we're thinking about.
And Jack when you seasonally adjust the.
Trends.
Empire slowdown or is this more.
The same of what use what you delivered in the second quarter I, just want to make sure I understand whether you're seeing a slowdown in traffic yeah. So where there is a subtle seasonality shift that we're seeing David we saw in early June as schools were letting out as people started traveling more we saw little bit of an inflection.
Point in transactions, we also when we stratified our restaurants, we did see that our restaurants and more touristy areas, we're benefiting restaurant and non touristy areas.
We're a little bit softer and just recently within the last week. We can have also we're starting to see some normalization of that so we're still reading through that we assume theyre not going to be a full bounce back in the fourth quarter, but we did assume the normalization or the rest of the third quarter, but we did assume that the.
Normalization that we've seen last week or so that some of that will continue so we're still trying to do a read through but it looks like there was maybe a little early vacation, taking this year that debt that.
It didn't necessarily happen last year or so.
Great. Thank you.
The next question comes from Sara Senatore from Bank of America. Please go ahead.
Great. Thank you I just wanted to talk about through put them in the context of you know it sounds like the traffic is fairly stable and you talked about new equipment I understand that Cook times are down pretty dramatically could you translate that into some sort of throughput measure in and kind of what you're seeing both.
Presently and then what the opportunity is I guess, how should we think about throughput.
The capacity is one side, but then making sure that you know you have enough demand there to them to move their customers through and I'm I'm trying to understand the dynamics. There. So anything you can tell us about throughput now in and what you're seeing with the the near Clinton and I know I'll just have a quick follow up.
Yeah sure. So you know we've made some really good progress on the throughput.
Right.
But we're not all the way to where we want to be.
I think I've mentioned this earlier, where the good news is we now consistently probably have three people on the frontline, but really what that needs to be is for people in order for us to achieve kind of our pillars of great throughput and.
That's partly why we're retrenching again on throughput and kind of going forward here.
But.
As I mentioned in my comments earlier in the places, where we've seen restaurants, who are patches adopt.
Called grades throughput execution.
Definitely seeing a move to.
To the tune of three to five transactions in their best 15 minutes. So we know it's out there.
You seem to do it as an entire enterprise and.
We're focused on that piece going forward.
As it relates to equipment and other tools to help us.
Become even more efficient and faster.
The double sided grills are now in 10 restaurants.
So not obviously across the system by any means.
Rather just moving through our stage gate process than just enables cooking times to dramatically decrease so chicken goes from 12 minutes to three to four minutes state goes from three or four minutes to a minute.
It makes the position a lot easier it makes the culinary much more consistent and then obviously it gives us much more capacity on the plant so that.
That's where we are with that and then things like auto condo in HIFU.
Hyphen very much still in the pilot phase, meaning like prototype phase, but we're pretty optimistic about both of those can do for us but.
We're not in any restaurants, yet with either one of those items.
Okay, and then just sort of clarifying as a follow up.
So we're working on throughput and we've seen some really nice improvement over last couple of quarters on the transaction or traffic growth yeah like it sounds like the anticipation is that it will be fairly stable I understand the comparisons plaintiffs that like would you expect you know and I kind of another step change in traffic is as some of what you were talking about best practices.
Sort of disseminate across the system again, just trying to understand how it sounded like there, but yeah no no absolutely I mean, I think there's a real opportunity for not only the continued strength in traffic, but a step up in traffic.
As we get better at executing.
The pillars of throughput and that's why I wanted to give that example, the one restaurant in New York that restaurants outperforming a region, that's doing a really nice job and the reason is because they're executing every element of our throughput pillars with excellence.
And so as that happens more consistently across more patches or more restaurants, we anticipate we're going to see increases both in traffic and total comps so.
Obviously that comes with time, we're dealing with a 110000 employees.
I need to learn what grade throughput is and what it looks like but the team is making great progress we're focused on it and.
I'm confident we're going to need a culture of throughput building this organization.
Great. Thank you very much.
The next question comes from Danilo Gargiulo from Bernstein. Please go ahead.
Thank you so with the low to me single digits expected comps three Q, what is giving you the confidence to meaningfully accelerated trajectory for Q4 your guidance.
Especially as we think about you know the four you.
Comparable sales potentially be coming more from traffic versus from nurses from pricing action, but what actions are you contemplating to sustain the momentum.
Yeah, I mean, obviously, we're gonna stay first and foremost on enhancing our operational performance as it relates to throughput so that'll be a piece of the puzzle.
We've got a new menu item.
That will be bringing out.
After we finish the run on chicken out that store and then obviously, we'll evaluate what component of pricing. It has in the fourth quarter as well given some of the inflationary pressures we're seeing so.
Your line those things up plus the strength of the trend that we already have and we feel really good about our full year guidance.
Thank you and maybe beyond this year, you know thinking a bit more and more pay your on a multiyear basis.
Historically, you have executed a more cautious international rollout across Canada, and Europe . So what drove you to undertake franchising and specifically why are you starting with the middle East. So can we expect the combination of coop and franchise mix in international markets or is this more of an ambulatory stat to fine tune your international expansion plans going forward.
Yeah. So.
You can probably anticipate more of a mix, we still believe company ownership in Western Europe makes a lot of sense.
Just had the opportunity to visit with the team there.
Last week or so and.
They're making great progress in London.
London, Frankfurt and obviously Paris.
And then as we mentioned in the call to Canada continues to really perform so we're gonna have built 10, new restaurants on a base of 34. So you can see how we're stepping up the development there and the team continues to have great job as it relates to the middle East and the partnership with our Cheyenne as.
As we looked around the world. We see there are certain regions, where it's like Hey, This makes a lot of sense for us to partner as opposed to try and go at it on our own.
The middle East is that region.
Chipotle is a concept based on the work we've done.
We believe it will resonate and perform really well and then you know when we had the opportunity to part with all Shire, which we believe is one of the best operators in the region.
We thought this is a great opportunity for us.
To experience what it's like.
To work with a great operator in more of a franchise.
Environment. So we're up we're optimistic we're excited about getting those restaurants opened in.
Dubai and Kuwait.
We look forward to a really successful partnership with them, but we're really excited about where international can go both from a standpoint of partnerships and then company ownership.
The next question comes from David Palmer from Evercore ISI. Please go ahead.
Thanks first I wanted to follow up on the double sided grills question and then I'll touch on the personalized marketing.
On the double sided grills you mentioned your intend stores now.
And then it's maybe a third of the Cook times, what is the pace that you anticipate on rolling that out and in and as far as the metrics that we would focus on what do you think ultimately would be the benefit to sales and profit from from those grills.
Yeah.
So look we're obviously really excited about what we're already seeing just in the 10 restaurants, both from a standpoint of yield.
Quality of culinary and then.
The teams are.
The ability to execute over and over again, so you know the excitement around the new.
Cooking equipment is.
It's terrific to see because that means.
We're going to get the execution that we'd want.
To rule this out.
It's probably a year plus project.
And.
The good news is.
The manufacturers have the capability to scale to what we need once we give them the green light. So we're.
We're pretty excited about this because you know obviously the bigger the volumes get with the amount of transactions that we're doing.
Fact that we now have even more capacity on the plant you is a terrific outcome and then it turns one of the harder jobs to train.
One of the easiest jobs to train and when the culinary is consistent people get great chicken or steak, we know they love Chipotle and they come back so.
We're still.
Dialing through all the components of.
The puts and calls on this but it looks very promising based on where we are in the first 10 stores.
Thanks for that and then on personalized marketing I think you recently launched that just seems to be something that we'd have a long runway to it where you could have different iterations and ultimately having a I b I E a component to it.
Are we already seeing anything different from personalized marketing Ah you know where do you see this going in you know maybe give us a sense of how how this could be impacting your business going forward. Thanks.
Yeah sure. So I mean look probably the most visible spot is just in the app would be suggestive sale.
You'll see already some personalization or and what we're offering.
As far as recommendations go to add to your order based on your own.
Our history with the brand.
And then obviously this goes all the way into the cohorts and the journey that we create.
And we believe you do this across our.
$35 million rewards customers that know us meaningful scale, where the customization results in.
Loyalty.
That results in obviously additional sales so.
The most visible space, probably you will see it in the App the web.
And there was probably a more nuanced in how we communicate and how often we communicated with you and what exactly we say to you but.
All the experiments, we're running we're continuing to see nice positive outcomes would that reiteration that we do.
The next big step for US is to roll this out in a way where it covers a lot.
Lot more people at much more meaningful scale, so that you feel it on the entire enterprise.
Alright, thank you.
The next question comes from John I haven't co from J P. Morgan. Please go ahead.
Hi, Thank you I actually want to you know to meet with the comment about excess capacity on on the plant yet it's actually an interesting point do you think that it significantly broadens.
No additional product opportunities that chipotle can do mean that you know double sided it takes care of that you have the chicken and the and the stake and presumably you know maybe the plants. It can be used for something different than what you're already selling how big of an opportunity is that in your mind.
I mean look we always want to make sure we execute the menu with excellence.
And we liked the cadence that we're doing as far as new menu items go right now.
But yeah, it's definitely frees up the capacity.
Which then allows us to evaluate.
How we do new menu items, and maybe how long we want to keep certain menu items on.
And so that is a big unlock for us I would say the biggest benefit though is and when the restaurant opens at 10 30, you don't have to start cooking chicken at eight in the morning.
Now, we can be ready for that launch business closer to the timing of lunch because it just takes a lot less time to cook all the chicken to be premier. It also allows us to recover a lot faster so in the event.
You have a really big.
<unk> push at 11, you have the ability to cover recover for that launch pushed it might be coming into it.
And so these are the things that I think are going to be really powerful for us going forward.
And then also the simplicity at which they're cooking creates for the team members is a big unlock too because in the culinary is just that much better every single time.
Yeah, I got it right and I agree and experience.
Yeah, Let me come back to another question, you've been a leading to including on this call upward bias to the 7000, North American store target I mean, I guess are you prepared to start.
Thinking about your numbers in the thousands and thousands and I want to ask any questions. Some years ago I remember I don't remember exactly when it was you know it used to be just got that chipotle would be a $10 billion brand well here. We are 23 in all likelihood it will be a $10 billion brand.
Yeah.
Sorry for that.
If you were to just look at the overall North American opportunity today, and I guess to some extent freeze the economy.
How big are the brand do you think you'll probably could be just based on what you know about the north American consumer market today in terms of how how big we can expand from here.
Yeah sure I mean look we're not ready to change the number yet but the good news is the economics of every new restaurant that we opened continue to be just terrific economics, where.
Hopefully, we'll get closer to the higher end of that 8% to 10% once.
We work through them.
A little bit of bottleneck that we have on development, but I believe we're going to continue to grow the four wall.
Revenue and then obviously the economics that come with it. So we're not even moving the 7000 store count if you all of a sudden find yourself at 3 million 4 million average unit volumes.
In that $20 billion to $28 billion range. So.
Lots of growth in front of us.
And that's without having to be really all that aggressive that.
That is just executing the plan we've been talking about and you know.
I think as long as Chipotle stays focused on great culinary great.
Great throughput.
Eloping team members, so that we're ready to go when we open new restaurants.
The number will grow.
<unk> told me when the company first went public who is the number of JAK. Three we said we were going to maybe do 3000 restaurants. So here. We are we're at 3000 restaurants.
I'm sure as we continue to grow.
<unk> will go up and the store counts will go up but.
Yes, it's pretty fun to think about.
We're closing in on 10 billion and then I'm sure we'll be talking about 'twenty and then probably from there we'll be talking about 30, so I don't see a cap on this business anytime soon.
Excellent. Thank you so much.
The next question comes from Brian Mullan from Piper Sandler. Please go ahead.
Hey, Thank you just a question on automation and robotics in general Yeah.
Technically it if all your combined efforts would yield a couple of hundred basis points of margin over the next many number of years.
We're inclined to want to let that all fall to the bottom line or perhaps would you want to let some of it fall to the bottom line and then fund the consumer value proposition with the rest you know maybe it's too early to say just wondering if you're already having those questions internally you know even if it's just philosophical right now.
Yeah.
Yes look I mean.
Obviously, the good news for US is we aren't capital constrained to invest and continuing to drive the.
The Chipotle business, both in growth and in value as it relates to giving a great experience for our customer and a great experience for our team members. So.
Obviously as we get closer we'll have a better idea of how much of it but also the bottom line but.
Right now I'm, hoping a lot of it falls to the bottom line.
But we'll know a lot more as we get closer to when we rolled it out.
Thank you.
Yeah.
The next question comes from Christopher Cole from Stifel. Please go ahead.
Yeah, Hi, Thanks for taking the question, Brian It sounds like the hyphen make line as close to that testing stage. So can you help us understand how long you expect it to be in that phase and maybe walk through with the validation stage could look like and I'm also curious if you could describe what kpis that teams monitoring to determine the success of that make line.
<unk>.
Yes sure so.
We haven't been our cultivate center right now it's fun to see it actually producing bowls.
And the team has done a phenomenal job of taking this from.
A concept to prototype to now working prototype.
We've learned a lot we're getting ready to.
Figure out with the next Gen version on initiatives, but.
It looks really promising obviously key components of this are and how fast can it do bowls.
For 10 minutes.
How accurate Kennedy edibles.
And then obviously our ability to expedite those bowls.
Meaning getting it to the customer in the correct order so.
Yeah.
We think assuming the prototype continues to evolve and grow the way it has demonstrated its growth over time.
We will have something to be putting in our restaurants here in the next you know.
12 to 18 months.
So.
Optimistic about where this gets too but.
It's one thing to run it in our cultivate center, it's another thing to run it in a restaurant and.
Until we run it in a restaurant, it's hard to really talk about the.
The benefits of what the timing is of it but conceptually and what it looks like right now still very promising a top priority to figure out how we get this thing into a restaurant sooner rather than later.
Great and then I just had a follow up Jack the step up in the underlying G&A run rate was pretty considerable okay. Can you breakdown, maybe what's driving that in a little more detail and then how we should be thinking about the core run rate in the fourth quarter and then maybe even just underlying growth for the out year.
Yeah, I mean, he be any increase in our underlying G&A is around some of the things that Brian mentioned and it was part of our review where we're investing in.
Resources for Europe .
We're adding resources frankly for some of the innovation that we're talking about in terms of robotics and things like that.
Some items in there where our equity we're expecting our equity.
Just on our projections, we will step up these are three year calculations that you are making so but in terms of underlying G&A is going to be.
People, just a quarter growth or tech to support our growth.
We haven't given fourth quarter guidance, but I would expect there'll be another slight.
A step up from Q3.
Not a huge step up.
Step up as we make sure we've got our teams all staffed up for the growth that we want to support.
Not just for this year, but for the next several years going forward.
Great. Thanks, guys.
The next question comes from Jon Tower from Citi. Please go ahead.
Great. Thanks, I, just wanted to dig into development, a little bit and Jack I know you in your prepared remarks talked about some delays in the system and I was hoping maybe you could drill into it a little bit, especially as you're thinking about getting to that 8% to 10% range in terms of unit growth over time can you really get into what's driving some of the delays.
In the market today to say mobile market permitting builder developer issues or are there problems with accessing equipment, just hoping you could flesh that out for us.
It's not really equipment anymore that was a challenge through the pandemic and as we got out of the pandemic, but our teams have done a good job to preorder. So we had bulk ordering.
Have a good relationship with our suppliers. So we get priority. So it's really down to things that are city.
Under the city control like getting utilities to the site, sometimes it takes us weeks just to get somebody.
Come out and make sure that we have utilities and.
<unk> come to the site. It does involve things like permitting and then you talked about inspections as well. So it's really a lot of these cities what we're hearing from our teams is that.
A lot of them are still working remote and so to get somebody to show up when they need to show up and do the work has been a real challenge now what we're doing.
Chris is here and Chris has been sending this message to the team is.
We really got the right city. Okay. We have we have to make sure, we're calling calling calling because theyre doing some work and whether they're working at home or whether they work in the office are doing some work, let's make sure that we're at the top of the list that they are hearing us.
And if they hear us more on it.
Likely they're going to move and so that's the that's the strategy to try to.
Hopefully remove that bottleneck.
Got it and just pivoting to the throughput initiatives I. Appreciate all the training that you guys have been doing I'm just curious I.
I know, Brian you had mentioned that like even on them make lines, making sure people for people are on the frontline at peak do you think you need to add labor hours to store or is it purely just getting people back to the east.
And there are places kind of belief.
Yeah, no it's more to do with getting the trust in the team to have the confidence to stay pieces in places.
Just yesterday I was in a restaurant.
And.
Staffed the deployment was right.
The culinary was right the restaurant look great. Unfortunately, we didn't have acos in places.
Yeah.
People, leaving the line to do other tasks.
They should have been doing when they got aligned to the door and.
I think once they understand that they stay in those places don't power through that line to then go take care of the task.
Accordingly, so I think it's a it's an element of.
They got to see it for themselves, we got to experience it and they've got a trusted because sometimes it's hard I mean, it's hard to just stay in position when you.
Thank you might need some more napkins out by the drink station, it's like well hang in there get through the line and then you can go put additional napkins and the drink station.
So.
I think it's a component of that if they need experiences with it so that they can trust it.
And I know Scott and the team are laser focused on.
Getting the pillars of great throughput back into our culture, not just as an initiative and.
The good news is we're staffed turnover is looking really good at the general manager level now we're now in the low twenties. So theyre leader is staying much more consistent.
Thank you have consistency and leadership consistency of message will get consistency in execution.
So I'm very optimistic about where Scott and the operators are going to get us to when it comes to throughput.
Got it thanks, and then just lastly, I know you have your lines are somewhat capacity constrained. So in terms of adding additional items to the menu not always easy you oftentimes have to rotate but you know with with I think chicken out that store I believe you said about 20% of your mix transaction mix came from that during the periods of how her.
When do we think about that potentially becoming a permanent menu item.
Well look it's something we definitely will go back and evaluate.
Obviously this was one that struck a chord with a lot of people and I can understand why it tastes great and it is great.
So we will reevaluate if and when it makes sense to bring it back how long we bring it back floor and if it should be a permanent item.
Challenge for US is I think if you wanted to add something permanent we gotta remove something so.
That'd be something that we'd have to work through to just make sure we understand the tradeoff.
Got it thanks for taking the questions.
Yes.
The next question comes from Dennis Geiger from UBS. Please go ahead.
Great. Thank you just wondering if you could provide a breakdown of the traffic price and mix for the for the two P. I think you gave it.
Traffic component, but if you could kind of loosely breakout those are those others that'd be helpful.
Yes, the traffic I mentioned traffic in my comments.
Better than 4%.
On a positive side on traffic the menu price increase was in the mid fives call. It 5556, something like that and then we had this mix item that I've mentioned, we're talking about the third quarter that actually reduced the comp by about two 5% and that that mix is entirely due to group size. The group sizes continue to normalize as we.
Continue youre watching people going back to the office Youre seeing are our urban locations are out comping, our suburban locations. So theres still been a normalization since the pandemic in a group sizes are still continuing to normalize Theres still group sizes are still ahead of where we were in 2019 before the pandemic, but they continue to normalize pretty much each quarter.
Very helpful. Jack just one more just.
I know mix is probably a tough one group sizes in particular to to predict you gave us the <unk> as we look to the end of the year can that still be I think you know closer to flat by the end of the year or is that a little bit of a moving target given given.
Given group size behaviors and well, maybe that's tough to predict. Thank you yeah, I don't I don't think it'll be totally flat, but it should narrow.
In this current quarter, we're about 1% group size over where we were in 2019. If you look at Q3 and Q4, they were about 3% to 4%.
It was 40% in Q3, 3% in Q4, so we still got a gap there that still to close but it should diminish the two and a half that we saw in Q2 should diminish each quarter I don't think it will be totally flat by the end of the year, though.
Thanks, Jack I appreciate it.
The next question comes from Brian Harper from Morgan Stanley . Please go ahead.
Yeah. Thank you good afternoon, Jack could you just elaborate on some of the food cost drivers I mean, you mentioned kind of what's what's really driven a year over year, but maybe just versus last quarter versus some of your expectations I'm sure avocados part of it but anything else and also just as we you know.
Think about the rest of the year well will this new item you know affect food costs in any way that we should think about.
Yeah, I mean during the quarter. We added just a number of things that just had a slight increase we had some of our south side as our tortillas are right our spices and all of those if you look at just the quarter and if you look at the quarter.
Consecutively, so Q2 versus Q1.
And I'd like 40, or 50 basis points, but those were offset by a combination of favorable avocado compared to last year as well as chicken El Paso or as I mentioned before it actually did ship people from.
From steak, and Barbara Com, which is more more expensive higher food costs to our chicken, which has a lower food cost. So we've had this just call. It low grade inflation, that's been hitting the P&L last couple of quarters that it's been offset by favorable avocado and then favorable mix. One reason why as we look forward into the.
And then the third quarter, we do think theres going to be a bump up in food cost and that's really attributable to this same kind of low grade inflation that we expect will continue into Q3, but.
But we're not gonna have avocado prices normalizing as we shift away from check them out past or we won't have that kind of offset.
To offset some of the inflation that we're seeing.
Okay. Thanks could you also just elaborate on what you said about Europe .
And I guess the broader question is just how fast might we see that grow as we start to think about the next few years.
Yes look I think very similar to what we did with Canada is the way to think about Europe . Once we get you know performance consistent.
In Europe like we did in Canada, we will start building a much more aggressively.
<unk> is very much focused on ensuring that we're building.
Building, a brand and as we build the brand we have the economics that support.
Building, a lot of restaurants and Blake.
Like I mentioned.
Jack myself in.
Scott we were just over there.
And the team has a terrific plan the thing I'd love to see is when I was in Frankfurt, Germany. There are a lot of Germans in a chipotle enjoying chipotle.
When we were in London, there are a lot of brits enjoying.
Chipotle the thing that I also saw was a lot of people walked up at the restaurant and had no idea of what Chipotle is.
So we still have a real opportunity to build a brand and while we build that brand ensure that we've got great economics that justify building.
Building a lot more restaurants.
Canada is a perfect example.
We put a great leader in place there or not.
She's hit it out of the park the economics.
Form she's doing a nice job of growing the brand not surprising we're building a lot of restaurants. So most recently, we just sent one of our top operators over to London to be part of that team lead the team.
With that.
Work that he's putting in place I'm already seeing.
Big Big improvements in operational execution, and I'm confident the economics will follow and I'm confident we will build a terrific brands. So assuming that all happens you can see has been quickly being able to invest.
Into building a lot more restaurants.
In those countries. So I think we've been pretty consistent on this it's like we're in no rush.
Did you start building restaurants for the sake of building restaurants, we want to have people that are ready to go when out of economics that makes sense and then we will have a great brand that we can execute against time and time again. So that's served us well in the United States, It's serving us well in Canada I believe it will serve us well in Europe .
Thank you.
And the last question comes from Zack <unk> from Wells Fargo. Please go ahead.
Hey, Good afternoon. This is John Park on for Zach I guess on the franchising side are there any more details you guys can provide on your new agreement with Shire surrounds the number of units in their initial development agreement anything on the royalty rates things like that.
Okay.
Not really.
We're just getting started with Australia you know.
We're excited to get the first couple of restaurants open.
Obviously, both of us have expectations of a lot more restaurants than just a handful.
And I'm confident we're going to have great openings and this is going to turn into something thats.
So we all Shire considers a huge success.
We consider huge success so.
More details to come but we probably need to open the first one.
Got it and then just kind of switching gears a little bit on the labor side have you guys kind of started to see any loved one wage inflation for new hires and I was just kind of move through Q2 and into Q3.
I would say it's more normal.
4%, 3% in that range, so there's still inflation.
That's another consideration as we look at our model look at our margin.
When we take pricing action. So it's not it's not anything we can't handle the great news is the applications are coming in our restaurants or they are doing a great job of staffing the restaurants, they're doing a great job of getting our restaurants to model.
So this is I would call it again kind of a low grade normal inflation going forward nothing nothing that our mahwah campus or.
Great. Thanks, a lot.
This concludes our question and answer session I would like to turn the conference back over to Brian nickel for any closing remarks.
Alright, Thank you and thanks, everybody for all the questions.
I'll just wrap up with again I think Chipotle has demonstrated an excellent quarter I think it demonstrates the strength of our business.
Proud of what our teams have accomplished in the field.
If I think about where we are today versus where we were a year ago. We were operating these restaurants significantly better I believe there's still a lot of upside in our ability to drive throughput going forward I am confident the teams are focused on it and we're going to see that happen. The other thing that I'm really excited about in our businesses that we're growing our business through traffic growth.
And we're doing it in my opinion, the right way, we're we're continuing to drive our value proposition forward with great culinary great people and obviously, great new restaurant openings. So very proud of our results very optimistic about the future and look forward to sharing our results next quarter with you all take care.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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Yeah.