Chipotle Mexican Grill, Inc.

Good afternoon and welcome to the Chipotle Mexican Grill first quarter 2020 results conference call. All participants will be in a listen only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note, this event is being recorded. I would now like to turn the conference over to Ashish Kohli, Head of Investor Relations. Please go ahead.

Hello, everyone, and welcome to our first quarter 2020 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. I will begin by reminding you that certain statements and projections made in this presentation about our future business and financial results constitute forward-looking statements. These statements are based on management's current business and market expectations, and our actual results could differ materially from those projected in the forward-looking statements. Please see the risk factors contained in our annual report on Form 10-K and in our Form 10-Qs for a discussion of risk that may cause our actual results to vary from these forward-looking statements. Our discussion today will include non-GAAP financial measures. A reconciliation to GAAP measures can be found via the link included on the presentation page within the investor relations section of our website. We will start today's call with prepared remarks from Brian Nickell, Chairman and Chief Executive Officer, and Jack Hartung, our 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'd like to turn the call over to Brian.

Thanks, Ashish, and good afternoon, everyone. We hope everyone is doing well and staying safe during this unprecedented time. Given the circumstances, we will discuss Q1 results and recent trends in a few minutes, but want to start by updating you on our response to COVID-19 and its impact on our business. Let me say up front how proud and grateful I am to all our employees for their positive attitude and efforts in providing guests access to our safe, delicious, high-quality food made from real ingredients. I want to thank our supply chain partners who have been dedicated to keeping our restaurants stocked with gloves, hand sanitizer, masks, and other necessary items to keep our employees, food, and customers safe. I also want to thank our supply chain partners who have delivered our food with integrity ingredients to every open Chipotle restaurant during these challenging times. in a healthy and safe way. As a result, I am pleased to report that only about 100 restaurants are fully closed at this time. These are mainly inside malls and shopping centers, as well as 17 locations in Europe, while the rest of our restaurants remain open for to-go and digital order ahead and delivery services, which is critical at a time where food options are limited. Cultivating a better world takes commitment from all of us, and we are fortunate to have the financial strength to weather this storm. Jack will provide more details, but it's important to note that we remain focused on conserving cash while prudently continuing to invest in several areas that will help us show a strong recovery once guest activity begins to normalize. Specifically, I want to focus my discussion on three key topics. One, our efforts to take care of our employees, guests, and communities. Two, our emerging digital platform. And three, our recent comp trends. At Chipotle, investing in our people has always been the top priority. After all, they are our greatest asset. Well before COVID-19, we had industry-leading benefits for all employees that include free meals, paid sick leave, crew bonuses, and debt-free degrees, as well as mental health benefits and access to a healthcare concierge service for all employees and their families. In the weeks since our world quickly changed, we continue to find ways to support our employees personally and financially. We expressed our appreciation for restaurant employees who were willing and able to continue work between March 16th and May 10th with assistance pay, a 10% increase in hourly rates. We approved discretionary Q1 bonuses of nearly $7 million to field leaders, general managers, apprentices, and eligible hourly employees. We're also providing an additional $2 million in assistance bonuses to general managers and apprentices for their services in April. And we expanded our emergency leave benefits to accommodate those directly affected by COVID-19. Beyond these benefits, we are working diligently to ensure that we're doing everything possible to keep our guests and employees safe during this time of uncertainty. At Chipotle, food safety is more than a collection of programs and processes. It's part of our DNA. We have a culture of continuous improvement in which we regularly evaluate our processes to ensure that our customers have consistently excellent experiences. Over the past few years, we strengthened many of our food safety initiatives, including wellness checks done before every shift, and trained nurses available to evaluate any employee who may feel ill in order to determine whether they should be excluded from work with full pay, installed advanced technology air purification systems to reduce the risk of viruses, supplied Purell sanitizer for employees and guests, mandated hand washing between tasks in at least every hour as well as gloves being worn for all tasks, enhanced food preparation and food handling practices designed to reduce food safety risks, improved internal training and education to ensure that all employees thoroughly understand the company's high standards for food safety and food handling, engaged a third-party consultant to perform regular inspections of all restaurants, and finally created an independent food safety advisory council comprised of food safety experts to provide ongoing guidance on best practices. More recently, as the cases of coronavirus started to grow in the U.S., we formed a cross-functional task force that has been holding daily calls. This provides a real-time platform for us to stay current with market trends, regulations, and mandates on COVID-19 based on feedback from the CDC, FDA, state, and local agencies, as well as ensuring we get frequent updates on our own operations. This is also allowing us to make quick decisions and navigate these evolving circumstances, including recent additional precautions to safeguard our employees and guests. These include increased sanitization of high-touch, high-traffic areas, providing masks for employees and a tamper-evident packaging seal. Customers can leave instructions in our app and online to request contactless deliveries and carryout. All of these initiatives give our employees and customers confidence that Chipotle remains steadfast in our commitment to keeping them safe. We are also doing our part for the community by donating excess food daily to various food banks, celebrating National Burrito Day by thanking healthcare heroes with 100,000 free burritos, and offering a new gift card program that supports health care workers on the front lines. Chipotle will be donating 10% to direct impact, an organization working to provide personal protective equipment and essential medical items to health care workers through May 31st. In addition, Chipotle is doing a buy one, give one offer for burritos, whereby Chipotle will donate one burrito to a health care worker for everyone purchased digitally from April 21st through April 26th, as we continue to support those on the front lines of this crisis. As I mentioned earlier, the majority of our restaurants are open for to-go orders, which is allowing us to successfully leverage the digital platform we've put in place over the past two years. Q1 digital sales grew 81% year-over-year to $372 million, our highest-ever quarterly level, and represented 26.3% of sales. As people started to implement social distancing, we moved swiftly by driving further investments towards digital and delivery designed to reduce friction while increasing convenient access. Although Queso Blanco was off to a terrific start, we reprioritized our marketing efforts by offering free delivery from March 15th to at least early May and shifted from live sports to more online and streaming platforms. We also announced a successful national delivery partnership with Uber Eats that is helping drive new customers and greater frequency. Collectively, these decisions translated into strong engagement with our guests as evidenced by March digital sales growing 103% year over year and representing 37.6% of sales. A recent survey among current Chipotle consumers suggested about 15% had Chipotle delivered for the first time during the last two weeks of March based on their desire for fresh ingredients, craveable taste, and good value. We believe this will have a lasting benefit well beyond the current crisis and are pleased to report that we have maintained strong momentum into April with the month-to-date digital mix running in the high 60s. While delivery continues to be the fastest growing part of our digital platform, we are also pleased with our order ahead business, where average daily sales have doubled from the level seen prior to COVID. This is part of the reason that we continue to shift our development pipeline more aggressively towards Chipotle lanes, as it helps drive our high margin digital order ahead transaction. Another element that is benefiting from the current environment is our rewards program, which now has more than 11.5 million enrolled members. Over the past month, daily sign-ups spiked nearly fourfold, which is another sign that our digital platform is gaining traction. We are pleased to report that 65% of newly enrolled rewards members are new to the Chipotle brand, up from 51% pre-COVID. In addition, 61% of previously store-only rewards members are now new to digital versus 8% pre-COVID. While it's early days, we are starting to leverage this growing install base with personalized promotions to better engage in incentive behaviors. We are seeing modest transaction increases across all frequency bands and expect this lever to become a bigger driver in the future as we gain greater customer insights while continuing to expand our digital ecosystem. Lastly, let me provide a few comments on trends during the quarter and thus far in April. Despite lapping a 9.9% comp in Q1 2019, we had a tremendous start to 2020 with our comps running at plus 14.4% with nearly 11% transaction growth through the end of February, including a 2% benefit for leap year. This highlights that our five key strategies continue to resonate with guests. And as a reminder, these are making the brand visible and loved, creating innovations utilizing a stage gate process, leveraging our digital make line to expand access and convenience, engaging with customers through our loyalty program, and running successful restaurants with a strong culture that provides great food, hospitality, throughput, and economics. We began March on a very positive note, but as COVID-19 restrictions became more prevalent, our comps deteriorated and ended up declining 16% for the month, with the week ending March 29th being the trough at down 35%. This resulted in the Q1 comp being up 3.3%, with transactions down 1.4%, including a 1.3% leap day benefit. Restaurant-level margins were 17.6%, and adjusted diluted EPS was $3.08, down 9% year-over-year. April has seen our comps improve, with the most recent week adjusted for Easter being in the negative high teens range. No one can predict the magnitude nor duration of this crisis, but we are focused on winning today while we cultivate a bright future for our employees, guests, communities, and shareholders. By staying calm and working collaboratively to leverage our strong brand, business model, and balance sheet, we are confident in our ability to get through the current downturn. In fact, we are continuing to judiciously invest in key areas of our business so that when we come out the other side, we will emerge even stronger. We know it won't be easy, but Chipotle is well prepared to regain our prior momentum and extend our brand leadership. A recent consumer survey showed that the vast majority of our pre-coronavirus consumers envision coming back to the restaurants at a similar or higher rate than before. As a result, we believe our long-term opportunity to significantly expand AUVs, margins, and store base remains in place. Thanks once again to all of our employees and partners for their dedication and hard work during these difficult times. We will get through this together and be stronger as a result of the tremendous passion and commitment from everyone. And lastly, I would be remiss if I didn't offer a heartfelt thank you to the healthcare workers for their heroic efforts on the front lines of this pandemic. With that, here's Jack to walk you through the financials.