Chipotle Mexican Grill, Inc.

Hello and welcome to the Chipotle Mexican Grill first quarter 2023 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 from the question queue, please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Head of Investor Relations and Strategy, Cindy Olson. Cindy, please go ahead.

Hello, everyone, and welcome to our first quarter fiscal 2023 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-Q 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 Nichols, 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'll turn the call over to Brian.

Thanks, Cindy, and good afternoon, everyone. 2023 is off to a great start with first quarter sales and margins ahead of our expectations. For the quarter, sales grew 17% to reach $2.4 billion, driven by a 10.9% comp. In-store sales grew by 23% over last year. Digital sales represented 39% of sales. Restaurant level margin was 25.6%, an increase of 490 basis points year over year, The looted EPS was $10.50, representing 84% growth over last year, and we opened 41 new restaurants, including 34 Chipotle lanes. These results demonstrate that our focus on running great restaurants with exceptional food and exceptional people is driving performance. Additionally, we benefited from exciting new menu innovations, including fajita quesadilla and chicken al pastor. Transaction trends were positive throughout the quarter, and the strength has continued into April. I would like to note that beginning this quarter, we are returning to our pre-COVID practice of providing annual comp guidance and anticipate comparable sales to be in the mid to high single-digit range for the full year. We will also continue to provide quarterly comp guidance for the remainder of this year and anticipate second quarter comps in the mid to high single-digit range. Now, I would like to provide an update on our five key strategies that will position us to win today while we create the future, 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, making the brand visible, relevant, and loved to improve overall guest engagement. Number three, amplifying technology and innovation to drive growth and productivity at our restaurants and support centers. 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 recently held our Field Leader Conference, which included all field leaders, team directors, and regional vice presidents, as well as leaders from our Restaurant Support Center. The message was clear. We are focused on developing exceptional people and preparing exceptional food. It was truly inspiring to see over 600 highly motivated leaders aligned to deliver Chipotle's standards of excellence, and I am proud of the progress our restaurant teams are making. We had another outstanding quarter for turnover, with both hourly and salary metrics being some of the best I've seen in five years. The stability of crew and managers and a return to shoulder-to-shoulder training is helping to translate Project Square One into results. As our teams are getting more experienced, we are continuing to see improvements in each of the Project Square One focus areas, including throughput on the front line, on-time and accuracy on the digital make line, being prepped and ready with our delicious food, and the overall customer experience. Specifically on throughput, while we are making progress, we see opportunities to do better. One area we are focused on is deployment on the front make line and the digital make line during peak periods. We have noticed that when the digital make line gets busy, our managers tend to pull a crew member from the front line to help, which is impacting throughput. We are currently testing changes to the smarter pickup times logic based on different sales and deployment levels in several markets. And early results show that we are increasing throughput on the front line and increasing on time on the digital make line without impacting sales. Leveraging our stage gate process, we will continue to fine tune our testing before rolling it out in phases across our restaurants. We have also added an additional incentive for our teams as we recently rolled out digital tipping across our restaurants. as part of our ongoing effort to enhance our crew member benefits. This will enable our teams to be rewarded for their efforts in preparing delicious food and providing a great experience for our guests. Overall, our focus on being brilliant at the basics and reestablishing our standards of excellence is resonating well. Our teams love to be held to a high standard because when you achieve it, you feel like you're a part of a winning team with the ability to be rewarded through bonuses and growth within the organization. We are starting to feel this again in our culture and in our people. When operations are running better, it helps all other drivers of sales to perform better, such as menu innovation, which brings me to our brand. As we often discuss, we continue to look for ways for the Chipotle brand to be more visible, more relevant, and more loved. And we had a couple of very exciting new menu innovations that did just that. We responded to a real-time opportunity to support our passionate TikTok fans who wanted fajita veggies and Chipotle honey vinaigrette as options for our digital exclusive quesadilla. We worked with two popular TikTok food reviewers who made the idea go viral at the start of the year and leveraged our strength in digital marketing and culinary to create an exciting new menu item utilizing all existing ingredients. The results have been outstanding. During launch, we nearly doubled our quesadilla business and had two of our top digital sales days of all time. We have decided to make this a permanent menu item as the addition of fajitas to our quesadilla along with dipping it in a combination of our honey vinaigrette and sour cream is really delicious. The best part is that it is made of all existing ingredients, which limits additional complexity in our restaurants, and we continue to see incremental quesadilla sales because of this launch. We also launched chicken al pastor as a limited time offer. Al pastor has been gaining mass appeal in recent years, and we tapped into these consumer trends to offer our own spicy spin on al pastor with our freshly grilled chicken. As we mentioned last quarter, this is also operationally simple to execute as it is our existing adobo chicken, cooked on the plancha, and then mixed in an al pastor marinade. This has allowed for an exciting new menu item while still maintaining our focus on Project Square One. Additionally, this is the first time we've launched a new menu innovation globally as it was rolled out in the U.S., Canada, and Europe. The launch has been a success, and early indications show that it is outperforming Pollo Asado, which was our most successful protein LTO ever. Turning to rewards, we now have 33 million rewards members, and we saw a nice pickup in enrollments as we rolled out Frippotle, which was designed to deliver a strong value proposition and attract new members to our transaction driving rewards program. Throughout the year, members will receive 10 personalized free rewards, ranging from a side of guac to a bag of chips to a free fountain drink. In addition to driving enrollments, we also saw an increase in member engagement as Freepolt Lake gained traction throughout the quarter. Shifting to amplifying technology and innovation, we continue to leverage technology to improve our in-restaurant and digital experiences. As we mentioned last quarter, we began testing a new grill to improve the overall cooking process for our chicken and steak. The grill is much faster, allows for more consistent execution, and maintains our high culinary standards as it cooks the chicken and steak to perfection with the same sear and char. Feedback from our teams and our guests has been tremendous, and we are currently in the process of rolling out the grill to 10 additional restaurants as a part of further validation through our stage gate process. During the quarter, we also rolled out our advanced location-based technology for our app, which allows for a more seamless process for scanning rewards, as it prompts reward members to scan while they are waiting in line. This has resulted in more rewards members scanning for points in our restaurants, which drives further engagement in our rewards program. For digital orders, it also alerts app users when it appears they are ordering from or heading to the wrong location, as one of our most frequent refund requests is due to guests arriving at the wrong restaurant. Since rolling out this feature, we have seen a meaningful reduction in those refunds. We are also investing in technology and innovation through our Cultivate Next Fund to help us scale and advance our Food with Integrity mission. We recently announced two new investments, including Local Line and Zero Acre Farms. Local Line is a leading local food sourcing platform connecting local producers with buyers and helping them digitize their operations and sell products. We believe Local Line will help Chipotle increase the amount of local food for our 3,200 restaurants. And Zero Acre Farms is a food company that is focused on healthy, sustainable cooking oils made by fermentation that are more environmentally friendly. Additionally, we recently announced our new responsible restaurant design, which includes features like rooftop solar panels, all electrical equipment and systems, LED lighting, cactus leather chairs, and electrical vehicle charging stations at select locations. While the pilot will go through the normal stage gate process, we believe it will enable us to take successful elements and incorporate them into future restaurant formats. These investments and initiatives will help to further our purpose of cultivating a better world and reflects our commitment to inspire real, sustainable change with a potential impact far beyond our company. And this brings me to expanding access and convenience with a long-term target of 7,000 restaurants in North America. We remain on track to grow new restaurants 8% to 10% per year for the foreseeable future, with at least 80% including a Chipotle. The expansion of Chipotle adds additional convenience by adding our unique order pickup channel, which comes with a larger digital penetration driven by the order ahead business. In Canada, we opened our first Chipotle in Ontario, and we also expanded access and convenience with our recently announced partnership with Skip the Dishes, which is Canada's largest food delivery network. Finally, new openings in small towns continue to be a success, with the recent opening of a restaurant in a small town in California that had the second highest opening day sales ever. In fact, within the last year, we had our top five openings in the company's history, of which four were in small towns. I'll turn now to sustaining world-class people leadership by developing and retaining diverse talent at every level. Our recent field leader conference was a time to celebrate the achievements and career progression of our teams and I'm always amazed by all the inspiring stories of our leaders. In fact, one of our field leaders from the Arizona sub-region who won the award for best throughput has been with Chipotle for 20 years. She's clearly doing a terrific job leading her patch of restaurants. However, what is even more incredible is that she has two sisters, one a team director who has been with Chipotle for 24 years and is consistently a top performer in her region, and the other is a recently promoted field leader who has been with Chipotle for 18 years. Each has a unique story, but all three sisters started as crew members and said that Chipotle changed their lives for the better and gave them the ability to develop and grow others within the organization. When you combine our industry-leading benefits with our tremendous growth, performance culture, and then layer on top exceptional leaders who will help to grow and develop our future leaders, Chipotle really is a special company. In closing, I want to thank our restaurant and support center teams for all their hard work in delivering a great quarter. Our focus on getting back to the basics and reestablishing Chipotle's standard of excellence is beginning to drive strong results. We will continue to develop exceptional people and prepare exceptional food and, of course, treasure our guests. In doing this, I strongly believe we can make Chipotle better than ever. With that, I'll turn it over to Jack.