Q2 2019 Earnings Call
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Good afternoon, everyone and welcome to the Chipotle Mexican Grill second quarter earnings Conference call.
All participants will be in a listen only mode should you need assistance. Please you know conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions.
Please note that this event is being recorded.
At this time I'd like to turn the conference call over to Mr. Ashish Kohli.
Head of Investor Relations Sir Please go ahead.
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Excuse me is the conference operator would do thank you for your patience or for when the conference will begin momentarily again, we thank you for your patience the conference will begin momentarily. Thank you.
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Ladies and gentlemen, thank you for your patience, we are ready to begin and at this time I'd like to turn the call over to Mr., She's coli head of Investor Relations.
Hello, everyone and apologies for the delayed opening.
Welcome to our second quarter 2019 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 <unk> Dot AAA 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.
Including projections about comparable restaurant sales growth.
New store openings, our effective tax rate and expect that you're going to expenses.
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 2018 annual report on Form 10-K and in our subsequent Form 10-Q s for a discussion of risks that may cause our actual results to vary from these forward looking statements.
Our discussion today will include non-GAAP financial measures a reconciliation of these measures 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 prepared remarks from Brian Nichols, Chief Executive Officer, and Jack Hartung, Chief Financial Officer.
After which we will take your questions our entire executive leadership team.
As available during the Q and a session.
With that I will turn the call over to Brian .
Thanks, Ashish and good afternoon, everyone. We're pleased with our second quarter financial performance, which reflects continued progress on the strategic initiatives, we discussed at our special Investor call just over a year ago.
Since that time, our efforts to highlight that fully sources cooks answers real food, but as the power to cultivate a better world have led to a meaningful improvement in our business fundamentals.
In fact, this marks the sixth consecutive quarter of accelerating comparable sales, which reinforces our view that when we connect with guests through culturally relevant marketing focused on always great taste and real ingredients and provide more convenient access with less friction they respond.
For the quarter, we reported 10% comparable restaurant sales growth that included nearly 7% transaction growth.
Restaurant level margins of 20.9%, which is 120 basis points higher than last year earnings per share adjusted for unusual items of $3.99, representing 39% year over year growth and digital sales growth of 99% year over year, representing 18.2% of sales.
These strong results were delivered despite a tougher year over year comparison and benefited from better execution.
On four key initiatives, we mentioned on last year's call.
Specifically revamping our marketing.
Creating a stage gate process renovations, leveraging our second make line to grow digital sales and expand access and engaging with our customers by launching a new loyalty program.
All of these efforts are layered on top of our foundational work to run successful restaurants with great hospitality and throughput.
Let me now spend a few minutes updating you on each of these initiatives.
First starting with our marketing efforts, we made sure to stay relevant throughout the quarter by celebrating our real ingredients and classic cooking techniques are behind the fall campaign resonated with guests by showcasing the connection between how food is raised and prepared to how it case by featuring our team members pride in making delicious food daily.
In addition, Q2 benefited from several strategic promotions that made to Chipotle brand more visible while helping expand access and example is a free delivery promotion in conjunction with a prominent influencer to celebrate national Brito day on April 4th.
Leveraging the social and digital experience helps make this the highest sales day in AAA history.
More importantly, it was another opportunity to acquire customers and transactions by introducing them to the convenience of delivery.
And we are seeing increased new customer retention with higher levels of delivery sales after the promotion.
On the menu side, we are elevating our core by developing innovation at Leeds food culture and meet guest requests.
Our lifestyle goals remain popular with customers and we continue to test new menu items that are in various stages of development.
The furthest along is carnitas audit, which I'm pleased to announce is nearing validation through our stage gate process after which we will decide on the timing of a potential national launch. This item is easy to execute operationally as unique flavor profile and is receiving terrific customer feedback in our test markets. We're also gaining valuable feedback on our case to be a pilot with the good news being that customers really love it.
The new ovens are helping improve the quality and taste of the case DS and could potentially be a platform for other new menu items, including desserts and not shows.
That being said, we still have some work to do in order to streamline our workflow as I've stated previously we're not going to rollout new menu items at the sacrifice throughput.
We will update you on our progress of all potential new menu items as they move through our stage gate process.
We are very excited about triple the rewards, which launched on March 12, and has exceeded our expectations with over 5 million enrolled members encouragingly. These sign ups are across all frequency bands and we are starting to use customer data to more effectively target and engage the incidents of lower frequency and lapsed users.
Early results are showing that members are increasing their frequency after joining the program.
The rewards program gives us a currency that we can use to incent behaviors and is a key enabler of our digital ecosystem moving forward.
Our customers are responding positively to our digital system, which includes order ahead delivery and catering as it reduces friction and creates a convenient and enjoyable wafer guest who experienced AAA.
Overall digital sales grew 99% year over year to $262 million during the quarter and represented 18.2% of sales.
To put this in perspective this was more than we did in digital sales during all of 2016.
Delivery remains a key driver of our digital growth given enhance capabilities on our app and website as well as our expanded reach in fact delivery is now available for more than 95% of our restaurants and remains highly incremental.
We continue to see residual lift in delivery sales that last beyond any promotion and have seen very little guest overlap between our owned in App delivery and our third party delivery partner apps.
Additionally, with mobile order pickup shelves available in all relevant restaurants, and digital make line to nearly 2000 restaurants, we are modernizing and making the customer and team member experience more efficient while building more law for AAA.
With more customers coming to AAA restaurants, many of whom are new it is imperative we provide a great guest experience. The operations team has made progress against this goal partly as a result of our focus to make 2019 the year of the general manager.
Specifically, we have a great company with a meaningful purpose that people are going to be a part of.
We have a culture of food safety, we are dedicated to training and developing talent and we are enhancing our industry leading employee benefits. In addition to our newly expanded tuition assistance program. You may have seen our recent announcement of a new crew bonus program. This gives hourly employees the opportunity to earn up to an extra month pay each year based on the restaurant achieving certain performance in food safety goals.
This is another example of investing in our most valuable asset our people.
As a result of these efforts we believe our employee value proposition is resonating manager and crew turnover have come down nicely over the past year, our food is being prepared more consistently through line tastings and our result is being executed better and we are seeing steady improvement in throughput aided by training focus and providing our teams with an easy to use dashboard that provides greater visibility on performance, while I am encouraged by the progress thus far I believe we still have a significant opportunity for further throughput gains when done well throughput isn't simply about moving people through the restaurant as quickly as possible instead, it's about outstanding customer service with clear authentic communication as customers efficiently move down or serving line.
I believe better execution on our five key pillars, which have historically been proven throughput drivers will drive sales and transactions.
Everyone in AAA believes real food can change the world. So we strive everyday to do the right thing for our employees for our customers and for the environment.
I would like to personally thank each of our team members for their tireless dedication and passion to make AAA success in closing we're really excites me is that I believe we are still in the early early stages on many of our key initiatives and by continuing to execute and get better which we are committed to doing AAA is well positioned for future growth.
With that here's Jack to walk you through the financials.
Thanks, Brian and good afternoon, everyone.
We're proud of our performance through the first half of 2019, as we continue to see comps and margins expand combination of investing in our people delivering relevant and compelling marketing and enhanced digital system and great execution and our restaurant is all leading to a better guest dining experience, which ultimately allows us to further strengthen our economic model.
Sales were $1.4 billion in the second quarter, an increase of 13.2% from last year.
The comp was 10% in the quarter, which include a 40 basis point reduction as a result of deferred revenue from our rewards program.
Restaurant level margins of 20.9% expanded 120 basis points over last year and earnings per share adjusted for unusual items was $3.99, representing 39% year over year growth.
The second quarter had unusual expenses related to our transformation as well as legal reserves, which I will talk about in more detail later and these negatively impacted our earnings per share by about 77 cents, taking to GAAP earnings per share up $3.22.
Our Q2 comp of 10% was driven by healthy acceleration in transactions at nearly 7% of the comp came from greater guest visits.
The higher average debt includes a price impact of about 2% and a mixed contribution of roughly 1.5% driven by growth and growth in digital orders, which have a higher average check.
We're delighted by the customer response to the convenience offered by our digital strategies as well as the culturally relevant marketing, which once again drove increased guest visits into our restaurants.
Given the strong Q2, and first half 2019 results, we're increasing our full year comp guidance from mid to high single digits to the high single digits with price continuing contribute about 2%.
And as you think about the cadence for the remaining two quarters remember that our comparisons get more difficult as the year unfolds.
We opened 20, new restaurants in the quarter with continued strong economics.
For 2019, we expect to open between 140 and 155, new restaurant with a waiting that's heavily skewed towards the fourth quarter.
We anticipate Q3 opening to be slightly higher than what we saw in Q2 with Q4 openings increasing significantly.
Based on the site pipeline, we are building so far this year, we expect the 2020, new restaurant openings to be more equally weighted.
By quarter.
Food cost for the quarter were 33.7% an increase of 110 basis points from last year, due primarily to higher avocado prices, partially offset by menu price increase.
While we anticipate at somebody avocado price increase due to a spike in late March based on higher demand from retailers prices spiked again in June to to further reduce supply coming from Mexico.
This resulted in a roughly 50 basis point greater headwind from avocados during the quarter than we expected.
Avocado prices are likely to remain elevated in July which should start to moderate as we move through the quarter as our sourcing shifts to other markets.
Offsetting some of the avocado pressure in Q2 was approximately $2 million a cost savings through more efficient sourcing.
Our supply chain team will continue to search for efficiencies our top priority is to continue to pursue high quality sustainably raised ingredients and our pursuit of efficiencies will never be at the expense of food quality or food safety.
Of note protein pricing was in line with our expectations during the quarter and we've not seen any impact from market forces thus far.
Since we purchased higher quality more extensive pork as opposed to commodity pork and we have pricing agreements in place covering the near term, we don't expect a significant impact on our cost for the rest of this year.
Factoring in the above items, we expect Q3 cost of sales to be slightly lower than Q2, while Q4 should be at or slightly below 33% of sales.
Labor costs for the quarter were 25.7% a decrease of 130 basis points from last year.
This decrease was driven primarily by sales leverage partially offset by labor inflation, which continues to be in the 4% to 5% range.
We expect Q3 labor cost to be in the mid 26% range as we expect similar labor inflation against lower sales seasonality.
Other operating costs for the quarter were 13.5% a decrease of 30 basis points from Q2 last year as sales leverage more than offset higher marketing and promo cost.
Marketing promo costs were 3.3% in the quarter, an increase of about 10 basis points compared to Q2 of last year to fund our behind the fall campaign and various delivery promotions.
We expect our marketing investment to be spent more evenly over the second half of the year with marketing and promo budget for the full year remaining around 3% of sales.
Other operating costs continue to include delivery fees and delivery the wafers to increase convenience drive awareness and ultimately acquire new customers.
It remains the fastest growing part of our business with a relatively small portion being associated with free delivery promotions given the high incremented now Incrementality. We are currently seeing delivery continues to be accretive to our restaurant level margins.
For the quarter was $121 million on a GAAP basis or $97 million on a non-GAAP non-GAAP basis, which excludes $4 million related to transformation expenses and $20 million for legal reserves.
Okay also includes $20 million related to non cash stock compensation and $4 million related to higher bonus accruals from our strong performance and payroll taxes on stock option exercises.
Similar to last quarter without these items, our underlying teenagers quarter restaurant.
Total right around $72 million, which is in line with our expectations.
Moving forward, we expect our underlying DNA support to increase by about 2 million to $3 million in Q3, as we round out our organizational structure.
Assuming our current financial trends continue I would expect stock compensation, including performance adjustments and higher bonus expenses to remain right around this $25 million for both Q3 and Q4.
As it relates to legal reserves, we recorded $20 million in the quarter for estimated loss contingencies related to legal proceedings much of which relates to older cases and it includes the previously disclosed government investigations that they've been going on for about four years now nearly four years.
We have a new general counsel and legal team or taking a determined approach to resolving certain outstanding matters with the objective of putting these specific issues behind us wherever appropriate, but we still have work to do to bring final resolution of these matters. We believe this reserves at reasonable estimate based on where we are today and we'll update you as we have more information.
Continuing down the income statement, our effective tax rate was 26.6% on a GAAP basis, and 23.9% on a non-GAAP basis, including both our GAAP and non-GAAP tax rate is the recognition of excess tax benefits on stock based compensation.
The GAAP tax rate is higher because of the possible non deductibility of some of the legal reserves.
For the remainder of 2019, we expect our underlying effective tax rate to be in the 26% to 29% range, though it may vary quarter to quarter based on discrete items.
Our balance sheet remains strong with cash and investments totaling about $746 million as of June thirtyth, we've repurchased $58 million of our stock at an average price of $703 per share during the quarter.
Similar to last quarter, even though there are fewer shares outstanding and trading as a result of these purchases our diluted weighted average shares actually increased by 182000 shares from Q1 as a result of more options being in the money given higher share price.
In closing we are encouraged by our Q2 results and the progress, we're making against our strategic growth initiatives that relate out about a year ago.
Sustaining our sales momentum is the most important lever to our powerful economic model and that requires great execution and delivering an excellent guest experience.
We are grateful to all of our team members for their hard work and their commitment and crew troop contributing to our vision of cultivating a better world.
And now we're happy to take your questions.
Ladies and gentlemen, we will now begin the question and answer session.
To ask a question you May press Star and then one on your Touchtone phones. If you are using a speakerphone. We do ask that you. Please pick up your handset before pressing the keys.
To answer your question you May press star into.
Again that is star and then one to join the question queue.
Our first question today comes from David Tarantino from Baird. Please go ahead with your question.
Hi, good afternoon, and congratulations on a strong first half of the year.
Brian units and being in the early stages of a lot of the initiatives and I guess the context for my question.
Is related to the momentum you've seen in the first half of the year and.
I guess it won't be long before investors start worrying about your ability to cycles, such big numbers as you move into next year and even the following year. So I guess can you talk about how you think about.
The business recovering over the next year or two as we cycle the big numbers and how as you layer on what you have on the initiative pipeline.
Or your degree of confidence in sustaining such positive comp momentum.
Yes sure.
Thanks, David So yes, my point on why we're in the early stages of all these initiatives is very simple.
We just launched our rewards program in March we've got 5 million members in there.
This is a place that we're going to grow from we're not done adding members to the rewards program.
As you think about the digital ecosystem.
We first started with installing digital make lines and we layered in the digital pickup shelves sort of even easier for the customer.
And then we layered in the rewards program and if you think about the awareness of this total system for our customers. We're still in the early days of those levels of awareness and utilization. So I think there's opportunities to grow from where we are today on that front and then as you think about really kind of revamping our marketing communication allocating those marketing dollars.
You really just now starting to see.
The marketing team utilize new communication vehicles and continue to fine tune the communication as it relates to triple A.'s real ingredients real cooking.
Which results in we think really the best food out there.
And then the last piece is some of the innovation that we've been working on our stage gate process.
All those things.
We are still in its early days and in most cases, the only thing we brought out really is the lifestyle bowls today.
And then I'd be remiss not to talk about all the great progress, we're making on operations.
If you think about where we were six months ago, a year ago or even two years ago. We are far better than we were and I am confident that team is focused on the right things to be better six months from now 12 months from now two years from now so.
It's still very much early days, we're delighted to see the response that we're getting to the digital system. The response that we're getting to I would say better operations with more consistent better tasting food.
But now is getting to be a bit faster and then we're very optimistic about how we can grow from here.
With this reward system and also the future as it relates to innovations as it relates to the menu Andrew or how will market. So.
I am delighted to see the response today, but.
This is just the beginning.
This I would categorize it.
Sounds good and not on the rewards program can you elaborate on what you've learned to date in terms of your ability to to change behavior with that program, our incentive behavior with that program.
I have a member of the program and I don't recall seeing any incentives throughout the quarter. So just wondering how you're using that and what your learnings so far.
Well, we have U blox David.
Thanks, Tom.
No.
Totally getting.
Yes. So look we're early days in this and we obviously are breaking this up into various cohorts and we're trying to experiment with each of those cohorts to understands.
If you incentivize them with points on certain days, the week or certain add ons would type of behavioral changes do we see and the good news is we've done a couple we've not done a whole lot and the thing to keep in mind is.
No last quarter, where we I think.
Two 3 million people this quarter now we're closing in on $5 million. So we're still refining the cohorts and then we're also experimenting with each of these cohorts to understand how that impacts their behavior with that all said the few.
Programs that Weve run we've been really pleased with our ability to influence behavior going forward. So as the population gets bigger in the rewards program and we get more fine tuned on our cohorts.
Our goal is to then further drive behaviors that make sense for the customer and then also makes sense for the triple the proposition so.
Early days, but we're very pleased with where we are right now.
Great. Thank you very much.
Our next question comes from David Palmer from Evercore ISI. Please go ahead with your question.
Thanks, just couple of quick questions on digital.
Acts like your mix was up eight points from the prior year.
How much do you think this mix increase is driving comps or how incremental do you think it is and over the next year. How do you think specifically I guess as it relates to Tarantin. His question, but how how how much do you think this digital lift can continue and just thinking about this the digital mix was up to 2.5 points from the previous quarter. So it looks like that digital lift is increasing or accelerating but of course, we have more difficult comparisons as you think about things like loyalty coming up so any thoughts on that thanks.
Yes, sure so look we.
Continued to understand all the facets of how this digital businesses coming to life right as it relates to order ahead delivery and rewards and then we also have about 16 restaurants now what you pull lane, where weve added another access point.
For people that order ahead, and what I'm delighted about is we see places where you're seeing the digital business achieved 30%.
And north of 30% and it is driven by just giving people more access building more awareness and giving them great experiences. So we definitely are not.
We think.
At the top of where this is we think there's still lots of room for growth.
In all aspects of the digital business.
Our catering business continues to still be a relatively small piece of the order had business and we think there is tremendous opportunity on that front as well. So as we continue to build awareness give people more access and get them to understand the occasions that they can use this excess floor.
We've been pleased to see where this business can get to and we've got some evidence of it getting north of 30%.
Okay, and do you think that.
Is there are you thinking about how much of that eight point mix is really adding to the comps you're seeing lately.
You mean the 18%.
Well, the eight point increase or.
10% this quarter, but year ago low versus year ago versus the 10, you're talking about yeah.
Thanks.
How you think about it.
Yes. So the good news is as we've talked about it a component of this is delivery, which is highly incremental.
That's in the 70% range I think is what.
We've shared and what we continue to see and appears to be pretty consistent with other people see our order ahead business not as incremental as our delivery business, but we're still continuing to see it be a very incremental piece on the business as well. So we're not breaking out exactly the contribution relative to the comp, but what I can tell you is it continues to be an incremental piece of the business and it comes with.
Nice.
Flow through as well, so we love incrementally profitable transactions and Thats, what this digital business brings to the triple the business.
Thank you.
Our next question comes from Nicole Miller from Piper Jaffray. Please go ahead with your question.
Thank you. Good afternoon, two quick questions. The first is on marketing. So the 3% spend is relatively static year over year, but dollars are outside that Jim question.
That's right the dollar spend is up.
The question is is fairly simple in that the dollars are up and comps are up so what's the thought process behind increasing marketing spend above 3% and depending on how you define your peer group.
That could be another 100 basis points to fall in line with with your peer group. Thank you.
Sure So I think.
Obviously this quarter the spend was up part of the reason for that is Chris and his team.
I think you're smart about allocating our marketing dollars.
Two communication vehicles that are going to be highly effective and there was more options available in this quarter.
For us to get that fully message in front of our customers at the right time and.
Fortunately, we had the right communication there the thing I will tell you is we are.
Always evaluating whether or not.
We have the right spend and.
What we see today is we feel really good about the absolute dollars that we're spending and I think really what you're seeing more than anything else is the allocation of those dollars, resulting in the brand being more visible with the right communication at the right time, which then is driving ultimately purchase a AAA. So.
No plans in the near term to go beyond that 3%.
The other thing to keep in mind too Nicole is as this business grows.
The marketing budget grows with it because it's 3% of now a much bigger business than it was six months a year ago and.
The marketing team is going to be really smart about how they allocate those additional dollars going forward.
So the brand continues even being more visible and even more effective and its communication. So.
Really proud of the work that that team has done.
But I think.
We're still getting started on this one as well and.
There is a lot of creative things to come with the dollars that have been allocated to marketing to date.
That's very helpful. I think what gets lost in the shuffle of can you comp the comp is.
There's really not much of a 3% spend then that would be one way if you ever wanted to look wailea in future to do it. So that's very helpful.
The second question is around your comments on digital.
And some stores being 30% next it'd be pretty fascinating understand anything you could share this might not be the right metric, but the person that comes to mind is the age range. So I'm trying to understand.
Clearly with the comp being what it is and the flow through.
I don't think Theres any question that it's incremental.
But would you characterize the of those digital.
Hi, you digital stores.
As at the system average, maybe they're higher at above the system or maybe they're even at like what a prior peak used to be for the system what does that look like.
Yes, what I can definitely share with you as they are above our average.
For sure and.
I don't think we want to get into specifically talking about what the fees are because some of that relates to the site specific but what I can definitely share with you is where the digital system is totally in place.
Meaning even adding a tripling.
It's beyond the average unit volumes and then even in the places without you pull lanes, it's above and beyond.
Our average unit volumes, where you see this.
Digital business plays such a big percentage of the business. So.
We feel great about continuing to drive.
That digital business to a higher percent because it is incremental which then results in these higher average unit volumes that we're seeing across our system.
Thank you for the time.
And our next question comes from Sharon Zackfia.
William Blair. Please go ahead with your question.
Hi, Good afternoon, I just have to say I did get an incentive through award so I'm I'm pleased to be in a different cohort than David.
Well certainly do that means though euro light user.
Quarterly is going to walk me as we're talking soon.
On.
The the delivery side of the equation I guess, just given the success you've had with door at ash and it sounds like very little overlap between what door dash is doing and what you're getting through your own App I mean, how do you think about opening that aperture to other third party delivery providers is that something you're exploring and then it seems as if the.
The digital cadence didn't slow at all after you lap the door at Ash.
Agreement in May and if you could.
Just talk about if that was in fact, the case that maintained its momentum.
Yes, so to answer your first question you know, we've got a great relationship with Jordache, we do.
To date also provide delivery with postmates and to tango.
So it's not exclusive however.
Door dash and triple they I think have done a nice job of marketing the delivery channel and.
We've got a great relationship in place with that team.
And as you mentioned.
We lapse our door dash partnership.
Pretty successfully and one of things that I'm really excited about seeing is it does continue to show up in the data that those that use our in app delivery experience are not the same people that are using the third party app experience. The other thing that I'm also really excited about is there are a lot of people on these third party platforms.
Thats still have not gotten to try chipotle late delivery, even though AAA is one of their top delivery partners. There is lots of runway with people that are using these aggregator sites to still have an opportunity you experienced the AAA delivery.
Experience so lots of runway even in the partnerships we have in place and then as I think about our digital business as it grows and we generate more awareness about the occasion.
Im very optimistic about how we grow from here.
Going forward.
Okay. Thank you.
Yep.
Our next question comes from Sara Senatore from Bernstein. Please go ahead with your question.
Great. Thank you I had a question about the the product launches and then a follow up on that does that answer Nick.
Just on the you talked about current is being well received and like indicate cdrs and getting the ops right. There I mean, I think and.
My question has to do with is the goal to sort of prevent menu fatigue is it can bring in new customers is it could drive incrementality in any given quarter that you launch. It is there anything you can tell us about the extent that you are seeing successful tech test, how that's translating into new or incremental traffic and how to think about that in the context of I think people in general are creatures of habit and a lot of people probably order the same thing over and over again anyway. So any color on that and then like I said I have a follow up on the digital bank.
Sure So to answer your question on the menu innovation.
We view it as it should be able to drive incremental sales transactions.
The reason why is because it does give people an experience.
That they don't get out of their everyday experience. So it gives them a reason to either come more often or maybe come and try us for the first time and.
As we do these tests, that's what we're really trying to understand how much of this is a this is just among our existing user that is coming more often.
Because we've now added another occasion form or what we've now peak somebody's interest has never had the opportunity to try chipotle in the past and.
Carne Asada is a great example, where.
We've actually gotten a request of both non users of AAA end users of AAA to say how come you guys never do Carne Asada.
Now whether or not it stays on the menu permanently.
There is a lot of things that go into that decision.
And that's why we keep these things into our test long enough. So that we can understand how is the perfect behave both new with marketing and then just on a sustained basis as part of the menu.
And then things like the case, India. It adds another level of validation because it cannot have a negative impact on our throughput.
But things like cases, using not chose those are clearly things that both again users and non users of chipotle. They have said well that would really make the brand the restaurant experience even more attractive so that I could come more often so.
That's why we're experimenting with these things.
And that's why we use the stage gate process. So we can understand that balancing act between incrementality among existing users as well as bringing in new users.
Great. Thank you and then just on the I know you said, you're not breaking out the contribution the comp from the different types of data ordering but.
Is it fair to assume that at least some of that growth came from mobile order and pay and the reason I ask is because of one the extent to which when you see people actually coming in the store, maybe that's an opportunity to engage with them versus delivery and then Q of course, I think they're very different margin profiles in so far as mobile order and pay I think is probably the highest margin.
And deliveries is lower so if you could just maybe talk about that you either even qualitatively that the mobile order and pay versus that.
The delivery.
Yeah sure. So yes, obviously it contributed to our comp growth right I mean, the thing Thats wonderful about this digital businesses.
It's incremental transactions with higher ticket, so we're picking up more ticket.
And that is true both in the order ahead business as well as the delivery business.
Now obviously order ahead business has even better economics because.
We don't have to deal with the aspect of the delivery cost but.
Both are proving to be incremental both are contributing to the comp.
And.
We're.
Very bullish on how we can drive this going forward.
Okay. Thank you.
Yep.
And our next question comes from John Glass from Morgan Stanley . Please go ahead with your question.
Thanks, very much Brian as you look at your digital mix across your fleet of stores. How is it a normal distribution is it more skewed as you might think to more urban markets more affluent markets or is it really across.
The breadth of your stores and I guess the comment is on digital but also delivery specifically how evenly distributed or not is that is that business for you.
Yes, it's actually fairly evenly distributed.
You don't have.
Certain spikes in.
Some of those areas that you mentioned, it's fairly evenly distributed John .
That's helpful. Can you talk about also throughput maybe update us on the metrics you're looking at for throughput you said, there's it's improving but there's still opportunity in particular, the digital make line is accounting for rounding up nearly 20% of your sales is that executing as you would expect or do you need to tweak that as the volumes are growing faster there than maybe maybe onetime expected you need more capacity there as it is it's still under utilized in there's headroom.
Yes, so the first ill answer the question just in general on throughput. The teams have made really great progress on throughput.
You know we are halfway through the year I think we mentioned in our prior call data.
We have.
The teams are incentivized in their bonus based on throughput targets and then.
Even to the point now where we will provide a crew bonus.
Assuming they're able to hit their both throughput targets food safety targets and the other key operating metrics that we ask the team to hit but the I think the thing that's really been powerful as Scott has guide.
The operation organization, just focused on the critical few items. It's you know these staffed have a great team have a great leader, which results in great culture, you know and Thats number one he's got them focused on number two great food taste, the food know how to make the food.
And do it right every single time.
Throughput, we now have the dashboard in place we're showing the teams what is the difference between having the five pillars in place versus not having the five pillars in place and we're seeing you know.
Nice results on that front and then obviously a culture of food safety has to be evident in everything that we do since we're handling.
Real ingredients with real cooking techniques.
Every single day so.
All of it is working together and give Scott and a lot of our Eightys a lot of credit because they are really getting after one best way of execution, and then holding themselves accountable against that execution. So.
I think we're going to continue to see better progress.
On operations going forward.
And you know we look at this every day and you know this the restaurant business the retail business is an everyday business.
And Thats the type of focus that we have every day.
We want to be better than we were the day before and.
That's what we're getting after on the throughput.
Teams stability, great food and then obviously all in a food safe environment. So on your question regarding the digital make line. The good news is we have plenty of capacity.
Capacity is not our issue.
If anything we just have to learn how to execute better on that second make line. Some new metrics are important for US right on the front line, we've never had to worry about accuracy because the reality is interacting with you and you get exactly what you want as you move down the line now we've moved to a place where you order you pick it up and go and then you open it up and that's the moment of truth of whether or not it's accurate everything's there.
And it is it hot and.
The good news is the foods hot because we make it really quick to deliveries are really fast.
You know and we're learning our way to becoming the more accurate so.
Some things that we're learning so that we can be better with that off premise experience, but all in all plenty of capacity customers really love, having the additional access both on premise and off premise and then as I mentioned I think the in store operations is just really.
Really continuing to improve and much better than we were six months ago or even a year ago.
Yes. Thank you.
And our next question comes from Andy Barish from Jefferies. Please go ahead with your question.
Hey, guys. One quick sales question then.
Expense question.
Any commentary you willing to share just on sort of cadence given you were lapping during the Twoq given you were lapping the door dash launch and the launch of.
For real advertising and then the start of the Threeq you here.
Yeah, and Andy from a dollar standpoint, our sales were.
Even throughout the quarter and then they continued through the trends continued through July .
You did see a difference in the comp presented as we move from April .
Two.
To May and June because we are comparing against the things that you mentioned for from a dollar standpoint, we still see nice underlying strength and that continued into into July as well.
Okay, and then can you give us a quick update Jack I think you mentioned that the 2 million of a food cost saves was that just a continuation of what you.
What you saw in the first quarter is that 2 million incremental and then just more broadly from an organizational perspective, obviously.
Given the numbers, you're putting up right now.
Cost saves efficiencies are kind of happening on their own but are there. Some efforts that may bear some fruit as we look out to 2020 more on that on the pure cost save side of things.
Yes, Andy to 2 million decremental sets on top of the the run rate that that we reported first quarter.
And the team does continue to look at opportunities and there are a number of opportunities Andy So I fully expect that we'll be talking about greater savings, especially as we move to the end of this year and into 2020.
Thank you.
Our next question comes from John Ivankoe from JP Morgan. Please go ahead with your question.
Hi, Thank you.
The past, we've talked about the ability to take price to the extent that there was any cost pressure, whether from commodities or labor or anything else.
It's 2% pricing the right thing for this brand, especially looking at some of the absolute pricing out supposedly versus some peers, which have obviously gotten higher how much pricing do you think you have at this point that you could take to the extent that you needed to that would that state.
Great well that excuse me that wouldn't influence your current rate of customer traffic.
Yes, so we've taken the approach on pricing that.
We don't want to be overly aggressive with it.
I love that the value proposition that we present today.
Because as you mentioned a lot of other people that are doing.
Real ingredients real cooking.
Their prices are significantly higher than AAA and it just puts us in a very nice position where.
If we need to take pricing, we have the pricing power to do it but we want to be very.
Judicious in when we choose to do it and.
The good news for US is we see no reason to go beyond the 2% right now.
But we've also learned that we definitely have room to price beyond 2% if necessary.
And if you know.
The environment.
Mandates that then we will do it accordingly.
Okay. Thank you and next just a quick modeling question I get DNA in the second quarter looked you're taking a step down is that the new run rate in DNA per operating week. However, you want to look at it.
Or was there anything unusual in the second quarter regarding DNA AD spent.
Yes, yes, yes.
Thats close to a normal run rate, but keep keep in mind. We have we've had a lot of things happening in the last year in terms of closing restaurant, which means to accelerate depreciation for a while same with the offices. So I think we're back to more of a normal depreciation but keep in mind as we open up new restaurants, especially because we talked about opening up.
The heavy load in the fourth quarter.
You will see that in the fourth quarter as those stores open.
You will see some incremental additions to depreciation.
Amortization at that time.
Perfect. Thank you.
Our next question comes from Jeffrey Bernstein from Barclays. Please go with your question.
Great.
Thank you very much two questions just one specifically on the commodity front Im wondering whether you can offer any color in terms of.
What basket inflation, you're seeing today.
It sounds like you're saying pork is not an issue in coming quarters. Just wondering if there's any directional trends you could offer whether you think there's some upward pressure expected as we look to 2020 it seems like that's what the.
Industry is talking about but I get the impression you, perhaps don't see the same way and then I had one follow up.
Yes, Jeff we avocados is the inflation story that we're seeing and it's and it's not really sustained inflation, it's more of a cyclical thing it's the best.
Supply and demand out of balance right now, we expect that to become more normal I don't think we'll necessarily get back to the price that we paid in the first quarter. This year, but it should drop from what we saw in Q2, we are seeing a little bit and dairy we set we saw that as a unique to us a little bit in salon true, but these are very very minor and manageable items.
We don't see or we're not anticipating anything.
Significant with any of our proteins that could change between now and the end of the year, but right now it looks like looks like other than avocados. The commodities are behaving.
Got it and then.
As you talk about kind of the outlook from an earnings perspective.
I mean I understand the comp visibility you have based on the guidance you provided but obviously the earnings flow through is critical as you look to the back half of the year.
Any other changes you would expect them in.
Just not sure.
If you think the comps and they begin to ease a little bit as you suggest on a tough compares would you expect restaurant margin expansion to moderate like how you're thinking about the puts and takes in the back half of the year with what seems like a very strong comp momentum and how that might flow through to earnings.
Yes.
On a year over year basis, if you're talking about high single digit comp versus a 10% comp.
Yes, you're going to see a different margin leverage.
Then that yet.
Jeff you can walk through the modeling to see what that would look like.
But remember we had pretty strong margin at the end of last year I would say the biggest wildcard in terms of our margin potential is avocados avocados normalized.
Avocados increased.
By by about 150 basis points from Q1 to Q2, so imagine if that comes back to us or if half of that comes back to us.
Our margin potential gets much greater as avocados normalize we haven't shopped at next year avocados could be more plentiful of member avocados kind of go in this every other year next year should be a more plentiful here and I will see if it actually materializes, but I would say thats. The biggest wildcard in terms of our flow through we're really happy with the flow through that we've seen with the comp that we've gotten if you do see a or as you do see a lower comp the flow through year over year is going to be somewhat less but we think we'll still see some nice flow through based on a contribution margin that we earned.
Nice to hear all the kind of the bigger issue than labor. That's a positive sign looking to 2020. Thank you.
Our next question comes from will Slabaugh from Stephens Inc. Please go ahead with your question.
Yes, thanks, guys.
Just had a follow up on the throughput comment that Ronnie made earlier in your prepared remarks.
You put any context around that in terms of where you are today versus where you were.
Previously I guess I guess towards the bottom if you will and then what do you see that opportunity going forward.
I couldn't hear the first part of your question I'm, sorry, Yes, you're just just to comment on on throughput and you mentioned that in your prepared remarks.
Improving so wondering if you could put some context around that in terms of where you are and what the opportunity is going forward.
Oh sure so.
I think we've talked about this in the past where today, we're kind of in the mid Twentys.
In our peak throughput performance, we're kind of in the mid to low Thirtys and I think the thing that I'm excited about is the team is really focused on getting ourselves from that mid twentys to high twentys.
And then.
You know how this works once we get the high Twentys, we'll be looking at low thirtys.
So that's what I mean by we've got terrific focus and we're seeing progress.
And then you know you have these moments where people achieve something and then we're able to share that with everybody else in the organization so that the throughput.
Machine really starts to.
Get going and people realize what's possible so.
That's where we are today, we're definitely making progress on that mid 20 number.
And then once we move beyond kind of the mid twenties high Twentys will be zeroing in on the low thirtys.
Great. Thank you.
And ladies and gentlemen, with that we will conclude todays question and answer session. At this time I'd like to turn the conference call back over to Brian nickel for any closing remarks.
Okay, Thanks, everybody and apologies for the technical difficulties that got us rolling but we've got it all sorted out.
And you know really appreciate you all taking the time.
To listen and ask questions, obviously very proud of our results very proud of the team Im very proud of what's happening in our restaurants.
As I mentioned in our call.
We've got some very specific strategies that were focused on around marketing digital operations and really using the stage gate process on innovation. We're in the early days on a lot of these initiatives were delighted by the customer response Weve seen to date and we're delighted by the performance we're seeing in our restaurants today.
And I look forward to sharing where we are next quarter with you all on this journey.
For Chipotle later really cultivate a better world. So thank you everybody and.
I'm sure we'll be in touch.
Ladies and gentlemen, the conference has now concluded we do thank you for attending today's presentation.
You may now disconnect your lines.