Chipotle Mexican Grill, Inc.

Good afternoon, and welcome to the Chipotle Mexican Grill second quarter 2020 results conference call. All participants will be in 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 second 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, 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 risks that may cause our actual results to vary from these forward-looking statements. Our discussion today will include non-GAAP financial measures. A reconciliation to GAAP 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, our Chairman and Chief Executive Officer, and Jack Hartung, 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. Since our last earnings call, the world has continued to face unprecedented challenges with regard to health, economic, and social issues. However, I'm so proud of our employees, those in the field managing and running our restaurants, our support center staff who are working remotely, as well as our supply partners for coming together to continue to provide our safe, delicious, high-quality food made from real ingredients. As a result, Chipotle is successfully delivering on its commitment to help cultivate a better world for our employees, guests, farmers, communities, and shareholders. Today, I want to focus my discussion on three key topics – First, our efforts to take care of our people and guests as restaurants reopen for in-room dining. Second, provide details on our improving comp trends. And third, highlight how we've built an operating model that's designed to generate strong performance in a wide variety of environments such that we can win today while we create a bright future. As I've mentioned previously, the health and well-being of our employees and guests has always been and will continue to be our top priority. Given our strong financial position, we are able to make investments in our people and the Chipotle business, which are not only helping us manage through this crisis, but set us up for a strong recovery and future success. Our top priorities for the rest of the year include safely running our restaurants and reopening dining rooms, using best practices to support alternate restaurant support center working arrangements, ensuring supply chain consistency, and strengthening our digital ecosystems. Within our restaurants, we have taken a number of steps to enhance our robust food safety and wellness protocols, including the creation of the steward role, which is focused on sanitization in high-touch and high-traffic areas, providing masks for all employees, and having a tamper-evident packaging seal for all digital orders. We are also delighted to see many of our guests doing their part by wearing masks, socially distancing, and, where appropriate, leaving instructions in our app and online to request contactless deliveries and carryouts. These initiatives give our employees and guests confidence that Chipotle remains steadfast in our commitment to keeping them safe, especially now that the dining rooms are starting to reopen. As of last week, about 30 restaurants remain fully closed, and these are mainly inside malls and shopping centers. We began to open dine-in capabilities in the middle of May and currently have about 85% of our restaurants offering limited in-restaurant and or patio dining. With the remaining being open for to-go services, which includes delivery, order ahead, and pickup, and coming into the restaurant and ordering a meal that is taken then off-premise. Encouragingly, since sales dropped in late March, we've been able to retain 70% to 80% of our digital sales gains while recovering 40% to 50% of our in-store sales. This supports our thesis that digital tends to be highly sticky and was a key factor in helping improve our sales performance as the quarter progressed. Our Q2 comp was down 9.8%. which includes a 1.9% headwind from closed restaurants. Our restaurant-level margins were 12.2%, and adjusted diluted EPS was 40 cents, down 90% year-over-year. In terms of monthly comp cadence, April was down 24%, with May being down 7%, and then June showing further progress to finish up 2%. Though I comps continue to improve and are up 6.4% month-to-date, including about a 1.4% positive impact from the July 4th weekend and about a 2.7% negative impact due to underperforming restaurants in the Northeast and international markets, as well as restaurants closures due to COVID-19. And keep in mind, we are comparing against a nearly 10% positive comp in July of 2019. Overall, these trends highlight that despite these unprecedented conditions, our five key strategies continue to resonate with guests, and position us for success in the near term, as well as giving us more confidence in doubling our restaurant base while ultimately expanding AUVs and margins above $2.5 million and 25% respectively. Let me spend the rest of my time providing a brief update on each of these strategies, which 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. To begin with, our marketing team has been remarkably agile and proactive during the crisis by quickly pivoting from traditional television advertising to creative social and digital media to help keep the Chipotle brand relevant and drive awareness of our digital capabilities. Whether it be healthcare heroes to support frontline workers, lifestyle goals to keep people healthy while working from home, or virtual events such as proms, concerts, e-gaming tournaments, and the virtual farmer's market. These initiatives are helping support our customers, suppliers, and communities in a time of need. These efforts continue to drive awareness, expand access, and grow sales by driving culture, driving difference, and ultimately driving a purchase. In conjunction with marketing, our StageGate process is a key enabler to develop innovation that leads food culture and meets guest requests. Over the last 18 months, lifestyle bowls, carne asada, super green salad mix, and queso blanco were all successfully validated by this process. Despite less marketing support than initially planned, our new queso, which uses 13 real ingredients and has just the right spice level and texture, has been a hit with guests. Our current attach rate of high teens is roughly 70% higher than with the previous queso. The latest innovation to make it through the Stage K process, and upgrading an existing item is a suite of tractor beverages. These are organic, non-GMO, less sugary, and align well with our food with integrity ethos. We received terrific customer feedback and expect these to help improve our drink incidents moving forward. While COVID, of course, has delayed testing of menu items over the past few months, the pipeline of potential new options continues to build. Now that regions are starting to reopen, we anticipate being able to test new items again, which will allow us to deliver on our goal of rolling out one to two new menu items on average per year. To give you a couple of examples, we recently launched a pilot to test cilantro, lime, cauliflower, rice, and began offering quesadillas as a digital-only entree, which we believe can overcome the throughput challenge presented on the front line. These menu items are in various markets where we are gaining valuable guests and operational feedback. We will update you on our progress of all potential new menu items as they move through our stage gate process. Next, our digital platform has been a big beneficiary of the current environment. Order 2 digital sales grew 216% year-over-year to $829 million, which is by far our highest ever quarterly level and represented 61% of sales. Working from home, driving increased digital awareness via advertising, new delivery partnerships with Uber Eats and Grubhub, as well as expanding our digital capabilities into Canada, are attracting new customers and helping reduce friction while increasing convenient access. Notably, partnering with all the major third-party delivery aggregators has led to an increase in orders, a reduction in delivery time and cancellations, and an improvement in overall customer ratings. As you know, all digital orders from Chipotle are fulfilled via our digital kitchens, which are comprised of a dedicated make line and operated by a special team in nearly all Chipotle locations. Recent digital investments such as Pepper, Our concierge bot on Facebook Messenger, group ordering, and complete customization are further optimizing a seamless ordering experience for our guests. Even with in-restaurant dining opening back up, we continue to see strong digital sales momentum in July with a mix of nearly 50%. Breaking this down further shows that a little more than half is coming from order ahead and pickup transactions, while the remainder is coming from delivery. Both channels continue to perform well, but we are pleased that order ahead is now our fastest grower due partly to being less promotional on delivery, partly to more customers realizing the value of a pickup transaction as there are no delivery fees, and to a lesser extent, more Chipotle lanes. With free delivery promotions likely to be less frequent moving forward and us pivoting more aggressively toward Chipotle lanes, we are optimistic that the order ahead transaction will continue to be a big driver of future growth, which should benefit both sales and margins. Another element that has seen a meaningful acceleration over the past few months is our rewards program, which now has nearly 15 million enrolled members. What an amazing accomplishment considering this program was launched only 15 months ago. The rate of enrollment has roughly doubled during the COVID crisis as customers flocked to Chipotle's digital ordering channels. Today, the question I hear most frequently is how are we going to benefit from this? Interestingly, even in the early stages of utilizing the customer data, we are seeing a significantly higher frequency of transactions from members versus non-members. It's early days, but we are starting to leverage this growing install base with personalized promotions to incent behaviors, especially considering more than 70% of current digital orders are from our members. We're also using this tool to help make our digital platform stickier by reengaging customers if their usage drops. As we continue to enhance our CRM journeys, we are seeing incremental transactions across all frequency bands. not only as a result of the offers, but also from our brand, safety, and purpose-driven messaging. We will continue to leverage our data over the second half of this year and expect loyalty to become a bigger tailwind over time as our install base expands and we increase our level of sophistication with this large base of consumers. Driving more people to Chipotle is only part of the equation. The other key is to ensure great restaurant operations so the guests have an enjoyable experience and continue to come back. As I visit our restaurants, it's apparent that the investments we are making in our people are paying off, as our food tastes great, employee retention continues to stabilize, and service levels are improving. Not only is this benefiting us currently, but these factors should position us well to drive higher throughput post-COVID, as in restaurant demand returns to a more normal level. What has always attracted me to Chipotle and what I believe is a key point of differentiation is our unique purpose of cultivating a better world, and a culture that has always been committed to fostering a diverse, inclusive, and safe environment where everyone can belong and have the opportunity to build personal and professional success and make a positive difference in their family and communities. This isn't always easy, especially given the unrest and uncertainty at the moment, but we must do what is right, even when it's hard. More recently, Chipotle has taken several actions to help drive out inequality and injustice, including listening sessions with our employees, financial contributions to organizations advocating against systemic racism, and forming a multicultural employee resource group. The bottom line is that we're all in this together, and when we do our part, we can make a difference to our employees, our food, our business practices, and in our communities. Before I conclude, I want to publicly welcome our two new directors, Mary Winston and Greg Engels. Both bring excellent experience to our board and will be valuable assets for Chipotle. Finally, I want to thank all of our employees for delivering excellent guest experiences and supporting our restaurants and each other. Their belief in our purpose, commitment to living our values, and hard work is what's pulled us through what we hope is the worst of the COVID crisis. By channeling our energy into programs and initiatives that help us become a stronger team, innovate, and grow our business, I believe we will finish 2020 with good momentum and be well-positioned for the long run. With that, here's Jack to walk you through the financials.