Q3 2023 Chipotle Mexican Grill Inc Earnings Call

Good day and welcome to the Chipotle Mexican Grill third quarter 2023 results conference call.

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Doctor Relations and strategy. Please go ahead.

Hello, everyone and welcome to our third quarter 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 Dot com.

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 breath 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 which we will take your questions. Our entire executive leadership team is available during the Q&A session.

With that I'll turn the call over to Brian.

Thanks, Cindy and good afternoon, everyone. Our focus on exceptional food and exceptional people continues to drive strong results, including positive transaction trends that accelerated throughout the quarter.

For the quarter sales grew over 11% to reach two and a half billion dollars driven by a 5% comp digital sales represented 37% of sales restaurant level margin was 26, 3% an increase of 100 basis points year over year adjusted diluted EPS was $11.36.

Representing 19% growth over last year, and we opened 62, new restaurants, including 50 for Chipotle.

Trends remained strong in October and we anticipate comps in the mid to high single digit range for the fourth quarter, which includes our recent pricing action before updating on our strategic priorities I'm thrilled to share that Laura went days has joined our board of directors, Laura as executive Vice President and Chief Human Resources Officer of Hilton worldwide with extensive experience.

<unk> global hospitality and people leadership and will be pivotal in helping chipotle deliver against our five key strategies that position us to win today, while we grow our future.

These include running successful restaurants with a people accountable culture that provides great food with integrity, while delivering exceptional in restaurant and digital experiences sustaining world class people leadership by developing and retaining diverse talent at every level, making the brand visible relevant and love to improve overall guest engagement amplifying.

And innovation to drive growth and productivity at our restaurants and support centers and expanding access and convenience by accelerating new restaurant openings and laying the foundation for international expansion.

Beginning with running successful restaurants with a people accountable culture.

It was exactly a year ago that we made a big effort internally to get back to Chipotle standard of excellence and I'm proud of the progress of our restaurant teams have made over the course of the year. This includes staffing and turnover better back to or better than pre pandemic levels restaurants that are prepped and ready, resulting in fewer outages improvements in on time and accuracy on the digital make line.

And continued progress on throughput or focus on the ops is strengthening a core piece of our value proposition, which is customized delicious culinary start quickly with great hospitality.

As a result of improvements in operational execution, along with keeping our menu pricing accessible our value proposition has never been stronger. This is certainly translating to great results with transaction comps positive all year and up over 4% in the third quarter.

While we are sitting on a strong foundation, we see an opportunity to be even better, particularly when it comes to throughput. We have two key initiatives that we recently rolled out that we believe will drive further improvement.

The first is adjusting the cadence of digital orders to better balance the deployment of labor eliminating the need to pull a crew member from the front make line to help the digital make line during peak periods and the second is a renewed focus on throughput training in our restaurants.

By bringing back a coaching tool that we had in place prior to the pandemic feedback from our restaurant teams on these two initiatives has been very positive and we're seeing that restaurants that have the right cadence of orders on the digital make line and that are executing the four pillars of throughput are seeing an improvement of four to five arbitration or peak 15 minute period.

As I mentioned in the past, we hold our teams to a high standard because when they achieve it they feel like they are part of a winning team with the ability to be rewarded through bonuses and growth within the organization.

For our crew members throughput is a key performance factor and the crew member bonus plan. There's also a component of the bonus measure for general managers field leaders team directors and regional Vice presidents as we coach and make progress on throughput it will enable more restaurants to achieve their quarterly bonus and importantly will drive a better overall experience for our guests and our teams.

Speaking of our teams we recently brought back our behind the foil campaign, which features our crew members, giving a glimpse into daily preparation using real ingredients and classic culinary techniques a key differentiator for Chipotle. The fact is we don't have freezers in our restaurants and our teams begin preparing its six or seven o'clock in the morning to be able to serve our delicious food by the time, we open.

10, 30. This includes drilling fajita veggies and the doble chicken on the plant, you're slicing and dicing onions, jalapeno sauce and collateral by hand also hand, mashing avocados to make our signature guacamole and making our chips fresh every day.

This campaign is a great way to put a spotlight on our talented teams and their hard work to prepare our exceptional food.

One of our team directors that was featured in behind the foil started as a crew member and within seven years moved its way up to team director managing a sub region of 49 restaurants at just 29 years old his passion for the brand and helping to deliver an excellent customer experience has driven the success. In fact, he is one of the best performing sub regions across the company he truly.

He believes in Chipotle is purpose and once the physician who seem to be able to replicate the same opportunities that have been given to him.

Our people are our greatest asset and developing future leaders is critical to delivering on our growth goals of reaching 7000 restaurants longer term and surpassing 90% internal promotions, we will continue to find ways like our behind the foil campaign to celebrate our team's growth hard work success and passion for Chipotle and.

In addition to this campaign our marketing team has done an outstanding job in finding authentic ways to make the brand more visible more relevant and more left.

Last month, we brought back our fan favorite and highly requested carnitas setup as a limited time offer and the reception has surpassed our expectations carnitas side as a delicious combination of responsibly raised premium cuts of steak seasonal on the grille with a blend of signature spices. That's finished with freshly squeezed lime in hand chopped cilantro, we also introduced in <unk>.

<unk>, new way to try Carne Asada with Carney Asada cases, and it's just truly delicious.

I'm really proud of the cross functional effort. It took to make sure we could bring back this popular L. T O, which is especially impressive given that we estimate only about 5% of U S beef meets our food with integrity standards.

In sports as college football season kicked off we leveraged our real food for real athletes platform to partner with players and teams to showcase their inspiring journeys their love for Chipotle and how our food can help them perform their best by providing proper nutrition. We also leverage creative gaming integrations as a fun way to connect with some of our biggest fans. We brought back a chipotle IQ went.

August is a one of a kind digital trivia game testing that knowledge at Chipotle is real ingredients, leading food standards culinary techniques sustainability efforts brand history and community engagement.

Shifting to amplifying technology, we're making progress on a couple of innovations that ultimately could help to improve the overall experience for our restaurant teams and our guests. The first is our automated digital make line, which we recently installed better cultivate center to test and learn on through our partnership with hyphen. We've been testing the hyphen make line, which fits into our existing digital make lines footprint and auto.

I'm actually makes bowls down below with the ability for our team to build tacos Burritos kids meals in case, if he is on top.

There are many reasons why we are excited about automating the digital make lines, such as increased capacity and improve speed and accuracy, which could further help with the balance of labor between the front make line and the digital make line.

Additionally, autocar, which cuts cores and scoops avocados. There's also other cultivate center and our restaurant teams are providing feedback to be included in the next phase of the prototype as we mentioned last quarter Autocar could save time and eliminate a less favorable task, but still allow for one of their favorite parts of the job, which is to add an freshly chopped onions, jalapeno and cilantro.

And with some citrus in salt and hand mash our signature guac.

Well, we still have some iterations to make the heightened and autocar before they are ready to be tested in a restaurant I am excited about the progress the team is making and we will continue to provide updates on the path through the stage gate process.

Finally, moving to expanding access and convenience we are on track to reach our guidance range of opening between 255 to 285, new restaurants, this year, which will mark a record for the company.

And we surpassed 700 Chipotle this quarter.

As we look out to 2024, we anticipate opening between 285 to 315, new restaurants with at least 80% having a chipotle.

This month, we opened our first location in Calgary. This was the first entrance into a new market in Canada. Since we entered Vancouver in 2012, and it is clear there is strong demand for chipotle with the opening day sales hitting a new company record the team in Canada has done an outstanding job with company, leading throughput on the frontline and on time and accuracy on the <unk>.

Digital make line.

Vs margins and returns are on par with the U S and I remain very confident in Canada as a long term growth potential.

Outside of North America, we have outlined a plan for Europe to deliver economics that would support accelerated growth. This includes improving our operations by aligning our training tools systems and culinary with our U S operations, where it makes sense and is feasible as well as building brand awareness similar to our strategy. When we first entered new markets in the U S.

We are building brand awareness in Europe to more local initiatives like partnering with local universities local sports teams and focusing on activities, which gets our food into the hands of potential guests.

The good news is our restaurants are staffed stable and the talent, we have coming through as exciting.

Finally in the Middle East we are collaborating with all Shire grew up across development culinary supply chain and food safety to support a successful opening of our restaurants next year in Kuwait in Dubai.

In closing I remain really excited about all the growth ahead of us both in the U S and internationally I want to thank our restaurant and support center teams for all their hard work and dedication to Chipotle. Our results demonstrate that we have a winning team that sets high standards and delivers a lot of opportunity in front of us and we will continue to push the boundaries of what is possible in terms of run.

Great restaurants, with exceptional people exceptional food and fast throughput I'm more confident than ever that we have created the foundation to achieve our aggressive growth goals and further our purpose of cultivating a better world.

With that I'll turn it over to Jack.

Thanks, Brian and good afternoon, everyone.

It was in the third quarter grew over 11% year over year to reach $2 $5 billion as comp sales grew 5% with over 4% transaction growth.

Restaurant level margin of 26, 3% increased about 100 basis points compared to last year and earnings per share adjusted for unusual items was $11.36, representing 19% year over year growth.

Third quarter had $1 million in unusual expenses related to corporate restructuring.

And you had to Q4 based on the trends we've seen so far in the quarter, including mid single digit transaction comps, we anticipate comps in the mid to high single digit range, which includes our recent price increase of about 3%.

As a reminder, in the fourth quarter, we will reevaluate estimated loyalty breakage for points projected to expire which may require a catch up adjustment that could have a negative or positive impact on our comps and that's not factored into our guidance.

We continue to forecast full year comps in the mid to high single digit range.

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

Cost of sales in the quarter with 29, 7% a decrease of about 10 basis points from last year. The benefit from last year's menu price increases was mostly offset by inflation across several food costs, mostly most notably beef encase out for Q4, we expect our cost of sales to be right around 30% as the benefit of the menu price increase we just talk will be offset by the.

Mix ship from chicken out past door to Carneous auto as well as higher cheese and avocado prices.

Labor costs for the quarter with 24, 9% a decrease of about 20 basis points from last year.

It benefited from sales leverage was mostly offset by wage inflation and for.

Q4, we expect labor costs to be in the mid 25% range as the benefit of the menu price increase will be offset by continued labor inflation and within our guidance. We anticipate a similar level of paid time off and other benefits that we experienced in the fourth quarter of last year.

Other operating costs for the quarter were 14% a decrease of about 50 basis points from last year. This decrease was primarily driven by sales leverage marketing and promo costs for the quarter were 2% and in Q4, we expect marketing cost to step up to the mid 3% range with the full year to come in just below 3%.

In Q4 other operating costs are expected to be in the low 15% range.

G&A for the quarter was $159 million on a GAAP basically of $158 million on a non-GAAP basis, excluding $1 million related to corporate restructuring expenses.

G&A also included $120 million in underlying G&A $34 million related to noncash stock compensation three.

$3 million related to higher bonus accruals and payroll taxes on equity vesting and exercises and $1 million related to our upcoming all manager conference, which is scheduled for Q1 of next year.

For Q4, 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 going growth.

Anticipate stock comp would be around $33 million in Q4, although this amount could move up or down based on our actual performance.

We also expect a recognized about $3 million related to performance based bonus accruals and payroll taxes and equity vesting exercises and $2 million related to our all manager conference, bringing our anticipated total G&A in Q4 around $163 million.

We anticipate preopening expenses to be around $15 million in Q4, do they kick to the cadence of new restaurant openings and as a reminder, about half of Preopening expense is non cash pre opening rent related to straight line accounting rules.

Depreciation for the quarter was $79 million or three 2% of sales for Q4, we anticipate depreciate depreciation expenses step up by $4 million to $5 million due to a larger number than expected new restaurant openings.

Asset retirement was $7 $2 million in the quarter and in Q4, we expect out of retirement to be around $8 million as we continue to focus on proactive equipment replacement as we prioritize the guest experience through great operation.

Our effective tax rate for Q3 was 24, 2%, which benefited from higher than expected tax credits. We continue to test made 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 over $1 $9 billion in cash restricted cash and investments with no debt during the third quarter, we repurchased $226 million of our stock at an average price of $1914 more than two and a half times, our Q2 purchases as we were optimistic as the market softened at the end.

The quarter, we had $368 million remaining under our share authorization program.

We opened 62, new restaurants in the third quarter of which 54 had a chipotle.

And we remain on track to open between 255 285, new restaurants, this year and as Brian mentioned, we plan to open between $2 85, and 315, new restaurants in 2024 of which at least 80% will have a chipotle.

We anticipate that our timeline will remain extended which is preventing us from reaching the higher end of our 8% to 10% New restaurant opening guidance range. In 2024, we continue to see permitting and inspection delays utility installation delays along with developers delaying projects due to macro pressures and rising interest rates.

Considering our current pipeline and timeline and assuming conditions do not worsen from here. We believe we can approach, 10% new restaurant opening by 2025.

To conclude I want to once again, thank our 114000 employees for treasury or gas and earning every single customer visit we.

We have exceptional people working hard every day to serve exceptional food to our guests and that shows through these terrific results as Brian mentioned, we have a lot of opportunity in front of us and as we continue to make meaningful progress in improving the guest experience through faster throughput in our restaurants. This will further strengthen our brand and industry, leading economic model and continue continue to position us.

For long term growth.

With that we're happy to take your questions.

Thank you.

I'll now begin the question and answer session.

You ask a question you May press Star then one on your Touchtone phone.

If youre using a speakerphone please pick up your handset before pressing the key.

To withdraw your question. Please press Star then two.

Please limit yourself to one question and one follow up question.

At this time, we will pause momentarily to assemble our roster.

Our first question comes from Sara.

Bank of America. Please go ahead.

Thank you so much and I just wanted to ask about unit growth if I'm, if I may for the U S and in Europe. You know Jack you noted that that you could get to the high end of that eight to 10 for 2025 I guess.

I'm curious, how or what you're doing to sort of cause a dru.

That construction and permitting delays that I think should probably they probably continue you know you sort of widening the funnel in terms of the sites that you identify them and the kind of work you do can you start I guess I'm trying to understand sort of the confidence in getting back there assuming the environment doesn't change that that much and then for Ken.

For Europe.

You talked about getting economics, you could support accelerated growth do you need to get these higher or are the sales volumes, there, but it's really that kind of operational efficiency and the training that you talked about.

Yeah.

Yeah sure I'll start with that in the U S. You know when we talk about getting to the high end of that 8% to 10% range by 2020 by that actually assumes that we don't get better in terms of the timeline. It assumes that things stay as they are and what that tells you. It just every year. Our teams are doing a great job of building a very robust.

Pipeline and so that pipeline is really filling up and as he timeline has been extending the pipeline just keeps getting bigger and so if you just assume we have the same timeline going forward for the next.

Operator: Good day, and welcome to the Chipotle Mexican Grill Third Quarter 2023 Results Conference Call. All participants will be in lists in only mode. Should you need assistance, please signal conference specialist by pressing the start button, followed by zero.

A couple of years, we should get close to that 10% range now having said that we've also challenge our teams.

We challenge our teams to take a look at what is causing some of the delays what can we do from a mix standpoint are there simple simpler deals that that.

We can go after that would shorten the timeline how can we work with developers that developers are getting cold feet in terms of that's what's slowing things down because of the higher interest rates, we have a strong balance sheet and not that we want to give away the bar, but there are things that we can do from an economic standpoint that might accommodate that so we challenge our teams to shorten the timeline, but in terms of us getting to 10% or.

Operator: After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touch time phone. To draw your question, please press star then two. Please note this event is being recorded.

Cindy Olsen: I would now like to turn the conference over to Cindy Olsen, head of investor relations and strategy. Please go ahead.

Frankly, our our pipeline.

We think can get us there even timeline stayed the same and then Brian you want to comment on Europe, Yes, sure. So on Europe. Sarah you basically in your question was the answer so the top line looks really good we're working hard on how we get that to flow to the bottom line. So some operating efficiencies and just getting better.

Cindy Olsen: Hello, everyone, and welcome to our third quarter fiscal 2023 earnings call. By now, you should have access to earnings press release. If not, immediately found on our investor relations website at ir. Chipotle.com. I will begin by reminding you that foreign statements and projections made in this presentation about our future business and by financial results constitute or 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 board looking statements.

Cindy Olsen: Please see the risk factors contained in our annual report on form 10K and in our form 10Qs for discussion of risks. That may cause our actual results to vary from these four looking statements. Our discussion today will include non gap financial measures in reconciliation to gap measures can be found via the link included on the presentation.

And managing the business is really what we're focused on.

Okay. Thank you very much.

Our next question comes from Steve.

<unk>.

Tarantino with.

Please go ahead.

Hi, Good afternoon. My question is about the traffic performance are saying I think Brian you mentioned that it accelerated.

As the quarter went on in and stayed strong in October and we've been hearing I guess more broadly that the consumer spending environment may have done the opposite so I was wondering if you could maybe unpack.

Cindy Olsen: The presentation page within the investor relations section of our website.

Cindy Olsen: We will start today's call with prepared remarks from Brian Nichol, chairman and chief executive officer and Jack Hardtown chief financial and administrative officer, after which we will take your questions. Our entire executive leadership team is available during the Q&A session.

The drivers that you think drove the divergence.

You're saying in your trends versus maybe what others are saying and specifically I was hoping that you could talk about the comparison related to cigar Lake stake and also you know what you're seeing on the throughput side.

Brian Niccol: And with that, I'll turn the call over to Brian. Thanks Cindy and good afternoon, everyone. Our focus on exceptional food and exceptional people continues to drive strong results, including positive transaction trends that accelerated throughout the quarter. For the quarter, sales grew over 11% to reach two and a half billion dollars driven by a 5% comp. Digital sales represented 37% of sales, restaurant level margin was 26.3% an increase of 100 basis points year over year.

Contributor to that.

Yeah.

So David our transactions actually throughout the quarter every month showed improvement.

And we continue to see that transaction stream.

Where we are today so.

The things that we've been focusing on is you know look does that get trained get deployed.

Brian Niccol: Adjusted the looted EPS was $11.36 representing 19% growth over last year. And we opened 62 new restaurants, including 54 Chipotle. Trends remain strong in October and we anticipate cops in the mid to high single digit range for the fourth quarter, which includes our recent pricing action.

And you know kind of the way we describe it as soon as we got a great people great culinary grade throughput and I think we're seeing that come through in our results combine that with the fact that.

You know, we just launched.

Kearney Asada.

The foundation of operational performance I think is critical in making carnitas ought to be.

Brian Niccol: Before updating on our strategic priorities, I'm thrilled to share that Laura Fuentes has joined our board of directors. Laura is executive vice president and chief human resources officer of Hilton worldwide with extensive experience in global hospitality and people leadership and will be pivotal in helping Chipotle deliver against our 5 key strategies that position us to win today while we grow our future. These include running successful restaurants with the people accountable culture that provides great food with integrity while delivering exceptional in restaurant and digital experiences.

The reformer that will outperform what we saw with garlic with Ya stake I know that was a favorite of yours, but.

I'm sorry to say that currently it's not it's probably gonna outperform it.

But.

Regardless I think it was really important as our operators have done a terrific job of getting back to the basics of staffing training deploying and holding ourselves accountable to great throughput and we're seeing every month some improvements in throughput in and that continues to be the case that we entered the fourth quarter and I think.

Brian Niccol: Sustaining world class people leadership by developing and retaining diverse talent at every level, making the brand visible relevant in love to improve overall guest engagement. Amplifying technology and innovation to drive growth and productivity at our restaurants and support centers and expanding access convenience by accelerating new restaurant openings and laying the foundation for international, expansion.

That's why we continue to see really good traffic results and.

We're going to protect the value proposition, we're going to protect the brand positioning that we have and I think we'll get rewarded with hopefully more than our fair share of transactions, yeah, and the only thing I would add Brian to that is.

Brian Niccol: Beginning with running successful restaurants with a people accountable culture, there was exactly a year ago that we made a big effort internally to get back to Chipotle standard of excellence, and I am proud of the progress our restaurant teams have made over the course of a year. This includes staffing and turnover that are back to, or better than pre-pandemic levels. Restaurants that are prepped and ready, resulting in few routers, improvements in on time and accuracy on the digital make line, and continued progress on throughput.

Reading the same things David that you are and the consumers clearly under pressure with inflation over the past year and pretty much everything with gas and groceries.

Really across the board higher interest rate.

We continue to do well not just across our income levels, but with the lower income they are holding up really well there they're really hanging in there at the same at about the same level as our medium and high income levels.

I think the chipotle value, where we haven't raised prices in over a year until this latest action I think is coming through and people are choosing to dine at chipotle, because we are very affordable, yes, I'm sorry.

Brian Niccol: Our focus on ops is strengthening a core piece of our value proposition, which is customized, delicious culinary served quickly with great hospitality. As a result of improvements in operational execution, along with keeping our menu pricing accessible, our value proposition has never been stronger. This is certainly translating to great results with transaction comps positive all year and up over 4% in the third quarter.

One of them.

As a favorite topic of ours here is we do love. The fact that our growth is being driven by transactions.

Which I do think is really important to ongoing health for our business and our opportunity to grow going forward. So.

Brian Niccol: While we are sitting on a strong foundation, we see an opportunity to be even better, particularly when it comes to throughput. We have two key initiatives that we recently rolled out that we believe will drive further improvement. The first is adjusting the cadence of digital orders, the better balance of deployment of labor, eliminating the need to pull a crew member from the front make line to help the digital make line during peak periods.

I'm really proud of the team is really proud of the result for this quarter.

Alright, Thank you very much.

Brian Niccol: And the second is a renewed focus on throughput training in our restaurants by bringing back a coaching tool that we had in place prior to the pandemic. Feedback from our restaurant teams on these two initiatives has been very positive, and we are seeing that restaurants that have the right cadence of orders on the digital make line and that are executing the four pillars of throughput are seeing an improvement of fortify bond trays in their peak 15 minute period.

Our next question comes from Dennis Geiger with UBS. Please go ahead.

Great. Thank you I'm wondering if there's anything else to highlight on the strength of the margins in the third quarter and I guess more importantly, how that's shaping how you're thinking about next year and specifically Jackie at 27% margin is at a $3 million. If that's kind of still the right way to think about the margin <unk> dynamic.

Yeah.

So we're like I would describe our margin right now we're not quite at 3 million, but we're knocking on the door or we should get there next year and we're knocking on the door of 27% were not all the way there yet we're at 26 and a half year to date and 26 three for the for the quarter fourth quarter typically is a lower margin quarter for us it will be closer to 26 and 27.

Brian Niccol: As I mentioned in the past, we hold our teams to a high standard because when they achieve it, they feel like they are a part of a winning team with the ability to be rewarded through bonuses and growth within the organization. For our crew members, throughput is a key performance factor in the crew member bonus plan. It is also a component of the bonus measure for general managers, field leaders, team directors, and regional vice presidents.

But I would call theyre knocking on the door and just give me an idea we're not going to do this but if for example, we were we chose to take an extra 1% or 1.25% and pricing our margin would be at 27% now we're not going to drive our margin based on that we're really using menu pricing just to offset inflation, but it gives you an idea with a.

Brian Niccol: As we coach and make progress on throughput, they will enable more restaurants to achieve their quarterly bonus, and importantly, we'll drive a better overall experience for our guests and our teams. Speaking of our teams, we recently brought back our behind the foil campaign which features our crew members, giving a glimpse into daily preparation using real ingredients in classic culinary techniques, a key differentiator for Chipotle. The fact is, we don't have freezers in our restaurants, and our teams begin preparing its six or seven o'clock in the morning to be able to serve our delicious food by the time we open at 10.30.

Little bit of extra pricing or with a little break in terms of some of the commodity cost ingredient costs next year, we've had multiple years of inflation at those ease a little bit.

If labour inflation eases, a little bit as well there was a number of ways.

To get there and I would use the algorithm is more a long term guideposts, rather than something were going to look to be right on the money every single quarter every single year. So I feel like our economic model is really really healthy were really knocking on the door of that 27% and with a break here or there I think we will hopefully get there next year.

Brian Niccol: This includes grilling for you to veggies, and a dobo chicken on the plunge, slicing and dicing onions, jalapenos, and cilantro by hand. Also hand-mashing avocados to make our signature guacamole and making our chips fresh every day. This campaign is a great way to put a spotlight on our talented teams and their hard work to prepare our exceptional food. One of our team directors that was featured in behind the foil started as a crew member, and within seven years moved his way up to team director, managing a sub-region of 49 restaurants at just 29 years old.

That's great. Thanks for that and then just I appreciate the strong traffic number in the third quarter can you just provide the price and mix breakdown in the third quarter, Jack and if you care to talk at all about how to think about those components.

Into the fourth quarter.

Level thinking about that mix in particular, thank you very much yeah, yeah sure. The price we were running in the quarter was in the high twos call. It right around two eight ish something like that and remember that's all from pricing. We took last year, we didn't take any additional pricing until just recently.

Brian Niccol: His passion for the brand and helping to deliver an excellent customer experience has driven his success. In fact, he is one of the best performing sub-regions across the company. He truly believes in Chipotle's purpose, and once the position is teamed to be able to replicate the same opportunities that have been given to him.

And mixed it ease a little bit is it mix was more than 2%.

Brian Niccol: Our people are our greatest asset in developing future leaders as critical delivering on our growth goals of reaching 7,000 restaurants longer term and surpassing 90% internal promotions. We will continue to find ways like our behind the foil campaign to celebrate our team's growth, hard work, success, and passion for Chipotle.

So you add that on top of a better than 4%.

Transaction.

Comprehend a quarter, that's how you get there.

Looking forward into Q4.

The 3%, we just talk remember we took it in the second half of October so that will average out to about a two 2% ish call. It a low twos menu price increase we are starting or we did start to see the mix negative mix component eased during the quarter and if that continues we would expect that the mixed component would be still a drag but it would be.

Brian Niccol: In addition to this campaign, our marketing team has been an outstanding job in finding authentic ways to make the brand more visible, more relevant, and more loved. Last month we brought back our fan favorite and highly requested carne asada as a limited time offer and the receptionist or pastor expectations, carne asada is a delicious combination of responsibly raised premium cuts of steak season on the grill with a blend of signature spices that's finished with freshly squeezed lime and hand chopped cilantro.

Brian Niccol: We also introduced an entirely new way to try carne asada with the carne asada quesadilla and it's just truly delicious. I'm really proud of the cross-functional effort it took to make sure we could bring back this popular LTO, which is especially impressive given that we estimate only about 5% of US beef meets our food with integrity standards.

Hopefully closer to a drag of 1% than the 2% that we saw in this quarter and then of course, you know Brian Brian mentioned, we continue to see strong mid single digit transaction comps.

In the fourth quarter so far.

Thank you.

Okay.

Our next question comes from Andrew Charles with TD Cowen. Please go ahead.

Great. Thanks, Jack just a clarification do you consider the recent 3% price increase to brace yourselves for a B 12, 28 next year or are you planning a separate California targeted price increase to.

Brian Niccol: In sports, as college football season kicked off, we've leveraged our real food for real athletes' platform to partner with players and teams to showcase their inspiring journeys, their love for Chipotle and how our food can help them perform their best by providing proper nutrition. We also leveraged creative gaming integrations as a fun way to connect with some of our biggest fans. We brought back Chipotle IQ in August as a one-of-a-kind visual trivia game testing the knowledge of Chipotle's real ingredients, leading food standards, culinary techniques, sustainability efforts, brand history, and community engagement.

Can be utilized sometime around April to help mitigate the impact of the higher California wages.

Yeah, but this does not consider anything any part of the California wages that'll happen next year, we've been studying that Andrew as you can imagine are already.

It's going to be a pretty significant increase to our labor our average wages in California are right around 17% so to get the minimum up to 'twenty and to make sure that we take care of compression as well, we're going to have to increase wages and called the high teens to 20% or so.

Brian Niccol: Shifting to amplifying technology, we were making progress on a couple innovations that ultimately could help to improve the overall experience for our restaurant teams and our guests. The first is our automated digital make line, which we recently installed at our Cultivates Center to test and learn on. Through our partnership with Huythin, we've been testing the Huythin make line, which fits into our existing digital make line footprint, and automatically makes bowls down below with the ability for our team to build tacos, burritos, kids meals, and quesadillas on top.

Haven't made a decision on exactly what level of pricing, we're going to take but to take care of.

The dollar cost of that <unk>.

<unk> the margin part of that and we haven't decided yet where we will land at that it's going to be a mid to high single digit price increase but we are definitely going to pass. The time, we just haven't made a final decision as.

Brian Niccol: There are many reasons why we are excited about automating the digital make line, such as increased capacity, and improved speed, and accuracy, which could further help with the balance of labor between the front make line and the digital make line. Additionally, Autocado, which cuts, cores, and scoops avocados, is also our Cultivates Center, and our restaurant teams are providing feedback to be included in the next phase of the prototype. As we mentioned last quarter, Autocado could save time and eliminate a less favorable task, but still allow for one of their favorite parts of the job, which is adding freshly chopped onions, jalapenos, and cilantro, season with some citrus and salt, and hand-mash or signature guac.

As to what level yet.

Got you. Okay. That's helpful. And then Brian question on menu innovation, you know it looks like Theres no innovation in the stage gate process is obviously, you're prioritizing operations and project square one I'm curious what do you need to see to resume.

Innovation in particular, it's reaching a number of transactions per peak 15 minute or or some other measure youre looking at to resume new menu innovation I would think.

Yes. So the teams are still working and Iterating on menu innovation are one of the things that they uncovered which I'm really excited about is we have an opportunity to just talk about our core man. So theres very little awareness and understanding of what Barbara Cobra Carnitas, Saar and Youll, probably be seeing our teams doing some work on how do we bring to life. What we currently have on our menu.

Brian Niccol: While we still have some iterations to make to Huythin and Autocado before they are ready to be tested in a restaurant, I am excited about the progress the team is making, and we will continue to provide updates on the path through the stage gave process.

So the customers can understand and truly enjoy everything that we currently offer at the same token there are still doing some work on what are some new menu items and we're also doing work on bringing back some menu innovation that we've done in the past that is really bummed about so I'm feeling really really good about where our menu stands and the pipeline that we have for news.

Brian Niccol: Finally, moving to expanding access and convenience, we are on track to reach our guidance range of opening between 255 to 285 new restaurants this year, which will mark a record for the company. And we surpass 700 Chipotle in this quarter. As we look out to 2024, we anticipate opening between 285 to 315 new restaurants, with at least 80% having a Chipotle.

Over the next call it 18 to 24 months.

Awesome looking forward to it thank you.

Yeah.

Brian Niccol: This month, we opened our first location in Calgary. This was the first entrance into a new market in Canada since we entered Vancouver in 2012, and it is clear there is strong demand for Chipotle with opening day sales, hitting a new company record. The team in Canada has done an outstanding job with company leading throughput on the front line, and on time, and accuracy on the digital matrix.

Our next question comes from David Palmer with Evercore ISI. Please go ahead.

Thanks question on labor productivity, I'm wondering how you're thinking about the drivers on getting back to something like <unk> got in the past that 23% or so labor margin.

Brian Niccol: Decline. AUV's margins and returns are on par with the US, and I remain very confident in Canada's long-term growth potential.

What do you what are the key unlocks from here.

You're obviously finding some traction.

On just paying.

Brian Niccol: Outside of North America, we have outlined a plan for Europe to deliver economics that would support accelerated growth. This includes improving our operations by aligning our training tools, systems, and culinary, with our US operations where it makes sense and is feasible, as well as building brand awareness. Similar to our strategy when we first centered new markets in the US, we are building brand awareness in Europe through more local initiatives like partnering with local universities, local sports teams, and focusing on activities which gets our food in the hands of potential guests. The good news is our restaurants are staff, stable, and the talent we have coming through is exciting.

Paying attention to how you deploy labor in some of the things Youre doing leaving with.

Computer vision and whatnot, but then there's the.

The other side, which might be the bigger leap stuff with equipment. So I'm wondering how you're thinking about the timing of these things and.

And how I'm really obviously thinking about 2024.

What drivers you see there.

Yeah, David I don't know that we will see 23% at.

At least not in the near future.

We've taken on some significant labor inflation over the last few years and this California Act that that.

Brian Niccol: Finally, in the Middle East, we are collaborating with al-Shaya Group across development, culinary, supply chain, and food safety to support a successful opening of our restaurants next year in Kuwait and Dubai.

We just talked about.

California's only 15% of our restaurants, but that's all by itself next year, that's going to add 2.5% to 3% inflation to our overall company inflation in labor so.

Brian Niccol: In closing, I remain really excited about all the growth ahead of us, both in the US and internationally. I want to thank our restaurant and support center teams for all their hard work and dedication to Chipotle. Our results demonstrate that we have a winning team that sets high standards and delivers. We have a lot of opportunity in front of us, and we will continue to push the boundaries of what is possible in terms of running great restaurants, with exceptional people, exceptional food, and fast throughput. I am more confident than ever that we have created the foundation to achieve our aggressive growth goals and further our purpose of cultivating a better world.

I don't I don't know that we'll see 'twenty three but the essence of your question is what are we going to do to continue to be efficient with labor and I I think you hit on all the key pieces.

For what we have in our restaurants today.

We're really a patient it doesn't really we don't have some opportunity, but our teams are doing a great job and for the most part they're using the labor that they need to throughout the day I think the unlock is that we have the labor deployed properly you know Brian mentioned this during the prepared comments. So that we have the right people that are staying in the frontline. So we can drive better throughput when we drive better throughput we know.

Jack Hartung: With that, I will turn it over to Jack. Thanks, Brian, and good afternoon everyone. Sales in the third quarter grew over 11% year-over-year to reach $2.5 billion, as CompSales grew 5% with over 4% transaction growth.

With a 40% flow through and we know with our ability to lever labor that that labor percent will go down and then over the I'll call. It the medium term and long term with things like avocado and.

Jack Hartung: Restaurant low margin of 26.3% increased about a hundred basis points compared to last year, and earnings per share adjusted for unusual items was $11.36 for representing 19% year-over-year growth. The third quarter had $1 million in unusual expenses related to corporate restructuring. Looking at the Q4, based on the trends we have seen so far in the quarter, including mid-single-digit transaction comps, win-to-space comps and the mid-to-high single-digit range, which includes our recent price increase of about 3%.

With hyphen, I think theres opportunities for us to try to offset some of the labor inflation, but I just don't know that we would be able to get all the way down to 23 that would be I mean, that'd be an 8% deflation.

And that would be I think difficult to accomplish but but rest.

Sure that Theres a lot of things that as we were working on investments that can make not just.

Reduced hours, but also make the jobs of our crew.

Jack Hartung: As a reminder in the fourth quarter, we will re-evaluate estimated loyalty breakage for points projected to expire, which may require a catch-up adjustment that could have a negative or positive impact on our comps, and that's not factored into our guidance.

Easier better and free them up so they can provide better customer service, we're definitely gonna invest in that.

Oh, Yeah. If it makes you feel any better I don't think I think anybody has 23% in their models or anything but just wanted to make sure yeah.

Jack Hartung: We continue to forecast full your comps in the mid-to-high single-digit range.

But when you mentioned that the 4% to 5% four to five entrees are in that peak 15 minute window improvement.

Jack Hartung: I'll now go through the key P&L line items, beginning with cost of sales. Cost of sales in the quarter were 29.7% of decrease of about 10 basis points from last year. The benefit from last year's menu price increases was mostly offset by inflation across several food costs, most notably beef and queso. For Q4, we expect our cost of sales to be right around 30%, as the benefit of the menu price increase we just took will be offset by the mix shift from Chicken Alpastor to Karnia Sada, as well as higher cheese and avocado prices.

What is the benefit to same store traffic and or just labor productivity youre getting from that can you put that into perspective.

Yeah, I mean on.

In terms of like comps for example, we need about five transactions in a day to get a 1% comp and so if you get three or four additional transactions that 15 minute period and do that for multiple periods. You can you can easily add up the math and you can get a two 3% additional comp.

Jack Hartung: Labor costs of the quarter were 24.9%, a decrease of about 20 basis points from last year. The benefit from sales leverage was mostly offset by wage inflation. And for Q4, we expect labor costs to be in the mid-25% range, as the benefit of the menu price increase will be offset by continued labor inflation. And within our guidance, we anticipate a similar level of paid time-off and other benefits that we experienced in the fourth quarter of last year.

And all of those restaurants that are that are seeing that additional flow through.

In terms of leverage David I'd have to go through the math.

Generally.

Generally as you add two three.

Additional transactions.

Jack Hartung: Other operating costs for the quarter were 14 percent, a decrease of about 50 base points from last year, 50 decrease was primarily driven by sales leverage, marketing and promo cost for the quarter were 2 percent, and a Q4 we expect marketing costs to step up to the mid 3 percent range with the full year to come in just below 3 percent, and Q4 other operating costs are expected to be in the low 15 percent range. DNA for the quarter was $159 million on a gap basis, $158 million on a non-gap basis, excluding $1 million related to corporate restructuring expenses.

Youre going to see tens of basis points, youre, not going to 200 basis points or anything like that you're going to see tens of basis points of leverage on the labor line. So it's certainly nice, but it's not it's again, it's not going to get you.

Anything in the sub 24% range, but keep in mind that the important thing from a margin standpoint.

Every single additional transaction, we bring in there as a 40% pass through down to the cash flow line and that's our that's how we want to grow our margins.

Thank you.

Yeah.

Our next question comes from Lauren Silberman with Deutsche Bank. Please go ahead.

Jack Hartung: DNA also included $120 million in underlying gene A, $34 million related to non-cash dot compensation, $3 million related to higher bonus accruals and payroll taxes on equity vesting and exercises, and $1 million related to our upcoming all manager conference, which is scheduled for Q1 of next year. For Q4 we expect our underlying gene A to be around $125 million, and it grows slightly thereafter as we make investments in technology and people to support ongoing growth.

Thank you I also wanted to ask about through play so one of the key initiatives being the right cadence of digital orders.

What extent have you rolled out that specific initiative across the system or what percentage of the system do you see opportunity to improve that labor allocation.

You're referring to the digital make line.

Our smart pickup times, yes, it's in more than half its about half of our restaurants right now.

Jack Hartung: We anticipate stock comp will be around $33 million in Q4, although this amount could move up or down based on our actual performance. We also expect to recognize about $3 million related to performance based bonus accruals and payroll taxes on equity vesting exercises, and $2 million related to our all manager conference, bringing our anticipated total G9 Q4 to around $163 million. We anticipate pre-opening expenses of around $15 million in Q4 due to the cadence of new restaurant openings, and as a reminder about half of pre-opening expense is non-cash pre-opening rent related to straight line accounting rules.

And we're seeing great outcomes from that we're being more on time more accurate with our digital business and where we have the correct deployment or aces in places on the frontline, we're seeing some nice improvement in entre number of entrees for 15 minutes. So we still have work to do though on executing.

The deployment on the frontline so that people don't leave their position.

For the most part we're seeing really nice progress on the on time and accuracy on the DFL and we're seeing some throughput gains at the frontline, but I think there's opportunity for us to get even better as we keep people in position during the entire peak that they're faced with.

Jack Hartung: Precision for the quarter was $79 million or 3.2% of sales, and for Q4 we anticipate precision expense to step up by $4 to $5 million due to a larger number of expected new restaurant openings. Asset retirement was $7.2 million in the quarter, and a Q4 we expect as a retirement to be around $8 million as we continue to focus on proactive equipment replacement as we prioritize the guest experience for great operations. Our effective tax rate for Q3 was 24.2%, which benefited from a higher than expected tax credits.

Great and just historically I believe talked about peaks trip type being Hy 'twenty or low 30 orders placed.

Peak 15 minute period I have you.

We're trying to those levels is there room to exceed prior peak here, but as you know utilize the second make line to a much greater level are there any constraints at that high 20, low 30 whatever level across.

The restaurants, thank you.

Jack Hartung: We continued 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 over $1.9 million in cash, restricted cash and investments with no debt. During the third quarter, we repurchased $226 million of our stock at an average price of $1,914 more than 2.5 times our Q2 purchases as we were optimistic as the markets often.

The good news is there is no real constrained.

We've got the opportunity to exceed that obviously when we were doing those numbers that was won the entire business was off the frontline.

So the good news is no bottleneck. The other piece of good news is if that does occur we've got a significantly bigger business than what we have today. So.

And we think Theres a lot of room for growth, we just got to execute this throughput.

Program with excellence on the frontline.

Jack Hartung: At the end of the quarter, we had $368 million remaining under our share authorization program. We opened 62 new restaurants in the third quarter of which 54 had a Chipotle. And we remain on track to open between 255 to 185 new restaurants this year. And as Brian mentioned, we plan to open between 285 and 315 new restaurants in 2024, which at least 80% will have a Chipotle. We anticipate that our timeline will remain extended, which is preventing us from reaching the higher end of our 8% to 10% new restaurant opening guides range in 2024. We continue to see permitting and inspection delays, utility installation delays, along with developers delaying projects due to macro pressures and rising interest rates.

I was just with all of our team directors frankly, this morning, and it's the number one initiative on everybody's mind, great people, great food grade throughput, we do those three things we're going to continue to drive growth from our operations.

Great. Thanks, so much.

Okay.

Yeah.

Our next question comes from John <unk>.

J P. Morgan. Please go ahead hi, Thank you very much yeah. The question is related to throughput, but I think it's more specifically an unmet demand and I was wondering you know if your data specifically on the digital make lines. He aside you know showed how much unmet demand you know that you actually may have based on the way.

Jack Hartung: Considering our current pipeline and timeline and assuming conditions do not worsen from here, we believe we can approach 10% new restaurant opening by 2025.

At times that are quoted to customers in other words, you have to get to the end of the transaction. They see a wait time and you know they just don't complete the transaction is that something you can measure and related to that you know do you have a sense of how many stores actually are at capacity, maybe still in Midtown Manhattan and in some other places where people do walk by a line that has.

Jack Hartung: To conclude, I want to once again thank our 114,000 employees for treasuring our gas and earning every single customer visit. We have exceptional people working hard every day to serve exceptional food to our gas, and that shows through these terrific results. As Brian mentioned, we have a lot of opportunity in front of us, and as we continue to make meaningful progress in improving the gas experience through faster throughput and our restaurants, this will further strengthen our brand and industry-leading economic model and continue to position us for long-term growth.

15, or 20 people in it perhaps and you know just go to a place that you know that that's let's say is there a way to kind of quantify as you see it today.

The amount of unmet demand that you know that you would serve if you could serve in other words. If you were you know kind of faster if the order time for less what have you you know just a you know just the opportunity on your current store base.

Operator: With that, we're happy to take your questions. Thank you.

Operator: We will now begin the question and answer session. To ask a question, you may press star then one on your touch tone phone. If you're using a speaker phone, please pick up your handset before pressing the key.

Yeah, Yeah, Hey, John we we don't have the ability today for the in restaurant, although we're talking about it we're talking about some of the new tools that there may be some ways for us to capture the data not only in terms of like how many customers are waiting at the end of the 15 minute period, which that would be the opportunity.

Operator: To withdraw your question, please press star then two. Please limit yourself to one question and one follow-up question.

You know as well as how well we're executing on the frontline. So we're talking about developing those tools, we do know historically, though when we drive faster throughput that we do flow more people not just through the 15 minute period, but we get a lot of incremental transactions as well. So historically, we know that people do they walk away from our lines you can see it anecdotally.

Operator: At this time, we will pause momentarily to assemble our roster.

Sara Senatore: My first question comes from Sarah sanatorium with Bank of America. Please go ahead. Thank you so much. I just wanted to ask about unit growth, if I may, both the US and then Europe. Jack noted that you could get the high end of that 8 to 10 for 2025. I'm curious how or what you're doing to sort of address the construction permitting delays that I think should probably continue. Are you widening the funnel in terms of the sites that you identify and the kind of work you do to start?

When youre in the Midtown restaurant, when you see a long line and you see somebody walked by open up the door and then walk away. That's the last transaction, we're not able to quantify that specifically, but we know what happens a lot.

Do you I mean eat well Kent do you know that on the on the digital side. I mean, you know transactions that kind of get you know get get to the final like you know the percentage of transactions that may be it you know that maybe aren't just completed that are right at the point of payment I don't know if that that that's exactly the way to look at it but there must be it must be a leading indicator to some degree.

Sara Senatore: I use them trying to understand the confidence in getting back there, assuming the environment doesn't change that much. And then for Europe, you talk about getting economics, you could support accelerated growth. Do you need to get AUVs higher or are the tailed volumes there, but it's really back kind of operational efficiency in the training that you talked about? Thanks.

We do have that on the digital side.

And related your related question was how many of your restaurants are at capacity.

We were able to flex capacity in the restaurants by adding staff. So we will have between one in four people on the D. M L.

Jack Hartung: Yeah, Sarah, I'll start with within the US. You know, when we talk about getting to the high end of the 8 to 10 percent range by 2025, that actually assumes that we don't get better in terms of the timeline. It assumes that things stay as they are. What that tells you is just every year our teams are doing a great job of building a very robust pipeline. And so that pipeline is really filling up.

So if you have a very very busy restaurant on the digital line you won't have as many for people as many as four people on that line, including one dedicated person that's going to run it ordered back and forth. So we have very few restaurants in very few individual periods within our restaurants that are that are maxed out from a from a digital stack.

Jack Hartung: And as these timelines have been extending, that pipeline just keeps getting bigger. And so if you disassume we have the same timelines going forward for the next couple of years, we should get close to that 10 percent range. Now, having said that, we've also challenged our teams. We challenged our teams to take a look at what is causing some of the delays. What can we do from a mixed standpoint, are there simpler deals that we can go after that would shorten the timeline?

Point.

Okay, and you know clearly you can see the faster you are the more customers you serve this current set of data proved that once again. Thank you so much.

Okay.

Our next question comes from Brian Mullan with Piper Sandler. Please go ahead.

Thank you just a question on loyalty could you talk about some of the key near term objectives. The team is focused on with the program over say next 12 to 24 months on the path towards I think the ultimate long term goal of greater personalization overtime, which much Brian I think you've referred to in the past is still a big opportunity.

Jack Hartung: Can we work with developers? If developers are getting cold feet in terms of, if that's what's slowing things down because of higher interest rates, we have strong balance sheet. Not that we want to give away the farm, but there are things that we can do from an economic standpoint that might accommodate that. So, we challenged our teams to shorten the timeline, but in terms of us getting to 10 percent, our, frankly, our pipeline, we think can get us there even in the timelines today the same.

Yes sure.

So the team is focused on taking all the analytics and insights that we obtain and figure out how we commercialize those learnings in a way that's very personalized for the individuals.

Brian Niccol: And then, Brian, not if you want to comment on Europe. Yes, sure. So, on Europe, Sarah, you basically, in your question was the answer. So, the top line looks really good. We're working hard on how we get that to flow to the bottom line. So, some operating efficiencies and just getting better at managing the business.

A simple example.

The suggestive sell.

When you get ready to check out if we know historically you do by a Mexican Coke and we don't see Polk in your basket. The suggestive sell will be for Mexican Coke and then we see when we do that we get a higher take obviously on the suggestive sale. So it is it's simple things that actually we know we can commercialize.

Sara Senatore: This really will work. Thank you very much.

David Tarantino: Our next question comes from David Tarantino with Bear, please go ahead. Hi, good afternoon. My question is about the traffic performance you're seeing. I think Brian, you mentioned that it accelerated as the quarter went on and staged strong in October. We've been hearing more broadly that the consumer spending environment may have done the opposite. I was wondering if you could maybe unpack the drivers that you think drove the divergent that you're seeing in your transverses, maybe what others are seeing.

It's done in a very personalized way and Thats what the team is centered on is how do we do this throughout the user experience from the moment you enter your ordering process at the moment, you're trying to pay on the wall.

The good news is the team has got a lot of <unk>.

Analytics.

That we're cranking through and we're knocking off the things that we think have the highest leverage points over the next.

Call It 18 to 24 months.

Yes.

Okay. Thank you and just wondering if you could just update us on the on the dual sided grills, maybe how many locations that have been rolled out to and are the benefits proven to be what you might've hoped inside the stores and if so you know when when could this be rolled out more broadly.

David Tarantino: And specifically, I was hoping that you could talk about the comparison related to garlic, guajillo steak, and also what you're seeing on the throughput side as a contributor to that. Thanks. Yeah, so yeah, David, our transactions actually throughout the quarter every month showed improvement. And we continue to see that transaction strain. What we are today. So, you know, the things that we've been focusing on is, you know, look, get fast, get trained, get deployed.

So we're still in 10 restaurants and.

This is why use the stage gate process because.

We are definitely one of the things we've learned is the energy needed to run. These dual sided girls is going to require some electrical upgrades.

We originally had planned on so we've got to understand exactly what is the cost of the equipment not only to purchase but then to actually.

Install and so we're still working through how do we make the economics of this makes sense, but the crew likes it the culinary turns out to be great, but we have to do some work on the economics of it.

David Tarantino: And, you know, kind of the way we describe this is you've got a great people, great culinary, great throughput. And I think we're seeing that come through in our results. Combine that with the fact that, you know, we just launched a carne asada. And the foundation of operational performance, I think is critical in making carne asada be, you know, probably a performer that will outperform what we saw the garlic guajillo steak.

Thank you.

Our next question comes from Brian Martin Please go home.

Yes. Thank you could you maybe just comment on that.

The delivery channel and then also just kind of you know mobile order and pickup and you know some of the things you're doing with.

David Tarantino: I know that was a favor of yours, but, you know, I'm sorry to say the carne is not just like an outperforming, but, you know, regardless, I think it was really important. Our operators have done a terrific job of getting back to the basics of staffing, training, deploying, and then holding ourselves accountable to great throughput. And we're seeing every month some improvements in throughput and that continues to be the case that we enter the fourth quarter.

With timing or orders for 15 minutes, if that's kind of affected volumes at all.

So.

Kind of a general question there so I'll see if there's maybe answering your question but.

What we see is the delivery business pretty stable.

The order ahead and pick up business.

David Tarantino: And I think that's why we continue to see really good traffic results. And, you know, we're going to protect the value proposition, we're going to protect the brand position that we have. And I think we'll get rewarded with hopefully more than our fair share of transactions. Yeah, the only thing I would add, Brian, to that is we're reading the same things that you are. And the consumers clearly under pressure with inflation over the past year and pretty much everything with gas and groceries and really across the board, high interest rates.

<unk> continues to be something that we're very much focused on being on time and accurate and that's why we've implemented this smarter pickup times, where we're moving how many orders, we allowing per 10 minutes as well as the buffer.

So that our crew can execute those digital orders with excellence without having to impact, giving the frontline of great experience and we're seeing nice progress on both fronts, which I mentioned earlier were more on time more accurate and we're seeing gains on the throughput side of things on the frontline and we're not seeing a step back and any conversion.

David Tarantino: We continue to do well not just across our income levels, but with the lower income. They're holding up really well. They're really hanging in there at the same at about the same level as our medium and high income levels. So I think that Chipotle value where we haven't raised prices in over a year until the latest action. I think it's coming through and people are choosing to, you know, to die at Chipotle because we are very affordable.

Rates in our digital business as well so.

No. It's full steam ahead, and we've got to execute the operating platform.

Okay.

Just on Chipotle is it are you still seeing kind of the same.

Volume uplift that you've previously talked about for those kind of the same impact on returns as it is in fact going up yeah any comments on how we think about the chipotle and impacts, especially as we kind of think about next year.

David Tarantino: Sorry, one other thing because this is a favorite topic of ours here is we do love the fact that our growth is being driven by transactions. Which I do think is really important to ongoing health for our business and our opportunity to grow going forward. So I'm really proud of the team. I'm really proud of the result for this. Porter. Right. Thank you very much.

Yeah did you pull lane volumes have gotten closer to the non chipotle volumes.

And keep in mind a lot of these were open during the pandemic win.

The Chipotle was was really a premium accidentally a preferred access channel during that time, but keep in mind, we're comparing a little bit of apples and oranges to because in the early days of Chipotle and we.

David Tarantino: Our next question comes from Dennis Geiger with UBS. Please go ahead. Great. Thank you. I'm wondering if there's anything else to highlight on the strength of the margins in the third quarter. And I guess more importantly, how that's shaping, how you're thinking about next year and specifically jacket, if kind of 27% margin is at a $3 million AUV. If that's kind of still the right way to think about the margin AUV dynamic.

We had a lot of trade areas that could accommodate chipotle and yet we werent, putting a chipotle and at every single restaurant now the only restaurants that don't have a chipotle tend to be a downtown area in inland locations, where you can't have a chipotle and so it can vary a little bit of apples and oranges, having said that the margin is much better because you've got a lot more you've got more of your.

David Tarantino: Yeah, so we're like, I would describe our margin right now. We're not quite a $3 million, but we're not going on the door. We should get there next year. And we're not going on the door of 27% we're not all the way there yet. We're at 26 and a half year today and 26 three for the for the quarter. Fourth quarter typically is a lower margin quarter for us. We'll be closer to 26 and 27.

Sure.

Business, that's going through the digital channel, which is a more efficient channel for us and the other thing that happens and you still have about a 10% shift where youre delivery is dropping by eight to 10 points or something like that and your order head is increasing by eight to 10 points or so so so our customers are choosing.

David Tarantino: But I would call that knocking on the door and just give you an idea, we're not we chose to take an extra 1% or 1.25% in pricing. Our margin would be at 27%. Now, we're not going to drive our margin based on that. We're really using menu pricing just to offset inflation. But it gives you an idea with a little bit of extra pricing or with a little break in terms of some of the commodity costs, the ingredient costs next year.

Inc.

The convenience channel, which also was a value channel, which is also an efficient.

A very efficient channel for us to run in that order ahead, and there are deselecting the delivery channel.

Thank you.

Mhm.

Our next question comes from Sharon Zackfia with William.

William Blair. Please go ahead.

David Tarantino: We've had multiple years of inflation at those ease a little bit. If labor inflation eases a little bit as well, there's a number of ways to get there. And I would use the algorithm as more a long-term guidepost rather than something we're going to look to be right on the money every single quarter or every single year. So I feel like our economic model is really, really healthy. We're really knocking on the door of that 27% and with a break here or there, I think we will hopefully get there next year.

Hi, good afternoon.

I guess going back to throughput I know in the past you've quantified kind of where you are relative to 2019 on peak throughput I was hoping perhaps if he can get an update on that and then I.

I guess I'm also wondering as 2019 really the right benchmark anymore, just given how the business has shifted I mean, you're doing double digital versus 2019, and we know that's causing some tension between the front and back line. So is that the right bogey I mean do you have a slice of restaurants that have exceeded 2019 peak throughput or is that.

David Tarantino: That's great. Thanks for that. And then just appreciate the strong traffic number in the third quarter. Can you just provide the price and mix breakdown in the third quarter, Jack, and if you care to talk at all about how to think about those components into the fourth quarter level, thinking about that mix in particular. Thank you very much. Yeah. Yeah, sure. The price we were running in the quarter was in a high twos, you know, call it right around to a fish, something like that.

Not the right answer anymore.

Sharon it's great question, when we use in 2019 as a benchmark we actually adjusted it for the fact that today's volume is at basically 60%, 62% of the business goes through the frontline versus back in 2019, it was about 80 or 81%, 82% or so so we've adjusted for that volume so.

David Tarantino: And remember, that's all from pricing we took last year. We didn't take any additional pricing until just recently. And mix did ease a little bit. It mixed was more than 2% range. So you add that on top of a better than 4% transaction, you know, contra in the quarter. And that's how you get there. You know, looking forward in the Q4. With the 3%, we just remember, we took it in the second half of October.

For example, the average <unk>.

Throughput in 2019 was in that high 20% range 28 to 29, when you adjusted for 62% of the volume going through the frontline that bogie ends up being on an adjusted basis is more like a 25 or mid Twenty's and so we do have the right targets for our teams because we did volume adjusted in terms of where we are we've been making incremental improvements.

David Tarantino: So that'll average out to about a 2.2%-ish. Call it a low-to's. Menu price increase. We are starting or we did start to see the mix, negative mix component eased during the quarter. And if that continues, we would expect that the mix component would be still a drag, but it would be hopefully closer to a drag of 1% than the 2% that we saw in this quarter. And then of course, you know, Brian mentioned we continue to see strong mid-single digit transaction comps, you know, in the fourth quarter so far.

We are now at right around 22, but we're still three transactions below two and a half to three transactions before our goal. The good news as Brian mentioned, we're seeing a lot of progress in terms of the right deployment, we're seeing that a lot of our restaurants are executing for core core core for meeting they've got at least for folks.

Not more on the frontline previous we saw most restaurants would have three or sometimes even less than that.

And now our teams are focusing on okay. What are the habits that drive great throughput because they're having four people on the frontline is an enabler, but it doesn't mean, you're going to deliver great throughput you have to stay on their frontline and then you have to have all the tricks that we're not going to go through right now and all the techniques to deliver great throughput, we're starting to see individual restaurants are patchy.

Dennis Geiger: Thank you. My next question comes from Andrew Charles with PD Cohen. Please go ahead. Great. Thanks.

Andrew Charles: Jackson with clarification, do you consider the recent 3% price increase to brace yourselves for AB 1228 next year or are you planning a separate California target price increase to be utilized sometime around April to help mitigate the impact of the higher California Yeah, this does not consider anything, any part of the California wages that will happen next year. We've been studying that, Andrew, as you can imagine already. It's going to be a pretty significant increase to our labor.

The restaurants that are executing core four and their throughput numbers are three to four or more transactions greater than a 15 minute period than restaurants in the same patch that or not executing the core for us. So we're seeing really encouraging results and is that three or four transactions here and that gets you from the 22 up to that mid 20. So we do feel like we're triangulating around the <unk>.

Target Okay.

Okay.

Then I guess a question on the guidance for the quarter on comps.

Andrew Charles: Our average wages in California are right around 17%, so to get the minimum up to 20, and to make sure that we take care of compression as well, we're going to have to increase wages in, you know, call it the high teens to 20% or so. We haven't made a decision on exactly what level of pricing we're going to take, but to take care of the dollar cost of that and or the margin part of that, we haven't decided where we will land at that.

I know you had kind of some weather and some disappointment around the holidays last year I mean, Jack are you factoring that into the guidance for this year or are you just kind of steady state in.

Well, we've done churn has taken our current trends.

From October and then pushing them forward.

Do take into account, what we did last year.

But were rather than taken account last year is that going to affect our comp either up or down we really take our current trends, which includes carneous adder and includes a menu price increase.

Andrew Charles: It's going to be, you know, a mid to high single digit price increase, but we are definitely going to pass this on. We just haven't made a final decision as to what level yet. Gotcha, okay, that's helpful.

Includes the current underlying transaction trend, we use that trend it turned out for the rest of the year compared to last year to the extent that there was some weather we see individual days or weeks, where there was weather our comp is going to bounce up during those periods, but we didnt use last year's weather to say, it's going to be any better or worse. Okay.

Andrew Charles: And then Brian, question on menu innovation, you know, it looks like there's no innovation in the stage gate process is obviously your prioritizing operations and project square one. I'm curious, what do you need to see to resume new menu innovation in particular, it's reaching a number of transactions per peak 15 minute or some other measure you're looking at to resume new menu innovation piloting. Yeah, so the teams are still working and iterating on menu innovation.

Okay, great. Thank you.

Thanks.

Okay.

Okay.

Our next question comes from Danilo.

Yeah.

Got it.

Andrew Charles: One of the things that they uncovered, which I'm really excited about is we have an opportunity to just talk about our core menu. So there's very little awareness and understanding of what barbecue or carnitas are, and you'll probably be seeing our teams doing some work on how do we bring the light what we currently have on our menu. So the customers can understand and truly enjoy everything that we have currently offer at the same token.

Please go ahead.

Thank you first of all quick clarification in light of your comments on the Chipotle, So I'm assuming that the 40% flow through is the outage in your system. So are you seeing any mix benefits in the 40% as you are getting more and more stores with chipotle and any new trade areas. So could we be talking about 40% to 43%.

Andrew Charles: They're still doing some work on, you know, what are some new menu items and we're also doing work on bringing back some menu innovation that we've done the past that has really run the bell. So I'm feeling really really good about where a menu stands and the pipeline that we have for news over the next, you know, call it 18 to 24 months. Awesome. Looking forward to it. Thank you.

Flow through in the near future.

That's correct.

And in a chipotle the margins are better and then the incremental margins are better. So you should see a few ticks up when we have incremental transactions and at Chipotle definitely.

Great and then with potential increase in value offerings from some of your large peers did you seem to the industry is moving toward a more elevated level of promotional intensity to attract and retain traffic and if so are you expecting chipotle to be able to leverage the same pricing power that they did last year.

David Palmer: Our next question comes from David Palmer with Evercore. I'm sorry. Please go ahead. Thanks. Question on labor productivity. I'm wondering how you're thinking about the drivers and getting back to something like you've done in the past at 23% or so labor margin. You know, what are the key on locks from here? You're obviously finding some traction on just paying attention to how you deploy labor and some of the things you're doing, even with computer vision and whatnot.

I mean, what we center on is providing a great.

Experience and what we've seen is that results in superior value.

And unfortunately, we aren't doing it through price promotion, rather we're doing it through great culinary lots of customization terrific speed and that's where our value.

David Palmer: But then there's the other side, which might be the bigger leap stuff with equipment. So I'm wondering how you're thinking about the timing of these things and how I'm really obviously thinking about 2024 and what drivers you see there.

For the consumer really shines through and then given the scale that we have we're able to buy ingredients and provide people clean eating experience and frankly to get anywhere else for the price at which we charge it so.

David Palmer: Yeah, David, I don't know that we'll see 23% at least not in the near future. We've taken on some significant labor inflation over the last few years. And, you know, this California act that we just talked about. California is only 15% of our restaurants, but that's all by itself. Next year, that's going to add two and a half to 3% inflation to our overall company inflation in labor. So I don't know that we'll see 23, but the essence of your question is, what are we going to do to continue to be efficient with labor?

Very affordable very customizable Super high quality is resulting in really strong value scores from consumers and then when we look at our relative price position to competitors.

We're anywhere from 15% to 30% discount on an everyday standard.

Some of those kind of interesting that the team did just to kind of dimensionalize. They took a look at <unk>.

18 to 34 year olds that actually have student debt.

And what we found is chipotle was the best value proposition among that universe. So one of the things. We're seeing is whatever situation you're in whether it's low income higher income with some students that we continue to be a strong value proposition, regardless, where you look across the consumer segments.

David Palmer: And I think you hit on all the key pieces for what we have in our restaurants today. We're really efficient. It doesn't mean we don't have some opportunity, but our teams are doing a great job. And for the most part, they're using the labor that they need to throughout the day. I think the unlock is that we have the labor deployed properly. You know, Brian mentioned this during his prepared comments, so that we have the right people that are staying on the front line.

Excellent. Thank you.

Our next question comes from Jeffrey Bernstein with Barclays. Please go ahead.

David Palmer: So we could drive better through, but when we drive better through, but we know with a 40% flow through and we know with our ability to leverage labor that that labor percent will go down. And then over the, I'll call it the medium term and long term with things like Adokado and, you know, with with hyphen. I think there's opportunities for us to try to offset some of the labor inflation, but I just don't know that we would be able to get all the way down to 23.

Okay.

Great. Thank you.

Two questions first Brian.

Brian I'm sure you're getting this question periodically I think I saw some headlines on CNBC earlier about it but just the topic of anti obesity drugs as a headwind.

You had mentioned that <unk> not seen anything to date, but it would seem like you, perhaps more vulnerable than others. Just because maybe you have a slightly higher income cohort. So I'm just wondering how you'd assess whether there was any impact or what you might do differently. If that was a future headwind maybe getting a halving of it with focus on the healthier offering that we know you have just how do you think about how it's being impacted and how.

David Palmer: That would be, I mean, that'd be an 8% deflation. And that'd be, I think, difficult to accomplish, but, but, you know, rest assured that there's a lot of things that as we're working on investment, second, make not just reduced hours, but also make the jobs of our crew easier, better and free them up so they can provide better customer service. We're definitely going to invest in that. Oh, yeah, if it makes you feel me better, I don't think anybody has 23% in their models or anything, but I just want to make sure.

You would respond and then I had one follow up.

Sure. So yeah, that's right, we've not seen any material impact from it.

And as I understand the drug and when I've spoken to people that know a whole lot more about the drug than I do.

Our food is a good solution because it's clean it's not fried.

It allows people then to customize their meal that would fit their diets that they're trying to achieve whether they're on <unk>, one drugs or whether they are on a keto diet or a whole 30 diet or insert the lifestyle diet that they're on or the lifestyle drug that they might be on the good news is we're positioned to be able to.

David Palmer: But when you mention the 4 to 5 on trays in that peak 15-minute window improvement, what is the benefit to same-store traffic and or just labor productivity you're getting from that? Can you put that into perspective? Yeah, I mean, in terms of like comps, for example, we need about five transactions in a day to get a 1% comp. And so if you get three, four additional transactions in that 15-minute period and do that for multiple periods, you can easily add up the map and you can get a 2%, 3% additional comp in all those restaurants that are seen that additional flow through.

Customize that die for you with clean food done in a very healthy way so.

Longer term.

I think we're positioned really well.

See how this continues to unfold, but to date, we've seen no real impact.

The best thing, we can do is make sure that we stay committed to food with integrity and providing those customized solutions at speed.

Got it and then.

Jack just in terms of the fourth quarter or maybe more importantly, looking to 2024.

David Palmer: In terms of leverage, David, I'd have to go through the map. Generally, you know, generally as you add two, three additional transactions, you're going to see tens of basis points, you're not going to see other basis points or anything like that. You're going to see tens of basis points of leverage on the labor line. So it's certainly nice, but it's not, again, it's not going to get you down to anything in the sub 24% range.

RV and labor.

Inflation, what's kind of the forecast you're assuming when you talk about kind of approaching that 27% restaurant margin I know you talked about how California labor alone is 250 to 300 basis points I'm just wondering what what assumption you have for inflation on commodities and labor for next year. Thank you.

I mean, Jeff.

Predicting.

Anything.

David Palmer: But keep in mind, the important thing from our margin standpoint, every single additional transaction we bring in, there is a 40% pass-through down to the casual line. And that's how we want to grow our margins. Thank you.

Actually inflation in the last few years has been very very difficult right now it looks like inflation is settling for both our ingredients and for labor in that call. It three ish percent, maybe between three and 4% something like that that's a very normal environment. If it stays at that 3% to 4% range I think that's I think that's just fine we can operate.

Lauren Silberman: Next question comes from Lauren. Thank you. I also wanted to ask about throughput. So one of the key initiatives being the right cadence and digital orders. To what extent have you rolled out that specific initiative across the system or what percentage of the systems use the opportunity to improve that labor allocation? You're referring to the digital make line and smart pickup lines. Yeah, it's about half of our restaurants right now. And you know, we're seeing great outcomes from that, you know, we're being more on time, more accurate with our digital business.

Very effectively in that environment.

Would we be able to get all the way to 27% with without taking any additional pricing that'd be tough unless our transactions accelerate and we can.

Leverage throw some more leverage along our fixed ethics line items.

But if it is in that 3% to 4% range. We just took a 3% price increase.

I think we'll.

B just fine, but if it if it continues at a higher level, obviously that would be a little a little tougher but.

Anyway.

If it ends up in that 3% to 4% range that people keep their jobs and people still want to dine out we like our chances that they'll keep coming to chipotle, especially based on the most recent trends that we've seen.

Lauren Silberman: And where we have to correct deployment or aces and places on the front line, we're seeing some nice improvement in a number of odd trees per 15 minutes. So we thought work to do though on executing the deployment on the front line so that people don't leave their position. But for the most part, we're seeing really nice progress on the on time and accuracy on the DML and we're seeing some throughput gains on the front line. But I think there's option for us to get even better as we keep people in position during the entire peak that they're faced with.

Thank you.

Yeah.

Our final question comes from Peter <unk> with <unk>. Please go ahead.

Great. Thanks, Thanks for taking the question, Brian I wanted to come back to your comments on the hyphen make line I think you said it increases capacity.

Better accuracy and better speed.

What are the challenges in some of the hurdles that you think you need to overcome at this point to move it to the next stage in this tankage process.

Lauren Silberman: Great. And just you've historically, I believe, talked about peak throughput being high 20 or low 30 orders per peak 15 minute period. As you worked your turn to those levels, is there room to exceed prior peak throughput as you now utilize a second make lines for much greater level, or is there any constraint at that high 20 low 30 order level across the restaurant. Thank you. Yeah, the good news is there's no real extreme.

Yeah. So thanks for the question so.

So we had our first prototype at our cultivate center and the team did a great job of kind of pressure testing all aspects of it.

We learned a lot right. There is work to be done on how your Expo things Theres work to be done on how you clean it theres work to be done on how we actually provide portions and.

Lauren Silberman: You know, we've got the opportunity to exceed that. Obviously, when we were doing those numbers, that was when the entire business was off the front line. So the good news is no bottleneck. The other really easy good news is if that does occur, we've got a significantly bigger business than we have today. And we think there's a lot of room for growth. We just got to execute this throughput program with excellence on the front line.

The good news is this is why we use the stage gate process. So that we learn we iterate and then hopefully we get to a faster solution.

I'm excited to see what the next prototype holds but the team is working on some of those key things that we learned on but.

But yes look all signs are really promising that as we continue to work on this in the stage gate what we're after is.

Accuracy speed.

Lauren Silberman: And, you know, I was just with all of our team directors, frankly, this morning. And it's the number one initiative on everybody's mind. You know, great people, great food, great throughput. We use those three things. We're going to continue to drive growth from operation.

And then the ability for the team members to execute this both of the Exco station and then keep it clean and who too so.

John Ivankoe: Thank you. Great, thanks so much.

We're working through those things, but for our very first prototypes the team did a great job.

Loved everybody's passion to learn so that we get to an even better second generation prototype.

John Ivankoe: All right, next question comes from John Ivankoe, where's JP Morgan? Please go ahead. Hi, thank you very much. The question is related to throughput, but I think it's more specifically on unmet demand. I was wondering if you were data specifically on the digital make lines side, showed how much unmet demand that you actually may have based on the wait times that are quoted to customers. In other words, they get to the end of the transaction, they see a wait time and they just don't complete the transaction.

Great and then just my last question would be on.

Have you seen any difference in sales performance for the urban versus suburban stores. These days is the is the return to office are you seeing any improvement there.

John Ivankoe: Is that something you can measure? And related to that, do you have a sense of how many stores actually are at capacity? Maybe still in Midtown, Manhattan and some other places where people do walk by a line that has 15 or 20 people when it perhaps, and just go to a place that's less. Is there a way to quantify, as you see it today, the amount of unmet demand that you would serve if you could serve. In other words, if you were fast or if you would have time for less, what have you, just the opportunity on your current store base.

Just any clarity around that would be helpful. Thank you, yes, the comps have gotten a lot closer.

The urban still outperform the suburban by about 100 basis points or something like that so it's much much much closer but.

But I would say the central business districts are still behind in terms of an absolute sales basis. If you look at pre pandemic and where we are today.

Central business districts are still behind but from a comp standpoint, they are performing in the same general range.

Okay.

Thank you very much.

Thank you.

Okay.

This concludes our question and answer session I would like to turn the conference back over to Brian Nagel for any closing remarks.

Yes, Thank you and thanks, everybody for the questions and joining the call. Obviously, we're very proud of our teams and the results that we delivered in the third quarter.

John Ivankoe: Hey John, we don't have the ability today for the in restaurant, although we're talking about it, we're talking about some of the new tools that there may be some ways for us to capture the data, not only in terms of how many customers are waiting at the end of a 15 minute period, which that would be the opportunity, as well as how well we're executing on the front line. So we're talking about developing those tools.

It's very exciting to see our efforts on <unk>.

Throughput driven by having teams staff trained and deployed correctly continuing to make progress and then with our strong value proposition seeing that show up in transactions as the driver of growth.

To continue to stay focused on executing great throughput, we're going to continue to stay focused on great culinary or we're going to continue to stay focused on having great people that are trained to know exactly what they need to do in their position. So very excited about the results we've achieved but very optimistic about our future silicon building new units and continuing to drive average unit volumes and margin.

John Ivankoe: We do know historically, when we drive faster throughput, that we do flow more people not through the 15 minute period, but we get a lot of incremental transactions as well. So historically, we know that people do they walk away from our lines. You can see it anecdotally. When you're in the mid-town restaurant, when you see a long line, and you see somebody walk by, open up the door, and then walk away, that's a lost transaction.

So thank you for taking the time and we will see in a couple of months. Thank you.

John Ivankoe: We're not able to quantify that specifically, but we know it happens a lot. Do you know that on the digital side, I mean, you know, transactions that kind of get to the final, like, you know, percentage of transactions that maybe, you know, that maybe aren't just completed, that are right at the point of payment. I don't know if that's exactly the way to look at it, but there must be a leading end to some degree.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.

John Ivankoe: We do that on the digital side. And related, your related question was, how many restaurants are at capacity? We were able to flex capacity in the restaurant by adding staff. So we will have between one and four people on the DML. And so if you have a very, very busy restaurant on the digital line, you will have as many four people, as many as four people on that line, including one dedicated person that's going to run orders back and forth.

John Ivankoe: So we have very few restaurants and very few individual periods within our restaurants that are maxed out from a digital standpoint. Okay. And clearly, you can see the faster you are, the more customers, you know, you serve the current set of proof that once again.

John Ivankoe: Thank you so much.

Ryan Mullan: Next question comes from Ryan Mullin with Piper Sandler. Please go ahead. Thank you. Just a question on loyalty. Could you talk about some of the key near-term objectives the team is focused on with the program over say next 12 to 24 months, you know, on the path towards I think the ultimate long-term goal of greater personalization over time, which, which, Brian, I think you referred to in the past that's still a big opportunity.

Ryan Mullan: Yeah, sure. So, yeah, the team is focused on taking all the analytics and the insights that we have seen, and figuring out how we commercialize those learnings in a way that's very personalized for the individual. So, a simple example, the suggestive self, you know, when you get ready to check out, if we know historically, you do buy a Mexican Coke, and we don't see Mexican Coke in your basket, the suggestive cell will be from Mexico.

Ryan Mullan: And then we see, you know, when we do that, we get a higher take obviously on the suggestive cell. So, it's it's simple things that actually, we know we can commercialize done in a very personalized way. And that's what the team is centered on is, how do we do this throughout the user experience from the moment you enter your learning process, the moment you're trying to take on the wall. And the good news is the team's got a lot of analytics that we're cranking through. And that's what we're trying to do. We're knocking off the things that we think are the highest leverage points over the next, you know, quality.

Ryan Mullan: Okay, thank you. And just, I wonder if you could just update us on the on the dual-sided grills, maybe having locations that been rolled out to and are the benefits proving to be what you might have hoped inside the stores. And if so, you know, when, when could this be rolled out more broadly. Yeah, so we're still in 10 restaurants. And, you know, this is why you use the state gate process because we've definitely one of things we've learned is the energy needed to run these dual-sided grills is going to require some electrical upgrades that we originally had planned on.

Ryan Mullan: So we've got to understand exactly what is the cost of the equipment not only to purchase, but then to actually install. And so we're still working through how do we make the economics of this makes sense. The crew likes it, the culinary turns out to be great. But we have to do some work on the economics of it. Thank you.

Brian Harbour: Our next question comes from Brian Harbor with Morgan Stanley. Please go ahead. Yes. Thank you. Could you move just comment on the delivery channel and then also just kind of, you know, mobile order and pick up. And, you know, some of the things you're doing with, with timing or orders per 15 minutes, if that's kind of affected volumes at all.

Brian Harbour: So, you know, a kind of a general question or so I'll see if this may be answered your question. But what we see is the delivery business pretty stable. You know, the order ahead and pick up business continues to be something that we are very much focused on being on time and accurate. And that's why we've implemented this smarter pickup times where we are moving how many orders we allow in per 10 minutes as well as the buffer.

Brian Harbour: So that our crew can execute those visual orders with excellence without having to impact giving the frontline a great experience. And, you know, we're seeing nice progress on both fronts, which I mentioned earlier. We're more on time, more accurate. And we're seeing gains on the throughput side of things on the frontline. And we're not seeing a step back in any conversion rates in that visual business as well. So, you know, it's full steam ahead and we got to execute the orders.

Brian Harbour: Okay, just on Chipotle's, are you still seeing kind of the same unit volume uplift that you've previously talked about for those kind of the same impact on returns? Is it in fact going up? Any comments on how we think about the Chipotle impact, especially as we kind of think about next year? Yeah, the Chipotle volumes have gotten closer to the non Chipotle volumes and keep in mind a lot of these were opened during the pandemic when the Chipotle was really a premium access channel, a preferred access channel during that time.

Brian Harbour: But keep in mind we're comparing a little bit of apples and oranges too because in the early days of Chipotle, we had a lot of trade areas that could accommodate Chipotle and yet we weren't putting a Chipotle in at every single restaurant. Now the only restaurants that don't have a Chipotle tend to be a downtown area and inline location where you can't have a Chipotle. So we're comparing a little bit of apples and oranges.

Brian Harbour: Having said that, the margin is much better because you've got a lot more, you've got more of your business that's going through the digital channel, which is a more efficient channel for us. And the other thing that happens is you still have about a 10th percent shift where your delivery is dropping by 8 to 10 points or something like that. And your order head is increasing by 8 to 10 points or so.

Brian Harbour: So our customers are choosing the convenience channel, which also is a value channel, which is also an efficient, a very efficient channel for us to run in that order head and they're deselecting the delivery channel. Thank you.

Sharon Zackfia: Our next question comes from Sharon Bexio with William Blair. Please go ahead. Hi, good afternoon. I guess going back to throughput, I know in the past you've quantified kind of where you are relative to 2019 on peak throughput. I was hoping perhaps we could get an update on that. And then I guess I'm also wondering is 2019 really the right benchmark anymore just given. How the business has shifted? I mean, you're doing double digital versus 2019 and we know that's causing some tension between the front and back lines. So is that the right bogey? I mean, do you have a slice of restaurants that have exceeded 2019 peak throughput or is that not the right answer anymore?

Sharon Zackfia: Sharon, it's a great question. When we use 2019 as a benchmark, we actually adjusted it for the fact that today's volume is at, you know, basically 60% 62% of the business goes through the front line versus back in 2019. It was about 80 or 81 or 82% or so. So we've adjusted for that. So for example, the average throughput in 2019 was in that high 20% range 28 to 29 when you adjusted for 62% of the volume going through the front line.

Sharon Zackfia: That bogey ends up being on a just a basis more like a 25 amid 20s. And so we do have the right targets for our teams because we did volume adjusted in terms of where we are. We've been making incremental improvements. We're now at right around at 22, but we're still three transactions below two and a half of three transactions before our goal. The good news is Brian mentioned. We're seeing a lot of progress in terms of the right deployment.

Sharon Zackfia: We're seeing that a lot of our restaurants are executing for core core core for meaning they've got at least four folks. If not more on the front line, previously we saw most restaurants would have three or sometimes even less than that. And now our teams are focusing on, what are the habits that drive great throughput? Because having four people on the front line isn't a neighbor, but it doesn't mean you're going to deliver great throughput.

Sharon Zackfia: You have to stay on their front line and then you have to have all the tricks that we're not going to go through right now and all the techniques to deliver great throughput. We're starting to see individual restaurants or passes restaurants that are executing core four and their throughput numbers are three to four or more transactions great or in a 15 minute period. Then restaurants in the same patch that are not executing to core four. So we're seeing really encouraging results. And it's that three or four transactions here and that gets you from the 22 up to the mid 20s. So we do feel like we're triangulating around the right target.

Sharon Zackfia: Okay, and then I guess a question on the guidance for the quarter on comps. I know you had kind of some weather and some disappointment around the holidays last year. I mean, Jack, are you factoring that in to the guidance for this year? Are you just kind of steady stating? Well, we've done Sharon has taken our current trends from October and then pushing them forward. We do take into account what we did last year, but we're rather than taking an account last year, is that going to affect our copy of the rubber down?

Sharon Zackfia: We really take our current trends, which includes carne asada and includes the menu price increase and includes the current underlying transaction trend. We use that trend to trend out for the rest of the year compared to last year to the extent that there was some weather. If we see individual days or weeks for there's weather, our comp is going to bounce up during those periods, but we didn't use last year's weather to say it's going to be any better or worse.

Sharon Zackfia: Okay. Great.

Danilo Gargiulo: Thank you.

Danilo Gargiulo: Thanks. Our next question comes from Demilo for dialogue with Bernstein. Please go ahead. Thank you. First of all, quick clarification in light of your comments on the Chipotle. So I'm assuming that the 40% flow through is the average in your system. So are you seeing any mixed benefits in the 40% as you're getting more and more stores with Chipotle and in neutral areas? So could we be talking about 42, 43% flow through in the near future? That's correct, Danielle. In a Chipotle, the margins are better and then the incremental margins are better. So you should see a few takes up when we have incremental transactions in Chipotle, definitely.

Brian Niccol: Great. And then with potential increase in value offerings from some of your large peers, do you think that the industry is moving forward more elevated level of promotional intensity to attract and retain traffic? And if so, are you expecting Chipotle to be able to leverage the same pricing power that they did last year? You know, I mean, what we center on is providing a great experience. And what we've seen is that results in superior value.

Brian Niccol: And fortunately, we aren't doing it through price promotion. Rather, we're doing it through grade culinary, lots of customization, terrific speed. And that's where our value, you know, for the consumer really shines through. And then, you know, given the scale that we have, we're able to buy ingredients and provide people, you know, a clean eating experience, frankly, you can get anywhere else for the price at which we charge it. So, you know, very affordable and very customizable, super high quality, as resulting in really strong value scores from consumers.

Brian Niccol: And then when we look at our relative price position to competitors, you know, we're anywhere from 15 to 30% discount on an everyday standard. You know, something that was kind of interesting that the team did just to kind of dimensionalize this. They took a look at, you know, 18 to 34-year-olds that actually have student debt, right? And what we found is, you're fully with the best value proposition among that universe. So, you know, one of the things we're seeing is whatever situation you're in, whether it's low income, higher income with some student debt, we continue to be a strong value proposition, regardless where you look across the consumer sector.

Jack Hartung: Jackson, thank you.

Jeffrey Bernstein: Our next question comes from Jeffrey Bernstein with Barclays. Please go ahead. Great. Thank you. Two questions. First, Brian, I'm sure you're getting this question periodically. I think I saw some headlines on CNBC earlier about it, but just the topic of anti obesity drugs is a headwind. I think it mentioned that you're not seeing anything to date, but it would seem like you're perhaps more vulnerable than others just because maybe you have a slightly higher income cohort.

Brian Niccol: So I'm just wondering how you assess whether there was any impact or what you might do differently if that was a future headwind, maybe get a heading of it with focus on the healthier offering that we know you have just how you think about how it's being impacted and how you would respond. And then I had one follow up. Sure. So yeah, that's right. We've not seen any material impact from it.

Brian Niccol: And as I understand the drug and when I've spoken to people that know a whole lot more about the drug than I do, you know, our food is a good solution because it's clean. It's not fried. You know, it allows people then to customize meal that would fit their diet that they're trying to achieve, whether they're on GLP one drugs or whether they're on a keto diet or a whole 30 diet or you know, insert the lifestyle diet that they're on or the lifestyle drugs that they might be on.

Brian Niccol: The good news is we're positioned to be able to customize that diet for you with clean food done in a very healthy way. So, you know, longer term, you know, I think we're positioned really well. We'll see how this continues unfold, but today we've seen no real impact. And, you know, the best thing we can do is make sure that we take advantage of food with integrity and providing those customized solutions and speed.

Jack Hartung: Got it. And then Jack, just in terms of the fourth quarter or maybe more importantly, looking to 2024, your commodity and labor inflation, what's kind of the forecast you're assuming when you talk about kind of approaching that 27% restaurant margin. And then you talk about how California labor alone is 250 to 300 basis points, but just wondering what assumption you have for inflation on commodities and labor for next year? Thank you.

Jack Hartung: Yeah. I mean, you know, this predicting anything, especially inflation the last few years has been very, very difficult right now. Looks like inflation is settling for both our ingredients and for labor in that call it 3% maybe between 3 and 4% something like that. That's a very normal environment. If it stays at that 3 to 4% range, I think that's I think that's just fine. We can operate, you know, very effectively in that environment.

Jack Hartung: Would we be able to get all the way to 27% without taking any digital pricing. That'd be tough unless our transactions accelerate and we can, you know, leverage for some more leverage along our fixed line item. But if it's in that 3 to 4% range, we just took a 3% price increase. I think we'll just, you know, be just fine. But if it continues at a higher level, obviously, that'd be a little, you know, a little tougher.

Jack Hartung: But anyway, that's I, I, if it ends up in that 3 to 4% range, if people keep their jobs and if people still want to dine out, we like our chances that they'll keep coming. Especially based on the both recent trends that we've seen. Thank you.

Peter Saleh: Hi, my final question comes from Peter Saleh with BTIG. Please go ahead. Great, thanks. Thanks for taking the question. Brian, I want to come back to your comments on the hyphen make line. I think you said it increases capacity, better accuracy, and better speed.

Brian Niccol: What are the challenges in some of the hurdle that you think you need to overcome at this point to move it to the next stage in the stage process? Thanks for the question. So we had our first prototype at our cultivate center and the team did a great job of kind of pressure testing all aspects of it. We learned a lot, right? There's work to be done on how you expo things, there's work to be done on how we actually provide portions, and you know, the good news is this is why we use the state-gate process so that we learn, we iterate, and then hopefully we get to a faster solution.

Brian Niccol: So I'm excited to see what the next prototype holds, but the team is working on some of those key things that we learned on. But yeah, look, all signs are really promising that as we continue to work on this in the stage gate, what we're after is, you know, accuracy, speed, and then the ability for the team member to execute this both to the expo station and then keep it clean and food safe.

Brian Niccol: So, you know, we're working through those things, but for a very first prototype, the team did a great job, and I loved everybody's passion to learn so that we get to an even better second-generation prototype.

Brian Niccol: Great, and then just my last question would be on, have you seen any difference in sales performance for the urban versus suburban stores these days? Is the return to office, are you seeing any improvement there? Just any clarity around that would be helpful. Thank you. Yeah, the comps have got a lot closer. You know, the urban still outperformed the suburban by about 100-based points. That's much, much, much closer. But I would say the central business districts are still behind in terms of an absolute sales basis. If you look at, you know, pre-pandemic and where we are today, the central business districts are still behind. But from a constant point, they're performing in the same general range. Thank you very much. Thank you.

Operator: This concludes our question and answer session.

Brian Niccol: I would like to turn the conference by go over to Brian Nichols for any closing remarks. Yeah, thank you. And thanks everybody for the questions and joining the call.

Brian Niccol: Obviously, we're very proud of our teams and the results that we delivered in the third quarter. You know, it's very exciting to see our efforts on throughput driven by having, you know, the teams staff trained in the employee correctly, continuing to make progress. And then with our strong value proposition, seeing that show up in transactions as the driver of growth, we're going to continue to stay focused on executing great throughput. We're going to continue to stay focused on great culinary.

Brian Niccol: We're going to continue to stay focused on having great people that are trained and no exactly what they need to do in their position. So very excited about the results we've achieved, but very optimistic about our future, both in building new units and continuing to drive average unit volumes and margins. So thank you for taking the time. And we'll see you in a couple months. Thank you.

Operator: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.