Chipotle Mexican Grill, Inc.

Good afternoon and welcome to the Chipotle second quarter 2021 earnings 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 fiscal 2021 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. We 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, 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. Chipotle's second quarter results highlight the strength of our brand and our people as we demonstrated growing momentum in our business. Over the past 15 months, our teams have done an admirable job navigating and executing against macro complexities while giving us great optimism for where we go from here. While COVID challenges remain, including uncertainty regarding the impact of the Delta variant, I'm confident that our teams are up to the challenge and we're hopeful that we'll gradually see a more stable environment over time. Specific to Chipotle, we're pleased that all of our restaurants are now open and most are back to normal operations. For the quarter, we reported sales of $1.9 billion, representing 38.7% year-over-year growth, which was fueled by 31.2% comparable restaurant sales growth. Restaurant level margin of 24.5% was more than double the 12.2% we reported last year. Earnings per share adjusted for unusual items of $7.46, representing a significant increase over the 40 cents reported last year. Digital sales growth of 10.5% year over year, representing 48.5% of sales. and we opened 56 new restaurants, including 45 with a Chipotle. And I'm delighted to report that Q3 is also off to a strong start. While our trailing 12-month AUV is $2.41 million, the underlying run rate during the quarter is now above the historical peak of $2.5 million AUV. When we started this transformation a little over three years ago, I was often asked whether I thought we could get back to our peak $2.5 million volumes. My answer was yes, and when we achieve it, we will talk about growth beyond that. So it's a nice achievement for our organization to have $2.5 million AUVs again, but more importantly, we have growth strategies that will take us to the next leg of our journey, $3 million AUVs, along with industry-leading returns on invested capital that improve as we continue to add Chipotle lanes. Stronger restaurant-level economics combined with significant unit growth should allow us to optimize earnings power for many years to come. In fact, we remain confident in our key growth strategies and believe that over the longer term, they will allow us to have 6,000 restaurants in North America with AUVs pushing well beyond $3 million. Yes, the opportunity ahead of us remains significant. So what are the key strategies that are resonating with guests and allowing us to win today while we create the future? To no one's surprise, they are the same ones we've been talking about for some time, namely opening and running successful restaurants with a strong culture that provides great food with integrity while delivering exceptional in-restaurant and digital experiences, leveraging digital capabilities to drive productivity and expand access, convenience, and engagement, engaging with customers through our loyalty program to drive transactions and frequency, making the brand visible, relevant, and loved, and utilizing a disciplined approach to creativity and innovation. Let me now provide a brief update on each of these, starting with our outstanding operations. This is a key focal point as our business is building on our digital gains along with in-restaurant strength due to a more confident and mobile consumer, as well as the hard work our team has done to build more love for Chipotle. We've continued to make operational adjustments to adapt to the constantly changing environment, which has led us to recovering about 70% of in-restaurant sales thus far, while retaining about 80% of digital sales. It's no secret that running great restaurants requires great people with a terrific culture, and we are privileged to have the best of both. Despite the labor challenges in certain parts of the country, the team has remained focused on safety, reliability, excellent culinary, and experiences. I'm extremely proud of our world-class employee value proposition We're providing industry-leading benefits, including a new virtual mental health platform, expanded debt-free degrees, attractive wages that were recently increased to an average of $15 per hour, specialized job training and development, and significant career advancement opportunities. And because more than 90% of our restaurant management roles are internal promotes, employees who join the Chipotle family know they have the opportunity to grow their careers with us. Through investing in our people, we have been able to maintain the stability of our workforce over the last two years. Knowing that our people are the key to our growth, we have been diligent in our recruiting focus since the start of the year. In reimagining the applicant experience, we're leveraging partnerships that allow us to engage in authentic conversations with prospective candidates and share all the opportunities Chipotle has to offer. Our Coast to Coast Career Day event last week resulted in us hiring thousands of additional team members, to meet current demand and accommodate future growth. These efforts have dramatically helped improve our labor position, and as a result, our restaurants are attracting and retaining excellent employees in a tough labor environment. After visiting several restaurants this past month, I'm encouraged to see more and more guests enjoying their meals in our dining rooms. They order Chipotle because they can get the exact customized meal they want, made with real ingredients, faster than anywhere else. As a result, we are committed to teaching, training, and validating the five pillars of throughput every day during every shift to ensure we meet our high standards and provide a great guest experience. Over the past few years, Chipotle has evolved to a point where we now have two sizable businesses in restaurant as well as our record-breaking digital platform that are helping us become a real food-focused digital lifestyle brand. During the second quarter, digital sales grew about 11% year-over-year to $916 million, and represented nearly 49% of sales. While COVID has, of course, helped bolster these digital gains, ongoing technology investments and operational excellence have been the critical success factors. Some examples of the digital innovations we've introduced include the addition of our concierge chatbot Pepper to the Chipotle app, which has the ability to answer common questions and resolve issues more efficiently, thus freeing up our customer care team's time to help guests with more complicated situations. We also gave guests the ability to easily rate their order right in the app and online at Chipotle.com, providing our restaurant operations teams with actionable insights on how to maintain and improve the digital guest experience. Additionally, we have opened a digital-only kitchen, continued expanding our digital drive-thrus with Chipotle's being the majority of our new restaurant openings, refreshed group ordering, and invested in digital internationally by launching the Chipotle app in Canada and implementing our digital assets in Europe. While the results and positive feedback on these innovations show us we're on the right track, we know there's still more to do to enhance the customer experience by expanding access and minimizing friction. Not only are we pleased with the level of digital sales and overall mix, we're also delighted to see that our highest margin transaction, digital pickup orders, is gaining traction. And we expect this to continue as we add more Chipotle lanes and customers experience the value of this occasion. As I mentioned earlier, we held on to about 80% of our digital gains exiting Q2. This highlights our digital experience is sticky because it is everything customers love about Chipotle with added convenience. And due to the pandemic, many new consumers were introduced to Chipotle via our digital channels and are now using us for alternative and often incremental occasions. Naturally, we believe our digital sales mix will moderate as capacity restrictions ease and guests feel more comfortable physically ordering and dining in our restaurants. However, we expect absolute digital sales dollars to find a new equilibrium in 2021 and grow from there. We're encouraged to see that so far in July, we continue to hold onto these digital gains, even as in-store recovery has strengthened. Moving next to the loyalty program, which is a key enabler of our digital ecosystem and an expanding network that now has more than 23 million members. With this large base of consumers, Chipotle can distribute its own content more and more effectively. and drive deeper levels of engagement within this community than ever before. We are leveraging our CRM platform to drive brand engagement and send personalized messages to help supercharge our super fans. We have proven that we can influence decisions along a guest buying journey when we offer them the right individually tailored offers at the right time. We're continuously improving our analytics and are consistently able to generate more transactions from light, medium, and high frequency users. With the recent announcement of Rewards Exchange, we're optimistic we can continue to build upon our success. The updated functionality provides greater customization and flexibility to redeem rewards and allows guests to earn rewards faster, all of which is expected to improve engagement and drive additional frequency. While we are off to a terrific start, we will continue to invest in the program to take it to the next level and have other enhancements to the program that are expected to be rolled out by year end. While the loyalty program is used to help drive frequency, our marketing efforts are primarily designed to bring more people to the brand. The combination of reach-based media and a successful frequency-driven loyalty program make a great one-two punch that both brings in new users and increases transactions with our existing customers. The marketing team continues to ensure that relevant creative across a wide variety of media channels enables the brand to remain visible and live at the intersection of Chipotle and culture. Their agile approach, innovative mindset, and relentless commitment to measurement have led to ongoing success. For example, our campaign to support the Quesadilla launch was omnichannel with relevant creative across online video, digital and social media platforms, as well as via traditional TV spots. We also celebrated Team Chipotle, a group of American athletes who loved the brand long before they became famous. Their personalized, unwrapped videos provide an inside look at Chipotle's athlete, super fans, and what it takes to compete at the highest level. It also highlights that training hard and eating real food with real ingredients go hand in hand. Furthermore, our burritos and Bitcoin campaign around National Burrito Day was one of our most successful social initiatives to date, with billions of impressions for this culturally relevant promotion. These are just a few examples of the brand's work to drive culture, drive difference, and ultimately drive a purchase. Another important pillar of our marketing efforts is a steady stream of new menu innovation with a cadence of, on average, about two to three per year. Cauliflower rice was a seasonal item that enhanced our lifestyle bowls and was successful at bringing in new guests. We launched quesadillas as a permanent digital exclusive offering in March, and this menu item continues to perform well as it appears in about 10% of our transactions. and is also helping attract new customers to Chipotle. Our talented culinary team is far from finished and our pipeline is filled with promise. I'm pleased to report that smoked brisket has been validated by our StageGate process. In addition, we are also in the early stages of developing other exciting menu items that we will validate using our StageGate that will bring news and new customers to the brand. To conclude, Chipotle is a unique brand committed to fostering a culture that values and champions our diversity. while leveraging the individual talents of all team members to grow our business, elevate our brand, and cultivate a better world. Well-trained and supported people preparing safe, delicious food, and delivering excellent guest experiences are at the heart of our success. A big thank you to all our hardworking employees for making this possible. As a result, I'm convinced more than ever that we have the right team, the right culture, and the right strategies to allow Chipotle to be a premier growth company for many years to come. With that, here's Jack to walk you through the financials.