Chipotle Mexican Grill, Inc.

Q2 2023 Earnings Conference Call

7/26/2023

spk07: Good afternoon and welcome to the Chipotle Mexican Grill second quarter 2023 results 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. 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.
spk00: Hello everyone and welcome to our second 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 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 the 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 Investors Relations section of our website. We will start today's call with prepared remarks from Brian Nickell, Chairman and Chief Executive Officer, and Jack Harjong, 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.
spk05: Thanks, Cindy, and good afternoon, everyone. The strength in our business continued into the second quarter, driven by our focus on exceptional food and exceptional people, as well as the success of Chicken Al Pastor. For the quarter, sales grew 14% to reach $2.5 billion, driven by a 7.4% comp. In-restaurant sales increased 16%. Digital sales represented 38% of sales. Restaurant level margin was 27.5%, an increase of 230 basis points year over year. Adjusted diluted EPS was $12.65, representing 36% growth over last year. and we opened 47 new restaurants, including 40 Chipotle lanes. For the third quarter, we anticipate comps in the low to mid single-digit range driven by transaction growth as we are rolling off of pricing. For the full year, we continue to anticipate mid to high single-digit comps. Before reviewing our strategic priorities, I want to share a few organizational updates. As a way of maintaining a healthy growth mindset, we proactively conducted a an in-depth review of our business needs and organizational structure to ensure we can deliver on our aggressive growth goals for future growth. This resulted in investments in areas like development, digital marketing, and international expansion. At the same time, we also identified areas where we could better optimize our organizational structure, such as putting our end-to-end digital experience, including product design, analytics, and the customer journey under Kirk Garner, our Chief Customer and Technology Officer, Additionally, we streamlined our strategic project management process to focus on key projects and to enable faster and more efficient decision making. These changes will further support our five key strategies that will position us to win today while we grow our 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, sustaining world-class people leadership by developing and retaining diverse talent at every level. Number three, making the brand visible, relevant, and loved to improve overall guest engagement. Number four, amplifying technology and innovation to drive growth and productivity at our restaurants and support centers. And number five, expanding access and convenience by accelerating new restaurant openings and laying the foundation for international expansion. Starting with our restaurants, while Project Square One is wrapping up, we have made the decision to permanently embed the program within our training DNA. On a quarterly basis, our crew members will be retrained on key components, ensuring we are always focused on being brilliant at the basics and that we never lose sight of training and developing exceptional people and preparing and serving exceptional food. Next quarter, we will reemphasize throughput and elevate our focus on proper deployment standards during peak periods. where we often only have three crew members on the front make line versus our minimum deployment of four. The fourth person, which is often the expediter, may leave the front line to help the digital make line. Our focus will be on coaching the expediter to stay on the front line and to bring together the items in an order and communicate them to the cashier, as alleviating this bottleneck is critical for delivering great throughput. Additionally, we believe we have an opportunity to better optimize our smarter pickup times and deployment of labor on the digital make line during peak periods. As you may remember, we began testing changes to the cadence of orders on the digital make line in several markets to see if we could improve throughput by eliminating the need to pull a crew member from front line to help the digital make line. The good news is that in these restaurants, we are seeing an improvement in throughput on the front line and an improvement in on-time on the digital make line. We will continue to test adjusting the cadence of orders on the digital make line at certain restaurants and roll out where we see the opportunity to improve the overall experience. We remain confident that balancing the deployment between the front and digital make lines, along with continuous training and reps, will further drive improvements in throughput. In fact, we have seen evidence of this in certain restaurants. I was recently in New York at our Chipotle on 50th and Park, and it was a great experience with delicious food and fast throughput on the front line, compared to my experience at this same restaurant exactly a year ago. The improvement in throughput was certainly noticeable as deployment of labor between the front make line and the digital make line was more balanced. Over the last year, the field leader responsible for this patch of restaurants in New York City worked with the GMs and crew members shoulder-to-shoulder on throughput fundamentals. During his regular restaurant visits, he also followed up with consistent feedback by reminding his restaurants to have an expo in position during peak periods. By having the proper deployment with an expo in place and the right balance between the front make line and the digital make line, throughput in his patch of restaurants improved by nearly five entrees in the peak 15 minutes as compared to the prior year. His restaurants are also out-comping his region and the company average, demonstrating throughput drives performance. This is the type of leader we want to develop, one that builds a strong team, runs world-class restaurants, ensures we serve exceptional food every day, and inspires our teams to achieve great results. And this brings me to our world-class people leadership. As part of our focus on developing our teams, we relaunched Cultivate University for our newly promoted field leaders, which is a three-day training program on the skills they need to truly excel in managing their patch of restaurants. This includes developing future leaders, the foundations of exceptional throughput in culinary, why it's critical to protect our economic model, and a culture of accountability. One of the most challenging transitions is from general manager, managing one restaurant, to field leader and managing around eight restaurants. Cultivate the University is a program that will be offered each year to support our new field leaders as they make this transition to managing a $20 million business. We remain committed to hiring and developing the best people to work at Chipotle through our competitive wages, industry-leading benefits, and tremendous growth opportunity. In fact, we are on track to surpass our 22,000 promotions from last year and create over 7,000 new jobs with our restaurants anticipated to open in 2023. We are also relaunching our successful and long-running Behind the Foil ad campaign. This campaign provides unfiltered and emotional testimonials from our team members about the impact Chipotle has had on their lives, as well as a glimpse into our daily preparation using our real ingredients and classic culinary techniques, a key differentiator for Chipotle. What better way to make the brand more visible, more relevant, and more loved than to feature our talented restaurant team members preparing exceptional food? And speaking of exceptional food, our menu innovation has been outstanding this year. Chicken al pastor has proven to be a popular LTO with one in five transactions, including the new protein. It is boosting transactions with a strong repeat, and is attracting new customers to Chipotle. It also delivered the highest positive social sentiment of any new menu introduction, and importantly, was simple for our teams to execute, which resulted in a win all around. As Chicken Al Pastor wraps up in late August, we have a planned new menu item for later in the quarter. Our rewards program is another way we aim to drive frequency within our existing customer base, as our reward members come more often and spend more than non-rewards members. We launched free Chipotle earlier this year, which was designed to deliver a strong value proposition and attract new members with 10 free rewards dropped into our members' accounts throughout the year. FreePoltLay has been successful in driving enrollments in the first half of the year as we surpassed 35 million reward members. With each strategic FreePoltLay drop, we are learning more about our customers' behaviors and utilizing those learnings to personalize future offers. We will continue to look for creative ways to drive enrollment and improve engagement in our rewards program. In traditional media, we remain top of mind at sporting events as we leverage the basketball playoffs as a high-profile opportunity to spotlight the Chipotle brand. And through our NHL partnership, our Chipotle logo was featured on the ice during the Stanley Cup playoffs. Additionally, the return of the popular Chipotle hockey jersey, BOGO Day, had the highest participation in the history of the program. Chipotle's ingredients continue to power many of the top male and female athletes on and off the field. Through our Real Food for Real Athletes campaign, we have showcased the inspiring journeys of athletes across all levels of sports and how Chipotle can help them perform their best by providing proper nutrition. Partnering with athletes and teams, along with traditional media around big sporting events, has been an authentic and successful way to connect the brand to some of our biggest fans. Shifting to technology and innovation in our restaurants. First, I wanted to provide an update on the benefits we have seen from the dual-sided grill, which we discussed last quarter. The new grill can cook the chicken in under 4 minutes versus 12 minutes on the plancha and can cook the steak in under 1 minute versus 4 minutes on the plancha. This allows for a faster recovery of freshly grilled chicken and steak, resulting in more opportunity to remain in stock during peak periods, as well as the ability to cook smaller batches, ensuring superior culinary. Additionally, the grill allows for more consistent execution with the same sear and char and maintains better moisture, resulting in juicier chicken and steak with less waste. Finally, it takes one of the most complex positions in our restaurants and significantly improves the learning curve, making it a more desirable role for our teams. The feedback from our guests and our teams continues to be very positive, and we recently completed the rollout of the dual-sided grill into 10 high-volume locations as the next step in the StageCade process. We also began to do a broader rollout of our new third-pan rice cookers, which eliminates our large rice pots and cooks the rice in our third pans that you see on the line. This streamlines the rice cooking process while delivering fresh, high-quality rice that's cooked perfectly to our standards. It can also make single batches, allowing for a faster recovery time, less waste during non-peak periods, and the ability to make white and brown rice at the same time. We have rolled this out to our new restaurants with plans to add it to another 200 existing restaurants this year. And as part of our Cultivate Next fund, we recently invested in Vibu. And together, we are exploring collaborative robotics that will drive efficiencies and ease pain points for our employees. One device that we are in the process of developing cuts, cores, and peels an avocado. It's called the AutoCado. This cobotic prototype saves time and eliminates a less favorable task, but still allows our teams to hand mash our signature guac. As you can see, all of these initiatives have a common goal, which is to improve the in-restaurant experience for our teams and our guests, while maintaining or improving upon our high culinary standards. I'm really proud of the work the teams are doing to leverage automation, technology, and artificial intelligence, and it was nice to be recognized as one of Time Magazine's most innovative companies last month. Our final key strategy is to expand access and convenience. I'm thrilled to share the addition of Stephen Piacentini as our new Chief Development Officer. Stephen has extensive experience at some of the largest restaurant brands and will lead our very talented and tenured development team as we look to reach 7,000 restaurants over time in North America. This year, we continue to target 255 to 285 new restaurants with over 80% including a Chipotle. And, in fact, this quarter we opened our 600th Chipotle. In Canada, performance remains strong with 34 locations, and we were on track to add about 10 new restaurants this year. We had our highest opening day ever in Canada this past quarter, which is a testament to the increasing excitement around the brand, and our growth opportunity in the country. We also believe there's even more opportunity beyond the 7,000 restaurants we are targeting longer term in North America, and we are laying the foundation for further international growth. Through our recent reorganization, we added resources to our European operations, including bringing over one of our top U.S. operators to Europe to drive productivity and better align our operations with the U.S. We look forward to continued progress in Europe over the coming quarters as we aim to set up the region for long-term growth. And finally, we recently announced our first-ever development agreement with the Al Shaya Group to open restaurants in the Middle East, which will further accelerate our international efforts. The Al Shaya Group has successfully expanded many of the largest global brands into the Middle East, North Africa, and Europe, and they plan to open our first restaurants in Kuwait and United Arab Emirates in 2024. We're excited to offer guests in the Middle East our responsibly sourced, classically cooked real food and look forward to furthering our purpose to cultivate a better world in this new territory. In closing, I want to thank our 114,000 employees for all their hard work to reestablish Chipotle's standards of excellence and culture of accountability. Earlier this month, Chipotle celebrated its 30th anniversary of the opening of the first Chipotle restaurant in Denver, Colorado. What makes Chipotle special and has driven our success over the last 30 years is our people, our purpose of cultivating a better world, and our focus on delivering exceptional food. Our culinary, using the highest quality ingredients and classic cooking techniques, makes our food delicious. Our customization, convenience, and speed are differentiators, and our value is simply tremendous. This has resulted in an industry-leading brand with industry-leading economics, and we still have a long runway for growth. We are well positioned to win today while we grow our future over the next 30 years. And with that, I will turn it over to Jack.
spk15: Thanks, Brian, and good afternoon, everyone. Sales in the second quarter grew 14% year over year to reach $2.5 billion as comp sales grew 7.4% with over 4% transaction growth. For the third quarter, we anticipate comps in the low to mid single digit range driven by transaction growth as we roll off nearly 500 basis points of pricing in early August. We continue to forecast full year comps in the mid to high single digit range. Restaurant level margin of 27.5% increased about 230 basis points compared to last year and earnings per share adjusted for unusual items was $12.65, representing 36% year-over-year growth. The second quarter had unusual expenses related to corporate restructuring and corporate and restaurant asset impairments, including the closure of Petri Locale. I'll now go through the key P&L line items, beginning with cost of sales. Cost of sales in the quarter was 29.4%, a decrease of about 100 basis points from last year. The benefit from last year is menu price increases and lower avocado prices, We're partially offset by elevated costs across the board, most notably in beef, tortillas, dairy, salsa, beans, and rice. For Q3, we expect our cost of sale to be around 30% due to higher beef and avocado prices. Our supply chain team has done a fantastic job of diversifying our avocado exposure, and in the third quarter, the majority of our avocados will come from Peru. While prices are higher than the very favorable levels in the second quarter, we are less impacted from the volatility in the Mexican avocado market. Labor costs for the quarter were 24.3%, a decrease of about 50 basis points from last year. The benefit from sales leverage was partially offset by wage inflation. And for Q3, we expect our labor costs to be around 25% reflecting continued labor inflation and seasonally lower sales. Other operating costs for the quarter were 13.9%, a decrease of about 40 basis points from last year. This decrease was driven by sales leverage. Marketing and promo costs for the quarter were 2.4%, and in Q3, we expect marketing costs to step down to the low 2% range before stepping up in Q4, with a full year to come in right around 3%. In Q3, other operating costs are expected to be in the mid-14% range. G&A for the quarter was $157 million on a gap basis, or $153 million on a non-gap basis, excluding $3.5 million related to corporate restructuring expenses. As Brian mentioned, we recently went through a review of our organization needs to assure we're well-positioned to meet our long-term growth goals. G&A also includes $119 million in underlying G&A, $29 million related to non-cash stock compensation, and $5 million related to higher bonus accruals and payroll taxes and equity vesting and exercises. For Q3, we expect our underlying G&A to be around $125 million, and to grow slightly thereafter as we make investments in technology and people to support ongoing growth. We anticipate stock comp will be around $31 million in Q3, although this amount could move up or down based on our performance. We also expect to recognize about $4 million related to performance-based bonus accruals and payroll taxes and equity vesting exercises, bringing our anticipated total G&A in Q3 to around $160 million. Depreciation for the quarter was $79 million at 3.1% of sales, and we expect depreciation to increase slightly each quarter as we continue to open more restaurants. Asset retirement stepped up to $16.2 million, which includes $8.5 million related to corporate and restaurant asset impairments including the closure of Pizzeria Locale. In the near term, we expect asset retirement to be around $8 million per quarter as we continue to prioritize the guest experience and focus on great ops. Our effective tax rate for Q2 was 23.8% due to an increase in tax benefits related to option exercises and equity vesting. We continue to estimate our underlying effective tax rate will be in the 25% to 27% range, though it may vary each quarter based on discrete items. Our balance sheet remained strong as we ended the quarter with over $1.8 billion in cash, restricted cash, and investments with no debt. During the second quarter, we repurchased $88 million of our stock at an average price of $1,937. At the end of the quarter, we had $295 million remaining under our share authorization program. We opened 47 new restaurants in the second quarter, of which 40 had a Chipotle. And we remain on track to open between 255 and 285 new restaurants this year with at least 80%, including at Chipotle. Our development timeline remains extended, but our pipeline remains strong, and we expect to move toward the high end of the 8% to 10% openings range once these timeline challenges subside. In closing, when I joined Chipotle, we were approaching our 10th anniversary with just over 200 restaurants. We were determined to change the way people think about and eat fast food by preparing delicious, fresh food using classic cooking techniques, sustainably raised, wholesome ingredients, and serving it quickly. Brian mentioned Chipotle celebrated its 30th anniversary earlier this month, and those fundamental values that made Chipotle successful are still deeply ingrained in our brand. Along the way, we've invested in food with integrity, expanded access and convenience through our digital channel, Chipotle lanes and international expansion, and continue to innovate within our restaurants to improve the overall experience. We still have a long growth runway ahead and a talented team excited to continue to build, expand, and evolve our brand and our purpose of cultivating a better world over the next 30 years. With that, we're happy to take your questions.
spk07: We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. In the interest of time, please limit yourself to one question and one follow-up. At this time, we'll pause momentarily to assemble our roster. And our first question comes from Andrew Charles from TD Cowan. Please go ahead.
spk14: Great, thanks. I wanted to talk about pricing plans in the second half, just given inflation in the beef and avocado categories. And what I'm looking to better understand is that is a price increase on the table for December when you historically took price in 2018 through 21, or does the resumption of student payments on September 1st that could weigh on restaurant industry spending lead you to want to potentially wait on that and see how that plays out?
spk05: Yeah, Andrew, this is Brian. You know, our approach on pricing has been obviously it's a lever that we will pull as, you know, kind of the last thing we like to pull. But I think we've proven, you know, time and time again that the brand is very strong, the value proposition is very strong, and we have that pricing power to use. Obviously, I think you heard in Jack's comments, you know, we're seeing some inflationary pressure both on the labor line and in some of the food areas when you pull out avocados. So it's something that we're looking hard at. And, you know, as we get closer to, you know, that fourth quarter, we'll make a decision on exactly what we want to do on the pricing front.
spk15: I don't know if you want to add anything there, Jack. No, just, I mean, I think Brian summarized it well, but, you know, we've had underlying inflation the last two quarters, but we've had benefits from lower cost avocados. That's offset that. And then also we got a benefit because chicken al pastor, has really shifted some of our customers from the more expensive beef into the less expensive chicken. That's been a benefit as well. As those benefits subside, that's when the inflation will flow through, and that's where we'll have a clear view of the inflation impact. We will, as you suggested, look at our customer demand transaction patterns as well before we make any final decisions on price.
spk14: Okay, that's helpful. And then just on the 3Q guidance, I know that you guys called out that you're seeing about 500 base points of price that rolls off in August. Can you just comment as well about the lower-income consumer? I know last quarter you guys were talking about sequentially. You're seeing some strength in that consumer. I just wanted to know what you guys have seen in recent months related to that consumer.
spk05: Yeah, I mean, you know, this is one of the elements of, I guess, the consumer demonstrating how resilient they are. Both the lower-income consumer and, you know, kind of our higher-income consumer are showing really good strength. I think that's why We had such a strong traffic performance in the quarter, and we continue to exit that quarter with really healthy traffic or transaction trends. So we're not seeing any weakness in the lower income consumer. If anything, they've continued to improve, and we're feeling really good about the value proposition we're providing all income levels.
spk07: Very helpful. Thanks, guys. The next question comes from David Tarantino from Baird. Please go ahead.
spk02: Hi, good afternoon. First question, I just want to clarify how you're thinking about the third quarter from a comps perspective. And maybe, Jack, if you can just talk about the underlying traffic trend you're assuming in the third quarter relative to what you saw in the second quarter and whether that would imply any slowdown versus what you've been running.
spk15: Yeah, David, the components of our guidance to SCIF you know, kind of general ranges. And the menu price increase remaining after the August from last year rolls off will be caught in that 2.5%, 2.6% range. We're still expecting positive transactions throughout the quarter. In fact, we expect the transactions will probably be in the plus 3% to plus 3.5% range, somewhere in that range. We're still seeing a little bit of a mixed impact. Our group size continues to normalize as people are returning to work. And so there's less of a channel shift between digital and in-restaurant ordering, but we are seeing that the group size is lowering. So this is the hardest part to predict, but we're assuming that somewhere in that two-ish range, we'll see a negative mix because of group size, somewhere in that 2% range. So those are the general components we're thinking about.
spk02: And Jack, when you seasonally adjust the trends, would it imply a slowdown, or is this more of the same of what you delivered in the second quarter. I just want to make sure I understand whether you're seeing a slowdown in traffic.
spk15: Yeah, so there is a subtle seasonality shift that we're seeing, David. We saw in early June as schools were letting out and as people started traveling more, we saw a little bit of an inflection point in transactions. We also, when we stratified our restaurants, we did see that restaurants in more touristy areas we're benefiting. Restaurants in non-touristy areas were a little bit softer. And just recently, within the last week, week and a half or so, we're starting to see some normalization of that. So we're still reading through that. We assume there's not going to be a full bounce back in the fourth quarter, but we did assume the rest of the third quarter. But we did assume that the that we're seeing last week or so, that some of that will continue. So we're still trying to do a read-through, but it looks like there was maybe a little early vacation taking this year that, you know, didn't necessarily happen last year. Great. Thank you.
spk07: The next question comes from Sarah Senatore from Bank of America. Please go ahead.
spk01: Great. Thank you. I just wanted to talk about throughput in the context of, you know, it sounds like the traffic's fairly stable. You talked about new equipment. I understand that cook times are down pretty dramatically. Could you translate that into, you know, some sort of throughput measure and kind of what you're seeing both presently and then what the opportunity is? I guess as we think about throughput, you know, the capacity is one side, but then making sure that, you know, you have enough demand there to to move the customers through, and I'm trying to sort of understand the dynamics there. So anything you can tell us about throughput now and what you're seeing with the new equipment? And then I'll just have a quick follow-up.
spk05: Yeah, sure. So we've made some really good progress on the throughput side, but we're not all the way to where we want to be. I think I mentioned this earlier where The good news is we now consistently probably have three people on the front line, but really what that needs to be is four people in order for us to achieve kind of our pillars of great throughput. And that's part of the reason why we're retrenching again on throughput kind of going forward here. But as I mentioned in my comments earlier, in the places where we've seen restaurants or patches adopt, I would call it great throughput execution, you're definitely seeing a move to the tune of three to five transactions in their best 15 minutes. So we know it's out there. We just need to do it as an entire enterprise. And we're focused on that piece going forward. As it relates to equipment and other tools to help us become even, I say, more efficient and faster, the double-sided grills are now in 10 restaurants. So, not obviously across the system by any means, but rather just moving through our stage gate process. That just enables cooking times to dramatically decrease. So, you know, chicken goes from 12 minutes to three to four minutes, steak goes from three to four minutes to a minute. It makes the position a lot easier, it makes the culinary much more consistent, and then obviously it gives us much more capacity on the plancha. That's where we are with that. And then things like AutoCado and Hyphen, very much still in the pilot phase, meaning like prototype phase. But we're pretty optimistic about what both of those can do for us. But, you know, we're not in any restaurants yet with either one of those items.
spk01: Okay. And then just to sort of clarify, I guess, a follow-up is, you know, you've been sort of working on throughput and we've seen some really nice improvement over the last couple of quarters in transaction or traffic growth. it sounds like the anticipation is that it'll be fairly stable. I understand the comparisons play into this, but would you expect kind of another step change in traffic as some of what you're talking about, best practices, sort of disseminate across the system? Again, just trying to understand how to translate throughput. Yeah, no, absolutely.
spk05: I mean, I think there's a real opportunity for traffic not only the continued strength in traffic, but a step up in traffic. As we get better at executing the pillars of throughput, and that's why I wanted to give that example of the one restaurant in New York, that restaurant's outperforming a region that's doing a really nice job. And the reason is because they're executing every element of our throughput pillars with excellence. And so as that happens more consistently across more patches or more restaurants, we anticipate we're going to see increases both in traffic and total comp. So, you know, honestly, that comes with time. We're dealing with 110,000 employees that need to learn what great throughput is and what it looks like. But the team's making great progress. We're focused on it. And, you know, I'm confident we're going to get a culture of throughput built in this organization.
spk01: Great. Thank you very much.
spk07: The next question comes from Danilo Gargiulo from Bernstein. Please go ahead.
spk09: Thank you. So with the low to mid single digit expected comps in 3Q, what is giving you the confidence to meaningfully accelerate the trajectory in 4Q to meet the full year guidance? Especially as we think about the 4Q compatible sales potentially becoming more from traffic versus from pricing actions. What actions are you contemplating to sustain the momentum?
spk05: Yeah, I mean, obviously, we're going to stay first and foremost on enhancing, you know, our operational performance as it relates to throughput. So that'll be a piece of the puzzle. We've got a new menu item that we'll be bringing out after we finish the run on chicken out past store. And then obviously, we'll evaluate what component of pricing it has in the fourth quarter as well, given some of the inflationary pressures we're seeing. So, you know, you line those things up, plus the strength of the trend that we already have, we feel really good about our four-year guidance.
spk09: Thank you. And maybe beyond this year, you know, thinking a bit more multi-year, on a multi-year basis, historically you have executed a more cautious international rollout across Canada and Europe. So what drove you to undertake franchising and specifically why are you starting with the Middle East? So can we expect a combination of co-op and franchise mix in international markets? Or is this more an evaluatory step to fine tune your international expansion plans going forward?
spk05: Yeah, so you can probably anticipate more of a mix. You know, we still believe company ownership in Western Europe makes a lot of sense. We just had the opportunity to visit with the team there in the last week or so. And they're making great progress in London, Frankfurt, and obviously Paris. And then as we mentioned in the call too, Canada continues to really perform. So we're going to build 10 new restaurants on a base of 34. So you can see how we're stepping up the development there and the team continues to do a great job. As it relates to the Middle East and the partnership with Al Shaya, You know, as we looked around the world, we see there are certain regions where it's like, hey, this makes a lot of sense for us to partner as opposed to try and go at it on our own. The Middle East is that region. You know, Chipotle as a concept, based on the work we've done, we believe it will resonate and perform really well. And then, you know, when we had the opportunity to partner with Alshaya, which we believe is one of the best operators in the region, we thought this is a great opportunity for us to experience what it's like to work with a great operator in more of a franchise environment. So we're optimistic. We're excited about getting those restaurants opened in Dubai and Kuwait. And we look forward to a really successful partnership with them. But we're really excited about where international can go, both from a standpoint of partnerships and then company ownership.
spk08: The next question comes from David Palmer from Evercore ISI.
spk07: Please go ahead.
spk11: Thanks. First, I wanted to follow up on the double-sided grills question and then touch on the personalized marketing. On the double-sided grills, you mentioned you're in 10 stores now and that it's maybe a third of the cook times. What is the pace that you anticipate on rolling that out and what And as far as the metrics that we would focus on, what do you think ultimately would be the benefit to sales and profit from those grills?
spk05: Yeah. So look, we're obviously really excited about what we're already seeing just in the 10 restaurants, both from a standpoint of yield, quality of culinary, and then the team's ability to execute over and over again. The excitement around the new cooking equipment is terrific to see because that means we're going to get the execution that we would want. To roll this out is probably a year plus project. The good news is the manufacturers have the capability to scale to what we need once we give them the green light. We're pretty excited about this because, you know, obviously the bigger the volumes get with the amount of transactions that we're doing, the fact that we now have even more capacity on the plancha is a terrific outcome. And then it turns one of the harder jobs to train into one of the easiest jobs to train. And when the culinary is consistent, people get great chicken or steak, we know they love Chipotle and they come back. So, you know, we're still... dialing through all the components of the puts and calls on this, but, uh, it looks very promising, uh, based on where we are in the first 10 stores.
spk11: Thanks for that. And then on personalized marketing, I think you recently launched that. This seems to be something that would have a long runway to it where you could have different iterations and ultimately having AI be a, a component to it. Uh, are we already seeing anything different from personalized marketing, uh, Where do you see this going? And maybe give us a sense of how this could be impacting your business going forward. Thanks.
spk05: Yeah, sure. So, I mean, look, probably the most visible spot is just in the app with the suggestive sale. You'll see already some personalization on what we're offering as far as recommendations go to add to your order based on your history with the brand. And then, obviously, this goes all the way into the cohorts and the journeys that then we create. And we believe, you know, you do this across our, you know, 35 million rewards customers and now has meaningful scale where the customization results in, you know, loyalty that results in obviously additional sales. So, you know, the most visible space, probably you'll see it in the app or the web, And then it's probably more nuanced in how we communicate and how often we communicate with you and what exactly we say to you. But all the experiments we're running, we're continuing to see nice, positive outcomes with every iteration that we do. You know, the next big step for us is to roll this out in a way where it covers a lot more people at much more meaningful scale so that you feel it on the entire enterprise.
spk11: All right. Thank you.
spk07: The next question comes from John Ivanko from JP Morgan. Please go ahead.
spk13: Hi, thank you. I actually want to meet with a comment about excess capacity on the plancha. It's actually an interesting point. Do you think that it significantly broadens additional product opportunities that Chipotle can do? I mean, the double-sided grill takes care of the chicken and the steak, and presumably maybe the plancha can be used for something different than what you're already selling. How big of an opportunity is that in your mind?
spk05: You know, I mean, look, we always want to make sure we execute the menu with excellence, and we like the cadence that we're doing as far as new menu items go right now. But, yeah, it definitely frees up the capacity for which then allows us to evaluate how we do new menu items and maybe how long we want to keep certain menu items on. And so that is a big unlock for us. I'd say the biggest benefit, though, is when the restaurant opens at 1030, you don't have to start cooking chicken at 8 in the morning because now we can be ready for that lunch business closer to the timing of lunch because it just takes a lot less time to cook all the chicken. to be prepared. It also allows us to recover a lot faster. So in the event, you know, you have a really big, you know, lunch push at 11, you have the ability to recover for that lunch push that might be coming at 12. And so these are the things that, you know, I think are going to be really powerful for us going forward. And then also the simplicity of which the cooking creates for the team members is a big unlock too, because then the culinary is just that much better every single time.
spk13: Yeah, I got it, and I agree in experience. Let me pivot to another question. You've been alluding to, including on this call, upward bias to the 7,000 North American store target. I mean, I guess, are you prepared to start thinking about numbers, and there's thousands and thousands, and I want to ask it in a question. Some years ago, I don't remember exactly when it was, it used to be discussed that Chipotle would be a $10 billion brand. Well, here we are in 23, and all likelihood it will be a $10 billion brand. Sorry for that. If you were to just look at the overall North American opportunity today, and I guess to some extent freeze the economy, How big of a brand do you think Chipotle could be just based on what you know about, you know, the North American consumer market today in terms of how big we can expand from here?
spk05: Yeah, sure. I mean, look, we're not ready to change the number yet, but the good news is the economics of every new restaurant that we open continue to be just terrific economics where, you know, hopefully we'll get closer to the higher end of that 8% to 10% once, you kind of we work through a little bit of the bottleneck that we have on development. But, you know, I believe we're going to continue to grow the four-wall revenue and then obviously the economics that come with it. So without even moving the 7,000 store count, if you all of a sudden find yourself at 3 million, 4 million average unit volumes, you know, you're in that 20 to $28 billion range. So, you know, lots of growth in front of us. And that's without... having to be really all that aggressive. That is just executing the plan we've been talking about. And I think as long as Chipotle stays focused on great culinary, great throughput, developing team members so that we're ready to go when we open new restaurants, the number will grow. I think Jack told me when the company first went public, what was the number, Jack? Like 3,000. We said we were going to maybe do 3,000 restaurants. So here we are. We're at 3,000 restaurants. You know, I'm sure as we continue to grow, you know, both the AUVs will go up and the store counts will go up. But, yeah, it's pretty fun to think about. You know, we're closing in on $10 billion, and then I'm sure we'll be talking about $20, and then probably from there we'll be talking about $30. So I don't see a cap on this business anytime soon.
spk13: Excellent. Thank you so much.
spk07: The next question comes from Brian Mullen from Piper Sandler. Please go ahead.
spk06: Hey, thank you. Just a question on automation, robotics in general. You know, hypothetically, if all your combined efforts were to yield a couple hundred base points of margin over, you know, the next many number of years, are you inclined to want to let that all fall to the bottom line? Or perhaps would you want to let some of it fall to the bottom line and then fund the consumer value proposition? With the rest, you know, maybe it's too early to say, just wondering if you're already having those questions internally, you know, even if it's just philosophical right now.
spk05: Yeah, look, I mean, obviously the good news for us is we aren't capital constrained to invest in continuing to drive the Chipotle business both in growth and in value as it relates to giving a great experience for a customer and a great experience for a team member. So, Obviously, as we get closer, we'll have a better idea of how much of it falls to the bottom line. But right now, I'm hoping a lot of it falls to the bottom line.
spk08: But we'll know a lot more as we get closer to when we roll it out.
spk07: Thank you. The next question comes from Chris O'Cole from Stiefel. Please go ahead.
spk03: Hi. Thanks for taking the question. Brian, it sounds like the hyphen make line is close to that testing stage. Can you help us understand how long you expect it to be in that phase and maybe walk through what the validation stage could look like? I'm also curious if you could describe what KPIs the team's monitoring to determine the success of that make line.
spk05: Yeah, sure. So, you know, we have it in our Cultivate Center right now. It's fun to see it actually producing bulls, you know, and the team has done a phenomenal job of taking this from, you know, a concepts to a prototype to now a working prototype. We've learned a lot. We're getting ready to figure out what the next-gen version on this is, but it looks really promising. Obviously, key components of this are how fast can it do bowls per 10 minutes, how accurate can it do the bowls, and then obviously our ability to expedite those bowls, meaning getting it to the customer in the correct order. So, you know, We think, assuming the prototype continues to evolve and grow the way it has demonstrated its growth over time, we'll have something to be putting into restaurants here in the next 12 to 18 months. So optimistic about where this gets to, but it's one thing to run it in our Cultivate Center. It's another thing to run it in a restaurant. And until we run it in a restaurant, it's hard to really talk about the benefits or what the timing is of it. Conceptually and what it looks like right now, still very promising, you know, a top priority to figure out how we get this thing into a restaurant sooner rather than later.
spk03: Great. And then I just had a follow up. Jack, the step up in the underlying G&A run rate was pretty considerable. Can you break down maybe what's driving that in a little more detail and then how we should be thinking about the core run rate in the fourth quarter and then maybe even just underlying growth for the out year?
spk15: Yeah, I mean, any increase in our underlying G&A is around some of the things that, you know, Brian mentioned, and it was part of our review where we're investing in resources for Europe. We're adding resources, frankly, for some of the innovation that we're talking about in terms of, you know, robotics and things like that. You know, there's some items in there where our equity, we're expecting our equity based on our projections, you know, we'll step up. These are three-year calculations that you're making. So, but in terms of underlying G&A, it's going to be either people to support our growth or tech to support our growth. We haven't given fourth quarter guidance, but I would expect there would be another slight, you know, a step up from Q3. Not a huge step up, but a modest step up as we make sure we've got our teams all staffed up for the growth that we want to support, you know, not just for this year, but for the next several years going forward.
spk03: Great. Thanks, guys.
spk07: The next question comes from John Tower from Citi. Please go ahead.
spk04: Great, thanks. I just wanted to dig into development a little bit. And Jack, I know you, in your prepared remarks, talked about some delays in the system. And I was hoping maybe you could drill into it a little bit, especially as you're thinking about, you know, getting to that 8% to 10% range in terms of unit growth over time. Can you really get into what's driving some of the delays in the market today? Is it, say, local market permitting, builder or developer issues, or are there problems with accessing equipment? Just hoping you can flesh that out for us.
spk15: Yeah, you know, it's not really equipment anymore. That was a challenge through the pandemic and as we got out of the pandemic. But our teams have done a good job to pre-order, so we had bulk ordering. We've had good relations with our suppliers, so we get priority. So it's really down to... things that are under the city control, like getting utilities to the site. Sometimes it takes us weeks to just get somebody to come out and make sure that we have utilities that are coming to the site. It does involve things like permitting. And then you're talking about inspections as well. So it's really a lot of these cities, what we're hearing from our teams is that a lot of them are still working remote. And so to get somebody to show up when they need to show up and do the work has been a real challenge. What we're doing, you know, Chris is here, and Chris has been sending this message to the team, is we really got to rise the city, okay? We have to make sure we're calling, calling, calling, because they're doing some work. And whether they're working at home or whether they're working in the office, they're doing some work. Let's make sure that we're at the top of the list, that they're hearing us, you know, often. And if they hear us more often, it's likely they're going to move. And so that's the strategy to try to hopefully remove that bottleneck.
spk04: Got it. And just pivoting to the throughput initiatives. I appreciate all the training you guys have been doing. I'm just curious. Um, I know Brian, you'd mentioned that like even on the make lines, making sure people, four people are on the front line at peak. Do you think you need to add labor hours to store? Is it purely just getting people back to the aces in their places kind of belief?
spk05: Yeah, no, it's, it's more to do with getting the trust in the team to have the confidence to stay aces in places. Um, Just yesterday I was in a restaurant and staffed, the deployment was right, the culinary was right, the restaurant looked great. Unfortunately, we didn't have aces in places. You had too many people leaving the line to do other tasks that they shouldn't have been doing when they got a line to the door. And I think once they understand that they stay in those places, they'll power through that line to then go take care of the task accordingly. So I think it's an element of they got to see it for themselves, they got to experience it, they got to trust it. Because sometimes it's hard. I mean, it's hard to just stay in position when you think you might need some more napkins out by the drink station. It's like, well, hang in there, get through the line, and then you can go put additional napkins in the drink station. You know, I think it's a component of they need experiences with it so that they can trust it. And I know Scott and the team are laser focused on getting the pillars of great throughput back into our culture, not just as an initiative. And, you know, the good news is we're staffed. Turnover is looking really good at the general manager level. And we're now in the low 20s. So their leader is staying much more consistent. I think you have consistency in leadership, consistency in message. We'll get consistency in execution. So, you know, I'm very optimistic about where Scott and the operators are going to get us to when it comes to throughput.
spk04: Got it. Thanks. And then just lastly, I know your lines are somewhat capacity constrained, so in terms of adding additional items to the menu, not always easy. You oftentimes have to rotate, but With, I think, chicken al pastor, I believe you said about 20% of your transaction mix came from that during the period. So when can we think about that potentially becoming a permanent menu item?
spk05: Well, look, it's something we definitely will go back and evaluate. Obviously, this was one that struck a chord with a lot of people, and I can understand why. It tasted great, and it is great. So, you know, we'll reevaluate if and when it makes sense to bring it back, how long we bring it back for, and if it should be a permanent item. You know, the challenge for us is I think if we wanted to add something permanent, we got to remove something. So, you know, that'd be something that we have to work through to just make sure we understand the tradeoff.
spk08: Got it. Thanks for taking the questions. Yeah.
spk07: The next question comes from Dennis Geiger from UBS. Please go ahead.
spk16: Great. Thank you. Just wondering if you could provide a breakdown of the traffic price and mix for the two. I think you gave the traffic component, but if you could kind of loosely break out those others, that would be helpful.
spk15: Yeah, the traffic. I mentioned traffic in my comments. Better than 4%, you know, on a positive side on traffic. The menu price increase was in the mid-5s, call it 5.5, 5.6, something like that. And then we had this, this mix item that I've mentioned, uh, we're talking about the third quarter, uh, that actually reduced the comp by about two and a half percent. And that, that mix is entirely due to group size. The group sizes continue to normalize as we continue. You know, you're watching people going back to the office. You're seeing our, our urban locations are outcropping our suburban locations. So there's still been a normalization since the pandemic and our group sizes are still continuing to normalize. There's still group sizes are still ahead of where we were in 2019 before the pandemic. but they continue to normalize pretty much each quarter.
spk16: Very helpful, Jack. Just one more. I know mix is probably a tough one, group size in particular, to predict. You gave us the 3Q. As we look to the end of the year, can that still be, I think, closer to flat by the end of the year, or is that a little bit of a moving target given group size behaviors, and maybe that's tough to predict? Thank you.
spk15: Yeah, I don't think it'll be totally flat, but it should narrow significantly. You know, in this current quarter, we're about 1% group size over where we were in 2019. If you look at Q3 and Q4, they were about 3% to 4%. You know, it was 4% in Q3, 3% in Q4. So we've still got a gap there that's still to close, but it should diminish. The 2.5% that we saw in Q2 should diminish each quarter. I don't think it will be totally flat by the end of the year, though.
spk08: Thanks, Chuck. Appreciate it.
spk07: The next question comes from Brian Harbor from Morgan Stanley. Please go ahead.
spk10: Yeah, thank you. Good afternoon. Jack, could you just elaborate on some of the food cost drivers? I mean, you mentioned kind of what's really driven a year over year, but maybe just versus last quarter versus some of your expectations. I'm sure avocado is part of it, but anything else? And also just as we think about the rest of the year, will this new item affect food costs in any way that we should think about?
spk15: Yeah, I mean, during the quarter, we had just a number of things that just had a slight increase. We had, you know, some of our salsas, our tortillas, our rice, our spices. And all those, if you look at just the quarter, and if you look at the quarter, you know, consecutively, so Q2 versus Q1, that added like 40 or 50 basis points. But those were offset by a combination of favorable avocados compared to last year, as well as Chicken al pastor, as I mentioned before, it actually did shift people from, you know, from steak and barbacoa, which is more expensive, higher food costs, to our chicken, which is a lower food cost. So we've had this, just call it low-grade inflation, that's been hitting the P&L the last couple quarters, but it's been offset by favorable avocados and then favorable mix. One reason why, as we look forward into the, you know, into the third quarter, we do think there's going to be a bump up in food costs, and, you know, that's really attributable to this same kind of low-grade inflation that we expect will continue into Q3. But we're not going to have, as avocado prices normalize and as we shift away from Chicanal Pastor, we won't have that kind of offset, you know, to offset some of the inflation that we're seeing.
spk10: Okay, thanks. Could you also just elaborate on what you said about Europe? And I guess the, you know, the broader question is just, you know, how fast might we see that grow as we start to think about the next few years?
spk05: Yeah, look, I think very similar to what we did with Canada is the way to think about Europe. Once we get performance consistent in Europe like we did in Canada, we'll start building much more aggressively. The team is very much focused on ensuring that we're building a brand And as we build the brand, we have the economics that support building a lot of restaurants. And like I mentioned, Jack, myself, and Scott, we were just over there, and the team has a terrific plan. The thing I love to see is when I was in Frankfurt, Germany, there were a lot of Germans in a Chipotle enjoying Chipotle. When we were in London, there were a lot of Brits enjoying Chipotle. The thing that I also saw was a lot of people walked up at the restaurant and had no idea what Chipotle is. So we still have a real opportunity to build a brand. And while we build that brand, ensure that we've got great economics that justify building a lot more restaurants. Canada is a perfect example. We put a great leader in place there, Anat. She's hit it out of the park. The economics perform. She's doing a nice job of growing the brand. Not surprising, we're building a lot of restaurants. So, you know, most recently we just sent one of our top operators over to London to be a part of that team, lead the team. With that work that he's putting in place, I'm already seeing, you know, big, big improvements in operational execution. And I'm confident the economics will follow and I'm confident we'll build a terrific brand. So assuming that all happens. You know, you can see us then quickly being able to invest into building a lot more restaurants in those countries. So I think we've been pretty consistent on this. It's like we're in no rush, you know, to just start building restaurants for the sake of building restaurants. We want to have people that are ready to go. We want to have economics that make sense. And then we want to have a great brand that we can execute against time and time again. So that's served us well in the United States.
spk08: It's serving us well in Canada. I believe it will serve us well in Europe. Thank you.
spk07: And the last question comes from Zach Sadom from Wells Fargo. Please go ahead.
spk12: Okay, good afternoon. This is John Park. I'm for Zach. I guess on the franchising side, are there any more details you guys can provide on your new agreement with Alshaya? I guess around like the number of units and the initial development agreement, anything on the royalty rates, things like that?
spk05: Not really. You know, we're just getting started with Alshaya. You know, we're excited to get the first couple of restaurants open. Obviously, both of us have expectations of a lot more restaurants than just a handful. And I'm confident we're going to have great openings. And this is going to turn into something that hopefully Alshaya considers a huge success and we consider a huge success. More details to come, but we probably need to open the first one.
spk12: Got it. And then just kind of switching gears a little bit, on the labor side, have you guys kind of started to see any leveling out of wage inflation for new hires as you kind of move through Q2 and into Q3?
spk15: I would say it's more normal. You know, it's in the 4%, 3%, you know, in that range. So there's still inflation. You know, it's another consideration as we, you know, look at our model, look at our margins. when we take a pricing action. So it's not anything we can't handle. You know, the great news is the applications are coming in. Our restaurants are doing a great job of staffing the restaurants. They're doing a great job of getting our restaurants to model. So this is, I would call it, again, kind of a low-grade normal inflation going forward. Nothing that our model can't absorb.
spk07: Great. Thanks a lot. This concludes our question and answer session. I would like to turn the conference back over to Brian Nickell for any closing remarks.
spk05: All right. Thank you. And thanks, everybody, for all the questions. You know, I'll just wrap up with, again, you know, I think Chipotle's demonstrated an excellent quarter, and I think it demonstrates the strength of our business. Very proud of what our teams have accomplished in the field. You know, if I think about where we are today versus where we were a year ago, we are operating these restaurants significantly better. I believe there's still a lot of upside in our ability to drive throughput going forward. I'm confident the teams are focused on it, and we're going to see that happen. The other thing that I'm really excited about in our business is that we're growing our business through traffic growth, and we're doing it, in my opinion, the right way, where we're continuing to drive our value proposition forward with great culinary, great people, and obviously great new restaurant openings. So very proud of our results, very optimistic about the future, and look forward to sharing our results next quarter with you all. Take care.
spk07: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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