Chipotle Mexican Grill, Inc.

Good afternoon and welcome to the Chipotle Mexican Grill third quarter 2022 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 more than two. Please note this event is being recorded. I would now like to turn the conference over to Cindy Olson, head of investor relations and strategy. Please go ahead.

Hello, everyone, and welcome to our third 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.chipolle.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 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-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 and Administrative 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. Our third quarter results demonstrated the resiliency of the brand and strength of our organization in managing through a difficult consumer environment along with the inflationary headwinds we have experienced over the past 18 months. For the quarter, sales grew 14% to reach $2.2 billion, driven by a 7.6% comp. In-store sales grew by 22% over last year. Digital sales represented 37% of sales. Restaurant level margin was 25.3%, an increase of 180 basis points year over year. Adjusted diluted EPS was $9.51, representing 35% growth over last year. And we opened 43 new restaurants, including 38 Chipotle's. In the third quarter, we continue to see a widening of trends by income level, with the lower income consumer further reducing frequency. Fortunately for Chipotle, the majority of customers are from higher income households, which continue to increase purchase frequency. While it is difficult to predict the macro impact on future spending trends, we know our value proposition remains strong, and we experience minimal resistance to our price increase in the quarter. To put it into perspective, our average chicken burrito or bowl, which makes up about 50% of our orders across the U.S., is below $9 in our restaurants. This is a tremendous value when you consider the quality of our food, including our food with integrity standards, the fresh preparation utilizing classic cooking techniques, the customization, generous portions, and of course, the convenience and speed. Our fresh preparation is particularly unique when comparing Chipotle to other restaurants. There are not many restaurant options that prepare their food fresh daily, and we do it in all 3,000 plus restaurants. Our restaurant teams begin preparation at 7.30 in the morning to be able to serve our delicious food by the time we open. We only use 53 real ingredients, all of which you can pronounce, and our dedicated employees prepare the food in our open kitchens using classic cooking techniques. This includes grilling fajita veggies and adobo chicken on the plancha, hand-mashing avocados to make our signature guacamole, and making our chips fresh every day. So again, when you combine all these elements, you get an industry-leading brand with a tremendous value offering. And our five key strategies will continue to help us win today while we create the future. Now let me provide an 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, making the brand visible, relevant, and loved to improve overall guest engagement. Number four, expanding access and convenience by accelerating new restaurant openings. And number five, sustaining world-class people leadership by developing and retaining diverse talent at every level. First, starting with our restaurants. We remain focused on being brilliant at the basics, including staffing our restaurants with talented team members focused on the foundations of the business. These include having great culinary prepared and ready to serve, open to close, in a food-safe environment, improving order accuracy and timing for the digital business, and increasing throughput and hospitality for the in-restaurant business. At the end of last quarter, we rolled out an updated training program called Project Square One, which includes training around throughput, digital execution, food quality, and hospitality to deliver an exceptional customer experience. We've made some progress during the quarter, but we are not where we need to be. The capabilities of our teams needs to and will improve. Chipotle is a restaurant business with high standards, and we need to train and develop our teams so that these standards are met. Additionally, in these uncertain times, it is critical that we treasure the guest, and this will be a primary focus of everyone in operations and across our company. With so much change over the past couple of years brought on by the pandemic, it has been refreshing to focus on the foundation which Chipotle was built. We do see that our highest volume restaurants are meaningfully outperforming lower volume restaurants in terms of throughput. What these restaurants have in common is experienced managers and crew that understand the importance of the foundations. As our newer restaurant employees go through the training and get more real-time reps, we believe we will see consistent improvement over time. As we discussed last quarter, we continue to look for ways to enhance our tools and systems to support in-restaurant execution and improve the overall experience for our employees and guests. I am excited to share a pilot that we recently announced, as well as an update on Chippy. We are piloting advanced location-based technology to enhance our app functionality and provide a seamless, convenient experience for our guests. For guests who opt in, the program can engage with Chipotle app users upon arrival to our restaurants and utilize real-time data to enhance their experience with our order readiness messaging, wrong pickup location detection, reminders to scan the Chipotle Rewards QR code at checkout, and much more. And I'm happy to share that Chippy is now in one of our restaurants, and we are excited to test and learn from the autonomous robot that helps our teams make tortilla chips, bring up their time to serve and support our guests. Chippy is trained to replicate Chipotle's exact recipe to cook the chips to perfection, finishing with a hint of lime juice and a dusting of salt. Additionally, Chippy can make chips throughout the day, which results in fewer outages and improves freshness. Moving to our branding. Our Real Food for Real Athletes platform continues to expand as we rolled it out to football, America's most watched sport. The campaign focusing on athletes that love to eat at Chipotle as part of their training and lifestyle as it helps them to perform their best by providing proper nutrition through real ingredients. At the pro level, we brought together the 88 Club for the first time in an ad with Dallas football greats who wore the number 88. C.D. Lamb, Michael Irvin, Des Bryant, and Drew Pearson. The 88 Club TV ad premiered during Sunday Night Football, and all of the athletes' go-to Chipotle orders were featured in our app. Chipotle's 88 Club content achieved great engagement with millions of views across channels. Additionally, at the college level, we took a local approach with the Real Food for Real Athletes campaign in Ohio, which is one of our biggest markets and where we have our largest restaurant support center. We partnered with Ohio State offensive lineman and running back Travion Henderson. on an ad narrated by former Buckeye running back grade Archie Griffin. Tapping into the passion the fans have for their favorite teams and game day excitement, the ad showcased Trevion's journey before he runs onto the field and was amongst our highest engaged videos in social media channels. Shifting to LTOs, we remain comfortable with our cadence of one to two LTOs a year as it excites our guests and is driving both higher frequency and spend. As you may have seen, we launched Garlic Weeheeo Steak in mid-September, which is an entirely new flavor profile featuring tender cuts of freshly grilled steak with the bold flavor of garlic and guajillo peppers and finished with fresh lime and cilantro. In maintaining our relevance in the metaverse, we premiered the garlic guajillo steak to our community on roadblocks, where users could grill, season, cut, and virtually taste the steak. The first 100,000 users who successfully completed the Chipotle Grill Simulator received a promotional code that can be redeemed in our restaurants. Again, showing our ability to blend the metaverse with real life. Complementing the Roblox experience, we also provided early access to our 30 million rewards members as we continue to provide rewards members with added value. While still early days, Garlic Guijillo Steak is getting excellent customer feedback and is driving a higher check as a premium protein experience. However, it is faced with the challenge of rolling over our highly successful brisket program last year. As a reminder, brisket ended in mid-November, and the Garlic Guajillo Steak Program will go through the end of the year. Additionally, following the success of Pollo Asado, we began testing Chicken al Pastor in Denver and Indianapolis. Chicken al Pastor adds an exciting level of spice to guests' go-to orders, and if successful in the stage gate process, it could be available for rollout in 2023. Our next strategic pillar is expanding access, which is still a top request from consumers. We remain on track to open 235 to 250 new restaurants in 2022, and anticipate opening between 255 to 285 restaurants in 2023, barring any further delays in construction or equipment availability. Our pipeline remains strong, and as these challenges ease, we are confident that we can get to the top end of our target 8 to 10% range. In addition to expanding in our core markets, we remain excited about new opportunities, including Alberta, Canada, and small towns in the U.S. We plan to enter Alberta, Canada in 2023 with our first location in Calgary. Alberta makes the most sense as our next market's open in Canada as it has two of the main cities, including Edmonton and Calgary, each with relatively large populations. Additionally, there is brand recognition as people from Alberta have visited Chipotle restaurants in British Columbia and Ontario. In the US, our small town strategy is also performing very well. Overall, small town restaurants have comparable margins and returns to the company average. And we were excited about the growth opportunity, which is included in our 7,000 long-term restaurant target. I'm also proud to share that opening day sales for a restaurant in a small town in Texas was a new company record. I would like to express my congratulations and gratitude to the restaurant and development teams for making that one happen. And speaking of teams, our purpose of cultivating a better world starts with our people. The importance of developing our people is paramount to running great restaurants, as well as developing future talent to grow. I'm delighted that over 90% of our promotions are internal, and I believe we will continue to see that percentage go up. There are many examples of senior leadership roles that started out as crew members. In fact, one story that particularly moved me was about our team in the mid-Atlantic region, where our regional vice president, team director, and field leader were all promoted from within the organization in March. Our RVP immigrated to the U.S. from Egypt, and his first job was as a crew member in 2009. He is another person that has worked his way up from crew member to regional vice president, overseeing $1 billion in sales. For perspective, that would be the fourth largest company in Egypt. His successor as team director immigrated to the U.S. from Palestine in 2017 with his first job as a crew member and now oversees a $200 million business. And finally, his successor as a field leader is a woman who immigrated to the U.S. from Ethiopia in 2015 who also started as a crew member and now oversees seven locations totaling $20 million in sales. Their perseverance is inspiring to many and a great example of how our growth and brand changes lives and communities for the better. Each of these individuals is also developing terrific talent that has the ability to become future leaders. For perspective, each year, just in the United States and Canada, we have the opportunity to promote more than 1,500 managers to open our new restaurants. In addition to career opportunities and industry-leading benefits, we also believe that communication between leadership and our restaurant teams is critical. We do this through several ways, including chip chats, where members of our executive leadership team meet with our restaurant teams to listen to their feedback. Through this feedback loop, we were able to identify that our teams wanted more educational benefits, which is why we implemented debt-free degrees and career certificates. And team members who have participated in our educational programs are two times more likely to be retained and six times more likely to be promoted. Supporting, developing, and growing our people will remain a core focus for Chipotle and is key to growing to 7,000 restaurants. In closing, I want to thank our employees for another great quarter. We remain committed to getting back to the basics and running great restaurants. I believe these actions will position us for strong performance in any environment and, more importantly, is key to delivering an excellent customer and employee experience. I'm excited to see everyone back in our restaurants next week for our 22nd year at Burrito. And with that, I'll turn it over to Jack.