Chipotle Mexican Grill, Inc.

Good day and welcome to the Chipotle Mexican Grill third quarter 2023 results conference call. All participants will be in listen-only mode. Should you need assistance, please signal 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 touch-tone phone. 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, Head of Investor Relations and Strategy. Please go ahead.

Hello, everyone, and welcome to our third 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.capole.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-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 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'll turn the call over to Brian.

Thanks, Cindy, and good afternoon, everyone. Our focus on exceptional food and exceptional people continues to drive strong results, including positive transaction trends that accelerated throughout the quarter. For the quarter, sales grew over 11% to reach $2.5 billion, driven by a 5% comp. Digital sales represented 37% of sales. Restaurant level margin was 26.3%, an increase of 100 basis points year over year. Adjusted diluted EPS was $11.36, representing 19% growth over last year, and we opened 62 new restaurants, including 54 Chipotle's. Trends remain strong in October, and we anticipate comps in the mid to high single-digit range for the fourth quarter, which includes our recent pricing action. Before updating on our strategic priorities, I'm thrilled to share that Laura Fuentes has joined our Board of Directors. Laura is Executive Vice President and Chief Human Resources Officer of Hilton Worldwide with extensive experience in global hospitality and people leadership and will be pivotal in helping Chipotle deliver against our five key strategies that position us to win today while we grow our future. These include running successful restaurants with a people accountable culture that provides great food with integrity while delivering exceptional in-restaurant and digital experiences. sustaining world-class people leadership by developing and retaining diverse talent at every level, making the brand visible, relevant, and loved to improve overall guest engagement, amplifying technology and innovation to drive growth and productivity at our restaurants and support centers, and expanding access and convenience by accelerating new restaurant openings and laying the foundation for international expansion. Beginning with running successful restaurants with a people-accountable culture. It was exactly a year ago that we made a big effort internally to get back to Chipotle's standard of excellence, and I'm proud of the progress our restaurant teams have made over the course of the year. This includes staffing and turnover that are back to or better than pre-pandemic levels, restaurants that are prepped and ready, resulting in fewer outages, improvements in on-time and accuracy on the digital make line, and continued progress on throughput. Our focus on ops is strengthening a core piece of our value proposition, which is customized, delicious culinary served quickly with great hospitality. As a result of improvements in operational execution, along with keeping our menu pricing accessible, our value proposition has never been stronger. This is certainly translating to great results with transaction comps positive all year and up over 4% in the third quarter. While we are sitting on a strong foundation, we see an opportunity to be even better, particularly when it comes to throughput. We have two key initiatives that we recently rolled out that that we believe will drive further improvement. The first is adjusting the cadence of digital orders to better balance the deployment of labor, eliminating the need to pull a crew member from the front make line to help the digital make line during peak periods. And the second is a renewed focus on throughput training in our restaurants by bringing back a coaching tool that we had in place prior to the pandemic. Feedback from our restaurant teams on these two initiatives has been very positive, and we are seeing that restaurants that have the right cadence of orders on the digital make line and that are executing the four pillars of throughput are seeing an improvement of four to five entrees in their peak 15-minute period. As I mentioned in the past, we hold our teams to a high standard because when they achieve it, they feel like they are part of a winning team with the ability to be rewarded through bonuses and growth within the organization. For our crew members, throughput is a key performance factor in the crew member bonus plan. It is also a component of the bonus measure for general managers, field leaders, team directors, and regional vice presidents. As we coach and make progress on throughput, it will enable more restaurants to achieve their quarterly bonus, and importantly, will drive a better overall experience for our guests and our teams. Speaking of our teams, we recently brought back our Behind the Foil campaign, which features our crew members giving a glimpse into daily preparation using real ingredients and classic culinary techniques, a key differentiator for Chipotle. The fact is, we don't have freezers in our restaurants, and our teams begin preparing at 6 or 7 o'clock in the morning to be able to serve our delicious food by the time we open at 1030. This includes grilling fajita veggies and adobo chicken on the plancha, slicing and dicing onions, jalapenos, and cilantro by hand, also hand-mashing avocados to make our signature guacamole and making our chips fresh every day. This campaign is a great way to put a spotlight on our talented teams and their hard work to prepare our exceptional food. One of our team directors that was featured in Behind the Foil started as a crew member and within seven years moved his way up to team director, managing a sub-region of 49 restaurants at just 29 years old. His passion for the brand and helping to deliver an excellent customer experience has driven his success. In fact, he has one of the best performing sub-regions across the company. He truly believes in Chipotle's purpose and wants to position his team to be able to replicate the same opportunities that have been given to him. Our people are our greatest asset, and developing future leaders is critical delivering on our growth goals of reaching 7,000 restaurants longer term, and surpassing 90% internal promotions. We will continue to find ways like our Behind the Foil campaign to celebrate our team's growth, hard work, success, and passion for Chipotle. In addition to this campaign, our marketing team has done an outstanding job in finding authentic ways to make the brand more visible, more relevant, and more loved. Last month, we brought back our fan favorite and highly requested carne asada. As a limited-time offer, and the reception has surpassed our expectations. carne asada is a delicious combination of responsibly raised premium cuts of steak seasoned on the grill with a blend of signature spices that's finished with freshly squeezed lime and hand chopped cilantro. We also introduced an entirely new way to try carne asada with the carne asada quesadilla and it's just truly delicious. I'm really proud of the cross-functional effort it took to make sure we could bring back this popular LTO, which is especially impressive given that we estimate only about 5% of U.S. beef meets our food with integrity standards. In sports, As college football season kicked off, we leveraged our Real Food for Real Athletes platform to partner with players and teams to showcase their inspiring journeys, their love for Chipotle, and how our food can help them perform their best by providing proper nutrition. We also leveraged creative gaming integrations as a fun way to connect with some of our biggest fans. We brought back Chipotle IQ in August as a one-of-a-kind digital trivia game, testing the knowledge of Chipotle's real ingredients, leading food standards, culinary techniques, sustainability efforts, brand history, and community engagement. Shifting to amplifying technology, we're making progress on a couple innovations that ultimately could help to improve the overall experience for our restaurant teams and our guests. The first is our automated digital make line, which we recently installed at our Cultivate Center to test and learn on. Through our partnership with Hyphen, we've been testing the Hyphen make line, which fits into our existing digital make line footprint and automatically makes bowls, down below, with the ability for our team to build tacos, burritos, kids' meals, and quesadillas on top. There are many reasons why we are excited about automating the digital make line, such as increased capacity and improved speed and accuracy, which could further help with the balance of labor between the front make line and the digital make line. Additionally, AutoCado, which cuts, cores, and scoops avocados, is also at our Cultivate Center, and our restaurant teams are providing feedback to be included in the next phase of the prototypes. As we mentioned last quarter, AutoCADO could save time and eliminate a less favorable task, but still allow for one of their favorite parts of the job, which is to add in freshly chopped onions, jalapenos, and cilantro, season with some citrus and salt, and hand mash our signature guac. While we still have some iterations to make to Hyphen and AutoCADO before they are ready to be tested in a restaurant, I am excited about the progress the team is making, and we will continue to provide updates on the path through the StageGate process. Finally, moving to expanding access and convenience. We are on track to reach our guidance range of opening between 255 to 285 new restaurants this year, which will mark a record for the company. And we surpassed 700 Chipotle this quarter. As we look out to 2024, we anticipate opening between 285 to 315 new restaurants, with at least 80% having a Chipotle. This month, we opened our first location in Calgary. This was the first entrance into a new market in Canada since we entered Vancouver in 2012, and it is clear there is strong demand for Chipotle, with opening day sales hitting a new company record. The team in Canada has done an outstanding job with company leading throughput on the front line and on time and accuracy on the digital make line. AUV's margins and returns are on par with the U.S., and I remain very confident in Canada's long-term growth potential. Outside of North America, we have outlined a plan for Europe to deliver economics that would support accelerated growth. This includes improving our operations by aligning our training tools, systems, and culinary with our U.S. operations where it makes sense and is feasible, as well as building brand awareness. Similar to our strategy when we first entered new markets in the U.S., we are building brand awareness in Europe through more local initiatives like partnering with local universities, local sports teams, and focusing on activities which gets our food into the hands of potential guests. The good news is our restaurants are staffed, stable, and the talent we have coming through is exciting. Finally, in the Middle East, we are collaborating with Al Shaya Group across development, culinary, supply chain, and food safety to support a successful opening of our restaurants next year in Kuwait and Dubai. In closing, I remain really excited about all the growth ahead of us, both in the U.S. and internationally. I want to thank our restaurant and support center teams for all their hard work and dedication to Chipotle. Our results demonstrate that we have a winning team that sets high standards and delivers. We have a lot of opportunity in front of us and we will continue to push the boundaries of what is possible in terms of running great restaurants with exceptional people, exceptional food, and fast throughput. I am more confident than ever that we have created the foundation to achieve our aggressive growth goals and further our purpose of cultivating a better world.