Q3 2024 Chipotle Mexican Grill Inc Earnings Call and Business Update
Speaker Change: Good day and welcome to the Civil Light Miss King Girl, 3rd quarter 2024 results off in saw.
Speaker Change: All participants will be in the snowman mode.
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Speaker Change: After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then 1 on your telephone keypad. To withdraw your question, please press star then 2.
Speaker Change: Please note, today's event is being recorded.
Speaker Change: I would now like to turn the conference over to Cindy Olsen.
Speaker Change: at Investor Relations and Strategy.
Cindy Olsen: Please go ahead. Hello, everyone, and welcome to our third quarter fiscal 2024 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.com.
Cindy Olsen: 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.
Cindy Olsen: These statements are based on management's current business and market expectations.
Cindy Olsen: 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 risk that may cause our actual results to vary from these forward-looking statements.
Cindy Olsen: 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.
Cindy Olsen: We will start today's call with prepared remarks from Scott Bowright, Interim Chief Executive Officer, Jack Hartung, President and Chief Strategy Officer, and Adam Reimer, Chief Financial Officer, after which we will take your questions. Our entire executive leadership team is available during the Q&A session. And with that, I will turn the call over to Scott.
Scott Bowright: Thanks, Cindy. And hello, everyone. Before I get into the details of the quarter, I know I speak on behalf of everyone at Chipotle when I say that we are grateful for Brian's leadership and for the transformation he led.
Scott Bowright: Over the past several years, we've built a strong team with a great culture and have developed compelling and successful strategies together. With that said, after leading our operations for the last seven years, I'm excited and honored for the opportunity to lead Chipotle as our interim CEO.
Scott Bowright: To start, there are three things I want to make very clear today.
Scott Bowright: The first is that I'm extremely passionate about our brand and purpose.
Scott Bowright: We are truly a special company that cares about the culinary heritage that Chipotle was founded upon and our purpose of cultivating a better world resonates with our teams at all levels of our organization as well as with the guests we serve in our restaurants each and every day.
Scott Bowright: I'm also passionate about our people, and I strongly believe we have the best in the industry.
Scott Bowright: both in our restaurants and at our support centers.
Scott Bowright: Since joining Chipotle in 2017, I've had the privilege and responsibility of leading our restaurant teams as we have grown from under 2,300 restaurants to over 3,600 restaurants today, employing over 125,000 people.
Scott Bowright: I can tell you firsthand how hard our teams work to provide our fresh, delicious and customizable culinary experience at accessible prices to millions of people every day. These exceptional people are the backbone of our great brand.
Scott Bowright: And the third is that our strategy is not changing. I have worked alongside our talented executive team to craft and evolve our successful strategy, and we will continue to execute against it.
Scott Bowright: This includes our long-term targets of expanding to 7,000 restaurants in North America, increasing our AUVs to over 4 million, and expanding our restaurant-level margins and growing internationally.
Scott Bowright: Now, before I dive into our five strategies, I want to run through our third quarter results.
Scott Bowright: We had another outstanding quarter with positive transaction growth every month.
Scott Bowright: We saw momentum build throughout the quarter as the impact from summer seasonality normalized and as we successfully launched smoked brisket, which is off to a fantastic start.
Scott Bowright: For the quarter, sales grew 13% to reach $2.8 billion, driven by a 6% comp with over 3% transaction comp growth.
Scott Bowright: In-restaurant sales grew by 18% over last year.
Scott Bowright: Digital sales represented 34% of sales.
Scott Bowright: Restaurant level margin was 25.5%, a decrease of 80 basis points year-over-year.
Scott Bowright: Adjusted diluted EPS was 27 cents, representing 17% growth over last year and we opened 86 new restaurants including 73 Chipotle's
Scott Bowright: The momentum in the business has continued into the fourth quarter with accelerating transaction trends and we are maintaining our four-year guidance of mid to high single-digit comps.
Scott Bowright: Now, let me provide an update on our five key strategies that have helped us win today and will grow our future. These strategies include running successful restaurants with a people-accountable culture that provides great food with integrity while delivering exceptional in-restaurant and digital experiences.
Scott Bowright: Amplifying technology and innovation to drive growth and productivity in our restaurants, support centers, and in our supply chain.
Scott Bowright: Sustaining world-class people leadership by developing and retaining diverse talent at every level.
Scott Bowright: Making the brand visible, relevant, and loved to acquire new guests and improve overall guest engagement and expanding access and convenience by accelerating new restaurant openings in North America and internationally.
Speaker Change: Let's start with running successful restaurants and our progress on throughput. We have mentioned this in the past, but it's important to say it again. Throughput is a core focus for Chipotle because it is the outcome of a strong operational engine that delivers a great experience for our guests and teams.
Speaker Change: And execution in our restaurant is improving as we continue to build our throughput muscle.
Speaker Change: Last quarter we began concentrating our efforts on the Expo position as it is a critical pillar of throughput. As a reminder, this is the crew member between Salsa and Cache who helps expedite the order assembly and payment process.
Speaker Change: Restaurants with an expo in place are averaging five incremental entrees in their peak 15 minutes.
Speaker Change: We are often asked why it's so challenging to execute this key pillar of throughput. Well, the crew member responsible for the expo position may be doing other tasks, like prep, which prevents them from being properly deployed.
Speaker Change: In late August, we made a decision to have the manager on duty deployed to the expo position during peaks.
Speaker Change: This has helped to improve the percentage of restaurants with an expo in place to over 60% compared to just over 50% last quarter. It has also helped to drive accountability, improve communication with the guests, and ensure we are properly ringing up each order.
Speaker Change: While we are making great progress on executing the four pillars of throughput, we still have work to do. Of the restaurants that do not have the four pillars in place, we are finding that often our crew member is still prepping food during peak periods.
Speaker Change: The fact is, preparing our delicious food is a lot of work and requires strong culinary skills. Our teams are beginning prep at 6 or 7 a.m. in the morning to be able to deliver our food on time when we open.
Speaker Change: This includes slicing and dicing produce, hand-mashing avocados to make our delicious guacamole, frying our chips every day, and grilling items like fajita veggies and adobo chicken on the plancha.
Speaker Change: In addition to coaching and training around throughput, we are also exploring ways to make the prep process easier on our teams while ensuring we are maintaining or improving upon our high culinary standards.
Speaker Change: This brings me to technology and innovation.
Speaker Change: We now have several initiatives in StageGate that could help to improve the prep and cooking process and drive a better experience for our teams. Two that I'm particularly excited about are the dual-sided plancha and the produce slicer.
Speaker Change: As we mentioned last quarter, we are in the process of rolling out the dual-sided plancha to an incremental 74 rustrocks, which will be complete by the end of next month.
Speaker Change: And as part of the StageGate process, we are now evaluating implementing the dual-sided placa into new restaurant openings, as well as retrofitting existing restaurants and we'll have more to share on this early next year.
Speaker Change: Additionally, over the last year we have been testing a produce slicer. In our restaurant, slicing and dicing vegetables like jalapenos and bell peppers is one of the most time-consuming and repetitive tasks.
Speaker Change: It would be an understatement to say our teams are excited about this new tool. In fact, at our all-manager conference in March, nearly 5,000 managers and above-restaurant leaders gave it a standing ovation.
Speaker Change: The new produce slicer drives improved efficiency, which will allow our teams to complete the prep process on time and to every restaurant, resulting in better deployment at peak and better throughput. And it also improves our culinary by delivering consistent cut sizes.
Speaker Change: I'm excited to share that we are beginning to roll out the new produce slicer in all restaurants which should be complete by next summer.
Speaker Change: Beyond these two initiatives are augmented make line by hyphen and avocado, which cuts cores and scoops avocados, were installed into their first restaurants for pilot testing during the quarter.
Speaker Change: These are both highly customized technologies that could provide big unlocks for us in the future. We have already received a lot of learnings on both innovations from our crew and our guests that will be used for future iterations.
Speaker Change: Thank you.
Speaker Change: As you can see, we have a number of initiatives underway, and I envision significant back-of-the-house changes in the near future that will drive efficiencies and improve the consistency of our culinary and our restaurants.
Speaker Change: This will enable our teams to focus on and execute the four pillars of throughput better than we ever have, and deliver an exceptional experience for our guests in-restaurant every day.
Speaker Change: Let's shift to world-class people leadership. In addition to innovation that helps to better enable the preparation of our delicious food, we are also rolling out a new technology platform across all restaurants that will make the hiring process simpler, faster, and more automated.
Speaker Change: The new AI hiring platform automates the communication and scheduling between applicants and our general managers, reducing the amount of time it takes to hire an employee for an in-restaurant position by as much as 75%.
Speaker Change: The automation of this administrative task will allow our GMs to spend more time coaching and developing their teams and providing excellent hospitality for our guests.
Speaker Change: And it also gives us a competitive advantage against the other restaurant chains in the high-volume hiring market because we can hire talent faster.
Speaker Change: As I mentioned earlier, I'm passionate about our people and building a strong culture that recruits, retains, and grows the very best.
Speaker Change: And I'm thrilled to share that Chipotle was ranked first among 400 of the largest publicly traded companies in the American Opportunity Index of best places for high school graduates to start a career.
Speaker Change: The rankings were based on how well a company hires entry-level employees, promotes from within, and prepares them for opportunities when they leave.
Speaker Change: One of the very best benefits we offer our teams is our career advancement opportunity.
Speaker Change: We have so many stories of crew members who have started at Chipotle and grown within the organization Resulting in life-changing careers including several to the position of regional vice president overseeing hundreds of restaurants and a billion dollar plus business
Speaker Change: In fact, a team director out of the Chicago region has one of these inspiring journeys. She came to the U.S. at the age of seven with her parents and brother as refugees, and at the age of 18, she started working at Chipotle as a crew member for her first job out of high school.
Speaker Change: She has advanced within Chipotle to become a top performing team director and now is responsible for 61 restaurants or almost $200 million in sales each year.
Speaker Change: She clearly demonstrates and understands that developing and growing future leaders is what makes Chipotle a special company.
Speaker Change: My favorite part about her journey is that through her financial success at Chipotle, she was able to help her mom retire, which she views as her biggest accomplishment.
Speaker Change: I could not be prouder to be part of an organization that prioritizes our people and their growth.
Speaker Change: And the exciting part is that as we look to grow to 7,000 restaurants in North America and expand internationally, we will be adding hundreds of new restaurant leadership roles each year, and we will continue to pursue our goal of promoting over 90% from within. The future is very bright at Chipotle.
Speaker Change: Now turning to marketing.
Speaker Change: I have to take a moment to acknowledge our marketing team for their outstanding work over the years in making Chipotle more visible, more relevant, and more loved.
Speaker Change: Our brand continues to lead and gain momentum in many categories, like quality of ingredients, quality of food for the money, and healthy and nutritious.
Speaker Change: This is a result of a strong marketing strategy and brand campaigns like Behind the Foil, which showcases our Chipotle teams preparing our fresh, delicious food.
Speaker Change: The campaign is certainly resonating well, and we will continue to evolve it and find new ways to put a spotlight on what differentiates Chipotle, which is our food, our people, our purpose, and our values.
Speaker Change: Turning to menu innovation. Our limited time offers continue to surpass our expectations. Our guests have been craving the return of smoked brisket for three years and it's off to a very strong start, driving incremental transactions and spend.
Speaker Change: As we have mentioned in the past, given the limited supply of responsibly raised beef, it was a huge cross-functional effort to bring back this fan favorite, and we anticipate it will last through the fourth quarter.
Speaker Change: We also have been testing Chipotle Honey Chicken, which is our adobo chicken seasoned with savory Mexican spices and finished with a touch of pure honey.
Speaker Change: Similar to Chicken Al Pastor, it is simple to execute in our restaurants and absolutely delicious.
Speaker Change: This has been one of our most successful tests to date, both in early sensory testing as well as in the broader two-market test we are currently running in Nashville and Sacramento.
Speaker Change: I'm delighted to share that Chipotle Honey Chicken has made its way through the stage gate process and is ready to be rolled out in the future.
Speaker Change: Finally, coming up this week will be our annual Boo Rita promotion.
Speaker Change: This year, our marketing team found another creative way to lead culture as we collaborated with Spirit Halloween and launched a new collection of Chipotle costumes Inspired by popular memes on our social channels, which has generated some of our highest social engagement this year
Speaker Change: Now moving on to our final strategy, which is to expand access and convenience both in North America and internationally.
Speaker Change: In North America, our development team made great progress smoothing the cadence of openings with 185 new restaurant openings year-to-date, which compares to 149 at this same time last year.
Speaker Change: We remain on track to open between 285 and 315 new restaurants this year, which will mark another record for us.
Speaker Change: As we look at 2025, we anticipate opening between 315 and 345 new restaurants with at least 80% including a Chipotle.
Speaker Change: In Canada, our new restaurant openings continue to be outstanding, and in the third quarter, we entered another new market with our first restaurant in Edmonton, which broke an opening day record for North America.
Speaker Change: We will surpass 50 restaurants in Canada next month, which is a huge milestone. Our unit-level economics and returns remain on par with the U.S., and we will continue to accelerate growth in Canada in 2025.
Speaker Change: Turning to Europe, under the new leadership team we are beginning to see promising results.
Speaker Change: We have better aligned our culinary menu to the North American standards, and we are in the process of fully unlocking the functionalities of our operational tools to better manage labor and food costs.
Speaker Change: Additionally, similar to our successful strategy in Canada, we are rolling out local and digital marketing initiatives which are building brand awareness and bringing more guests into our restaurants.
Speaker Change: The recent performance gives us confidence that we can begin to build our restaurant pipeline for the future.
Speaker Change: And I'm optimistic that Europe will be a sizable growth opportunity for Chipotle over the coming years.
Speaker Change: Finally, I'm excited to share that our first restaurant at Dubai opened earlier this month. The restaurant is absolutely beautiful and located along the beachside boulevard of Jumeirah Beach.
Speaker Change: This is the third restaurant we have opened this year with our partner, Al Shaya Group.
Speaker Change: All three restaurants are exceeding our expectations, and Chipotle is one of the top-performing brands in Alshaya's portfolio.
Speaker Change: This is further strengthening our confidence that Chipotle's responsibly sourced, classically cooked, real ingredients resonates across geographies. We are targeting to open a second restaurant in Dubai early next year and plan to accelerate growth with Al Shaya Group in 2025.
Speaker Change: In closing, I want to thank our restaurant and support center teams for another great quarter driven by strong transaction growth. I always say that at Chipotle, we're either directly serving our guests, or serving someone who is serving our guests.
Speaker Change: And it's important that, as a team, we continue to focus on exceptional food.
Speaker Change: Exceptional people and exceptional throughput.
Speaker Change: This will drive great execution in our restaurants that will enable us to continue down our very long runway for growth as we expand to 7,000 restaurants in North America and grow internationally.
Speaker Change: And as we make our way down this path, I strongly believe Chipotle will become a purpose-driven global lifestyle brand. With that, I'll turn it over to Jack.
Jack Hartung: Thank you, Scott. Good afternoon, everyone.
Jack Hartung: Before I hand it over to Adam to go through the third quarter financial results, I want to make a few comments about the management transition. While Brian's departure was not expected, our focus on succession planning at all levels of the organization allowed for this to be a seamless transition with Scott assuming the role as our interim CEO.
Jack Hartung: We're all very supportive of Scott as his leadership at the company is unparalleled, having led our restaurant teams over the last seven years. And Adam and Jamie were already well prepared to take on their new roles earlier than anticipated so that I could step into my new role as President and Chief Strategy Officer.
Jack Hartung: Also, I want to emphasize that the culture at Morale Chipotle has never been stronger. We have so many passionate leaders running our restaurants and at our sports centers that are all connected by our purpose of cultivating a better world.
Jack Hartung: There's positive energy and a real sense of responsibility to keep the momentum going and to continue to execute against our very successful strategy.
Jack Hartung: Finally, I'm committed to my new role and plan to stay on indefinitely to ensure a smooth transition.
Jack Hartung: As you can imagine, having spent 22 years at Chipotle, I love this company, I'm passionate about our purpose, and I strongly believe we have a very long growth runway ahead of us as we expand Chipotle in North America and around the world. With that, I'll now turn it over to Adam, our new Chief Financial Officer, to go through the results.
Speaker Change: Adam, congratulations and over to you.
Adam Reimer: Thank you, Jack. I'm excited to take on the role of Chief Financial Officer for this great company and I'm happy to be with all of you on my first conference call. With that said, I will turn to our quarterly results.
Adam Reimer: Sales in the third quarter grew 13% year-over-year to reach about 2.8 billion dollars as comp sales grew 6% driven by over 3% transaction growth. Restaurant level margin of 25.5% decreased about 80 basis points compared to last year.
Adam Reimer: Earnings per share adjusted for unusual items was 27 cents, representing 17% year-over-year growth.
Adam Reimer: The third quarter benefited from equity awards forfeited by our former CEO and a gain on an investment.
Adam Reimer: These were partially offset by the impairment of a corporate asset and equity awards granted for retention of key executives. Collectively, these positively impacted our earnings per share by one cent, leading to gap earnings per share of 28 cents.
Speaker Change: As Scott mentioned, comps accelerated throughout the quarter, with transaction trends strongest in September as the impact from summer seasonality normalized and we rolled out smoked brisket.
Speaker Change: Looking to Q4 and taking into consideration that the strong transaction trends have continued so far in October as well as the tougher comparison against carne asada, we anticipate our transaction comps to modestly accelerate from Q3.
Speaker Change: As a reminder, we roll off about three points of pricing at mid-October, as the impact of pricing in the fourth quarter will be just over 1% due to the price increase we took in our California restaurants in April.
Speaker Change: For the full year, we continue to expect our overall comp to be in the mid to high single-digit range.
Speaker Change: I will now go through the key P&L line items, beginning with cost of sales.
Speaker Change: Cost of sales in the quarter were 30.6%, an increase of about 90 basis points from last year.
Speaker Change: The benefit of last year's many price increase was more than offset by inflation across several items, most notably avocados and dairy, as well as higher usage as we focused on ensuring consistent and generous portions.
Speaker Change: and the mixed impact from our premium smoked brisket LTO. For Q4, we anticipate our cost of sales to be just above 31% as we have a full quarter of our smoked brisket LTO.
Speaker Change: As we mentioned last quarter, we believe we can offset the 60 basis point portion investment through efficiencies and innovation over the next several quarters. This includes efficiencies we have identified within our supply chain, as well as several in-restaurant initiatives, including the produce slicers that Scott mentioned earlier.
Speaker Change: While we anticipate some of the benefit to begin in Q4, we don't anticipate a full offset until the second half of 2025.
Speaker Change: Labor costs for the quarter were 24.9 percent, about flat to last year, as the benefit from sales leverage offset wage inflation. For Q4, we expect our labor costs to be in the low 25 percent range due to seasonally lower sales, with wage inflation to remain in the mid-single-digit range.
Speaker Change: As a reminder, about half of the wage inflation is due to the nearly 20% step up in wages in California from the increase in minimum wage for restaurant companies like ours that took effect in April.
Speaker Change: and John Hartung. Thank you.
Speaker Change: Other operating costs for the quarter were 13.8%, a decrease of about 20 basis points from last year. The decrease was primarily driven by sales leverage and a lower delivery mix, partially offset by higher marketing and promo costs.
Speaker Change: Marketing and promo costs were 2.1% of sales in Q3, and in Q4 we expect marketing costs to step up to the low 3% range.
Speaker Change: In Q4, other operating costs are expected to be in the low 14% range as we anticipate higher marketing costs to be partially offset by lower seasonal expenses, like utilities and maintenance and repair.
Speaker Change: G&A for the quarter was 127 million dollars on a gap basis or 149 million dollars on a non-gap basis, excluding a net 22 million dollar benefit from equity awards forfeited by our former CEO, partially offset by the expense for awards granted for retention of key executives.
Speaker Change: G&A also includes $126 million in underlying G&A, $25 million related to non-cash stock compensation, and a $2 million benefit from a bonus adjustment.
Speaker Change: Non-cash stock compensation and bonus expense benefited in the quarter from our CEO's departure as well as performance-based adjustments.
Speaker Change: We expect our underlying DNA to step up to around $130 million in Q4 as we invest in people to support our growth. We anticipate stock comp will be around $28 million in Q4, although this amount could move up or down based on our actual performance.
Speaker Change: We also expect to recognize around $4 million related to higher bonus accruals and employer taxes associated with shares that vest during the quarter, and $1 million.
Speaker Change: for costs associated with our field leadership conference in early 2025, bringing our anticipated total GNA in Q4 to around $163 million.
Speaker Change: Thank you.
Speaker Change: Appreciation for the quarter was 84 million dollars or 3% of sales. In Q4 we expect appreciation to step up slightly as we open more restaurants.
Speaker Change: Our effective tax rate for Q3 was 22.9% for GAAP and 23.8% for non-GAAP.
Speaker Change: Our effective tax rate benefited from a reduction in non-deductible expenses related to our CEO's departure. For fiscal 2024, we estimate our underlying tax rate will now be in the 24 to 26 percent range, although it may vary based on discrete items.
Speaker Change: Our balance sheet remained strong as we ended the quarter with $2.3 billion in cash, restricted cash and investments, with no debt. During the quarter, we repurchased $488 million of our stock at an average price of $54.55.
Speaker Change: In the third quarter, our Board of Directors approved an incremental $900 million in share repurchase authorization, and at the end of the quarter, we had nearly $1.1 billion remaining.
Speaker Change: To close, I'm grateful for Jack's mentorship over the last 15 years and honored to be a part of our leadership team, serving our 125,000 employees in our restaurants and support centers.
Speaker Change: We will continue to protect the special brand and our unique economic model that allows us to spend more on our real ingredients yet remain one of the best values in the industry while also maintaining industry-leading margins.
Speaker Change: This is a huge competitive advantage and will continue to require a relentless focus on driving an exceptional experience for our restaurant teams and our guests each and every day. And with that, let's open it up for questions.
Speaker Change: Thank you. We will now begin the question and answer session.
Speaker Change: To ask a question, you may press star then 1 on your telephone keypad. To withdraw your question, please press star then 2.
Speaker Change: We do ask that if you are using a speakerphone, you please pick up your handset before pressing the keys.
Speaker Change: Today's first question comes from Andrew Charles of TD Cowen. Please go ahead.
Andrew Charles: Great, thank you. First off, Adam, Jack, as well as Scott, congrats on your new roles. Last call, you guys were contemplating a price increase in 4Q and was curious if the strengthening traffic in recent months, along with missing rigid labor costs and cost pressures, has helped solidify your decision on this?
Andrew Charles: Yeah, this is Scott. I'll jump in here. Thanks for the question.
Andrew Charles: We're keeping a really close eye on the consumer, as you can imagine.
Andrew Charles: Also a close eye on this very competitive market that we're in today given the macros and what's going on with
Scott Bowright: Value Wars and QSR and Fast Casual. But also note that we are seeing some modest inflation. I'll let Adam speak to that in the business today. So nothing planned today, but that's not to say we wouldn't look at a pricing action at some point in the future.
Adam Reimer: Yeah, to go a little bit further into inflation, so yeah, like you said, Andrew, we're kind of seeing low single-digit inflation on cost of sales.
Adam Reimer: That's after you peel back a few layers, so one of that's going to be the investment that we made in portions of roughly that 60 basis points that we mentioned on the call. We believe we can offset that through efficiencies within our supply chain as well as within the back of house of our restaurants.
Adam Reimer: probably a full offset by the end of next year. So that's not included. Neither is, you know, the impact of brisket, kind of that premium item and what that's doing to cost of sales right now, as well as the avocado comparison. So if you remember about a year ago, avocados were
Adam Reimer: abnormally low and so once you peel back those layers you're seeing about a low single-digit inflation on cost of sales and then a similar amount on labor. We mentioned mid single-digit on labor but that includes the FAST Act. We've already taken prices you know back in April of this year to offset that roughly 20% increase in wages in California and so the remaining underlying inflation on labor is kind of in that low single-digit range.
Speaker Change: Thank you.
Speaker Change: Okay, very helpful. And then, Jack or Adam, you guys previously talked about aspirations to ramp to 10% net restaurant growth in 2025. You know, while the guidance for 315 to 345 openings is a strong number, it was a bit light of the aspirations you guys previously laid out. So, I was wondering if you could talk through, you know, what is factored into the development guidance for 2025?
Speaker Change: This is Scott. I'll jump in here again. I'll let Adam come in behind.
Scott Bowright: You know, I'll tell you, we will see year-over-year incremental new restaurant growth at 25. The percentage will move closer to 10% than we've been in years past. We feel really comfortable about the number today to successfully open that many restaurants with high-quality leaders.
Scott Bowright: that we know we can execute and deliver with excellence. We feel really comfortable in the 8% to 10% range.
Scott Bowright: Can we move closer to 10%? Perhaps.
Scott Bowright: Timelines remain pretty consistent at 21 months and we have a really robust pipeline and we have a lot of confidence in our development team and operations team to deliver great results in the years to come.
Speaker Change: Great, thank you so much.
Speaker Change: Thank you. And our next question comes from David Tarantino with Baird. Please go ahead.
David Tarantino: Hi, good afternoon. My question is on new unit performance, at least the way we calculated this quarter. It looked a little lower than it has been in past quarters, so I was wondering if you could explain what you're seeing there and whether there's something unusual in the numbers affecting the calculations of that.
Speaker Change: Yeah I'll start and then Scott, you know, definitely jump in. So nothing unusual in this quarter to really call out. We're still seeing productivity kind of in that low 80% range and so we're still really excited about how our new units are performing.
Scott Bowright: Yeah, and the year two ROI is still holding pretty steadily, and we feel really good about the performance of this class of restaurants.
Speaker Change: Great, thank you. And then I guess my other question was about...
Speaker Change: The path to get back to the high 20s restaurant margin, I think you've talked about.
Speaker Change: that being something that you would have at this level of average unit volume.
Speaker Change: I know you mentioned some official
Speaker Change: Thank you for joining us. Happy New Year. Happy New Year.
Speaker Change: David, I'll start and again flip it over to Adam. But I think in general, we have a lot of confidence in our ability to get back to high 20s.
Speaker Change: There are several initiatives that are in the pipeline today, whether it's supply chain initiatives or efficiencies and or technologies like equipment technologies will help us be more efficient at the restaurant level. Adam. Is there anything else you would add to that? No, I mean, I would just say that, you know, within the margin algorithm, that 40% flow through on incremental transactions still very much in line. And I know in Q3, it was about an 80 basis point decline year over year, but you have to take into account a few different things. 1, the portion investment.
Speaker Change: which again will offset that 60 basis points.
Speaker Change: through efficiencies. The avocado comparison is another like 50 basis points or so. And then there's an ad promo timing that added another 20 basis points. So if you take those into consideration, we would have gone from kind of a, you know, minus 80 basis points to a positive 50, which would be a more in line with the transactions that we drove. So a few unique items in the quarter.
Speaker Change: Great, thank you very much.
David Tarantino: Thanks, David.
Speaker Change: And our next question today comes from Sarah Senatore with Bank of America. Please go ahead.
Sarah Senatore: Thank you. I guess a clarification on the comps and then a question on the on the throughput.
Sarah Senatore: I thought, Courtney, I thought I was on the menu for all of the fourth quarter of last year. So just trying to understand if you're saying that you would expect traffic trends, which accelerated nicely, you know, into October.
Sarah Senatore: to somehow, you know, flow through the rest of the quarter and whether or not, again, that any of this is seasonality, you know, similar to what we saw in the second quarter where maybe April was very strong but then, you know, some other kind of variability. So I wanted to make sure I was understanding.
Speaker Change: the commentary on the traffic outlook for 4Q and then just a question about throughput.
Speaker Change: Yeah, Sarah, we are seeing acceleration in the business, and that's even in light of what we believe to have been a very successful carne asada promotion, which we're rolling over at present.
Speaker Change: as well as, if you recall, we have 30% pricing that is rolled off a couple of weeks ago.
Speaker Change: And so, we feel great about the trend, and I think it's a combination of an exceptional product offering, great marketing around what makes our brand unique and special, as well as operational execution. I'll tell you, Sarah, our ops teams are delivering on a level I have not seen before in my 30-year history. I couldn't be more proud of them. And I think all of those things together are driving the performance that we're seeing in the business today.
Speaker Change: Yeah, and then I can expand a little bit on throughput. So we saw great progress in the quarter. Like Scott mentioned, expo execution went from 50% of our restaurants to 60% of our restaurants, so that was a nice step up.
Speaker Change: And then we saw an increase in max 15 of about 1.2 entrees in our 15-minute period. And so we believe that, again, the fueling of not only the positive 3.3% transaction, but also that execution that Scott talked about, just amazing in our restaurants to help drive that result.
Speaker Change: Right, that's, thank you, that's great color. And just on the throughput, just one quick question. Is that how you think about the, some of the technology and equipment you're rolling out? I mean, I know you talked about efficiencies, and it seems like it's, that'll largely be reinvested into the, the portion sizing. But, but would you expect to see a step change in throughput as well, or is that, you know, again, more incremental?
Speaker Change: I do Sarah, absolutely. You know one of the challenges that we have in our restaurants is in the mornings our teams are so involved in cutting, slicing, dicing, chopping, and really preparing all the wonderful ingredients to be used throughout the day that oftentimes they fall behind for a host of reasons whether that's a call-out or a new team member joining the team that is less talented with a knife.
Speaker Change: those challenges are formidable and that oftentimes causes us to not be deployed effectively at peak and not able to drive great throughput. The technologies we are talking about will help enable our teams to deliver great culinary but also get the process done in time to be deployed effectively and really drive great throughput of the business.
Speaker Change: Thank you very much, really helpful.
Speaker Change: Thank you. And our next question today comes from David Palmer with Evercore ISI. Please go ahead.
David Palmer: Thanks. Good evening. Scott, I actually heard you on CNBC just now, just a half hour ago or so, and you were talking about some of the technology.
David Palmer: The AI-enabled customized marketing that you would imagine happening and some of the bespoke type suggestions or what not.
David Palmer: Imagine what you could have been talking about there, maybe you can maybe bring that to life for us about maybe what iterations of enhanced digital experiences and...
David Palmer: and what that could mean ultimately to comps. And just to follow up on that throughput question that Sarah was asking about, you mentioned something like a 1.2 improvement in entrees per 15 minutes.
David Palmer: You know, we saw that.
David Palmer: It looks like your labor hours might have been roughly flat versus the traffic up 3%. Is that the type of relationship that happens from that? I mean, you talked about five more entrees per 15 minutes being the opportunity. Does that mean...
David Palmer: that you can kind of do this for another, if you, is there a relationship there that we should think about as we model between those two things? Or maybe I'm overthinking that, thanks.
Speaker Change: Yeah, thanks, David. On to the CRM and CDP, I'm sorry, CDP loyalty and personalization I spoke of earlier. I met with Kurt Garner and his team and talked through some of the early stages of what would an AI model look like.
Speaker Change: to really drive greater efficiency with our loyalty members.
Speaker Change: And we're early innings and we're still experimenting with some really, really unique ideas. He has an extraordinarily talented team that continues to figure out ways to iterate and drive performance in that channel. And so it's really early days, but we think the AI model sitting on top that's really searching out whether you're a lapsed user, an at-risk user, or an active user within the program.
Speaker Change: How do we serve up a bespoke experience, a truly bespoke experience, beyond some of the traditional format?
Speaker Change: pitches that you typically get in a loyalty program, but something that's really tailored for the user, not just at checkout for ads, but also a bespoke experience. When you enter the experience, you'll see something tailored for you as an individual based on your needs, your usages over the past or your history.
Speaker Change: So we think it's a really cool play on how do we continue to drive incremental value within that platform.
Speaker Change: Yeah, and then David, I can comment on the labor comments. I mean, outside of normal leverage, you know, as we drive additional transactions, whether that be through throughput or marketing initiatives, or really all of the above labor hours, there's no kind of relationship, I think, other than the leverage that you're talking about. So, if I'm understanding that question correctly.
David: Yeah, no, and we can, I'll ask about it more offline, but thank you.
Speaker Change: David, I will add one of the challenges we face again is getting all the work done in the a.m. and being deployed correctly. So it's the same amount of labor in the building but someone's taking care of you know pots and pans of the dishing and someone else is wrapping up prep on onions or peppers or bell peppers or jalapenos and not being deployed. So if we can get all that work done put away in the right way in every restaurant consistently every day we can deploy all those individuals to the guest experience which is where we'll drive the most value.
Speaker Change: Thanks again.
Speaker Change: Thank you. And our next question comes from Christine Chow with Goldman Sachs.
Speaker Change: Thank you.
Christine Chow: Thank you. Congrats, Scott, Jack and Adam on the new role. I was wondering if you can share any internal metrics or measures on the impact and returns of the portion size investments. So do you think these investments have been sufficient in protecting the core brand equity? And what do you need to see to kind of move on gradually? I know you mentioned that you won't expect to fully cycle until the second half, how you see the returns on the investments so far. Thank you.
Speaker Change: Yeah it's really hard to quantify. Here's what I will tell you is if you think about one of the core equities of the Chipotle brand for the last 30 years it's all been grounded in this idea of high quality fresh ingredients prepared through classic culinary techniques in variety and abundance at a speed in which you can't get anywhere else at an extraordinary price point.
Speaker Change: And so, we know that portioning is a core equity of ours in the organization, and we are committed to ensuring that we give the right portion to every guest that walks into the building. We've seen strong improvement, even through our social channels, of people. Now, it's a reverse of what we saw earlier in the year, around people posting big burritos, big bowls, and really excited about portioning they're getting in the Chipotle brand.
Speaker Change: We also see that show up in our brand tracker and other third-party sources where value for the money, food for the money, and quality for the money exceed most of our peers in the category. So, also internal consumer metrics that we measure through our digital channel and in-restaurant experience.
Speaker Change: show portioning positive scores for up 500 points over the over the spring so we know we're making great progress we know we're delivering value for the consumer especially in this really tight environment and we'll continue to lean into that.
Speaker Change: Thank you. And our next question comes from Brian Harbour with Morgan Stanley. Please go ahead.
Brian Harbour: Yeah, thanks. Good afternoon guys. Maybe just first one, Adam, do you have any kind of thoughts on inflation next year so far? What do you think low single digit for food and wages is?
Brian Harbour: Okay.
Brian Harbour: kind of continue.
Adam Reimer: Yeah, for what we see at this point, we believe that that will continue. Labor has been kind of in that levels outside of the FAST Act for quite some time now, so we have no reason to believe that'll change. And then our first initial looks at cost of sales into next year are still going to be more of the same, but we'll update you guys if that changes, you know, in upcoming calls.
Speaker Change: Okay, thanks.
Speaker Change: Scott, maybe just on some of the new equipment and automation.
Speaker Change: How fast do you think some of that can be deployed and I guess just kind of like philosophically is this something where
Speaker Change: It's mainly about kind of creating a better experience for employees. Is it something that you think kind of drives better margins over time? Or, you know, on the other hand, do you sort of...
Speaker Change: for your competition.
Speaker Change: the questions.
Speaker Change: Yeah, Brian, I'll tell you, we have a number of initiatives in our stage gate process today, some short-range, some mid-range, some long-range.
Speaker Change: A couple of pieces that are in the short range of the stage gate that have moved their way through the dual-sided plancha, which will drive
Speaker Change: great efficiency, and unlock
Speaker Change: increased capacity, I should say, in the kitchen.
Speaker Change: The produce slicer we feel really good about. I've already talked about that.
Speaker Change: testing a new dual back fryer to help us be more efficient as we cook chips daily and season chips in our restaurants.
Speaker Change: So all of these things will be items that will help the team member experience, drive efficiency, remove some of the mundane, repetitive tasks in the restaurant.
Speaker Change: which will always ladder to a better guest experience, and some of them will have a margin improvement.
Speaker Change: baked into the program. So we feel really good about the long range items around avocado and hyphen. Recall, these are companies that we've invested in, that we're building, co-building, really bespoke pieces of technology that we know will help us down the road somewhere, but we continue to refine and iterate on how those show up in the restaurant. And so you'll see those items. I think it's important to know, go into restaurants,
Speaker Change: will test and learn, bring it out of the restaurant, refine the piece of equipment, put it back in. But we feel really good about the value they can bring long-term for the organization. Hopefully that answers your question, Brian.
Brian Harbour: Thank you.
Speaker Change: Thank you. And our next question comes from John Ivanko with J.P. Morgan. Please go ahead.
John Ivanko: Hi, thank you too, if I may. The first question is on your investment in Brassica, in the Mediterranean and the Columbus area. Should we read anything in it? Chipotle maybe extending itself a little bit more in terms of being a platform company? Was that a one-off type of transaction or could we expect a series of interesting businesses like that that could eventually fit within the Food with Integrity broader theme?
Speaker Change: You know, that was a, that was an investment we made from our Chipotle Next Fund, and we feel really good about it. We were, we've been looking around the industry for concepts, emerging concepts that
Speaker Change: are aligned with our food ethos and how we think food should be eaten, that were aligned to our business model and practices that we could co-invest with. Now, keep in mind this is a passive investment and a minority investment, and will not be a distraction on the Chipotle organization. We see them as they think about growth down the road, we'll give them some guidance and counsel on development and how they grow, but it won't be a distraction for this organization and it could be a growth platform somewhere 10, 15 years down the road that adds a layer of growth for the business.
Speaker Change: and more.
Speaker Change: Hey, it's a great question, and it's something we have looked at in the past. Now, it comes with its own set of complexities and inherent risks.
Speaker Change: and largely, in fact, that...
Speaker Change: Largely, the opportunity is how do we create that experience? We can be consistent with regard to how we prep, but then distributing and keeping that food safe during the distribution process from the center location out to, call it a spoken hub.
Speaker Change: is just challenging, and when we looked at it a few years back, it was cost prohibitive as well. And so right now, we feel like the working model we have is the best way to Chipotle to deliver our unique experience, but that's not to say we couldn't look at something different down the road.
Speaker Change: Perfect, thank you.
Speaker Change: Thank you. And our next question comes from Lauren Silverman at Deutsche Bank. Please go ahead.
Lauren Silverman: Great, thanks so much. I just wanted to ask about the consumer, some of the behavior you're seeing across different cohorts, the low, middle income, high income consumer, any differences that you're seeing across regions at all?
Speaker Change: Yes, I'll start and I'll flip it over to Adam here. We're still seeing strength across all income cohorts, even in this competitive environment, which gives us the belief that we are still delivering extraordinary value for the consumer.
Speaker Change: You can get all the core equities that I talked about earlier, and the chicken burrito on average is still under $10, which we believe is still a 15% to 30% discount compared to our peer group. And so we'll continue to lean into that as we move forward. Again, all income cohorts, even low income, are showing positive signs of strength.
Speaker Change: Yeah, and I would just add, you know, across the board, too, in terms of our regions, I mean, really all performing very, very well. We called out California in the last call, of course, after the FAST Act price increase there. We did see some weakness overall in our sales in California after the FAST Act, but we sold out across the entire industry, so it seemed to be more of a macro-based or really just a reaction to the inflation in restaurants in California. So that has kind of continued on into Q3, but outside of that, it's really been pretty broad based on our strength.
Speaker Change: Great, very helpful. And then just a follow-up on the 4Q guide. You talked about traffic modestly accelerating, have price rolling off. Are you assuming traffic decelerates as we move through the quarter and just a level set? Are you thinking four and a half to five percent in terms of the comp guide for the quarter? Thank you.
Speaker Change: Yeah, and so like I said earlier, you know, September was kind of a mid 7% comp, of which, you know, trans were kind of in that low 4% range. That trans comp has continued into October, and at this point our assumption is that will continue into Q4. And then in the prepared comments, I talked about how the price impact would be just above 1%.
Speaker Change: and there'll be a slight mixed drag. So I believe check will be somewhere around one percent. So I think you're thinking about it the right way if you get kind of into that you know mid-five range.
Speaker Change: Great. Very helpful. Thanks.
Speaker Change: And our next question today comes from Chris O'Call with Speed Fool. Please go ahead.
Chris O'Call: Thank you. First, Scott, I wanted to clarify the level of improvement in the number of entrees per 15 minutes that you believe is ultimately possible after implementing the throughput initiatives that are planned for the next six to nine months or so.
Scott Bowright: Yeah, I think it's possible for us to get back to where we were in the heyday of Chipotle, in the low 30s. And today we're trending around the mid-20s. So you have to include digital in that number, the digital entrees that are coming through the digital channel as well. But if you think about just the true business, the in-restaurant experience that is, we think there's still pretty significant upsides.
Speaker Change: Okay, and then just one other question. I was hoping you could provide a bit more color on the performance of the smoked brisket. In particular, has the repeat usage been as high this time as it was the last time it was promoted?
Speaker Change: Yeah, so I'll start and then Scott you can jump in. And so brisket, you know, is performing really well, especially compared to carne asada. It's kind of in that mid-teens incident in terms of percent of entrees.
Speaker Change: It's driving spend, it's driving additional transactions, comping really well over Karni Asada. And then in terms of repeat usage, I mean, I know it's driving amazing...
Speaker Change: new customers to the brand as well as getting people in and increasing their frequency and then what's beauty the beauty of all of these LTOs is they come in they try brisket and then we see on a second or third visit sometimes they go back to brisket sometimes they go to chicken steak or other items so really seeing some great trends there
Speaker Change: Yeah, it's not often that you find an LTO that you can put in the marketplace that's going to drive check, transactions, and margin. This is one of them, and so we're super excited about the product, love how it's performing.
Speaker Change: Great. Thanks, guys.
Speaker Change: And our next question today comes from Brian Bittner in Oppenheimer. Please go ahead.
Brian Bittner: Hey, thank you, and congratulations to everybody on their new roles. As it relates to margins, and specifically the COGS margin line, you saw the deleverage this quarter of about 90 basis points, and obviously that was expected. But can you bridge that deleverage broken down between the actual portion investments that you deployed versus...
Brian Bittner: underlying dynamics like food cost inflation for us so we can understand that bridge a little bit better and and and I totally understand that a price action
Brian Bittner: doesn't seem necessarily on the table for 4Q, but how do you want us all thinking about the potential base case for pricing as we go into 2025? Because I think that is gonna be a debate on investors' minds moving forward.
Speaker Change: Yeah, so like I talked about earlier, so within cost of sales, you know, that portion investment of about 60 basis points, you know, that's fully in that cost of sales number.
Speaker Change: And then the avocado comparison of being about another 50 basis points or so of just it being abnormally low in the prior years also.
Speaker Change: in there as well. And so once you peel back those two layers, and then the fact that brisket, which like Scott talked about, it drives margin overall, however it does increase our cost of sales. I think roughly, you know, 40 or 50 basis points in a quarter. And so that's another, you know, layer that's basically temporary hit to cost of sales. However, because of the price point of brisket, you leverage on labor and other operating costs.
Speaker Change: and things like that. And so once you peel back the layers, look at the underlying inflation of cost of sales, labor, and other operating expense, that menu price impact that we would need to offset that and maintain our margins would be probably somewhere in that like 2 to 3% range.
Speaker Change: Okay. Thank you.
Speaker Change: And our next question today comes from Sharon Zachlott with William Blair, please go ahead.
Sharon Zachlott: Hi, good afternoon. It sounds like things are on a really good path with Alshaya so far, and I'm curious, just given what seems to be a good start there, are you...
Sharon Zachlott: thinking about other kind of shortlisted regions that you'd like to find licensees to operate Chipotle and are you fully committed to continuing to own your locations in France, Germany, and the UK?
Speaker Change: Here's what I'll tell you, we're really pleased with our partnership with Alshaya, and as I said on the call, we're one of the best performing brands in Alshaya's portfolio. We plan pretty aggressive growth with Alshaya over the next few years.
Speaker Change: We will strategically look at other like partners around the globe that we can potentially partner with to expand, whether that's Latin America or APAC or otherwise.
Speaker Change: Those opportunities will, I'm sure, emerge over the coming months, and we'll look at those very closely on what the market entry would look like for us, how we think about those partnerships.
Speaker Change: We will continue to own our presence in Western Europe as well as North America. We think that's the greatest way to drive value for our brand and for our shareholders.
Speaker Change: Thanks for that. And then just a question on hyphen. I know it's early days and you only have it, I think, in one location, but is that helping keeping kind of the aces in their places, having that tool in the restaurant?
Speaker Change: It is. More importantly, it will allow us to unlock demand in that channel.
Speaker Change: And so we think, you know, we don't think, we know that the table with one individual, the output is far greater than one or two individuals on the table. And so.
Speaker Change: The goal here is 60% of our entrees are either bowls or salads.
Speaker Change: And so if the table is taking care of all of that lifting, heavy lifting, if you will, and then the operator of the table can focus on burritos and tacos, we think it's a pretty magnificent lift in overall demand and will drive improved performance, whether it's plating or accuracy for the consumer.
Speaker Change: Great, thank you.
Speaker Change: Thank you. And our final question today will come from Danilo Garuglio with Bernstein.
Speaker Change: Thank you so much. Thank you.
Danilo Garuglio: Thank you, and once again, congrats everybody for your new and extended roles.
Danilo Garuglio: Scott, clearly your message has been that of continuity with the, you know, with the strategy at Chipotle.
Danilo Garuglio: So, if your appointment were to become permanent, what would you like to be known for and which opportunities for acceleration of the current strategy do you see more likely for Chipotle? I mean, it sounds like you're more open to international growth.
Danilo Garuglio: as a natural evolution, but maybe there is more areas that you are going deeper on. Thank you.
Speaker Change: Yeah, terrific question. It is my endeavor to keep our organization, this leadership team, and all the 125,000 folks in our field organization clearly focused on our five strategic priorities that have served our brand for the last many years.
Speaker Change: Sure, there will be some iteration or modification in the years to come, but we feel very confident those five key strategies will continue to drive extraordinary performance for this organization.
Speaker Change: It'll also, two other things I think I'd like to point out is I'd like to continue to move our organization to a more connected organization to the consumer through our restaurant teams. And so I think it's an important note, right? I think everyone in the organization, I said this in the prepared remarks.
Speaker Change: is either serving a Chipotle guest or serving someone who is. And when you have that kind of power and focus in an organization, extraordinary things can happen.
Speaker Change: And the last thing I'd leave you with is, you know, this brand has had extraordinary success here in North America. We have our sites clearly aligned on 7,000 restaurants.
Speaker Change: But I also want to give an eye towards how do we continue to push Chipotle to be more of an iconic global brand. And so that's what you'll see probably in the coming years and coming months. And that's probably it.
Speaker Change: Okay, great. And if I may, just double-clicking on this international expansion, given your continuous successes in Europe, if you were to borrow from your experience in Canada, how many quarters away do you think we are from Chipotle growing units in Europe? And what is still pending before the performance in Europe can really close the full gap versus Canada or U.S.? Thank you.
Speaker Change: Yeah, so if you look back what happened historically when we worked on the turnaround in Canada started about six years ago
Speaker Change: And of course, appointing a new leader in Canada, Anand Davidson, was critical and really the fulcrum to leverage the business in a more full way, whether it's supply chain efficiencies, operational efficiencies, or marketing.
Speaker Change: Demand Driven Marketing, you know she's done an amazing job in that country getting margins to U.S. comparable to U.S. margins and we're growing at 25 to 35 percent in country today.
Speaker Change: The reason we put a knot in Western Europe is to look for a similar outcome, and she's already making incredible progress.
Speaker Change: aligning the culinary to U.S. standards, getting operational efficiencies and processes in place around cost of labor, cost of food, and so we feel really good about the progress.
Speaker Change: Thank you.
Speaker Change: Thank you. This concludes our question and answer session. I'd like to turn the conference back over to the company for any closing remarks.
Speaker Change: We look forward to speaking to all of you in our fourth quarter earnings call in February. Thank you so much.
Speaker Change: Thank you.