Chipotle Mexican Grill, Inc.

Good day and welcome to the Chipotle Mexican Grill second quarter fiscal 2022 earnings 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 Cindy Olson with Investor Relations. Please go ahead.

Hello, everyone, and welcome to our second quarter fiscal 2022 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.tipole.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 the projections in the forward-looking statements. Please see the risk factors contained in our annual report on Form 10-K and in our Form 10-Q for our discussion of risks that may cause our actual results to vary from these forward-looking statements. On our discussion today, we 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 Nichols, 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 will turn the call over to Brian.

Thanks, Cindy, and good afternoon, everyone. We are pleased with our second quarter performance during a period of inflation and consumer uncertainty. For the quarter, sales grew 17% to reach $2.2 billion, driven by a 10.1% comp. In-store sales grew by 36% over last year. Digital sales represented 39% of total sales. Restaurant level margin was 25.2%, an increase of 70 basis points year over year. Adjusted diluted EPS was $9.30. representing 25% growth over last year, and we opened 42 new restaurants, including 32 Chipotle's. I would like to spend a couple minutes providing insight into current trends and our outlook. Regarding Q2, through mid-May, comparable sales were on track to reach the top end of our guidance range. Since then, the underlying trend has decelerated, and we anticipate mid to high single-digit comps for Q3 with planned pricing in August. There are a couple key things we have learned during the quarter. Our pricing power is strong and the brand is resilient. Our culinary and food with integrity commitment is a key point of difference. Our restaurants are staffed with terrific people despite a difficult hiring and retention environment. And our people are still getting up to speed on running a growing multimillion-dollar digital business, as well as a growing multimillion-dollar in-restaurant business. To accelerate this learning curve, we are instituting an ops initiative focused on being brilliant at the basics. We did this in 2019 and saw a positive impact on the business right up to the pandemic in 2020. I will discuss this in more detail later. And finally, we are focused on the right strategies. It is as important as ever that we remain focused on our five strategies that help us to win today while we create the future. Now, let me provide a brief update on each of these strategies, which include, number one, running successful restaurants with a people accountable culture, that provides great food with integrity while delivering exceptional in-restaurant and digital experiences. Number two, amplifying technology and innovation to drive growth and productivity at our restaurants and support centers. Number three, sustaining world-class people leadership by developing and retaining diverse talent at every level. Number four, expanding access and convenience by accelerating new restaurant openings. And number five, making the brand visible, relevant, and loved to improve overall guest engagement. Let's start with discussing running successful restaurants. I'm happy to say that I've seen lines out the door and mobile pickup shelves full in Boston, Philadelphia, Denver, Austin, Ann Arbor, Dallas, Cincinnati, London, Paris, and Los Angeles. I think everybody gets the point. Fortunately, we were staffed with terrific employees and they were working hard with smiles on their faces and great attitudes. I'm very proud to say that our restaurant teams have successfully grown average unit volumes to about $2.8 million with 39% being digital. Our general managers and teams have adapted well to our growing digital and growing in-restaurant business. However, customers were waiting on digital orders, and the front line was moving, but it could have been quicker. I know we can be better. This is why we have launched an ops initiative focused on retraining our crew members on the fundamentals of our business. These fundamentals include having great culinary prepared and ready to serve, open to close, in a food-safe environment. ensuring that restaurants are staffed and appropriately deployed across both the digital make line and front make line, improving order accuracy and timing for the digital business, and increasing throughput and hospitality for the in-store business. Additionally, we completed the rollout of our new labor management tool that helps put the right people in the right place at the right time. We believe the combination of being brilliant at the basics with a new labor management tool will drive meaningful productivity in our restaurants. Along with our labor management tool, our technology roadmap remains robust. I think it is worth highlighting how we are investing in technology to support strong execution of the basics. We just installed new customer-facing pin pads that offer faster and contact-free payment options. We've deployed a new learning management system that enables immersive ways for our employees to experience training and provides digitally enhanced e-learning courses, videos, and resource materials. We also are in the process of updating our POS hardware across the system, which should be completed by this year, and we have made DML enhancements that aid accuracy and throughput. These recently completed or in-flight programs will all be positive for our restaurant teams and guest experience. Additionally, we will continue to invest in possible technology for the future, like Chippy, the autonomous robot we are testing that integrates culinary traditions with artificial intelligence to help our teams make tortilla chips. bringing up their time to serve and support our guests. And we are exploring an automated real-time kitchen production system that ensures high quality food is always available to meet the needs of our guests. This brings me to our Cultivate Next Venture Fund, which is off to a great start and is giving us a front row view of emerging food technologies. We are interested in a breadth of innovations, including sustainable farming, supply chain advancements, restaurant operating efficiencies, and ways to elevate the employee and guest experience. We've received a lot of interest with over 200 inquiries for investments. And as you may have heard last week, we announced our first investments in Hyphen and Meaty. Hyphen is a food service platform that automates the assembly of meals on a make line and could help fulfill our promise to deliver on time, accurate orders for our digital guests. We look forward to sharing more investments in the future that will help us drive meaningful change at scale. I do want to take a moment to discuss our people. Despite a challenging labor market, I am proud to say our staffing levels remain above 2019 levels. Our purpose of cultivating a better world with food with integrity has created a brand that people are proud to represent and be part of. We continue to offer a world-class employee value proposition that includes industry-leading benefits, attractive wages, specialized training and development, access to education, and a transparent pathway to significant career advancement opportunities. We believe these efforts, along with our growth and purpose, are helping to attract and retain great employees. And our people development program is important in order to accelerate our new restaurant openings. The real estate pipeline remains strong and supports our target of 8% to 10% new restaurants per year, with more than 80% including a Chipotle. We now have 430 Chipotle's, and results continue to exceed our expectations with Chipotle's generating higher average unit volumes and higher restaurant level margins. In fact, a recent opening of a Chipotle in a small town in California had one of the highest opening day sales in the company's history. In addition to the US, we are also excited about our progress in both Canada and Europe. Canada has hit its stride with AUVs and returns that are at the same level as the US, and Canadian comparable sales trends remain strong. We currently have 29 locations in Canada, and longer term we see room for several hundred which is included in our target of 7,000 restaurants in North America. And Europe continues to move through the stage gate process. We have made significant progress in improving the economics in Europe, driven by operational efficiencies, adding our digital systems, and opening smaller formats that resemble the US restaurants. We have opened five new restaurants in the UK over the last 18 months, and results have been strong. We are gaining confidence that Europe could be another layer to our growth story in the future. This brings me to making the brand visible, relevant, and loved everywhere we operate. Our Real Food for Real Athletes campaign focuses on helping athletes across all levels perform their best by providing proper nutrition through real food and real ingredients. As an official sponsor of the NHL, we activated this relationship through traditional media and creative promotions to highlight Chipotle, including having our logo in the ice for every game of the Stanley Cup playoffs. Additionally, we have partnered with U.S. Soccer to create behind-the-scenes content that showcases how Rose Lavelle and Sophia Smith overcame the challenges of competing at the highest level of women's soccer. And later this year, we will follow the U.S. men's national team via our sponsorship and with advertising during the World Cup. We also continue to appear in nontraditional channels to drive difference, culture, and ultimately a purchase. We recently launched Burrito Builder on Roblox on National Burrito Day. The first 100,000 players to successfully roll a virtual burrito at a virtual Chipotle earned a free entree on our app. This led to one of our best digital sales days and marks the first time a brand-enabled Roblox player to earn and exchange virtual Roblox currency for real-world items. Okay, moving on to the menu, our pipeline remains robust. Building upon the brand's recent success with menu innovations, including Smoked Brisket and Pollo Asado, we have tested and successfully validated garlic guajillo steak. And this steak is ready for rollout in the future. Difting to our digital experience, we now have a digital business tracking toward $3.5 billion in sales, and we currently have over 29 million rewards members. We are mining the data every day for insights while leveraging the information to influence behavior and drive greater frequency. We are also working aggressively on greater personalization across the customer journey and have gained valuable insights on which incentives provide the greatest ROI. Additionally, we're excited about the recent launch of the rewards program in Canada, which will provide another way for Canadian guests to engage with the brand and provide Chipotle with the ability to further delight its Canadian rewards members. Finally, our digital ecosystem is rolling out in the UK and France will follow shortly thereafter. To conclude, there is much uncertainty we are all dealing with, but what I am certain about is Chipotle and its people will remain committed to leading and growing. I'm certain that over time we have the ability to grow our average unit volumes and achieve at least 7,000 restaurants across the US and Canada. I'm certain that we will move our purpose of cultivating a better world forward in a meaningful way. I'm certain that Chipotle provides one of the best value propositions in the industry. I'm certain that we have the right teams with the right focus to navigate whatever comes our way. and that our culture will continue to offer our crews terrific career opportunities. Finally, I am certain that we are well positioned for long-term growth. Lastly, and very importantly, I want to thank our restaurant teams for their hard work and contributions to making Chipotle one of the best restaurant brands in the world. With that, here's Jack to walk you through the financials.